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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549-1004

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

OR

For the transition period from                  to                 

Commission file number 0-26035

THE DIRECTV GROUP, INC.

(Exact name of registrant as specified in its charter)

2250 East Imperial Highway

El Segundo, California 90245

(310) 964-0808

(Address, including zip code, and telephone number, including area code, of registrants’ principal executive office)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes ¨  No x

As of June 30, 2003, the aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates was $0. At such date, the registrant was a wholly-owned subsidiary of General Motors Corporation.

As of March 11, 2004, the registrant had outstanding 1,384,112,120 shares of common stock.

Documents incorporated by reference are as follows:

THE DIRECTV GROUP, INC.

CAUTIONARY STATEMENT FOR PURPOSE OF THE “SAFE HARBOR” PROVISIONS

OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Annual Report on Form 10-K may contain certain statements that The DIRECTV Group, Inc., or the Company, believes are, or may be considered to be, “forward-looking statements” within the meaning of various provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as we “believe,” “expect,” “estimate,” “anticipate,” “intend,” “plan,” “foresee,” “project” or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or from those expressed or implied by the relevant forward-looking statement. Risk factors which could cause actual performance and future actions to differ materially from forward-looking statements made herein include, but are not limited to, economic conditions; product demand and market acceptance; ability to simplify aspects of our business model; improve customer service; create new and desirable programming content and interactive features; achieve anticipated economies of scale; government action; local political or economic developments in or affecting countries where the Company has operations, including political, economic and social uncertainties in many Latin American countries in which DIRECTV Latin America, LLC operates; foreign currency exchange rates; ability to obtain export licenses; competition; the outcome of legal proceedings; ability to achieve cost reductions; ability to timely perform material contracts; ability to renew programming contracts under favorable terms; technological risk; limitations on access to distribution channels; the success and timeliness of satellite launches; in-orbit performance of satellites; loss of uninsured satellites; ability of customers to obtain financing; and the Company’s ability to access capital to maintain its financial flexibility.

Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Annual Report are made only as of the date of this Annual Report and the Company undertakes no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.

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THE DIRECTV GROUP, INC.

PART I

ITEM 1.    BUSINESS

On March 16, 2004, we changed our corporate name from Hughes Electronics Corporation to The DIRECTV Group, Inc. Effective on March 17, 2004, our ticker symbol on the New York Stock Exchange, or NYSE, was changed to “DTV.” This name change has no impact on our common stock or the rights of our stockholders. The name of the Company was changed to better reflect our commitment to building our business around the DIRECTV businesses. When we refer to the “Company” in this document, we are referring to The DIRECTV Group, Inc.

We were incorporated in Delaware in 1977 and were subsequently acquired by General Motors Corporation, or GM, in 1985. From 1985 to 2003, we were a wholly-owned subsidiary of GM. Upon GM’s acquisition of us, GM issued GM Class H common stock as a “tracking stock” designed to provide holders with financial returns based on the financial performance of the Company. Holders of GM Class H common stock had no direct rights in the equity or assets of the Company, but rather had rights in the equity and assets of GM (which included 100% of the stock of the Company).

On December 22, 2003, GM, the Company and The News Corporation Limited, or News Corporation, completed a series of transactions that resulted in the split-off of the Company from GM and the simultaneous sale of GM’s 19.8% interest in the Company to News Corporation. GM received approximately $3.1 billion in cash and 28.6 million News Corporation Preferred American Depository Shares, or ADSs, in these transactions. GM split-off the Company by distributing our common stock to the holders of the GM Class H common stock in exchange for their GM Class H common shares on a one-for-one basis. Immediately after the split-off, News Corporation acquired an additional 14.2% of outstanding common stock from the former GM Class H common stockholders, which provided News Corporation with a total of 34% of our outstanding common stock. GM Class H common stockholders received about 0.8232 shares of our common stock and about 0.09207 News Corporation Preferred ADSs for each share of GM Class H common stock held immediately prior to the closing of the transactions. In addition, we paid to GM a special cash dividend of $275 million in connection with the transactions. Upon completing these transactions, News Corporation transferred its 34% interest in the Company to its 82% owned subsidiary, Fox Entertainment Group, Inc., or Fox. As a result of these transactions, we are now a publicly-traded company.

We are a world-leading provider of digital television entertainment, broadband satellite networks and services, and global video and data broadcasting. We provide advanced communication services on a global basis and have developed a wide range of entertainment, information and communication services for home and business use, including video, data, voice, multimedia and Internet services.

Our businesses include:

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In February 2004, we announced our intent to restructure the Company from a corporate conglomerate to one focused on the direct-to-home satellite businesses. As a result, during the first quarter of 2004, the Company announced the reduction of corporate office headcount by over half and the consolidation of corporate and DIRECTV U.S. support functions. We are also considering strategic alternatives with regard to HNS and our ownership interest in PanAmSat. With the emergence of DIRECTV Latin America LLC, or DLA LLC, from bankruptcy in February 2004, we are turning our attention to potential combinations, alliances or other initiatives with respect to that business. DLA LLC also announced headcount reductions, subsequent to its emergence from bankruptcy and the completion of certain transactions that were anticipated under its Plan of Reorganization. We view 2004 as a transitional year for the Company, and expect additional changes in both the way our businesses are managed and in our overall structure.

DIRECTV U.S.

Overview

DIRECTV U.S. is the largest provider of direct broadcast satellite, or DBS, television services and the second largest MVPD provider in the U.S., in each case based on the number of subscribers. DIRECTV U.S. provides its customers with access to hundreds of channels of digital-quality video and audio programming that are transmitted directly to its customers’ homes or businesses via high-powered geosynchronous satellites. As of December 31, 2003, DIRECTV U.S. had approximately 12.2 million subscribers, of which approximately 10.7 million were owned and operated subscribers and approximately 1.5 million were subscribers who received DIRECTV^® service from members and affiliates of the NRTC.

DIRECTV U.S. believes it provides one of the most extensive collections of programming available in the MVPD industry. DIRECTV U.S. currently distributes to its customers more than 850 digital video and audio channels, including about 125 basic entertainment channels, 31 premium movie channels, over 25 regional and specialty sports networks, an aggregate of over 600 local channels, over 35 Spanish and Chinese language special interest channels, up to 55 pay-per-view movie and event choices and seven high-definition television, or HDTV,

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channels. Although DIRECTV U.S. distributes over 600 local channels, a customer receives only the local channels in the customer’s home market. Currently, DIRECTV U.S. delivers local channels in 64 major metropolitan markets or about 72% of U.S. television households. Assuming the successful launch of a new high-powered, spot-beam satellite, DIRECTV 7S, along with approval from the Federal Communications Commission, or FCC, to move the DIRECTV 5 satellite to an orbital slot currently controlled by Telesat Canada, or Telesat, DIRECTV U.S. expects to provide local channel coverage to approximately 130 markets, or about 92% of U.S. television households, by the end of 2004.

DIRECTV U.S. also provides premium professional and collegiate sports programming such as the NFL SUNDAY TICKET^™ package, which allows subscribers to view as many as 14 NFL games played each Sunday during the regular season. Under the contract with the NFL, DIRECTV U.S. has exclusive DBS television, high-definition and interactive rights to the NFL SUNDAY TICKET package through 2007 and exclusive multi-channel television rights through 2005.

To subscribe to the DIRECTV service, customers purchase receiving equipment from DIRECTV U.S. or through one of approximately 18,000 retail locations in the U.S., including Best Buy and Circuit City, as well as independent satellite television retailers and dealers.

The receiving equipment consists of a small receiving satellite dish antenna, a digital set-top receiver and a remote control, which is referred to as a “DIRECTV System.” After purchasing and installing a DIRECTV System, customers activate the service by calling DIRECTV U.S. and subscribing to one of its programming packages.

Infrastructure

In addition, based on a review of various strategies and technologies, DIRECTV U.S. is exploring alternatives to maximize the capacity of the DIRECTV platform to provide its customers expanded local and HDTV services. The implementation of such strategies will require additional capital expenditures in the future.

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The National Rural Telecommunications Cooperative

As of December 31, 2003, 1.5 million of the approximately 12.2 million subscribers received DIRECTV services from the members and affiliates of the NRTC. Pursuant to an agreement entered into in 1992 between a predecessor of DIRECTV, Inc., a wholly-owned subsidiary of DIRECTV Holdings LLC, and the NRTC, the NRTC has the exclusive right to distribute DIRECTV services transmitted from 27 of the 32 frequencies located at 101 WL to customers located primarily in rural areas of the U.S. As part of a settlement reached in January 2004 regarding certain disputes arising from the agreement, the NRTC and DIRECTV U.S. agreed that the term of the agreement will continue until the later of the useful life of the initial direct-to-home satellite, DIRECTV 1, or June 30, 2008. In addition, the NRTC and DIRECTV U.S. agreed to enter into a new agreement on the same terms that will run from the expiration of the prior agreement to June 30, 2011. See Item 3. Legal Proceedings for further information. The NRTC separately contracted with its members and affiliates to provide them with rights to market and sell these services. The NRTC pays DIRECTV U.S. a fee on the revenues from these services, which are branded using the DIRECTV name pursuant to a trademark license agreement between DIRECTV U.S. and the NRTC. NRTC “territories” comprise approximately ten million of the approximately 107 million U.S. television households.

DIRECTV U.S. has also separately contracted with the NRTC and with Pegasus Satellite Television Inc., or Pegasus, the NRTC’s largest affiliate whose territory covers approximately eight million of the ten million NRTC households. The agreements with the NRTC and Pegasus permit each of them to market and sell services, including premium services, that DIRECTV U.S. transmits from the other five frequencies located at the 101 WL orbital slot, as well as frequencies located at the 110 WL and 119 WL orbital slots. For these separately contracted services, the NRTC and Pegasus pay DIRECTV U.S. a percentage of subscriber revenues generated. As of December 31, 2003, approximately 1.2 million of the 1.5 million NRTC subscribers were customers of Pegasus. See Item 3. Legal Proceedings for further information.

Key Strengths

DIRECTV U.S.’ business is characterized by the following key strengths:

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DIRECTV U.S.’ satellite-based service provides it with many advantages over ground-based cable services, including the ability to distribute hundreds of channels to millions of recipients nationwide with minimal incremental cost per additional subscriber, comprehensive coverage to areas with low population density in the U.S. and the ability to quickly introduce new services to a large number of customers.

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Business Strategy

DIRECTV U.S.’ overall goal is to provide customers with the best television experience in the U.S. DIRECTV U.S. believes its association with News Corporation’s global economies of scale and world-class content will help it attain this goal. DIRECTV U.S.’ strategy focuses on attaining leadership in technology, offering its customers compelling and differentiated content and providing high-quality customer service. If it is successful in executing this strategy, DIRECTV U.S. believes that it will generate strong subscriber revenue and cash flow growth in the future.

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Competition

DIRECTV U.S.’ industry is highly competitive. Its competition includes companies that offer video, audio, interactive programming, telephony, data and other entertainment services, including cable television, wireless companies, DBS companies and companies that are developing new technologies. Many of DIRECTV U.S.’ competitors have access to substantially greater financial and marketing resources. DIRECTV U.S. believes that the quality and variety of video, audio and interactive programming, quality of picture, access to service, availability of a broadband Internet service, customer service and price are the key elements for gaining and maintaining market share.

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Other domestic or foreign satellite operators also have proposed to offer direct-to-home satellite service to U.S. customers using U.S.-licensed satellite frequencies and/or foreign-licensed frequencies that have the ability of covering the U.S. SES Americom, for example, which is the licensee of U.S. frequencies that can be used to offer direct-to-home service, has petitioned the FCC for a declaratory ruling to allow it to provide DBS service using frequencies assigned to it by the government of Gibraltar and the United Kingdom.

DIRECTV LATIN AMERICA

DLA is a provider of digital direct-to-home satellite television entertainment in Latin America, which includes South America, Central America, Mexico and the Caribbean. When we refer to DLA, we are referring to a group of companies that combine to provide the DIRECTV service throughout Latin America. The most significant companies include DLA LLC, which was 74.7% owned by us as of December 31, 2003, as well as the local operating companies, or LOCs, selling the DIRECTV service in Latin America. As of December 31, 2003,

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DLA LLC owned, directly or indirectly and along with certain affiliates, sixteen subsidiaries, including the LOCs in the largest Latin American countries. DLA provides a wide selection of high-quality local and international programming under the DIRECTV brand to approximately 1.5 million subscribers in 28 countries through the LOCs located in the various countries. Approximately 91% of the Latin American DIRECTV subscribers are in Brazil, Mexico, Venezuela, Argentina and Puerto Rico, and receive their service from consolidated LOCs. The DIRECTV service is provided to DLA’s customers via the Galaxy 3C satellite that was placed into service in September 2002. DLA LLC leases the satellite transponder capacity on Galaxy 3C from PanAmSat (see “PanAmSat” below).

Latin America has faced very difficult economic and political conditions over the last several years. Major markets, such as Argentina, Brazil and Venezuela, have been experiencing significant currency devaluations, high unemployment rates and/or civil unrest due to economic and political uncertainty. These factors have resulted in fewer new subscribers than DLA had originally projected. In addition, a large portion of DLA LLC’s expenses were denominated in U.S. dollars. As currencies devalued across the region, DLA LLC found it increasingly difficult to satisfy U.S. dollar denominated expenses with local currency earned revenues.

As a result of the conditions noted above and DLA LLC’s high fixed costs and substantial debt levels, on March 18, 2003, DLA LLC filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware, or the Bankruptcy Court. On December 11, 2003, DLA LLC filed a proposed Plan of Reorganization, or the Reorganization Plan, that reflected an agreement reached between DLA LLC, its owners and unsecured creditors. The Reorganization Plan was confirmed by the Bankruptcy Court on February 13, 2004 and became effective on February 24, 2004. Holders of allowed general unsecured claims received, or will receive, cash distributions equal to 20% of their allowed claims. These distributions were funded from DLA LLC’s operating cash flow and a senior secured debtor-in-possession financing facility provided by us.

DLA LLC, after emerging from bankruptcy, is 85.9% owned by us and 14.1% owned by Darlene Investments LLC, or Darlene, one of DLA LLC’s founders. The equity that we received upon DLA LLC’s emergence from Chapter 11 was in consideration of our allowed claim for the senior secured debtor-in-possession financing facility, the assets we had contributed to the restructured DLA LLC and certain other claims. Darlene received a minority share of the equity in consideration of assets it contributed to the restructured DLA LLC. The Company and Darlene also contributed their respective ownership interests in certain LOCs and related entities and certain debts owed by such entities. This “roll-up,” which occurred when DLA LLC emerged from Chapter 11 on February 24, 2004, consolidated DLA LLC’s ownership of the largest LOCs and simplified its corporate structure.

News Corporation owns a minority interest in several entities (together “SKY Latin America”) that are engaged in the direct-to-home satellite television market in competition with DLA. News Corporation, the Company, and the respective partners in DLA and SKY Latin America are exploring the benefits of consolidation in the pay-television market in Latin America. There has been no agreement reached to date on any consolidating transaction and it is uncertain whether any consolidation will take place.

In each of its markets, DLA competes primarily with other providers of pay television, who distribute their programming via cable or satellite. DLA competes on the basis of programming, price, quality, customer support,

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brand recognition and reputation. DLA believes that its service compares favorably to its competitors in these areas. The operating platforms of SKY Latin America represent DLA’s principal DBS competition in the major markets in which it operates, other than Puerto Rico, where EchoStar is the principal DBS competitor. DLA competes with SKY Latin America primarily in Brazil, Mexico, Chile and Colombia. In most Latin American markets, cable services are the primary competitors in the MVPD market.

PANAMSAT

We own approximately 80.5% of PanAmSat, which is a leading global provider of video, broadcasting and network distribution and delivery services through its fleet of 25 satellites. PanAmSat is traded on the NASDAQ^® stock market under the ticker symbol “SPOT.” PanAmSat leases transponder capacity on its satellites for the distribution and delivery of entertainment and information to cable television systems, television broadcast affiliates, DTH television services, ISPs, telecommunications companies and other corporations and governments. Its customers include some of the world’s leading media and communication companies. PanAmSat distributes channels such as HBO, the Fox Family of channels, ESPN and MTV. PanAmSat operates in the most mature segment of the satellite communication business, historically characterized by steady and predictable revenue streams, strong cash flows from operations and substantial revenue backlog.

PanAmSat currently has 25 satellites in orbit, including five in-orbit backups, representing one of the world’s largest commercial geostationary earth orbit satellite networks, capable of reaching over 98% of the world’s population. PanAmSat is one of only a few companies worldwide that is capable of servicing a global footprint through a fleet of owned satellites. PanAmSat operates its 25 satellites in 16 orbital slots and has one of the most sophisticated ground infrastructure networks available to support the needs of its customers. PanAmSat has eight technical facilities in the U.S., which provide transmission, monitoring and control services for operating its fleet of satellites and transmission and other services for its customers. PanAmSat leases such services outside of the U.S. to support the remainder of its worldwide satellite fleet.

PanAmSat’s strategy is to be the world’s leading provider of video, broadcasting and network services through customer-driven, integrated, state-of-the-art satellite and terrestrial networks. This goal is based upon the expanded use of its satellite fleet, improved connectivity to its terrestrial network and its 24 hours a day, seven days a week customer support organization capable of serving distributors of video entertainment, operators of business networks, government agencies and other customers around the world.

PanAmSat plans to accomplish this goal through the following initiatives that it believes will deliver technologically superior services that in turn will improve revenue and profitability: continuing to increase the value of the U.S. video market by developing high margin customer-driven applications, increasing sales to the U.S. and other governments, using advanced IP-based applications to meet increasing demand, launching service extensions and selectively pursuing acquisitions.

During the fourth quarter of 2003, PanAmSat agreed to amend its satellite transponder lease agreements with DLA. These amendments became effective in February 2004 upon DLA LLC’s emergence from the Chapter 11 bankruptcy proceedings. In conjunction with these amendments, we have agreed to guarantee all of the satellite transponder lease agreements between PanAmSat and DLA for a period of five years.

PanAmSat’s principal global competitors in the fixed satellite services industry are Intelsat Ltd., SES Global, and New Skies Satellites N.V. PanAmSat’s principal regional competitors are Asia Satellite Telecommunications Company Limited, also known as AsiaSat, Satmex S.A. de C.V., Loral Space & Communications Ltd. and Eutelsat S.A. PanAmSat’s satellite services also compete with certain of the services and products offered by providers of terrestrial fiber optic cable networks.

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PanAmSat’s backlog, which consists primarily of operating leases on satellite transponders, was about $4.56 billion as of December 31, 2003 compared to about $5.55 billion as of December 31, 2002. The change in backlog is the result of customer contract activity during 2003 and a reduction to total backlog of approximately $360 million as a result of the Xenon-Ion Propulsion Systems, or XIPS, failure and resulting shortened estimated useful life of PAS-6B. See “Contractual Obligations, Off Balance Sheet Arrangements and Contingencies” in Item 7 for additional information regarding the XIPS failure. Approximately $1.3 billion of backlog is for contracts with the Company and News Corporation and its affiliates.

HUGHES NETWORK SYSTEMS

HNS, our wholly-owned subsidiary, is a leading supplier of broadband satellite networks, services and products with a particular emphasis on providing broadband access to both the enterprise and residential markets through its DIRECWAY brand. HNS designs, manufactures, installs and provides service for advanced networking solutions for enterprises worldwide using VSATs. HNS is also a leading supplier of set-top receivers for DIRECTV, a manufacturer of equipment for telecommunications carriers and the developer of SPACEWAY, a more advanced satellite broadband communications platform.

HNS is the leading supplier of satellite-based VSAT private business networks in the world. Since 1987, HNS has more than 500,000 VSATs shipped to or ordered from a variety of business customers worldwide. VSATs are typically used by enterprises with a large number of geographically dispersed locations to provide reliable, scalable and cost effective applications such as credit card verification, inventory tracking and control, and video teleconferencing.

HNS expects to launch the first SPACEWAY satellite in North America in 2004 and expects to introduce service in 2005. HNS views the SPACEWAY platform to be the next generation enterprise VSAT platform. SPACEWAY will enable HNS to offer high-speed “bandwidth-on-demand” providing customers with the ability to transmit and receive via satellite any combination of data, video, audio and multimedia while paying only for the amount of bandwidth they use.

Utilizing the Ka-band spectrum, the SPACEWAY platform will have additional features such as spot-beam technology and on-board processing that allow the satellites to efficiently re-use spectrum and provide peer-to- peer applications like video conferencing, distance learning and telemedicine. HNS plans on capitalizing on its expertise in private business networks and advanced satellite-based communication technology and gradually transitioning its current Ku-band enterprise VSAT customers to the SPACEWAY platform. SPACEWAY’s superior bandwidth capacity, speed and value are expected to enable it to offer a competitive service to a much larger market segment than its Ku-band enterprise broadband service can today.

As of December 31, 2003, excluding capitalized interest of about $174 million, approximately $1.5 billion of the total $1.8 billion investment has been spent on the SPACEWAY system, which will consist of three in-orbit satellites built by Boeing Satellite Systems, Inc. and ground systems provided by HNS.

HNS also provides broadband Internet access to the residential market. As of December 31, 2003, HNS had 180,000 DIRECWAY residential customers, nearly 95% of whom receive “two-way” service. We are pursuing a “limited growth” strategy for HNS’ consumer broadband business in order to minimize cash requirements associated with subscriber acquisition costs. As a result, HNS expects its consumer broadband business to begin generating positive operating cash flows in 2004.

HNS is a leading supplier of DIRECTV set-top receivers with over 14 million units shipped through December 31, 2003. In addition, HNS manufactures advanced equipment for DIRECTV, including HDTV set-top receivers, DVRs and multi-satellite receiving equipment for local channels in certain DIRECTV markets.

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HNS faces global competition in the enterprise VSAT market, principally from Gilat Satellite Networks Ltd. and ViaSat Inc., as well as from competitors employing terrestrial technologies such as frame relay and optical fiber. HNS’ consumer DIRECWAY business faces competition from satellite providers and from other terrestrial providers like cable companies, using cable modems, and RBOCs, using DSL technology. RCA/Thomson Consumer Electronics, Samsung Electronics and Sony Corporation are the primary competitors in the manufacture of DIRECTV set-top products.

ACQUISITIONS, STRATEGIC ALLIANCES AND DIVESTITURES

We review our competitive position on an ongoing basis and consider various acquisitions, strategic alliances and divestitures. Consistent with our plans to focus on the DIRECTV business, we are currently considering strategic alternatives with regard to HNS and our ownership interest in PanAmSat. With the emergence of DLA LLC from bankruptcy in February 2004, we are turning our attention to potential combinations, alliances or other initiatives with respect to that business. There can be no assurance that we will be successful in any of these initiatives.

Certain of DIRECTV U.S.’ and PanAmSat’s financing arrangements contain limitations on their ability to acquire and dispose of assets or to enter into strategic alliances. Their ability to take these actions may require the consent of lenders. There can be no assurance that we will be able to obtain such consent, if required.

REGULATION

Our businesses are subject to government regulation, primarily by the FCC and, to a certain extent, by Congress, other federal agencies, state and local authorities and the International Telecommunications Union, a specialized agency of the United Nations within which governments and the private sector coordinate global telecommunications networks and services. Depending upon the circumstances, noncompliance with legislation or regulations promulgated by these entities could result in the suspension or revocation of licenses or registrations, the termination or loss of contracts or the imposition of contractual damages, civil fines or criminal penalties.

This section sets forth a summary of regulatory issues pertaining to the operations of our geosynchronous, or GEO, satellites used in connection with DIRECTV’s operations and our other businesses generally and is not intended to describe all present and proposed government regulation and legislation affecting our businesses.

The ownership and operation of our GEO satellites and DIRECTV U.S.’ DBS system is regulated by the FCC primarily for:

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The FCC grants authorizations to satellite operators that meet its legal, technical and financial qualification requirements. Such authorizations are conditioned on satisfaction of ongoing due diligence, construction, reporting and related obligations. Further, the FCC must approve the relocation of satellites to different orbital locations or the replacement of an existing satellite with a new satellite.

Our satellites and earth stations are licensed by the FCC. The FCC generally issues DBS and earth station licenses for a ten-year period, which is less than the estimated useful life of a healthy direct broadcast satellite. Upon expiration of the initial license term, the FCC has the option to renew a satellite operator’s license or authorize an operator to operate for a period of time on special temporary authority, or declines to renew the license. If the FCC declines to renew the operator’s license, the operator would be required to cease operations and the frequencies would revert to the FCC.

Currently we have several applications pending before the FCC, including applications to relocate DIRECTV 3 and DIRECTV 5 satellites, as well as applications to launch and operate DIRECTV 7S, the second spot-beam satellite and various replacement satellites. In connection with the DIRECTV 3 application, DIRECTV U.S. reported to the FCC that the DIRECTV 3 satellite had been moved without receiving prior FCC approval, which could subject it to enforcement action by the FCC. In general, the FCC’s approval of these applications is required for DIRECTV U.S. to continue to expand its offering of local-into-local service into additional local television markets. There can be no assurance that these approvals will be obtained in a timely fashion or at all.

As a DBS licensee and operator, DIRECTV U.S. is subject to a variety of Communications Act requirements, FCC implementing regulations and copyright laws that could materially affect its business as a distributor of multi-channel video and audio programming. They include:

SHVIA also permits satellite retransmission of distant network stations (those that originate outside of a satellite subscriber’s local television market) only to “unserved households.” A subscriber qualifies as an “unserved household” if he or she cannot receive, over the air, a signal of sufficient intensity from a local station affiliated with the same network. In implementing SHVIA, the FCC has required satellite carriers to delete certain programming, including sports programming, from the signals of certain distant stations. In addition, the FCC’s interpretation, implementation and enforcement of other provisions of SHVIA, as well as judicial decisions interpreting and enforcing SHVIA (as codified in the Communications Act and copyright laws), could hamper DIRECTV U.S.’ ability to retransmit distant network and superstation signals, reduce the number of its existing or future customers that can qualify for receipt of these signals, impose costs on DIRECTV U.S. in connection with the process of complying with the rules, or subject DIRECTV U.S. to fines, monetary damages or injunctions. In addition, the FCC’s sports blackout requirements, which apply to all distant network signals, may require costly upgrades to DIRECTV U.S.’ system.

Many of the changes to the Communications and Copyright Acts enacted by SHVIA expire at the end of 2004, and require Congressional re-authorization. A failure of Congress to do so could have a material adverse effect on DIRECTV U.S.’ business. In addition, there could be a number of additional

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requirements imposed on DIRECTV U.S. through the legislative renewal process that are difficult to predict and that could also adversely affect DIRECTV U.S.

The FCC has implemented SHVIA’s must carry requirement and adopted further detailed must carry rules covering DIRECTV U.S.’ carriage of both commercial and non-commercial broadcast television stations. These must carry rules generally require DIRECTV U.S. to carry all of the local broadcast stations requesting carriage in a timely and appropriate manner in markets in which DIRECTV U.S. chooses to retransmit the signals of local broadcast stations. DIRECTV U.S. has limited capacity, and the projected number of markets in which it can deliver local broadcast programming will continue to be constrained because of the must carry requirement and may be reduced depending on the FCC’s interpretation of its rules in pending and future rulemaking and complaint proceedings, as well as judicial decisions interpreting must carry requirements. For example, the FCC is currently assessing whether cable operators, and possibly DBS operators, must engage in “dual carriage” of local broadcast signals as these broadcasters upgrade their signals to digital transmission. In addition, the FCC is assessing the degree to which satellite carriers are capable of carrying HDTV signals, or multicast digital standard-definition channels, of local broadcasters, and the extent to which the Communications Act requires mandatory carriage of such signals. Compliance with must carry rules may also mean that DIRECTV U.S. may not be able to use capacity that could otherwise be used for new or additional national programming services.

In connection with the requirement that DIRECTV U.S. serve an additional 30 local markets with local broadcast channels beyond what had been previously funded, projected or planned, DIRECTV U.S. has applied to the FCC for authority to do so by relocating its DIRECTV 5 satellite to 72.5 WL, which is an orbital slot allocated to Canada under International Telecommunications Union rules, and using the frequencies at that slot to offer additional local channel service. DIRECTV U.S.’ applications are presently being processed by the FCC, but have been opposed by certain third parties. While DIRECTV U.S. expects to ultimately obtain the approvals it seeks, there can be no assurance that DIRECTV U.S. will do so in a timely fashion or at all. A failure to meet the FCC’s condition of providing additional local channel service could subject DIRECTV U.S. to enforcement action or other penalties.

In addition to the above, we may be required to obtain licenses in other countries to provide services in or connected to the country. Foreign laws and regulatory practices governing the provision of satellite services to licensed entities and directly to end users vary substantially. We are required by international rules to coordinate

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the use of the frequencies on our satellites with other satellite operators who may interfere with us or who may suffer interference from us. We may also be subject to national communications and/or broadcasting laws with respect to our provision of international satellite service.

RESEARCH AND INTELLECTUAL PROPERTY

The ability to continue to generate technological innovations either internally or in relationships with third-party suppliers is important to our long-term business strategy. The continued development of new technologies, particularly as they relate to the DIRECTV service, including innovations in DVR capability, interactive applications and HDTV, may provide new and improved products that will continue to fuel business opportunities. Research and development is carried on in each of our business units in connection with ongoing product improvement efforts. Expenditures for research and development were $57.7 million in 2003, $71.7 million in 2002 and $85.8 million in 2001.

We utilize a large number of patents and trademarks, which are held by the Company or our subsidiaries. We believe that, in the aggregate, the rights existing under such patents, trademarks and licenses are important. Our portfolio of DIRECTV trademarks and other intellectual property is an integral part of our business. DIRECTV holds over 75 U.S. and foreign trademark registrations, including registration of its primary DIRECTV trademark and the Cyclone Design logo. We actively pursue patent and trademark protections of our technological and engineering innovations and actively pursue enforcement of our intellectual property rights.

ENVIRONMENTAL REGULATION

We are subject to the requirements of federal, state, local and foreign environmental laws and regulations. These include laws regulating air emissions, water discharge and waste management. We have an environmental management structure designed to facilitate and support our compliance with these requirements and attempts to maintain complete compliance with all such requirements. We have made and will continue to make capital and other expenditures to comply with environmental requirements. We do not, however, expect capital or other expenditures for environmental compliance to be material in 2004 and 2005. Environmental requirements are complex, change frequently and have become more stringent over time. Accordingly, we cannot provide assurance that these requirements will not change or become more stringent in the future in a manner that could have a material adverse effect on our business.

We are also subject to environmental laws requiring the investigation and cleanup of environmental contamination at facilities we formerly owned or operated or currently own or operate or to which we sent hazardous wastes for treatment or disposal. We are aware of contamination at one of our former sites. We believe that we have adequately provided for the expected cost of environmental investigation and cleanup.

SEGMENT REPORTING DATA

Operating segment and principal geographic area data for 2003, 2002 and 2001 are summarized in Note 19 of the Notes to the Consolidated Financial Statements in Part II and are incorporated herein by reference.

EMPLOYEES

As of December 31, 2003, the Company and our subsidiaries had approximately 12,300 employees. We believe that our employee relations are good. None of our employees are represented by labor unions.

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THE DIRECTV GROUP, INC.

ACCESS TO COMPANY REPORTS

Our website address is www.directv.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished, if any, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission, or SEC. We are not incorporating by reference in this Annual Report on Form 10-K any information on our website.

In addition, our subsidiaries, DIRECTV U.S. and PanAmSat, are separate registrants with the SEC. You can access their Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished, if any, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 free of charge through their websites at www.directv.com and www.panamsat.com, respectively, as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.

The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW., Washington, DC 20549. You may obtain information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer with the SEC. The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically.

ITEM 2.    PROPERTIES

As of December 31, 2003, we had approximately 65 locations operating in 18 states and 44 cities in the U.S. and approximately 79 additional locations operating in 45 cities in 18 countries outside the U.S. At such date, we owned approximately 1.7 million square feet of space and leased an additional 2.8 million square feet of space. The major locations of the Direct-To-Home Broadcast segment include five administrative offices, five broadcast centers and a call center. The major locations of the Satellite Services segment include three administrative offices and six teleports. The Network Systems segment’s major locations include seven administrative offices, a broadcast center and three manufacturing and distribution facilities. We consider our properties adequate for our present needs.

ITEM 3.    LEGAL PROCEEDINGS

(a) Material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we became, or were, a party during the year ended December 31, 2003 or subsequent thereto, but before the filing of this report are summarized below:

CAS 413 Administrative Proceedings.    As part of the combination of our defense businesses with Raytheon Company, or Raytheon, in 1997 and the sale of our satellite systems manufacturing businesses to The Boeing Company, or Boeing, in 2000, transfers were made from the Company’s retirement plans to the retirement plans of the buyer in each case of actuarial accrued liabilities and pension assets, including an appropriate portion of any pension surplus, attributable to the businesses. The Defense Contract Management Agency, or DCMA, of the U.S. Department of Defense objected to our calculation of the appropriate pension surplus transferred in these sales under Cost Accounting Standard 413, or CAS 413, which addresses the treatment of pension assets in such cases. The DCMA issued a Finding of Noncompliance with CAS 413 on September 30, 2003 in the Raytheon transaction and on October 6, 2003 in the Boeing transaction. We responded timely to both findings. On December 12, 2003, the DCMA issued a Final Decision and Demand for Payment related to the Raytheon transaction of approximately $69 million, including interest. We also anticipate an adverse decision by the DCMA on the Boeing transaction. We have twelve months to appeal each adverse decision in the U.S. Court of Federal Claims.

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We contend that we have complied with CAS 413 and no further amount is due to the U.S. government. Our position is supported by the recent Teledyne decisions of the U.S. Court of Federal Claims and Court of Appeals for the Federal Circuit interpreting CAS 413. The U.S. Supreme Court on December 1, 2003, denied a writ of certiorari challenging the circuit court’s Teledyne decision. We will continue to vigorously defend our position, including appeals of the DCMA’s decisions.

* * *

NRTC, Pegasus and Related Litigation.    On June 3, 1999 and on August 26, 1999, the NRTC filed lawsuits against certain of our subsidiaries, including DIRECTV, Inc., in the U.S. District Court for the Central District of California. For purposes of this section, we refer to all of our subsidiaries involved in these lawsuits collectively as DIRECTV. The lawsuits alleged that DIRECTV breached its DBS Distribution Agreement with the NRTC and wrongfully deprived it of the exclusive right to distribute certain programming, and sought recovery of related revenues. DIRECTV denied the NRTC claims and asserted counterclaims against the NRTC. A class action was filed in the same court against DIRECTV on behalf of the NRTC’s participating members on February 29, 2000. The class, which the court certified, asserted claims identical to the claims that Pegasus and Golden Sky Systems, Inc., or Golden Sky, asserted as described in the next paragraph. On August 11, 2003, DIRECTV, the NRTC and the class representatives entered into a binding settlement term sheet and on January 5, 2004, the Court approved the class action settlement at a fairness hearing, resulting in the dismissal of all claims by and between DIRECTV, the NRTC and the class.

Pegasus and Golden Sky, the two largest NRTC affiliates, which we refer to in this paragraph as Plaintiffs, filed an action on January 11, 2000 against DIRECTV in the same court as the NRTC case. The Plaintiffs alleged, among other things, that DIRECTV interfered with their contractual relationship with the NRTC. The Plaintiffs alleged that their rights and damages are derivative of the rights and damages asserted by the NRTC in its lawsuits against DIRECTV discussed above. On May 22, 2003, the Court granted DIRECTV’s motion for summary judgment on the interference claims, eliminating all claims for compensatory damages and punitive damages asserted by Plaintiffs and narrowing other of Plaintiffs’ claims. Plaintiffs have not accepted DIRECTV’s offer to settle on the same terms as the class settlement described above. However, DIRECTV believes that the remaining issues regarding the term of Plaintiffs’ contractual rights and its future relationship with DIRECTV have been determined by the settlement because Plaintiffs’ rights are derived from its contract with the NRTC. On January 23, 2004, DIRECTV moved to dismiss all of Plaintiffs’ remaining claims and moved for reconsideration of its summary judgement motion on the term of Plaintiffs’ member agreement.

DIRECTV filed suit in California State Court, Los Angeles County, on June 22, 2001 against Pegasus and Golden Sky, which we refer to collectively in this paragraph as the Defendants. The lawsuit seeks to recover approximately $54 million, excluding interest, that Defendants owe DIRECTV under the parties’ Seamless Marketing Agreement, which provides for reimbursement to DIRECTV of certain costs that resulted from new subscriber activations in Defendants’ territory. Defendants had ceased making payments, and indicated that they did not intend to make any further payments due under the agreement. On July 16, 2001, Defendants filed a cross complaint. Defendants then removed the action to the U.S. District Court for the Central District of California, where it was transferred to the judge hearing the other cases described above. DIRECTV denies any liability to Defendants, and intends to vigorously pursue the amounts owed to it, plus interest, from Defendants and defend against Defendants’ counterclaims. The trial date is set for March 23, 2004. This matter is not affected by the settlement described above.

On February 1, 2001 and September 19, 2001, the NRTC filed lawsuits in the U.S. District Court for the Central District of California against DIRECTV seeking a declaration from the court that it is not required to defend and indemnify DIRECTV for certain litigation pursued by its members. As part of the settlement described above, these cases were dismissed by the parties on January 8, 2004. The NRTC agreed to waive all

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claims regarding recoupment of fees and costs paid to date. The NRTC will no longer have the obligation to pay DIRECTV’s costs of defense, including attorneys’ fees, of any litigation other than Pegasus’ current litigation pending in the Central District of California, and the NRTC will not be required to indemnify DIRECTV for any judgment entered in the Pegasus Development Corporation patent litigation described below unless and until a court has entered final judgment that the NRTC has such obligation.

* * *

Independent Retailer Litigation.    In April 2001, Robert Garcia, doing business as Direct Satellite TV, an independent retailer of DIRECTV system equipment, instituted arbitration proceedings against DIRECTV U.S. in Los Angeles, California regarding commissions and certain chargeback disputes. On October 4, 2001, Mr. Garcia filed a class action complaint against DIRECTV U.S. in Los Angeles County Superior Court asserting the same claims and a Consumer Legal Remedies Act claim. Mr. Garcia alleges $300 million in class-wide damages and seeks certification of a class of plaintiffs to proceed in arbitration with court oversight. DIRECTV U.S. moved to dismiss and compel arbitration. On April 17, 2002, the Court entered an order compelling plaintiffs in the purported class to pursue their individual claims in arbitration, but the court purported to retain jurisdiction to determine whether there should be class treatment of dealer claims within the arbitration. DIRECTV U.S. appealed the order which was denied by both the appellate court and the California Supreme Court. On June 23, 2003, the U.S. Supreme Court issued its decision in the case Bazzle v. Green Tree Financial Corp., finding that whether an agreement to arbitrate permits class action arbitration is a decision for the arbitrator, not a court, to make. On October 6, 2003, the U.S. Supreme Court granted DIRECTV U.S.’ writ of certiorari vacating the state court decision and remanding the Garcia case for further proceedings consistent with the Bazzle decision. The California Court of Appeals issued an opinion on January 28, 2004 in which it reversed the April 17, 2002 order and remanded the case to the trial court with directions to remand the case to arbitration. On February 23, 2004, the trial court compelled the matter to arbitration and relinquished all jurisdiction in connection with the case. The matter is now pending before the American Arbitration Association.

* * *

On May 18, 2001, plaintiffs Cable Connection, Inc., TV Options, Inc., Swartzel Electronics, Inc. and Orbital Satellite, Inc. filed a class action complaint against DIRECTV U.S. in Oklahoma State Court, alleging claims similar to those in the above-described Garcia matter on behalf of all DIRECTV dealers. The plaintiffs seek unspecified damages and injunctive relief. As in the Garcia matter, the trial court granted DIRECTV U.S.’ motion to compel arbitration, but purported to retain jurisdiction to determine whether there should be class treatment of retailer claims within the arbitration. On January 7, 2003, the Oklahoma State Supreme Court issued an order permitting DIRECTV U.S. to proceed with an appeal of the trial court order. The appeal was stayed because of the Bazzle case. Following the Bazzle decision, DIRECTV U.S. and plaintiffs stipulated to dismiss the appeal and treat the matter in accordance with the Bazzle decision, but the Oklahoma State Supreme Court, in a communication dated July 23, 2003, has decided to retain jurisdiction and has not yet issued any further orders. On March 12, 2004, the plaintiffs served upon DIRECTV U.S. a Statement of Claim and Demand for Class Action Arbitration in Los Angeles, California essentially repeating the allegations and demands made in the litigation.

* * *

Intellectual Property Litigation.    On June 27, 2000, SuperGuide Corporation filed suit in the U.S. District Court for the Western District of North Carolina against DIRECTV Enterprises, LLC, DIRECTV, Inc. and DIRECTV Operations, LLC, which we refer to together in this paragraph as the DIRECTV defendants, the Company, Thomson Consumer Electronics, EchoStar Communications Corporation, EchoStar Satellite Corporation and EchoStar Technologies Corporation, alleging patent infringement and seeking unspecified damages and injunctive relief. Gemstar Development Corp. was added as a third party defendant because it

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asserts to have exclusive control of the patents by reason of a license agreement with SuperGuide Corporation. On July 3, 2002, the court granted summary judgment of non-infringement to the DIRECTV defendants, the Company and DIRECTV system manufacturers under all asserted claims of the patents in the case. Judgment for all defendants dismissing all claims of infringement and awarding costs to defendants was entered on July 25, 2002. On February 12, 2004, the Court of Appeals for the Federal Circuit affirmed the decision in part and reversed in part and remanded the action for further proceedings.

* * *

On December 5, 2000, Personalized Media Communications, LLC and Pegasus Development Corporation filed suit in the U.S. District Court for the District of Delaware against DIRECTV, Inc., the Company, Thomson Consumer Electronics and Philips Electronics North American Corp., alleging patent infringement and seeking unspecified damages and injunctive relief. On May 14, 2003, the court stayed the case pending outcome of reexaminations of the patents by the Patent Office.

* * *

In April 1997, the International Electronics Technology Corp. filed suit in the U.S. District Court for the Central District of California against DIRECTV, Inc., Hughes Aircraft Co., and Thomson Inc., alleging infringement of one U.S. patent and seeking unspecified damages and injunction. Plaintiff has asserted an interpretation of the claims at issue that relates to conditional access technology, and DIRECTV, Inc. has turned over the defense to NDS Limited, or NDS. Trial has not yet been scheduled. DIRECTV, Inc. has raised defenses of non-infringement and/or invalidity.

* * *

Other.    In March 2003, the Indian Income Tax Department issued an assessment of approximately $15.2 million against one of PanAmSat’s subsidiaries for the Indian tax year ended March 31, 1997. The tax claim relates to withholding taxes assessed on revenues derived from broadcasters inside and outside of India who broadcast from or into India. PanAmSat promptly appealed to the Commissioner of Indian Tax (Appeals) and continues to contest this assessment. If PanAmSat’s appeal is unsuccessful, it could be subject to comparable claims for subsequent years.

* * *

(b) Previously reported legal proceedings which have been terminated during the fourth quarter of 2003 and, in the case of voluntary petition for reorganization, subsequent thereto, but before the filing of this report, are summarized below:

Voluntary Petition for Reorganization.    On March 18, 2003, DLA LLC filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court. On December 11, 2003, DLA LLC filed a proposed Reorganization Plan, that reflected an agreement reached between DLA LLC, its owners and unsecured creditors and on January 9, 2004, the Bankruptcy Court approved DLA LLC’s disclosure statement for soliciting creditor approval of the proposed Reorganization Plan. The Reorganization Plan was confirmed by the Bankruptcy Court on February 13, 2004. On February 24, 2004, the Reorganization Plan became effective and DLA LLC emerged from bankruptcy protection as a reorganized entity. The Bankruptcy Court has retained jurisdiction to resolve certain remaining matters primarily related to the enforcement and interpretation of the Reorganization Plan. However, it is anticipated that the resolution of these matters will not have a material impact on DLA LLC’s operations.

* * *

Stockholder Litigation.    In April 2003, purported class actions were filed in Delaware Chancery Court (Young v. Pearce, et al.; Silverstein vs. Pearce, et al.; Wyser-Pratte Management Co., Inc., v. Barnevick, et al.;

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Robert LaMarche v. General Motors Corporation, et al.) and in the California Superior Court, Los Angeles, (Matcovsky, et al. v. Hughes Electronics Corporation, et al.; Brody v. Hughes Electronics Corporation, et al.) on behalf of the owners of GM Class H shares, challenging the series of transactions by which GM split-off its interest in the Company to the holders of shares of GM Class H common stock and News Corporation acquired 34% of our outstanding capital stock. The lawsuits allege that the transactions provided benefits to GM not available to all GM Class H common stockholders, in violation of fiduciary duties.

The Delaware actions were consolidated and plaintiffs filed a Consolidated Class Action Complaint on August 29, 2003, which dropped the Company, our directors and News Corporation from the case.

The California actions were consolidated and plaintiffs filed a Consolidated Class Action Complaint on July 18, 2003 against GM, the Company and each member of the respective Board of Directors of the two companies. On August 21, 2003, defendants filed a motion to dismiss or stay, and certain named defendants filed a motion to quash service, contesting personal jurisdiction in this matter. On November 12, 2003, the California Superior Court granted the motion to quash service, denied the motion to dismiss and granted the motion to stay.

The challenged transactions were consummated on December 22, 2003. As of that date, pursuant to the Separation Agreement between GM and the Company, GM has assumed the defense and indemnification of the Company and our directors in this matter. Based on the dismissal of the Delaware proceedings and the indemnification by GM as to the California case, we believe this matter is no longer material to us.

* * *

A purported class action, P. Shoenfeld Asset Management LLC, et al. v. Shaw et al., was filed in Delaware Chancery Court on December 18, 2002, against the Company and PanAmSat’s Board of Directors. The suit alleged that the settlement between EchoStar Communications Corporation and the Company of all claims related to the termination of the proposed merger between EchoStar and the Company favored the Company in violation of alleged fiduciary duties. On July 10, 2003, the Delaware Chancery Court granted defendants’ motions to dismiss all claims with prejudice and denied plaintiffs’ motion for leave to amend the complaint. The plaintiffs appealed, and on December 17, 2003, the dismissal was affirmed by the Delaware Supreme Court, so this purported transaction is no longer pending.

* * *

In September 2002, DIRECTV, Inc., DIRECTV Enterprises, LLC, and DIRECTV Operations, LLC, which we refer to in this paragraph as the DIRECTV Parties, filed a lawsuit in U.S. District Court in Los Angeles against NDS (and related entities), the provider of DIRECTV’s conditional access system, alleging, among other things, breach of contract and misappropriation of trade secrets. On October 21, 2002, NDS filed counterclaims against the DIRECTV Parties and a chip manufacturer. NDS sought injunctive relief as well as an unspecified amount in punitive damages. On August 5, 2003, the DIRECTV Parties, NDS, the chip manufacturer, the Company and News Corporation, NDS’ parent company, entered into an agreement to stay the litigation pending the closing of the proposed transactions with News Corporation. Upon closing of the News Corporation transactions, the litigation and all claims and counterclaims were dismissed with prejudice.

* * *

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

* * *

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

On March 16, 2004, we changed our corporate name from Hughes Electronics Corporation to The DIRECTV Group, Inc. The name change has no impact on the Company’s common stock or the rights of our stockholders. Effective on March 17, 2004, our ticker symbol on the NYSE was changed to “DTV.” From December 23, 2003 through March 16, 2004, the Company’s common stock was traded under the ticker symbol “HS.” Prior to December 23, 2003, our financial performance was tracked by the GM Class H common stock issued by GM, which was listed on the NYSE under the ticker symbol “GMH.” The GM Class H common stock was a “tracking stock” designed to provide holders with financial returns based on our financial performance. Holders of GM Class H common stock had no direct rights in our equity or assets, but rather had rights in the equity and assets of GM (which included 100% of the stock of the Company). In the split-off of the Company from GM that occurred as part of the News Corporation transactions completed on December 22, 2003, GM distributed the Company’s common stock to holders of the GM Class H common stock in exchange for their shares of GM Class H common stock on a one-for-one basis.

For purposes of setting forth, for the calendar periods indicated, the high and low closing sales price per share for the Company’s common stock, the information below is based on the GMH per share price through December 22, 2003 and the HS per share price from December 23, 2003 through December 31, 2003, as reported by the NYSE:

As of March 11, 2004, there were approximately 137,117 holders of record of the Company’s common stock.

Subject to the preferential and other dividend rights of any outstanding series of the Company’s Preferred Stock, holders of the Company’s common stock are entitled to such dividends and other distributions in cash, stock or property of the Company as may be declared by our Board of Directors in its sole discretion. There were no shares of the Company’s Preferred Stock outstanding at December 31, 2003. Since the split-off from GM, the Company’s Board of Directors has not paid, and does not currently intend to pay in the foreseeable future, cash dividends on its common stock. The Company paid a $275 million special cash dividend to GM in connection with the split-off. Future earnings of the Company, if any, are expected to be retained for the development of the businesses of the Company.

Prior to the completion of the News Corporation transactions on December 22, 2003, all of the Company’s common stock and convertible preferred stock were owned by GM. Accordingly, there was no public trading market for the Company’s common or convertible preferred stock. Dividends on the common stock were to be paid when and if declared by the Company’s Board of Directors. Except for the $275 million special cash

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dividend paid in connection with the split-off, no dividends were declared by the Company’s Board of Directors in 2003 and 2002. The convertible preferred stock did not accrue dividends.

Our subsidiaries, DIRECTV U.S. and PanAmSat, are subject to restrictive covenants under their debt and credit facilities. These covenants limit the ability of DIRECTV U.S., PanAmSat and their respective subsidiaries to, among other things, make restricted payments, including dividends, loans or advances to the Company.

Information regarding compensation plans under which our equity securities may be issued is included in Item 12 by incorporation by reference to the Proxy Statement for the Annual Meeting of Stockholders of the Company scheduled to be held on June 2, 2004.

ITEM 6.    SELECTED FINANCIAL DATA

Reference should be made to the Notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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THE DIRECTV GROUP, INC.

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SUMMARY DATA

Reference should be made to the Notes to the Consolidated Financial Statements.

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SUMMARY DATA — (continued)

The Company believes this measure is useful to investors, along with GAAP measures (such as revenues, operating profit and net income), to compare the Company’s operating performance to other communication, entertainment and media service providers. The Company believes that investors use current and projected Operating Profit Before Depreciation and Amortization and similar measures to estimate the Company’s current or prospective enterprise value and make investment decisions. This metric provides investors with a means to compare operating results exclusive of depreciation and amortization. The Company’s management believes this is useful given the significant variation in depreciation and amortization expense that can result from the timing of capital expenditures, the capitalization of intangible assets in purchase accounting, potential variations in expected useful lives when compared to other companies and periodic changes to estimated useful lives.

Operating Profit Before Depreciation and Amortization Margin is calculated by dividing Operating Profit Before Depreciation and Amortization by total revenues.

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THE DIRECTV GROUP, INC.

SUMMARY DATA — (concluded)

Selected Segment Data

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THE DIRECTV GROUP, INC.

BUSINESS OVERVIEW

We are a world-leading provider of digital television entertainment, broadband satellite networks and services, and global video and data broadcasting. We provide advanced communication services on a global basis and have developed a wide range of entertainment, information and communication services for home and business use, including video, data, voice, multimedia and Internet services. Our principal operations are carried out through four businesses organized in three segments:

Direct-To-Home Broadcast Segment

The Direct-To-Home Broadcast segment consists of the DIRECTV digital multi-channel entertainment businesses located in the U.S. and Latin America.

The Company records 100% of the net losses incurred by DLA LLC and certain other consolidated LOCs due to the accumulation of net losses in excess of the minority investors’ investments and our continued funding of those businesses.

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THE DIRECTV GROUP, INC.

Satellite Services Segment

PanAmSat, a publicly-held company of which we own approximately 80.5%, constitutes our Satellite Services segment. Currently, PanAmSat owns and operates 25 satellites that are capable of transmitting signals to geographic areas covering over 98% of the world’s population. PanAmSat provides satellite capacity for the transmission of cable and broadcast television programming from the content source to the cable operator or to the consumer’s home. PanAmSat’s satellites serving the U.S. are able to reach cable operators representing nearly 100% of all cable subscribers. PanAmSat’s global fleet also serves as the transmission platform for eight direct-to-home services worldwide, including DLA. In addition, PanAmSat provides satellite services to telecommunications carriers, government agencies, corporations and ISPs for the provision of satellite-based communication networks, including private business networks employing VSATs.

Network Systems Segment

Hughes Network Systems, our wholly-owned subsidiary, constitutes our Network Systems segment. HNS is a leader in the global market for VSAT private business networks with more than 500,000 terminals shipped or ordered. HNS operates a satellite-based consumer broadband Internet access service marketed under the DIRECWAY brand, which had approximately 180,000 subscribers as of December 31, 2003. In addition, HNS is one of the two largest manufacturers of DIRECTV set-top receivers, having shipped over 14 million units. HNS is also developing SPACEWAY, a more advanced satellite broadband communications platform that is expected to provide customers with high-speed, two-way data communications on a more cost-efficient basis than systems that are currently available. The first SPACEWAY satellite is expected to be launched in 2004 and service is expected to be introduced in 2005.

News Corporation Transactions

On December 22, 2003, GM, the Company and News Corporation completed a series of transactions that resulted in the split-off of the Company from GM and the simultaneous sale of GM’s 19.8% interest in the Company to News Corporation. GM received approximately $3.1 billion in cash and 28.6 million News Corporation Preferred ADSs in these transactions. GM split-off the Company by distributing our common stock to the holders of the GM Class H common stock in exchange for their GM Class H common shares on a one-for-one basis. Immediately after the split-off, News Corporation acquired an additional 14.2% of outstanding common stock from the former GM Class H common stockholders, which provided News Corporation with a total of 34% of our outstanding common stock. GM Class H common stockholders received about 0.8232 shares of our common stock and about 0.09207 News Corporation Preferred ADSs for each share of GM Class H common stock held immediately prior to the closing of the transactions. In addition, we paid to GM a special cash dividend of $275 million in connection with the transactions. Upon completing these transactions, News Corporation transferred its 34% interest in the Company to its 82% owned subsidiary, Fox.

For the Company, the transactions represented an exchange of equity interests by investors. As such, we continued to account for our assets and liabilities at historical cost and did not apply purchase accounting. We recorded the $275 million special cash dividend payment to GM as a reduction to additional paid-in capital. We also recorded a $25.1 million decrease to additional paid-in capital representing the difference between the Company’s consolidated tax receivable from GM as determined on a separate return basis and the receivable determined pursuant to the amended income tax allocation agreement between GM and the Company. See Note 9 to the Consolidated Financial Statements in Item 8 for additional discussion regarding the amended income tax allocation agreement.

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DLA LLC Reorganization

On March 18, 2003, DLA LLC filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court. The filing did not include any of the LOCs providing the DIRECTV service in Latin America and the Caribbean. During the bankruptcy proceedings, DLA LLC continued to manage its business as a debtor-in-possession.

On December 11, 2003, DLA LLC filed a proposed Reorganization Plan that reflected an agreement reached between DLA LLC, its owners and unsecured creditors. On February 13, 2004, the Bankruptcy Court confirmed DLA LLC’s Reorganization Plan, which became effective on February 24, 2004. The Bankruptcy Court has retained jurisdiction to resolve certain remaining matters primarily related to the enforcement and interpretation of the Reorganization Plan. However, it is anticipated that resolution of these matters will not have a material impact on DLA LLC’s operations.

While the bankruptcy was proceeding, we provided DLA LLC with a $300 million senior secured debtor-in-possession financing facility. The facility was fully drawn and converted, in accordance with the Reorganization Plan, into an equity interest in DLA LLC on February 24, 2004. As part of the Reorganization Plan, we also agreed to provide “exit” financing, consisting of a revolving credit facility of up to $200 million, decreasing from time to time based on a schedule in the revolving credit facility agreement. The revolving credit facility expires on February 27, 2009 and borrowings bear interest at a variable rate, calculated as the base rate (as defined in the revolving credit facility agreement) plus 6%, not to exceed the greater of 12% or the Company’s cost of funds.

The Reorganization Plan and/or contribution agreement between the Company and Darlene, or the Contribution Agreement, provided for the contribution by the Company of our claims against DLA LLC of approximately $1.4 billion, to the extent not previously discharged in the Chapter 11 proceedings, as well as the contribution of approximately $530 million in intercompany loans made by the Company to SurFin Ltd. and its subsidiaries, or SurFin, our 75% owned financing affiliate of DLA LLC. Also, in accordance with the Reorganization Plan and/or Contribution Agreement, we contributed to DLA LLC our equity and other interests in SurFin and in the various LOCs. In exchange for these contributions, the discharges and waivers of our claims and the conversion into equity of the $300 million senior secured debt-in-possession financing facility, our equity interest in the restructured DLA LLC increased from 74.7% to approximately 85.9% pursuant to the Reorganization Plan and/or the Contribution Agreement. Darlene, which also contributed its equity and other interests in SurFin and the various affiliated operating entities, holds the remaining approximately 14.1% equity interest in the restructured DLA LLC pursuant to the Reorganization Plan and/or the Contribution Agreement. The restructuring in bankruptcy and the contributions by the Company and Darlene provided DLA LLC with direct control of SurFin and DLA’s most significant LOCs and assets.

Reorganization expense of $212.3 million reported in our Consolidated Statements of Income includes the costs incurred to file the bankruptcy petition, ongoing related legal and consulting costs, costs related to settlement agreements reached with creditors, the write-off of intangible assets and other charges related to the reorganization. Also included in reorganization expense are accruals for any claims allowed in the Chapter 11 proceeding for amounts not previously recognized as liabilities subject to compromise. Cash payments of $27.8 million and $137.7 million were made during December 2003 and February 2004, respectively. DLA LLC will record a gain of approximately $50 million during the first quarter of 2004 as a result of the settlement of certain obligations in connection with the confirmation of the Reorganization Plan.

Strategic Initiatives

In February 2004, we announced our intent to focus on the direct-to-home satellite businesses. We are also considering strategic alternatives with regard to HNS and our ownership interest in PanAmSat. With the emergence of DLA LLC from bankruptcy in February 2004, we are turning our attention to potential combinations, alliances or other initiatives with respect to that business. Specifically with regard to

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DIRECTV U.S., we continue to consider alternatives to resolve remaining outstanding issues with the NRTC and to resolve our disputes with Pegasus.

As a result, during the first quarter of 2004, the Company announced the reduction of corporate office headcount by over half and the consolidation of Corporate and DIRECTV U.S. support functions. DLA LLC also announced headcount reductions during the first quarter of 2004, subsequent to its emergence from bankruptcy and the completion of certain transactions that were anticipated under its Reorganization Plan as more fully discussed above in “DLA Reorganization.” As a result, during the first quarter of 2004, the Company will record a charge of about $43 million, including $19 million relating to severance and other benefits provided to employees and $24 million in curtailment and settlement charges related to the Company’s pension benefit plans.

RESULTS OF OPERATIONS—EXECUTIVE OVERVIEW AND OUTLOOK

The following discussion relates primarily to DIRECTV U.S., which generates over 80% of our revenues and is the source of most of our revenue growth.

Competition and Industry Highlights

DIRECTV U.S.’ competitors within the MVPD industry include cable television, DBS and wireless cable companies. The FCC recently reported that approximately 90 million, or 84%, of approximately 107 million U.S. television households subscribe to MVPD services, of which more than 21 million subscribe to DBS. DIRECTV U.S. believes there continues to be significant demand for its high-quality television programming service, which it plans to continue to differentiate from other MVPDs with new content, interactivity, HDTV programming, DVR content and more. Therefore, DIRECTV U.S. believes there is substantial opportunity for continued subscriber revenue, earnings and cash flow growth.

Although there is substantial opportunity for revenue and earnings growth, the industry is subject to increasing programming costs due to average annual programming rate increases that significantly exceed inflation and the high cost of subscriber acquisitions due to significant competition. DIRECTV U.S. believes that there is an opportunity to reduce the average annual increase of its programming costs by leveraging its large subscriber base in renegotiations with its program suppliers. DIRECTV U.S. also believes there is an opportunity to reduce its subscriber acquisition costs through simplification and standardization of its set-top receiver design, and through streamlining its ordering, distribution, inventory management and sales processes, as well as through technological advances.

The industry is also subject to high levels of subscriber churn, which requires significant investment for DIRECTV U.S. to manage. DIRECTV U.S. believes that the cost of managing churn is well worth the investment since it is more costly to add new subscribers. DIRECTV U.S. manages its churn by providing a high level of customer service and by providing loyalty and retention offers to its existing subscribers. The loyalty and retention offers include such offers as the additional set-top receiver, DVR and local channel upgrade programs. DIRECTV U.S. finds that subscribers that have advanced products, multiple set-top receivers or receive local channels remain DIRECTV subscribers longer than other subscribers. DIRECTV U.S. believes that it can reduce retention costs by improving its cost structure similar to that described above for its subscriber acquisition costs.

DIRECTV U.S. is also subject to the additional cost of adding more local channels and HDTV programming, which requires significant capital expenditures for satellites, broadcast equipment and additional orbital frequencies to increase its programming content capacity. As part of the approval of the News Corporation transactions, the FCC required DIRECTV U.S. to provide local channels in an additional 30 local U.S. markets, subject to certain conditions, for a total of up to 130 local markets by the end of 2004. DIRECTV U.S. believes its continued expansion will require significant capital investment over the next several years, which it believes is necessary to remain competitive with other MVPD companies.

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THE DIRECTV GROUP, INC.

Revenues

Our revenue increases over the last three years have been driven by the growing subscriber base and increasing ARPU at DIRECTV U.S. DIRECTV U.S. has added more than one million net new owned and operated subscribers in each of the last three years. DIRECTV U.S. expects to add more than one million net new owned and operated subscribers in 2004 mostly through the introduction of local channels in additional markets, continued competitive offers to new customers, the introduction of new services and the expected reduction of churn to slightly below the level of churn in 2003. DIRECTV U.S.’ ARPU increased 6.9% in 2003 and 1.9% in 2002. DIRECTV U.S. expects ARPU for 2004 to increase slightly above the planned March 2004 price increase of 3.0%-3.5% per month.

In addition to the revenue growth at DIRECTV U.S., we expect our other business units to have 2004 revenues that are slightly higher or relatively unchanged compared to 2003 revenues.

Operating Costs and Expenses

Over the last three years, operating costs and expenses at DIRECTV U.S. have decreased as a percentage of revenues from 104% in 2001 to 94% in 2003. DIRECTV U.S. expects operating costs and expenses as a percentage of revenues to continue to improve in 2004 due to lower general and administrative expenses, subscriber service expenses and depreciation and amortization expense as a percentage of revenues, partially offset by an increase in the cost of customer retention and upgrade programs associated with their existing subscribers. Although DIRECTV U.S. believes subscriber acquisition costs will remain fairly constant as a percentage of revenues due to its revenue growth, DIRECTV U.S. believes that cost per gross subscriber addition, or SAC, will be higher in 2004 compared to 2003. The expected increases in SAC and the cost of customer retention and upgrade programs associated with their existing subscribers are due to an expected increase in the number of set-top receivers and DVRs per subscriber, partially offset by lower set-top receiver costs.

In 2004, we expect PanAmSat’s operating profit to remain relatively unchanged from 2003. We expect HNS’ operating profit to improve mostly from the added efficiencies and gross profit provided by a larger DIRECWAY subscriber base. We also expect improvement in DLA’s operations, largely as a result of the renegotiation of its significant programming contracts prior to its emergence from bankruptcy in February 2004 and an expected improvement in the economic conditions in several major countries in the region.

SIGNIFICANT EVENTS AFFECTING THE COMPARABILITY OF THE RESULTS OF OPERATIONS

In addition to the items described above, the following events had a significant effect on the comparability of our operating results for the three years ended December 31, 2003:

Direct-To-Home Broadcast Segment

On June 4, 2002, DIRECTV U.S. and General Electric Capital Corporation, or GECC, executed an agreement to settle, for $180 million, a claim arising from a contractual arrangement whereby GECC managed a credit program for consumers who purchased DIRECTV programming and related hardware. As a result, in 2002, the provision for loss related to this matter was increased by $122.0 million, of which $48.0 million was recorded as a charge to “Selling, general and administrative expenses” and $74.0 million was recorded as a charge to “Interest expense” in the Consolidated Statements of Income.

In December 2002, DIRECTV U.S. announced a five-year agreement with the NFL for the exclusive DBS television rights to the NFL SUNDAY TICKET through 2007 and exclusive multi-channel television rights through 2005. DIRECTV U.S.’ agreement with the NFL allows it to distribute expanded programming on the

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THE DIRECTV GROUP, INC.

DIRECTV service to its NFL SUNDAY TICKET subscribers, including games broadcast in HDTV and the NFL CHANNEL^™. In 2003, DIRECTV U.S. increased the price charged for the NFL SUNDAY TICKET package in order to cover the increased costs under the new agreement.

On July 1, 2003, as more fully discussed in “Accounting Changes” below, DLA began consolidating the Venezuelan and Puerto Rican LOCs with the adoption of Financial Accounting Standards Board, or FASB, Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities—an interpretation of ARB No. 51,” or FIN 46. Prior to July 1, 2003, DLA accounted for its investments in the Venezuelan and Puerto Rican LOCs under the equity method of accounting and reflected approximately 75.0% of their net income or loss in “Other, net” in the Consolidated Statements of Income. In addition, in May 2001, due to the acquisition of a majority interest of Galaxy Entertainment Argentina S.A., or GEA, DLA began consolidating the results of GEA. Previously, DLA’s interest in GEA was accounted for under the equity method.

Also in 2001, DLA secured a contract for the exclusive rights to broadcast and re-sell the FIFA World Cup soccer tournaments occurring in Argentina, Chile, Colombia, Mexico, Uruguay and Venezuela in 2002 and 2006. The cost of the 2002 rights of $135.0 million was charged to operations in 2002 when the live events were broadcast. DLA was unable to recover the entire cost of the programming, resulting in an $80.0 million loss on the contract in 2002. The 2006 contract was rejected in conjunction with DLA LLC’s bankruptcy and renegotiated under substantially different terms.

DLA’s 2003 and 2002 operating results have been adversely affected by the economic and political instability throughout Latin America. In particular, revenues and operating profit have been significantly affected by a loss in net subscribers and the ongoing depreciation of certain local currencies.

Satellite Services Segment

In June and July 2003, two of PanAmSat’s satellites experienced secondary XIPS failures. As a result of these failures, PanAmSat reduced the estimated useful lives of these satellites during the third quarter of 2003 resulting in $14.3 million of additional depreciation expense in the second half of 2003. See “Contractual Obligations, Off Balance Sheet Arrangements and Contingencies” below for further information regarding the XIPS failures and related insurance claim.

In October 2001, PanAmSat filed a proof of loss under an insurance policy on PAS-7 related to circuit failures, which occurred in September 2001 and resulted in a reduction of 28.9% of the satellite’s total power available for communications. During 2002, PanAmSat’s insurers settled the claim by payment to PanAmSat of $215.0 million. PanAmSat recorded a net gain of approximately $40.1 million related to this insurance claim in 2002.

Other

During December 2003, upon completion of the News Corporation transactions discussed above, the Company expensed related costs of about $132 million that primarily included investment advisor fees of about $49 million, retention benefits of about $65 million and severance benefits of about $15 million to “Selling, general and administrative expenses” in the Consolidated Statements of Income. In addition, certain employees of the Company are expected to earn about $36 million in additional retention benefits during the 12 month period subsequent to the completion of the transactions.

During the first quarter of 2003, the Company and America Online, Inc., or AOL, agreed to terminate the strategic alliance, which the companies had entered into in June 1999. In connection with the termination of the alliance, we recorded a charge of $23.0 million in the fourth quarter of 2002 to “Selling, general and

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THE DIRECTV GROUP, INC.

administrative expenses” in the Consolidated Statements of Income and were released from our commitment to spend up to approximately $1 billion in additional sales, marketing, development and promotion efforts in support of certain specified products and services.

Beginning in the first quarter of 2003, we no longer allocate general corporate expenses to our subsidiaries. Prior period segment information has been reclassified to conform to the current period presentation.

During 2002, we recorded a $95.0 million gain, net of legal costs, as an offset to “Selling, general and administrative expenses” in the Consolidated Statements of Income as a result of the favorable resolution of a lawsuit we filed against the U. S. government on March 22, 1991. The lawsuit was based upon NASA’s breach of contract to launch ten satellites on the Space Shuttle.

During 2001, we announced a nearly 10% reduction of our approximately 7,900 employees, excluding DIRECTV customer service representatives, located in the U.S. As a result, about 750 employees across all business disciplines were given notification of termination that resulted in an expense of $87.5 million in 2001 to “Selling, general and administrative expenses” in the Consolidated Statements of Income. Of that charge, $80.0 million was related to employee severance benefits and $7.5 million was for other costs primarily related to a remaining lease obligation associated with excess office space and employee equipment. The remaining accrual amounted to $3.8 million and $14.1 million at December 31, 2003 and 2002, respectively.

In addition to the significant operating gains and losses described above, we recognized a number of significant non-operating gains and losses during the years ended December 31, 2003, 2002 and 2001. These transactions are more fully described in Note 6: Investments, Note 14: Other Income and Expenses and Note 17: Acquisitions and Divestitures in the Consolidated Financial Statements in Item 8.

RESULTS OF OPERATIONS

2003 Compared To 2002

Consolidated

Revenues.    The following table presents our revenues, by segment, for the years ended December 31:

The $1,171.0 million increase in revenues at the Direct-To-Home Broadcast segment resulted primarily from the addition of new subscribers in 2003 and higher ARPU on the larger subscriber base at DIRECTV U.S. The increase in revenues at DIRECTV U.S. was partially offset by a decrease in revenues at DLA due to the $55.0 million of revenues generated by the 2002 FIFA World Cup, a decline in the number of subscribers and the further depreciation of certain Latin American currencies in 2003. The $152.1 million increase in revenues at the Network Systems segment resulted primarily from higher sales in its set-top receiver and DIRECWAY satellite broadband businesses.

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THE DIRECTV GROUP, INC.

Operating Costs and Expenses.    The following table presents our operating costs and expenses for the years ended December 31:

Broadcast programming and other costs increased by $748.7 million due to higher costs at DIRECTV U.S. resulting from higher programming costs associated with the increase in subscribers, annual program supplier rate increases, the launch of additional local and other channels during 2003, increased costs associated with the new NFL SUNDAY TICKET contract and an increase in gross subscriber additions through direct customer acquisition programs. We include costs to acquire new DIRECTV U.S. subscribers through direct customer acquisition programs, which primarily consist of the cost of hardware and installation subsidies, in “Broadcast programming and other costs.” However, we include costs to acquire new DIRECTV U.S. subscribers through third-party customer acquisition programs, which primarily consist of commissions paid to authorized retailers and dealers, in “Selling, general and administrative expenses.” Broadcast programming and other costs also increased at the Network Systems segment related to the larger DIRECWAY subscriber base. The increases in broadcast programming and other costs were partially offset by the $135.0 million cost of the 2002 FIFA World Cup rights at DLA and lower programming costs due to the rejection and/or renegotiation of certain programming contracts as a result of the 2003 DLA LLC bankruptcy proceedings.

Selling, general and administrative expenses increased by $177.6 million primarily due to a one-time charge of approximately $132 million in 2003 related to the completion of the News Corporation transactions, higher 2003 retention, upgrade and other marketing costs at DIRECTV U.S., a $95.0 million net gain recorded in 2002 for the NASA claim, and a $40.1 million net gain recorded in 2002 related to the PAS-7 insurance claim. These increases were partially offset by lower foreign currency translation losses at DLA in 2003, a $48.0 million loss recorded for the GECC settlement in 2002 and a $23.0 million loss recorded in connection with the termination of the AOL alliance in 2002.

The increase in depreciation and amortization was primarily from DIRECTV U.S. due to a $35.9 million increase in depreciation expense associated with assets placed in service during 2002 and 2003 and a $55.5 million increase in amortization expense that resulted from the reinstatement of amortization expense during the fourth quarter of 2002 related to certain intangible assets due to the issuance of the Emerging Issues Task Force, or EITF, Issue No. 02-17, “Recognition of Customer Relationship Assets Acquired in a Business Combination.” See Note 5: Goodwill and Intangible Assets in the Notes to the Consolidated Financial Statements in Item 8 for additional information. The increase was partially offset by a $22.9 million decrease at the Satellite Services segment primarily resulting from a satellite becoming fully depreciated in July 2002, partially offset by an increase in depreciation expense resulting from satellites placed into service during 2002 and 2003.

Interest Income and Expense.    Interest income increased to $42.7 million in 2003 compared to $24.5 million in 2002 due to an increase in average cash balances. Interest expense decreased to $312.5 million in 2003 from $334.5 million in 2002. The decrease in interest expense resulted from the $74.0 million of interest recorded in connection with the settlement of the GECC dispute in 2002, partially offset by higher average outstanding borrowings and a higher weighted average interest rate in 2003. Interest expense is net of capitalized

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THE DIRECTV GROUP, INC.

interest of $133.9 million and $116.8 million in 2003 and 2002, respectively. Changes in cash and cash equivalents and debt are discussed in more detail below under “Liquidity and Capital Resources.”

Reorganization Expense.    As part of DLA LLC’s bankruptcy proceedings, the Company and DLA recognized reorganization expenses of $212.3 million in 2003 resulting from settlement agreements reached with creditors, the write-off of intangible assets and legal and consulting costs. See “DLA LLC Reorganization” above for additional information.

Other, Net.    Other, net decreased to zero in 2003 from income of $425.5 million in 2002. The significant components of “Other, net” were as follows for the years ended December 31: