<PAGE>   1
 
                          HOME SHOPPING NETWORK, INC.
                               1995 ANNUAL REPORT
 
                                          This report is being printed on the
                                          lowest cost paper obtainable.
                                          Management felt that this was
                                          appropriate given this year's dismal
                                          performance. Our hope is that next
                                          year this report will glow with color,
                                          graphics, and expansive statements
                                          about the future of your Company,
                                          supported by results from calendar
                                          year 1996. Meanwhile, there is work to
                                          be done.
<PAGE>   2
 
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                             ---------------------
 
                                   FORM 10-K
 
<TABLE>
<C>         <S>
    [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
            THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
               FOR THE YEAR ENDED DECEMBER 31, 1995
</TABLE>
 
                           COMMISSION FILE NO. 1-9118
 
                             ---------------------
 
                          HOME SHOPPING NETWORK, INC.
             (Exact name of registrant as specified in its charter)
 
                             ---------------------
 
<TABLE>
<S>                                           <C>
                   DELAWARE                                     59-2649518
       (State or other jurisdiction of                       (I.R.S. Employer
        incorporation or organization)                     Identification No.)
   2501 118TH AVENUE NORTH, ST. PETERSBURG,                       33716
                    FLORIDA                                     (Zip Code)
 (Address of registrant's principal executive
                   offices)
</TABLE>
 
                                 (813) 572-8585
              (Registrant's telephone number, including area code)
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
<TABLE>
<CAPTION>
                                  TITLE OF                           NAME OF EXCHANGE
                                 EACH CLASS                         ON WHICH REGISTERED
          --------------------------------------------------------  -------------------
          <S>                                                       <C>
          Common Stock, $.01 Par Value............................         NYSE
</TABLE>
 
                             ---------------------
 
          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/
 
     As of March 6, 1996, there were outstanding 70,740,579 shares of Common
Stock (net of 6,986,000 shares held in treasury) and 20,000,000 shares of Class
B common stock. The aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 6, 1996, was $611,499,585.
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
<TABLE>
<CAPTION>
                                DOCUMENTS                        FORM 10-K REFERENCE
                                                                 --------------------
          <S>                                                    <C>
          Proxy Statement dated March 1996.....................  Part III Items 10-13
</TABLE>
 
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<PAGE>   3
 
                          HOME SHOPPING NETWORK, INC.
 
                            FORM 10-K ANNUAL REPORT
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                                       PAGE NO.
                                                                                       --------
<S>          <C>                                                                       <C>
PART I
  Item 1     Business................................................................      1
  Item 2     Properties..............................................................      7
  Item 3     Legal Proceedings.......................................................      8
  Item 4     Submission of Matters to a Vote of Security Holders.....................      8
PART II
  Item 5     Market for Registrant's Common Equity and Related Stockholder Matters...      9
  Item 6     Selected Financial Data.................................................     10
  Item 7     Management's Discussion and Analysis of Financial Condition and Results
             of Operations...........................................................     12
  Item 8     Consolidated Financial Statements.......................................     24
  Item 9     Changes in and Disagreements with Accountants on Accounting and
             Financial Disclosures...................................................     46
PART III
  Item 10    Directors and Executive Officers of the Registrant......................     47
  Item 11    Executive Compensation..................................................     47
  Item 12    Security Ownership of Certain Beneficial Owners and Management..........     47
  Item 13    Certain Relationships and Related Transactions..........................     47
PART IV
  Item 14    Exhibits, Financial Statement Schedule, and Reports on Form 8-K.........     47
</TABLE>
<PAGE>   4
 
                                     PART I
 
ITEM 1 -- BUSINESS
 
                                    GENERAL
 
     Home Shopping Network, Inc. ("HSN" or the "Company") is a holding company,
the subsidiaries of which conduct the day-to-day operations of the Company's
various business activities. The Company's primary business, and principal
source of revenue, is electronic retail sales by Home Shopping Club, Inc.
("HSC"), a wholly-owned subsidiary of the Company and a leader in the electronic
retailing industry.
 
     The Company experienced a downturn in its business during 1995, reporting a
net loss of $61.9 million, a decline in net sales, significant operating losses
and negative cash flow from operations.
 
     The Company believes that its negative performance in 1995 was due in part
to the adverse effects of certain merchandising and programming strategies which
had been implemented in late 1994 and 1995. In November 1995, the Company
appointed Barry Diller as Chairman of the Board of Directors and James Held as
President and Chief Executive Officer. The Company sought the services of
Messrs. Diller and Held because of their significant experience in electronic
retailing and programming.
 
     The new senior management of HSN has undertaken a comprehensive review of
HSN's merchandising and programming strategies, operations, budget and financial
condition. Although the Company believes that new management's operating and
merchandising strategies will improve the Company's operating results, there can
be no assurance that management will be successful in these efforts.
 
     On March 1, 1996, the Company obtained additional financing through a
private placement of $100.0 million of Convertible Subordinated Debentures.
 
     In November 1995, Tele-Communications, Inc. ("TCI"), which, through its
wholly owned subsidiary Liberty Media Corporation ("Liberty"), beneficially owns
approximately 41% of the outstanding equity securities of the Company,
representing approximately 80% of the voting power, entered into certain
agreements with Mr. Diller and Silver King Communications, Inc. ("SKC") pursuant
to which, among other things, TCI has agreed to transfer these equity securities
of the Company to SKC. Pursuant to a separate proposed transaction between Mr.
Diller and Liberty, an entity controlled by Mr. Diller would acquire equity
securities representing a majority of the voting power of SKC. As a result,
assuming the consummation of these transactions, Mr. Diller would acquire
indirect voting control of the Company through his voting interest in SKC. The
consummation of each of these transactions is subject to a number of conditions
including, but not limited to, the receipt of necessary regulatory and SKC
shareholder approvals.
 
                            HOME SHOPPING CLUB, INC.
 
     HSC sells a variety of consumer goods and services by means of HSC's live,
customer-interactive electronic retail sales programs which are transmitted
twenty-four hours a day, seven days per week, via satellite to cable television
systems, affiliated broadcast television stations and satellite dish receivers.
HSC's retail sales programming is currently carried on two separate networks,
HSN and Spree!. Both networks are carried by cable television systems and
broadcast television stations throughout the country. Spree! programming is
available in one hour segments, which enable broadcast and cable affiliates to
air Spree! in available time slots that would not otherwise produce revenue for
the affiliate.
 
     The Company's electronic retail marketing and programming is intended to
promote sales and customer loyalty through a combination of information,
entertainment and the creation of confidence in HSC and its products. HSC
programming is divided into segments which are televised live with a show host
who presents the merchandise and conveys information relating to the product,
including price, quality, features and benefits. Viewers place orders for
products by calling a toll-free telephone number. Show hosts engage callers in
on-air discussions regarding the currently featured product or the caller's
previous experience with the Company's products. This format creates a
spontaneous and entertaining program. HSC attempts to stimulate
 
                                        1
<PAGE>   5
 
customer loyalty by providing, among other things, marketing materials such as
the "Bargaineer(R) HomeView(sm)" magazine which offers discounts on HSC
purchases, features articles on the Company's products and programming, and
includes schedules of upcoming shows.
 
     On August 5, 1995, the Company relaunched HSN with more scheduled programs
and theme related shows, new sets, graphics and music. During the third quarter
of 1995, the Company relaunched Spree! with a more spontaneous format, new
graphics and music. These changes were designed to distinguish the networks and
reach a broader range of potential customers.
 
     The following table highlights the changes in the estimated unduplicated
television household reach of HSN, the Company's primary network, by category
for the year ended December 31, 1995:
 
<TABLE>
<CAPTION>
    ---------------------------------------------------------------------------------------------
                                                          CABLE*   BROADCAST   SATELLITE   TOTAL
    ---------------------------------------------------------------------------------------------
                                                               (In thousands of households)
    <S>                                                   <C>      <C>         <C>         <C>
    Households -- December 31, 1994.....................  38,960     23,068      3,750     65,778
    Net additions/(deletions)...........................   4,757     (1,510)        --      3,247
    Shift in classification.............................     503       (503)        --         --
    Change in Nielsen household counts..................      --        164         --        164
                                                          ------   ---------   ---------   ------
    Households -- December 31, 1995.....................  44,220     21,219      3,750     69,189
                                                          ======    =======     ======     ======
</TABLE>
 
---------------
 
* Households capable of receiving both broadcast and cable transmissions are
  included under cable.
 
     According to industry sources, as of December 31, 1995, there were 95.3
million homes in the United States with a television set, 62.1 million basic
cable television subscribers and 3.8 million homes with satellite dish
receivers.
 
     In addition to the households in the above table, as of January 1, 1996,
approximately 12.0 million cable television households were reached by Spree!,
of which 3.4 million were on a part-time basis. Of the total cable television
households receiving Spree!, 9.7 million also receive HSN.
 
CUSTOMER SERVICE AND RETURN POLICY
 
     HSC believes that satisfied customers will be loyal and will purchase
merchandise on a regular basis. Accordingly, HSC has customer service personnel
and computerized voice response units (the "VRU") available to handle calls
relating to customer inquiries seven days a week, twenty-four hours a day.
 
     Generally, any item purchased from HSC may be returned within thirty days
for a full refund of the purchase price, including the original shipping and
handling charges.
 
DISTRIBUTION, DATA PROCESSING AND TELECOMMUNICATIONS
 
     The Company's fulfillment subsidiaries store, service and ship merchandise
from warehouses located in St. Petersburg, Florida, Salem, Virginia and
Waterloo, Iowa. During 1995, the Company closed its distribution warehouse in
Reno, Nevada. Generally, merchandise is delivered to customers within 7 to 10
business days of placing an order.
 
     HSN currently operates several Unisys main frame computers and has
extensive computer systems which track purchase orders, inventory, sales,
payments, credit authorization, and delivery of merchandise to customers.
 
     HSC has digital telephone and switching systems and utilizes the VRU which
allows callers to place their orders by means of touch tone input or to be
transferred to an operator.
 
     The Company is developing plans for upgrading or replacing many of these
systems during 1996 and 1997.
 
                                        2
<PAGE>   6
 
PRODUCT PURCHASING AND LIQUIDATION
 
     HSC purchases merchandise made to its specifications, merchandise from
manufacturers' lines and overstock inventories of wholesalers. During 1995, the
Company continued to change its purchasing strategy to emphasize product
sourcing, variety, development of new private label lines and name brand
merchandise. This strategy is likely to change in 1996 based on determinations
to be made by new management. The mix of products and source of such merchandise
depends upon a variety of factors, including price and availability. HSC has no
long-term commitments with any of its vendors, and there are various sources of
supply available for each category of merchandise sold.
 
     HSC's product offerings include: jewelry; hardgoods, which include consumer
electronics, collectibles, housewares, and consumables; softgoods, which consist
primarily of clothing and fashion accessories, and cosmetics. For 1995, jewelry,
hardgoods, softgoods and cosmetics accounted for approximately 39%, 37%, 14% and
10%, respectively, of HSC's net sales.
 
     The Company liquidates short lot and returned merchandise through its five
outlet stores and two liquidation centers located in Florida. Merchandise that
is damaged is liquidated by the Company through traditional channels.
 
TRANSMISSION AND PROGRAMMING
 
     HSC produces retail sales programs in its studios located in St.
Petersburg, Florida. These programs are distributed to cable television systems,
broadcast television stations, a direct broadcast satellite service and
satellite dish receivers by means of HSN's satellite uplink facilities to
satellite transponders leased by HSN. Any cable television system, broadcast
television station or individual satellite dish owner in the United States and
the Caribbean Islands equipped with standard satellite receiving facilities is
capable of receiving HSC programming.
 
     HSN has lease agreements securing full-time use of three transponders on
three domestic communications satellites. Each of the transponder lease
agreements grants HSN "protected" rights. When the carrier provides services to
a customer on a "protected" basis, replacement transponders (i.e., spare or
unassigned transponders) on the satellite may be used in the event the
"protected" transponder fails. Should there be no replacement transponders
available, the "protected" customer will displace a "preemptible" transponder
customer on the same satellite. The carrier also maintains a protection
satellite and should a satellite fail completely, all "protected" transponders
would be moved to the protection satellite which is available on a "first fail,
first served" basis.
 
     One transponder leased by HSN may, however, be preempted in order to
satisfy the owner's obligations to provide the transponder to another lessee on
the satellite in the event that the other lessee cannot be restored to service
through the use of spare or reserve transponders (the "Special Termination
Right"). As of June 5, 1995, the Company discontinued use of this satellite
transponder for which it has a non-cancelable operating lease calling for
monthly payments of approximately $150,000 through December 31, 2006. The
Company subleased this satellite transponder to a related party during 1995. The
sublease expired on February 15, 1996, and the Company is currently seeking to
sublease the transponder or to sell its rights with respect to this satellite
transponder. The Company does not expect any material adverse financial impact
in connection with the lease.
 
     A transponder failure that would necessitate a move to another transponder
on the same satellite would not result in any significant interruptions of
service to the cable systems and/or television stations which receive HSC's
programming. However, a failure that would necessitate a move to another
satellite may temporarily affect the number of cable systems and/or television
stations which receive HSC's programming (as well as all other programming
carried on the failed satellite) because of the need to install equipment or to
reorient earth stations.
 
     The terms of two of the leases are for the life of the satellites, which
are projected to be through 2004. The term of the third lease is through
December 31, 2006, subject to earlier implementation of the Special Termination
Right.
 
                                        3
<PAGE>   7
 
     HSN's access to three transponders pursuant to long-term agreements would
enable HSC to continue transmission of its two programming services, HSN and
Spree!, should any one of the satellites fail. Although HSN believes it is
taking every reasonable measure to ensure its continued satellite transmission
capability, there can be no assurance that termination or interruption of
satellite transmissions will not occur. Such a termination or interruption of
service by one or more of these satellites could have a material adverse effect
on the operation and financial condition of the Company.
 
     The availability of replacement satellites and transponder time beyond
current leases is dependent on a number of factors over which HSN has no
control, including competition among prospective users for available
transponders and the availability of satellite launching facilities for
replacement satellites.
 
     The Federal Communications Commission ("FCC") grants licenses to construct
and operate satellite uplink facilities which transmit signals to satellites.
These licenses are generally issued without a hearing if suitable frequencies
are available. HSN has been granted two licenses for operation of C-band
satellite transmission facilities and two licenses for operation of KU-band
satellite transmission facilities on a permanent basis in Clearwater and St.
Petersburg, Florida.
 
REGULATORY MATTERS
 
     On October 5, 1992, the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") was enacted into law. Among the
many provisions of this law is one that mandates that cable systems carry the
signals of local commercial television stations ("must carry") or, at the
station's option, that cable systems and television stations negotiate a fee to
be paid by cable systems for the retransmission by such cable systems of the
local television station's broadcast signal. HSC's full-time, full power
broadcast affiliates have all requested "must carry" status in lieu of a
retransmission fee and most have obtained "must carry" status. The U. S.
District Court for the District of Columbia has twice upheld the
constitutionality of the "must carry" rules. The Supreme Court will review this
issue in late 1996 or early 1997.
 
     During 1993 and 1994, "must carry" was important to the Company in
obtaining carriage by cable operators. Due to HSC's success in obtaining
long-term carriage commitments, in the event "must carry" is ruled
unconstitutional, the Company does not believe the ruling will have a material
adverse impact on the Company or result in any significant loss in carriage.
 
     In November 1994, the FCC issued "going forward" rules pursuant to the 1992
Cable Act regarding the fees cable operators can charge subscribers for new
programming. The going forward rules provide that cable operators can increase
the charges to subscribers for new programming but must offset the charges by
revenues, including sales commissions, they receive from the programmer. The
Company and other electronic retailing companies filed Petitions for
Reconsideration with the FCC which requested that shop-at-home programming
revenues be excluded from the cable operator's offset to revenues, and this
petition was granted in August 1995.
 
     In January 1996, the Telecommunications Act of 1996 became law, providing
for, among other things, the deregulation of the telephone and cable industries
to permit increased competition and technological developments. Although the
effect of this law on the telecommunications industry cannot yet be determined,
the Company does not believe it will have an adverse impact on its business.
 
AFFILIATION AGREEMENTS WITH CABLE OPERATORS
 
     HSC enters into affiliation agreements with cable system operators to carry
HSN, Spree! or both. HSC has a standard form of affiliation agreement which has
a term of five years, is automatically renewable for subsequent one year terms,
and obligates the cable operator to assist the promotional efforts of HSC by
carrying commercials regarding HSN and Spree! and distributing HSC's marketing
materials to the cable operator's subscribers. The standard form of affiliation
agreement provides that the cable operator will receive a commission of five
percent of the net sales of merchandise sold within the cable operator's
franchise area (from both cable and non-cable households). However, particularly
with larger, multiple system operators, HSC has agreed to provide additional
compensation. In the past, this has included the purchase of advertising
 
                                        4
<PAGE>   8
 
availabilities from cable operators on other programming networks and the
establishment of commission guarantees committing HSC to a certain level of
payments. Although a number of these contracts remain in effect, as a general
rule, HSC is no longer entering into agreements that provide for advertising
availability and commission guarantee compensation. These forms of compensation
were replaced with cable distribution fees or performance bonus commissions that
are intended to increase sales by compensating the cable operators for
promotional efforts which result in higher net sales levels.
 
     Due to the possibility of "must carry" being found unconstitutional, HSC
embarked on an aggressive campaign to bring the "must carry" households under
contract by volunteering to pay commissions to cable operators required to
transmit HSC's programming. As an additional contract incentive, HSC offered to
make payments of cable distribution fees, primarily consisting of up-front
payments, based on a commitment to transmit HSC programming to a certain number
of subscribers. In exchange for these payments, HSC required significant
commitments for both the "must carry" and "non-must carry" households and
original terms of five to fifteen years.
 
AFFILIATION AGREEMENTS WITH BROADCAST TELEVISION STATIONS
 
     SKC, through its subsidiaries, owns twelve broadcast television stations,
including one television satellite station. These stations are located in many
of the top markets in the United States and exclusively broadcast HSC
programming, except for a portion of broadcast time which is used to provide
public affairs and other non-entertainment programming and advertising inserts.
 
     Each of the full power SKC stations has an affiliation agreement with HSC
to carry HSC's programming through December 28, 1997 providing for an hourly
fee, and upon reaching certain sales levels, commissions on net sales. These
agreements are automatically renewable at SKC's option for a five-year term,
unless written notice is given by SKC at least 18 months prior to the expiration
date. The Company has agreed in principle with SKC that the period for delivery
of the notice of non-renewal by SKC will be extended until December 28, 1996.
SKC has informed the Company that it has not made any final decision regarding
whether it will renew any or all of the affiliation agreements but presently
contemplates that it will not renew the affiliation agreements. The Company
believes, based on its preliminary analysis, that the orderly termination of the
affiliation agreements may be in the Company's best interests because of the
potential cost savings and the existing cable carriage of the HSC programming in
many of the SKC markets. The Company is evaluating the affected markets to
determine the need for obtaining additional program carriage and the related
costs of such carriage. There can be no assurance that SKC will in fact
terminate any or all of the affiliation agreements or that, if so terminated,
that the Company will be able to find other means of distributing HSC
programming by broadcast or cable to the households in the broadcast areas
currently served by SKC stations.
 
     SKC also owns 26 low power television ("LPTV") stations that broadcast
HSC's programming services. Fourteen stations are currently under existing
affiliation agreements, and the Company contemplates entering into contracts
with the remaining stations in 1996. LPTV stations have lower power transmitters
than conventional television stations, and therefore, the broadcast signal of an
LPTV station does not cover as broad a geographical area as conventional
broadcast stations.
 
     In addition to affiliation agreements with the SKC broadcast television and
LPTV stations, HSC has entered into affiliation agreements with other broadcast
television stations and LPTV stations to carry either HSN or Spree! for a
predetermined number of hours per day. The broadcast station affiliation
agreements may generally be terminated upon notice by either party and specify
the payment of fixed hourly fees for the carriage of HSC programming.
 
                        ADDITIONAL SUBSIDIARY BUSINESSES
 
     In addition to the electronic retailing business, the Company's
subsidiaries are involved in mail order, insurance and other businesses
complementary to electronic retailing.
 
                                        5
<PAGE>   9
 
     HSN Mail Order, Inc. ("Mail Order") markets a variety of merchandise
through five mail order catalogs. The catalogs include HSN By Mail(sm), HSN By
Mail(sm) -- Signature Gem Collection(sm), HSN by Mail(sm) -- The Gallery of
Dolls(sm), HSN By Mail(sm) -- Private Showing(R) Jewelry, and Bargaineer(R)
Homeview(sm). Mail Order also markets a variety of products by inserting
marketing materials, including its catalogs, in packages containing HSC products
shipped to customers. In addition, through its Life Way(R) name, Mail Order
markets natural vitamin and mineral supplements, over-the-counter items, health
and wellness merchandise and a complete line of skin and hair products.
 
     Vela Research, Inc. develops and markets high technology audio and video
MPEG compression/decompression products to the cable, broadcast, computer and
telecommunications industries.
 
     HSN Direct Joint Venture ("HSND") develops, produces, and markets
infomercials and short form direct response spots on a national and
international basis. The Company presently owns a majority interest in HSND. The
Company has entered into negotiations with FlexTech p.1.c., an affiliate of TCI,
("FlexTech") pursuant to which FlexTech (or a subsidiary thereof) would make a
substantial investment in HSND and become the majority owner of HSND. If this
transaction is consummated upon the terms presently proposed, FlexTech would own
approximately 79% of the business of HSND, and the Company's interest would be
reduced to 15%. In connection with this transaction, the Company would receive
approximately $5.0 million. There can be no assurance that this transaction will
be consummated or, if consummated, will be consummated on the currently proposed
terms.
 
     Internet Shopping Network, Inc. ("ISN") is a wholly-owned subsidiary which
operates an interactive shopping service on the Internet specializing in small
office and computer equipment. ISN is also engaged in exploring business
opportunities for merchandising products via digital interactive television
services and other new digital retailing vehicles.
 
     HSN Insurance, Inc. ("HSI") is a full-service insurance agency marketing a
wide range of insurance products such as life, health, auto, homeowners and
commercial policies to the public and HSC customers. Mass-marketing of other
insurance and service-related products such as a private-label travel club, an
auto club, a health and dental discount program, an AD & D insurance product and
an extended service plan for electronics are offered to HSC customers
nationally. HSI also handles the placement of all property and liability
insurance for HSN and its subsidiaries, as well as employee benefits insurance
products.
 
                                  COMPETITION
 
     The Company operates in a highly competitive environment. It is in direct
competition with businesses which are engaged in retail merchandising, other
electronic retailers, direct marketing retailers such as mail order companies,
companies that sell from catalogs, other discount retailers and companies that
market through computer technology. The Company also competes for access to its
customers with broadcasters and alternative forms of entertainment and
information, such as programming for network and independent broadcast
television stations, basic and pay cable television services, satellite master
antenna systems, home satellite dishes and home entertainment centers. In
particular, the price and availability of programming for cable television
systems affects the availability of these channels for the Company's programs
and the compensation which must be paid to the cable operators for carriage of
HSC programming. In addition, the Company believes that due to a number of
factors, including the development by cable operators of alternative sources of
cable operator owned programming, the competition for channel capacity has
substantially increased. With the advent of new compression technologies on the
horizon, this competition for channel capacity may substantially decrease,
although additional competitors may have the opportunity to enter the
marketplace. No predictions can be made with respect to the viability of these
technologies or the extent to which they will ultimately impact the availability
of channel capacity.
 
     The Company and QVC, Inc. ("QVC") are currently the two leading electronic
retailing companies. There are other companies, some having an affiliation or
common ownership with cable operators, that now market merchandise by means of
live television. A number of other entities are engaged in direct retail sales
businesses which utilize television in some form and which target the same
markets in which the Company
 
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<PAGE>   10
 
operates. Some of the Company's competitors are larger and more diversified than
the Company, or are also affiliated with cable operators which have a
substantial number of subscribers. The Company cannot predict the degree of
success with which it will meet competition in the future. TCI currently owns
43% of QVC but has entered into a stockholders agreement with Comcast
Corporation (which owns 57% of QVC) pursuant to which Comcast Corporation
controls the day to day operations of QVC.
 
     In addition to the above factors, the Company's affiliation with broadcast
television stations creates another set of competitive conditions. These
stations compete for television viewers primarily within local markets. The
Company's affiliated broadcast television stations are located in highly
competitive markets and compete against both VHF and UHF stations. Due to
technical factors, a UHF television station generally requires greater power and
a higher antenna to secure substantially the same geographical coverage as a VHF
television station. Under present FCC regulations, additional UHF commercial
television broadcasting stations may be operated in all such markets, with the
possible exception of New York City. The Company also competes with new
entertainment and shopping networks for carriage on broadcast television
stations. The Company cannot quantify the competitive effect of the foregoing or
any other sources of video programming on any of the Company's affiliated
television stations, nor can it predict whether such competition will have a
material adverse effect on its operations.
 
     In summary, the Company operates in a highly competitive environment in
which, among other things, technological change, changes in distribution
patterns, media innovations, data processing improvements and new entrants make
the competitive position of both the Company and its competitors extremely
difficult to predict.
 
                     TRADEMARKS, TRADENAMES AND COPYRIGHTS
 
     The Company has registered and continues to register, when appropriate, its
trade and service marks as they are developed and used, and the Company
vigorously protects its trade and service marks. The Company believes that its
marks are a primary marketing tool.
 
                                   EMPLOYEES
 
     During 1995, the Company instituted a number of cost cutting measures
including a reduction in work force of 262 employees. At December 31, 1995, the
Company had 3,804 full-time employees and 491 part-time employees. The Company
believes it has generally good employee relationships.
 
ITEM 2 -- PROPERTIES
 
     The Company owns an approximately 480,000 square foot facility in St.
Petersburg, Florida, which houses its television studios, broadcast facilities,
and most of the Company's administrative offices and training facilities.
 
     The Company operates four warehouse type facilities totaling approximately
115,000 square feet near the Company's main campus in St. Petersburg, Florida.
These facilities are used for returns processing, retail distribution and
general storage.
 
     The Company leases a 21,000 square foot facility in Clearwater, Florida for
its video and post production operations.
 
     The Company owns and operates a warehouse consisting of approximately
163,000 square feet located in Waterloo, Iowa which is used as a fulfillment
center.
 
     The Company operates a warehouse located in Salem, Virginia, consisting of
approximately 650,000 square feet which is leased from the City of Salem
Industrial Development Authority. On November 1, 1999, the Company will have the
option to purchase the property for $1.
 
     The Company's retail outlet subsidiary leases seven retail stores in the
Tampa Bay and Orlando areas totaling approximately 173,000 square feet.
 
                                        7
<PAGE>   11
 
     The Company and its other subsidiaries also lease office space in
California, Colorado and New Jersey.
 
     The Company considers its properties suitable and adequate for its present
needs.
 
ITEM 3 -- LEGAL PROCEEDINGS
 
     The Company has agreed to settle a consolidated class action initiated in
1990 pending in the Court of Common Pleas of Bucks County, Pennsylvania,
entitled Mauger v. Home Shopping Network, Inc.; Powell v. Home Shopping Network,
Inc. (case number 91-6152-20-1). The complaints allege violation of the
Pennsylvania Unfair Trade Practices and Consumer Protection Law in relation to
the Company's pricing practices with respect to diamond and imitation diamond
jewelry sold to Pennsylvania residents between December 27, 1984 and May 20,
1991. Under the proposed settlement, customers who present adequate proof of
purchase of cubic zirconia or diamond jewelry during the class period will have
the option of receiving a cash payment or a discount certificate usable for the
purchase of HSN merchandise during the following twelve months. The maximum cash
payment required from the Company with respect to all costs relating to the
settlement is $2.5 million, which will be placed in an escrow account following
preliminary court approval of the settlement. The Company will be entitled to a
refund of any balance not used for these purposes. If certificates representing
a maximum discount of more than $5.2 million would be issuable under the
settlement, the Company has the right to require that the certificates be
pro-rated among those who elect to receive them. The settlement is subject to
approval by the Court after notice and hearing.
 
     On March 2, 1995, the Federal Trade Commission ("FTC") issued an
administrative complaint against the Company, HSC and HSN Lifeway Health
Products, Inc., In Re Home Shopping Network, Inc. et al., No. D-9272, in
connection with the on-air presentation in 1993 of certain spray vitamin and
nutritional supplement products. The FTC alleged that the Company did not have a
reasonable basis to support certain on-air claims, and proposed a settlement
based upon a cease and desist order that would require the Company to obtain
scientific evidence that would meet certain defined standards. The Company did
not agree that the consent order proposed by the FTC was warranted, and the
complaint, which seeks no monetary damages, will be heard by an FTC
administrative law judge during the first half of 1996.
 
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     Not applicable
 
                                        8
<PAGE>   12
 
                                    PART II
 
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
PRICE RANGE OF COMMON STOCK
 
     The following table sets forth, for the quarterly periods indicated, the
high and low sales prices of the Company's common stock on the New York Stock
Exchange (Symbol: HSN).
 
<TABLE>
<CAPTION>
    --------------------------------------------------------------------------------------
                                                                          HIGH       LOW
    --------------------------------------------------------------------------------------
    <S>                                                                  <C>        <C>
    YEAR ENDED DECEMBER 31, 1995
      Quarter ended March 31...........................................  $10.00     $ 7.38
      Quarter ended June 30............................................    8.50       6.50
      Quarter ended September 30.......................................   10.75       8.13
      Quarter ended December 31........................................   10.13       7.88
    YEAR ENDED DECEMBER 31, 1994
      Quarter ended March 31...........................................  $15.13     $11.63
      Quarter ended June 30............................................   14.75       9.50
      Quarter ended September 30.......................................   13.00      10.38
      Quarter ended December 31........................................   11.75       9.50
</TABLE>
 
     The closing price per share as of March 6, 1996 was $11.50 and there were
8,050 stockholders of record as of that date.
 
     The Company has paid no dividends on its common stock to date and does not
anticipate that it will pay cash dividends in 1996. Any payment of future
dividends and the amounts thereof will be dependent upon the Company's earnings,
financial requirements and other factors deemed relevant by the Board of
Directors.
 
                                        9
<PAGE>   13
 
ITEM 6 -- SELECTED FINANCIAL DATA
 
SUMMARY FINANCIAL DATA
--------------------------------------------------------------------------------
(Table amounts in thousands, except per share data)
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
SUMMARY CONSOLIDATED
    STATEMENTS OF            YEARS ENDED DECEMBER 31,             FOUR MONTHS      YEARS ENDED AUGUST 31,
     OPERATIONS        -------------------------------------         ENDED         -----------------------
        DATA              1995          1994         1993      DECEMBER 31, 1992      1992         1991
<S>                    <C>           <C>          <C>          <C>                 <C>          <C>
----------------------------------------------------------------------------------------------------------
Net sales............  $1,018,625    $1,126,514   $1,046,580       $ 357,166       $1,097,787   $1,078,547
Gross profit.........     316,947(1)    396,010      342,540(4)      124,636          406,459      389,398
Operating profit
  (loss).............     (80,280)(2)    26,879       (6,949)         17,569           82,202       64,570(6)
Earnings (loss)
  before
  extraordinary
  item...............     (61,883)(3)    17,701      (15,539)(5)       5,140           37,405       (9,599)(6)
Net earnings
  (loss).............     (61,883)(3)    16,777      (22,781)          5,140           37,293       (8,945)(6)
Earnings (loss) per
  common share:
Earnings (loss)
  before
  extraordinary
  item...............        (.69)(3)       .19         (.18)            .06              .42         (.11)(6)
Net earnings
  (loss).............        (.69)(3)       .18         (.26)            .06              .42         (.10)(6)
Weighted average
  common shares
  outstanding........      90,782        95,061       91,192          91,115           90,255       87,452
</TABLE>
 
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                             DECEMBER 31,                                AUGUST 31,
SUMMARY CONSOLIDATED   ---------------------------------------------------------   -----------------------
BALANCE SHEET DATA        1995          1994         1993            1992             1992         1991
----------------------------------------------------------------------------------------------------------
<S>                    <C>           <C>          <C>          <C>                 <C>          <C>
Working capital......    $  7,571      $ 23,073     $  8,053        $ 38,493         $ 47,004     $ 52,868
Total assets.........     436,295       446,499      501,143         477,913          519,670      565,036
Secured Revolving
  Credit Facility....     135,000            --           --              --               --           --
Unsecured Revolving
  Credit Facility....          --        25,000           --              --               --           --
Unsecured Senior Term
  Loans..............          --            --       85,000(7)           --               --           --
11 3/4% Senior Notes
  due October 15,
  1996...............          --            --           --         140,000(7)       153,252(7)   184,752
5 1/2% Convertible
  Subordinated
  Debentures due
  April 22, 2002.....          --            --           --          16,915           16,915       17,115
Other long-term
  obligations........         810         2,491        1,927           2,276            2,689        3,175
Stockholders'
  equity.............     125,061       206,443      196,554         170,149          170,329      161,839
</TABLE>
 
---------------
 
(1) The gross profit declined to 31.1% for the year ended December 31, 1995,
    from 35.2% for the year ended December 31, 1994. This was due to warehouse
    sales and other promotional events and an inventory carrying value
    adjustment of $14,500,000 primarily relating to new management's evaluation
    of existing inventory and determining that certain merchandise would not fit
    the Company's future sales and merchandising strategy.
(2) During 1995 the Company recorded a $4,114,000 restructuring charge related
    to closing its fulfillment center in Reno, Nevada. The Company also recorded
    $11,893,000 of other charges, including $3,978,000 of severance pay related
    to a reduction in work force, $4,800,000 of payments to certain executives
    as provided for under their employment agreements in connection with the
    termination of their employment and $1,303,000 related to the write-down of
    inventory to net realizable value for Ortho-Vent, one of the Company's mail
    order subsidiaries. An additional $2,400,000 related to name lists of
    Ortho-Vent were
 
                                       10
<PAGE>   14
 
    written off and included in depreciation and amortization. Other charges
    also include the write-off of certain equipment maintenance and contractual
    fees totaling $1,812,000 related to service contracts which the Company will
    no longer utilize.
(3) During 1995, the Company recorded additional interest expense of $773,000
    related to bank fees that were amortized, miscellaneous expense of
    $4,700,000 for the write-down of computer equipment, and $6,383,000 of
    additional litigation expense.
(4) The gross profit declined to 32.7% for the year ended December 31, 1993,
    from 37.0% for the year ended August 31, 1992. This was primarily due to the
    liquidation of inventory at less than cost.
(5) In the fourth quarter of 1993, the Company charged $13,000,000 to other
    income (expense) for the settlement of various lawsuits.
(6) During 1991, the Company recorded $44,500,000 in pre-tax non-recurring
    special charges. Additionally, the Company increased its income tax
    provision $10,382,000 relating to certain adjustments proposed by the IRS.
(7) At December 31, 1993 and 1992, and August 31, 1992, $25,000,000, $3,200,000
    and $27,500,000, respectively was classified as a current liability
    reflecting management's ability and intent to satisfy a portion of the debt
    from funds provided from operations.
 
                                       11
<PAGE>   15
 
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS
 
GENERAL
 
     Home Shopping Network, Inc. (the "Company") is a holding company, the
subsidiaries of which conduct the day-to-day operations of the Company's various
business activities. The Company's primary business is electronic retailing
conducted by Home Shopping Club, Inc. ("HSC"), a wholly-owned subsidiary of the
Company.
 
     The following discussion presents the material changes in the consolidated
results of operations of the Company which have occurred between the years ended
December 31, 1995 and 1994, along with material changes between the years ended
December 31, 1994 and 1993. Reference should also be made to the Consolidated
Financial Statements and Summary Financial Data included herein.
 
     The Company expects to sell a majority of its interest in its infomercial
joint venture, HSN Direct Joint Venture ("HSND") in early 1996. This transaction
will result in a reduction in net sales, cost of sales and certain operating
expenses in 1996. The sale of HSND should not have a material impact on the
Company's results of operations in 1996 or future periods.
 
     All tables and discussion included herein calculate the percentage changes
using actual dollar amounts, versus rounded dollar amounts.
 
YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994
 
NET SALES
 
     For the year ended December 31, 1995, net sales for the Company decreased
$107.9 million, or 9.6%, to $1.019 billion from $1.127 billion for the year
ended December 31, 1994. Net sales of HSC decreased $140.6 million, or 13.9%,
for the year ended December 31, 1995, reflecting a 19.4% decrease in the number
of packages shipped and a 9.1% increase in the average price per unit sold
compared to the year ended December 31, 1994. The decrease in HSC sales was
partially offset by sales increases by HSND, and wholly-owned subsidiaries, HSN
Mail Order, Inc. ("Mail Order") and Vela Research, Inc. ("Vela"), totaling $32.0
million for the year ended December 31, 1995.
 
     Since June 5, 1995, the Company has operated two full-time networks renamed
HSN, the primary network, and Spree!. On August 5, 1995, the Company relaunched
the HSN network with more scheduled programs and theme related shows, new sets,
graphics and music. During the third quarter of 1995, the Company relaunched the
Spree! network with a more spontaneous format and new graphics and music. These
changes were designed to reduce programming redundancies, distinguish the
networks and reach a broader range of potential customers.
 
     Management also instituted promotional programs to help increase sales,
including a national advertising campaign and a "no interest-no payments" credit
promotion through February 1996 for certain purchases made during the third and
fourth quarters of 1995 using the Company's private label credit card. Although
the credit promotion program was successful, its effect was not enough to offset
the overall decrease in sales.
 
     The Company believes that its negative performance in 1995 was due, in
part, to the adverse effects of certain merchandising and programming strategies
which had been implemented in late 1994 and 1995. Consequently, in November
1995, the Company appointed a new chairman of the board and a new president and
chief executive officer, both with significant experience in the electronic
retailing and programming areas. Immediate changes were made to the Company's
merchandising and programming strategies which management believes resulted in
the improved sales in December 1995 and January 1996 when compared to the same
months in the prior years. Further plans include improving inventory mix with
respect to product assortment and price point designed to attract both
first-time buyers and active buyers, improving inventory management and better
planning of programmed shows. While management is optimistic that results will
continue to improve and the Company will return to profitability, there can be
no assurance that changes to the Company's merchandising and programming
strategies will achieve management's intended results.
 
                                       12
<PAGE>   16
 
     For the year ended December 31, 1995, HSC's merchandise return percentage
increased to 25.7% from 24.4% compared to 1994. The increase in return rate is
attributable, in part, to an increase in average price per unit and, in part, to
returns resulting from promotional events. New management's merchandising
strategy is designed to reduce return rates in 1996. Promotional price discounts
increased to 2.8% from 2.7% of HSC sales for the year ended December 31, 1995
compared to 1994.
 
     At December 31, 1995, HSC had approximately 4.8 million active members
representing a 3.1% decline from December 31, 1994. An active member is defined
as a customer that has completed a transaction within the last 18 months or
placed an order within the last seven months. In addition, 59.2% of active
members have made more than one purchase in the last 18 months, compared to
59.4% at December 31, 1994.
 
     The Company has significantly increased its program carriage and believes
that future levels of net sales of HSC will be dependent on the success of new
management's plans, as discussed above, in increasing market penetration. Market
penetration represents the level of active customers within a market.
 
     The following table highlights the changes in the estimated unduplicated
television household reach of HSN, the Company's primary network, by category
for the year ended December 31, 1995:
 
<TABLE>
<CAPTION>
    ---------------------------------------------------------------------------------------------
                                                          CABLE*   BROADCAST   SATELLITE   TOTAL
    ---------------------------------------------------------------------------------------------
                                                               (In thousands of households)
    <S>                                                   <C>      <C>         <C>         <C>
    Households -- December 31, 1994.....................  38,960     23,068      3,750     65,778
    Net additions/(deletions)...........................   4,757     (1,510)        --      3,247
    Shift in classification.............................     503       (503)        --         --
    Change in Nielsen household counts..................      --        164         --        164
                                                          ------   ---------   ---------   ------
    Households -- December 31, 1995.....................  44,220     21,219      3,750     69,189
                                                          ======    =======     ======     ======
</TABLE>
 
---------------
 
* Households capable of receiving both broadcast and cable transmissions are
included under cable.
 
     According to industry sources, as of December 31, 1995, there were 95.3
million homes in the United States with a television set, 62.1 million basic
cable television subscribers and 3.8 million homes with satellite dish
receivers.
 
     The cable television household growth was achieved through increased cable
system carriage of HSC's broadcast signal due to the implementation of "must
carry" beginning in September 1993, and the Company's aggressive campaign to
obtain contracts for cable carriage of HSC programming. In areas where HSC
programming is now carried by a cable operator, former broadcast households that
are cable subscribers can more easily access HSC programming. In addition to the
households in the above table, as of January 1, 1996 approximately 12.0 million
cable television households were reached by the Spree! network, of which 3.4
million were on a part-time basis. Of the total cable television households
receiving Spree!, 9.7 million also receive HSN.
 
     During 1996, cable system contracts covering 4.2 million cable subscribers
are subject to termination or renewal. This represents 9.4% of the total number
of unduplicated cable households receiving HSN. The Company is pursuing both
renewals and additional cable television system contracts, but channel
availability, competition, consolidation within the cable industry and cost of
carriage are some of the factors affecting the negotiations for cable television
system contracts. Although management cannot determine the percentage of
expiring contracts that will be renewed or the number of households that will be
added through new contracts, management believes that a majority of these
contracts will be renewed.
 
     HSC's market penetration lags behind increases in carriage. As a result of
the increase in carriage which began in late 1993, and previous changes in
merchandising and programming strategies, the Company has experienced a decrease
in its market penetration. As the new households mature and new management's
plans are fully implemented, the Company expects market penetration to improve,
but there can be no assurance that this will occur.
 
                                       13
<PAGE>   17
 
COST OF SALES
 
     For the year ended December 31, 1995, cost of sales decreased $28.8
million, or 3.9%, to $701.7 million from $730.5 million for the year ended
December 31, 1994. As a percentage of net sales, cost of sales increased to
68.9% from 64.8% compared to the year ended December 31, 1994.
 
     Cost of sales of HSC decreased $49.1 million for the year ended December
31, 1995. This was partially offset by increases in cost of sales of HSND, Mail
Order and Vela totaling $21.4 million for the year ended December 31, 1995. As a
percentage of HSC's net sales, cost of sales increased to 71.8% from 66.9% for
the year ended December 31, 1995, compared to 1994.
 
     The 1995 dollar decreases in consolidated and HSC's cost of sales, compared
to 1994, relate to the lower sales volume. The comparative increases in cost of
sales percentages primarily relate to warehouse sales and other promotional
events. These events offered price discounts to facilitate the Company's
distribution center restructuring and sales of existing merchandise to make room
for new merchandise for the holiday selling season and to correct excessive
inventory levels and product mix in December 1995. In addition, consolidated and
HSC's cost of sales for the year ended December 31, 1995, reflect a $14.5
million increase in HSC's inventory carrying value adjustment primarily related
to product which is inconsistent with HSC's new sales and merchandising
philosophy.
 
OPERATING EXPENSES
 
     The following table highlights the operating expense section from the
Company's Consolidated Statements of Operations:
 
<TABLE>
<CAPTION>
     ---------------------------------------------------------------------------------------
                                                             YEARS ENDED
                                                            DECEMBER 31,
                                                           ---------------     $        %
                                                            1995     1994    CHANGE   CHANGE
     ---------------------------------------------------------------------------------------
                                                                (In millions, except %)
     <S>                                                   <C>      <C>      <C>      <C>
     Selling and marketing...............................  $167.1   $161.9   $ 5.2      3.2%
     Engineering and programming.........................    98.2     98.8     (.6 )     (.6)
     General and administrative..........................    77.1     79.3    (2.2 )    (2.8)
     Depreciation and amortization.......................    38.8     29.1     9.7      33.7
     Other charges.......................................    11.9       --    11.9     100.0
     Restructuring charges...............................     4.1       --     4.1     100.0
                                                           ------   ------   ------
                                                           $397.2   $369.1   $28.1       7.6
                                                           ======   ======   =====
</TABLE>
 
     As a percentage of net sales, operating expenses increased to 39.0% from
32.8% compared to the year ended December 31, 1994.
 
     In 1995 and early 1996, management instituted measures aimed at
streamlining operations primarily by reducing its work force and taking other
actions to reduce operating expenses. Although these changes resulted in some
reduction in individual categories of operating expenses in 1995 and will result
in future reductions to operating expenses, the Company incurred additional
costs in 1995 as a result of these measures. See "Other Charges" and
"Restructuring Charges."
 
SELLING AND MARKETING
 
     For the year ended December 31, 1995, selling and marketing expenses, as a
percentage of net sales, increased to 16.4% from 14.4% compared to the year
ended December 31, 1994.
 
                                       14
<PAGE>   18
 
     The major components of selling and marketing expenses are detailed below:
 
<TABLE>
<CAPTION>
     ----------------------------------------------------------------------------------------
                                                               YEARS ENDED
                                                              DECEMBER 31,
                                                              -------------     $        %
                                                              1995    1994    CHANGE   CHANGE
     ----------------------------------------------------------------------------------------
                                                                  (In millions, except %)
     <S>                                                      <C>     <C>     <C>      <C>
     Telephone, operator and customer service...............  $51.8   $53.8   $(2.0 )   (3.6 )%
     Fees to cable system operators:
       Commissions..........................................   33.2    38.4    (5.2 )  (13.5 )
       Marketing payments for cable advertising.............   16.8    25.3    (8.5 )  (33.6 )
       Performance bonus commissions........................   12.8     9.1     3.7     40.1
     HSND selling expenses..................................   10.0     6.7     3.3     50.6
</TABLE>
 
     Telephone, operator and customer service expenses are typically related to
sales, call volume and the number of packages shipped. For the year ended
December 31, 1995, telephone costs decreased due to a $1.4 million rebate for
past telephone charges from the Company's long distance telephone carrier in
connection with a new contract for telephone services. This contract will also
result in lower future telephone rates compared to prior periods. HSC telephone
and operator costs decreased $2.2 million for the year ended December 31, 1995,
due to lower call volume. In addition, the sale in the second quarter of 1994 of
the Company's former wholly-owned subsidiary, HSN Mistix Corporation ("Mistix"),
resulted in a $2.0 million decrease in telephone and operator costs for the year
ended December 31, 1995. These decreases were primarily offset by increased
telephone and operator costs incurred by Mail Order and the Company's
telemarketing subsidiary, National Call Center, Inc., totaling $2.9 million for
the year ended December 31, 1995. Management expects HSC operator costs to
fluctuate in relation to call and package volume in 1996. Customer service costs
increased $.3 million for the year ended December 31, 1995, due to the expansion
of customer service operating hours, in March 1995, to seven days a week,
twenty-four hours a day.
 
     For the year ended December 31, 1995, commissions to cable system operators
decreased as a result of the decrease in sales.
 
     Marketing payments for cable advertising, which relate primarily to
previous contractual commitments, decreased for the year ended December 31,
1995. As older agreements expire or are renegotiated and new cable carriage
agreements are executed, marketing payments for cable advertising are being
replaced by other forms of incentive compensation to cable operators. These
include payment of cable distribution fees, as discussed in "Depreciation and
Amortization," and performance bonus commissions which require payments based
upon HSC attaining certain sales levels in the cable operator's franchise area.
Accordingly, marketing payments for cable advertising are expected to decrease,
and depreciation and amortization will increase in 1996. Performance bonus
commissions are expected to fluctuate in relation to sales in 1996.
 
     In addition, cable operators which have executed affiliation agreements to
carry the Company's programming are generally compensated for all sales within
their franchise areas, regardless of whether a customer's order results from
watching the program via cable, satellite dish, or on a broadcast television
station. Thus, with the advent of "must carry," HSC is paying commissions to
cable operators in addition to the hourly affiliation payments made to broadcast
television stations. As a result of the above factors, subject to sales volume,
fees paid to cable system operators are expected to remain at higher levels in
future periods.
 
     Selling and marketing expenses related to HSND primarily consist of media
and telephone, operator and customer service expenses. The remaining net
increase in selling and marketing expenses is attributable to promotional
expenses incurred in connection with the Company's programming strategies which
were implemented in 1995, increased Mail Order catalog costs and advertising and
promotional expenses of the Company's other subsidiary operations, totaling
$12.4 million. As a result of the Company's promotional program related to its
private label credit card, the Company incurred an additional $1.4 million of
interest charges in the fourth quarter of 1995. Management believes that total
selling and marketing expenses in future periods will be at higher levels as the
Company maintains its efforts to increase the number of cable systems carrying
the Company's programming and increase market penetration through expanded
direct mailings and other advertising, as discussed in "Net Sales."
 
                                       15
<PAGE>   19
 
ENGINEERING AND PROGRAMMING
 
     For the year ended December 31, 1995, engineering and programming expenses,
as a percentage of net sales, increased to 9.6% from 8.8% compared to the year
ended December 31, 1994 primarily as a result of the decrease in net sales.
 
     The decrease in engineering and programming expenses for the year ended
December 31, 1995, compared to 1994, was primarily due to lower broadcast costs
of $2.3 million. In addition, based on sales within the broadcast markets of
Silver King Communications, Inc. ("SKC"), for the year ended December 31, 1995,
the Company incurred lower broadcast commission expense of $1.1 million,
compared to the year ended December 31, 1994. Broadcast commission expense is
expected to fluctuate in relation to sales for 1996. These decreases were offset
by increases totaling $2.3 million for the year ended December 31, 1995, in
production costs incurred in connection with the Company's new programming
strategies, as discussed in "Net Sales", and HSND programming costs. Engineering
and programming expenses are expected to remain relatively constant in 1996.
 
GENERAL AND ADMINISTRATIVE
 
     For the year ended December 31, 1995, general and administrative expenses,
as a percentage of net sales, increased to 7.6% from 7.0% compared to the year
ended December 31, 1994.
 
     For the year ended December 31, 1995, decreases in legal expense and
expense in connection with the Company's executive stock award program and
repairs and maintenance totaling $4.9 million were primarily offset by increases
in expenses for consulting, Stock Appreciation Rights ("SAR's"), the Company's
employee equity participation plan, and other administrative expenses totaling
$2.7 million.
 
     Based on savings expected to be realized in connection with the reduction
of the Company's work force, as discussed in Note F to the Consolidated
Financial Statements included herein, and other expense reduction initiatives,
management expects general and administrative expenses to decrease in 1996.
 
DEPRECIATION AND AMORTIZATION
 
     The increase in depreciation and amortization was primarily due to the
amortization of cable distribution fees, which increased $8.8 million to $12.7
million for the year ended December 31, 1995. Amortization of these fees is
expected to total $15.7 million in 1996 based on existing agreements. This
amortization could increase if additional long-term cable contracts are entered
into during 1996, as discussed in "Net Sales." The expected increase in
depreciation expense in 1996 will be partially offset by a decrease related to
the retirement of certain equipment as discussed in "Other Income (Expense)." In
addition, amortization expense increased $2.4 million for the year ended
December 31, 1995, in connection with the sale of the assets of Ortho-Vent, Inc.
("Ortho-Vent"), as discussed in Note F to the Consolidated Financial Statements
included herein.
 
OTHER CHARGES
 
     The other charges of $11.9 million for the year ended December 31, 1995
consist of severance costs of $4.0 million related to a reduction in work force,
$4.8 million of payments to certain executives as provided for under their
employment agreements in connection with the termination of their employment and
the write-off of certain equipment maintenance and contractual fees totaling
$1.8 million related to service contracts which the Company will no longer
utilize. In addition, the Company recorded a write-down of inventory totaling
$1.3 million to net realizable value based on the disposition of Ortho-Vent's
assets. See Note F to the Consolidated Financial Statements, included herein.
The sale of Ortho-Vent should not have a material impact on the Company's net
sales or results of operations in future periods.
 
RESTRUCTURING CHARGES
 
     Restructuring charges for the year ended December 31, 1995, of $4.1
million, represent management's estimate of costs to be incurred in connection
with the closing of the Company's Reno, Nevada, distribution
 
                                       16
<PAGE>   20
 
center, which was accomplished in June 1995. The decision to close the Reno
distribution center was based on an evaluation of the Company's overall
distribution strategy. Management believes that consolidation of the Company's
distribution facilities will result in operating efficiencies and improved
service to customers.
 
OTHER INCOME (EXPENSE)
 
     For the year ended December 31, 1995, the Company had net other expense of
$(14.9) million compared to net other income of $3.6 million for the year ended
December 31, 1994.
 
     Interest income decreased $7.6 million for the year ended December 31,
1995, compared to 1994, primarily due to the repayment by SKC in August 1994, of
its indebtedness to the Company. Interest income is expected to further decrease
in 1996, compared to 1995.
 
     Interest expense increased $4.6 million for the year ended December 31,
1995, due to borrowings by the Company under its Secured $150.0 million
Revolving Credit Facility ("Credit Facility") in late 1994 and 1995. On March 1,
1996, the Company obtained additional financing through a private placement of
$100.0 million of convertible subordinated debentures, as discussed in
"Financial Position, Liquidity and Capital Resources." Interest expense for 1996
will increase compared to 1995.
 
     For the years ended December 31, 1995 and 1994, net miscellaneous expenses
remained constant at $.4 million. In 1995, $6.0 million in losses recorded in
connection with the retirement of equipment was offset by receipts from lawsuit
settlements, royalty income and other miscellaneous income totaling $5.6
million. In 1994, a $(2.9) million loss on the sale of the common stock of
Mistix was offset by receipts from lawsuit settlements and other miscellaneous
income totaling $2.5 million.
 
     Litigation expense for the year ended December 31, 1995, of $6.4 million,
represents litigation settlements and anticipated costs in connection with the
resolution of certain pending litigation.
 
INCOME TAXES
 
     The Company's effective tax rate was a benefit of (35.0)% for the year
ended December 31, 1995, and an expense of 42.0% for the year ended December 31,
1994. The Company's effective tax rate for these periods differed from the
statutory rate due primarily to the amortization of goodwill, state income taxes
and the provision for interest on adjustments proposed by the Internal Revenue
Service ("IRS"). The Company anticipates full realization of its net operating
loss carryforward and accordingly no valuation allowance has been provided. See
Note D to the Consolidated Financial Statements included herein.
 
EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM OBLIGATIONS
 
     In the year ended December 31, 1994, the Company repaid the remaining $85.0
million outstanding balance on its Senior Term Loans. This resulted in an
extraordinary item -- loss on early extinguishment of long-term obligations, net
of taxes as discussed in Note C to the Consolidated Financial Statements
included herein.
 
NET EARNINGS (LOSS)
 
     The Company had a net loss of $(61.9) million, or $(.69) per share, for the
year ended December 31, 1995, compared to net earnings of $16.8 million, or $.18
per share, for the year ended December 31, 1994. The loss for the year ended
December 31, 1995 compared to the year ended December 31, 1994, was primarily
attributable to the decrease in net sales of $107.9 million, the decrease in
gross profit of $79.1 million and increased operating expenses and other charges
as discussed above. The results for the year ended December 31, 1994, include an
extraordinary loss of $(.9) million, or $(.01) per share, on the early
extinguishment of long-term obligations.
 
                                       17
<PAGE>   21
 
YEAR ENDED DECEMBER 31, 1994 VS. YEAR ENDED DECEMBER 31, 1993
 
NET SALES
 
     For the year ended December 31, 1994, net sales for the Company increased
$79.9 million, or 7.6%, to $1.127 billion from $1.047 billion for the year ended
December 31, 1993. Net sales of HSC increased $65.2 million, or 6.8%, for the
year ended December 31, 1994, reflecting a 19.5% increase in the number of
packages shipped and a 10.2% decrease in the average price per unit sold
compared to the year ended December 31, 1993. Promotional price discounts, used
to enhance HSC merchandise sales, increased to 2.7% of HSC sales for the year
ended December 31, 1994, from 1.8% in 1993. In addition, sales by HSND, which
commenced operations during the third quarter of 1994, totaled $13.5 million and
sales by the Company's retail outlets increased $6.7 million for the year ended
December 31, 1994 compared to the prior year.
 
     The increases for the year ended December 31, 1994 were primarily offset by
a decline in sales of $6.9 million attributable to the sale of Mistix in the
second quarter of 1994.
 
     The sales increases for the year ended December 31, 1994 versus 1993,
occurred primarily in the first nine months of the year and were the
continuation of a trend that began in the latter part of the third quarter of
1993. Management believes that 1994 sales levels were positively affected by
several factors, most significantly the addition of new cable subscribers
beginning in September 1993 as a result of the "must carry" provisions of the
cable re-regulation law.
 
     In September 1994, the Company appointed senior management personnel with
expertise in merchandising. The Company had also instituted procedures intended
to improve purchasing and other merchandising practices. Management's emphasis
included evaluating new product sources and programs to boost customer loyalty,
offering higher quality and a greater variety of products, developing strong
private label lines, selling higher margin items and offering name brand
merchandise.
 
     During the fourth quarter of 1994, in addition to reorganizing its
merchandising and sales practices, the Company continued to significantly
restyle its programming. This included new on-air presentations, offering
regularly scheduled themed shows, increasing the number of items aired per hour
and the display of item numbers which enables a customer to order an item when
it is off the air.
 
     These changes in merchandising and programming strategy were aimed at
long-term improvements in sales by attempting to attract new customers and
increase the frequency of sales. However, the impact of these changes was a
slowdown in sales, such that consolidated net sales for the quarter ended
December 31, 1994 increased only 1.8% over the same period in 1993.
 
     For the years ended December 31, 1994 and 1993, HSC's merchandise return
percentage remained constant at 24.4%. The return rate continued to be affected
by high returns in jewelry and electronics merchandise categories which
typically experience higher return rates than other merchandise categories.
 
     The following table highlights the changes in the estimated unduplicated
television household reach of HSN programming by category for the year ended
December 31, 1994:
 
<TABLE>
<CAPTION>
    ---------------------------------------------------------------------------------------------
                                                          CABLE*   BROADCAST   SATELLITE   TOTAL
    ---------------------------------------------------------------------------------------------
                                                               (In thousands of households)
    <S>                                                   <C>      <C>         <C>         <C>
    Households -- December 31, 1993.....................  33,788     25,876      3,100     62,764
    Net additions.......................................   2,029        463        650      3,142
    Shift in classification.............................   3,143     (3,143)        --         --
    Change in Nielsen household counts..................      --       (128)        --       (128)
                                                          ------   ---------   ---------   ------
    Households -- December 31, 1994.....................  38,960     23,068      3,750     65,778
                                                          ======    =======     ======     ======
</TABLE>
 
---------------
 
* Households capable of receiving both broadcast and cable transmissions are
  included under cable.
 
                                       18
<PAGE>   22
 
COST OF SALES
 
     For the year ended December 31, 1994, cost of sales increased $26.5
million, or 3.7%, to $730.5 million from $704.0 million for the year ended
December 31, 1993. As a percentage of net sales, cost of sales decreased to
64.8% from 67.3% compared to year ended December 31, 1993.
 
     Cost of sales of HSC increased $22.5 million for the year ended December
31, 1994. As a percentage of HSC sales, cost of sales decreased to 66.9% from
69.1%, compared to the year ended December 31, 1993. In addition, cost of sales
for HSND and the Company's retail outlets for the year ended December 31, 1994,
increased $5.0 million and $3.7 million, respectively, compared to the year
ended December 31, 1993.
 
     The remaining decrease in cost of sales for the year ended December 31,
1994, compared to 1993, was primarily attributable to the sale of Mistix, as
discussed in "Net Sales."
 
     The decreases in consolidated and HSC's cost of sales percentages in 1994
compared to 1993 relate primarily to an additional $20.1 million adjustment made
to HSC's inventory carrying amount, which increased cost of sales in the first
quarter of 1993, in connection with a change in management's merchandising
philosophy.
 
OPERATING EXPENSES
 
     The following table highlights the operating expense section from the
Company's Consolidated Statements of Operations:
 
<TABLE>
<CAPTION>
    -----------------------------------------------------------------------------------------
                                                              YEARS ENDED
                                                             DECEMBER 31,
                                                            ---------------     $        %
                                                             1994     1993    CHANGE   CHANGE
    -----------------------------------------------------------------------------------------
                                                                 (In millions, except %)
    <S>                                                     <C>      <C>      <C>      <C>
    Selling and marketing.................................  $161.9   $138.1   $ 23.8     17.2%
    Engineering and programming...........................    98.8     93.7      5.1      5.5
    General and administrative............................    79.3     93.5    (14.2)   (15.1)
    Depreciation and amortization.........................    29.1     24.2      4.9     20.2
                                                            ------   ------   ------
                                                            $369.1   $349.5   $ 19.6      5.6
                                                            ======   ======   ======
</TABLE>
 
     As a percentage of net sales, operating expenses decreased to 32.8% from
33.4% compared to year ended December 31, 1993.
 
SELLING AND MARKETING
 
     For the year ended December 31, 1994, selling and marketing expenses, as a
percentage of net sales, increased to 14.4% from 13.2% compared to the year
ended December 31, 1993.
 
     The major components of selling and marketing expenses are detailed below:
 
<TABLE>
<CAPTION>
     ----------------------------------------------------------------------------------------
                                                          YEARS ENDED
                                                         DECEMBER 31,
                                                        ---------------       $          %
                                                        1994      1993      CHANGE     CHANGE
     ----------------------------------------------------------------------------------------
                                                               (In millions, except %)
     <S>                                                <C>       <C>       <C>        <C>
     Telephone, operator and customer service.........  $53.8     $48.5     $ 5.3       10.8 %
     Fees to cable system operators:
       Commissions....................................   38.4      33.9       4.5       13.1
       Marketing payments for cable advertising.......   25.3      30.7      (5.4 )    (17.5 )
       Performance bonus commissions..................    9.1        --       9.1      100.0
</TABLE>
 
     Telephone, operator and customer service expenses are typically related to
sales, call volume and the number of packages shipped, and for the year ended
December 31, 1994, compared to the year ended December 31, 1993, these expenses
increased as a result of increases in call and package volume.
 
                                       19
<PAGE>   23
 
     For the year ended December 31, 1994, commissions to cable system operators
increased at a higher rate than sales as a result of increased cable system
carriage of the Company's programming due to the implementation of the "must
carry" provisions of the cable re-regulation law.
 
     Marketing payments for cable advertising, related primarily to previous
contractual commitments, decreased for the year ended December 31, 1994,
compared to the year ended December 31, 1993.
 
     Selling and marketing expenses related to HSND totaled $6.7 million for the
year ended December 31, 1994. The remaining net increase in selling and
marketing expenses was attributable to other advertising and promotional
expenses of the Company's other subsidiary operations.
 
ENGINEERING AND PROGRAMMING
 
     For the year ended December 31, 1994, engineering and programming expenses,
as a percentage of net sales, decreased to 8.8% from 9.0% compared to the year
ended December 31, 1993.
 
     Increases in expense related to broadcast affiliates in additional markets
totaled $3.7 million compared with the year ended December 31, 1993. In
addition, based on sales within the broadcast markets of SKC for the year ended
December 31, 1994, the Company incurred additional broadcast commission expense
of $1.3 million, compared to the year ended December 31, 1993.
 
GENERAL AND ADMINISTRATIVE
 
     For the year ended December 31, 1994, general and administrative expenses,
as a percentage of net sales, decreased to 7.0% from 8.9% compared to the year
ended December 31, 1993.
 
     For the year ended December 31, 1994, consulting and stockholder relations
expenses decreased $5.3 million, due to expenses incurred in 1993, in connection
with a merger proposal by Liberty Media Corporation ("Liberty") following the
acquisition, in February 1993, of a controlling interest in the Company by a
wholly-owned subsidiary of Liberty and the unsolicited merger proposal by QVC,
Inc. that was not consummated. Expenses in connection with the Company's
executive stock award program, SAR's, settlement of sales tax issues, legal
expense, repairs and maintenance and equipment rental decreased $13.8 million
for the year ended December 31, 1994, compared to the year ended December 31,
1993. The above decreases were offset by increases for the year ended December
31, 1994, totaling $5.0 million, in payroll expense and other administrative
expenses.
 
DEPRECIATION AND AMORTIZATION
 
     For the year ended December 31, 1994, depreciation and amortization
increased $3.9 million due to the amortization of cable distribution fees for
the year ended December 31, 1994. The balance of the increase in depreciation
and amortization was attributable to capital asset additions during the year
ended December 31, 1994.
 
OTHER INCOME (EXPENSE)
 
     For the year ended December 31, 1994, the Company had net other income of
$3.6 million compared to net other expense of $(12.6) million for the year ended
December 31, 1993.
 
     Interest income decreased $4.1 million for the year ended December 31,
1994, compared to the year ended December 31, 1993, due to the repayment by SKC,
in August 1994, of its indebtedness to the Company.
 
     Interest expense decreased $5.4 million for the year ended December 31,
1994, primarily as a result of the repayment by the Company, in August 1994, of
its Senior Term Loans.
 
     For the year ended December 31, 1994, net miscellaneous expense decreased
$2.0 million compared to the year ended December 31, 1993. Net miscellaneous
expense for the year ended December 31, 1993 included nonrecurring costs
totaling $3.8 million. For the year ended December 31, 1994, net miscellaneous
 
                                       20
<PAGE>   24
 
expense included a $(2.9) million loss on the sale of Mistix. In addition, 1994
included the receipt of proceeds from a lawsuit settlement totaling $.8 million.
 
     Net other expense for the year ended December 31, 1993 also included
litigation settlements totaling $13.0 million.
 
INCOME TAXES
 
     The Company's effective tax rate was an expense of 42.0% for the year ended
December 31, 1994 and a benefit of (20.6)% for the year ended December 31, 1993.
The Company's effective tax rate for these periods differed from the statutory
rate due primarily to the amortization of goodwill and other acquired intangible
assets relating to acquisitions from prior years, state income taxes and the
provision for interest on adjustments proposed by the IRS, as discussed in Note
D to the Consolidated Financial Statements included herein.
 
EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM OBLIGATIONS
 
     In the year ended December 31, 1994, the Company repaid the remaining $85.0
million outstanding balance on its Senior Term Loans. In the year ended December
31, 1993, the Company refinanced and retired the remaining $143.3 million of its
11 3/4% Senior Notes and retired the remaining $16.9 million of its 5 1/2%
Convertible Subordinated Debentures. These transactions resulted in
extraordinary items -- loss on early extinguishment of long-term obligations,
net of taxes as discussed in Note C to the Consolidated Financial Statements
included herein.
 
NET EARNINGS (LOSS)
 
     The Company had net earnings of $16.8 million, or $.18 per share, for the
year ended December 31, 1994, compared to a net loss of $(22.8) million, or
$(.26) per share, for the year ended December 31, 1993. The increase in net
earnings for the year ended December 31, 1994, was primarily attributable to an
increase in net sales of $79.9 million and an increase in gross profit of $53.5
million compared to the year ended December 31, 1993. As discussed in "Cost of
Sales," the results for the year ended December 31, 1993, included an additional
adjustment of $20.1 million to the inventory carrying amount. The results for
the year ended December 31, 1993 were also affected by the litigation
settlements of $13.0 million, as discussed in "Other Income (Expense)." As
previously discussed, the Company recorded a loss of $(2.9) million on the sale
of the common stock of Mistix. In addition, the consolidated results for the
year ended December 31, 1994 included a pre-tax loss for Mistix of $(1.6)
million. Consolidated results also included extraordinary losses, net of taxes,
of $(.9) million, or $(.01) per share, for the year ended December 31, 1994, and
$(7.2) million, or $(.08) per share, for the year ended December 31, 1993.
 
SEASONALITY
 
     The Company believes that seasonality does impact its business but not to
the same extent it impacts the retail industry in general.
 
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
 
     The following table highlights various balances and ratios from the
Consolidated Financial Statements included herein:
 
<TABLE>
<CAPTION>
    ---------------------------------------------------------------------------------------
                                                                           DECEMBER 31,
                                                                        -------------------
                                                                         1995        1994
    ---------------------------------------------------------------------------------------
    <S>                                                                 <C>         <C>
    Cash and cash equivalents (millions)..............................  $  25.2     $  33.6
    Working capital (millions)........................................  $   7.6     $  23.1
    Current ratio.....................................................   1.04:1      1.11:1
    Accounts and notes receivable, net (millions).....................  $  23.6     $  43.7
    Inventories, net (millions).......................................  $ 101.6     $ 118.8
    Annual inventory turnover.........................................     6.37        6.36
</TABLE>
 
                                       21
<PAGE>   25
 
     The principal source of cash for the year ended December 31, 1995, was
borrowings by the Company under its Credit Facility, which were used principally
to pay cable distribution fees of $72.1 million, purchase treasury stock, pay
litigation settlements of $14.5 million and pay for capital expenditures. The
net loss adjusted for non-cash items totaled $(32.2) million for the year ended
December 1995.
 
     The primary reason for the decrease in accounts and notes receivable is
"FlexPay" accounts receivable which totaled $13.0 million at December 31, 1995,
compared to $23.6 million at December 31, 1994. The Company's financing of
"FlexPay" accounts receivable has not had a significant impact on its liquidity
position. In addition, on March 27, 1995, Precision Systems, Inc. ("PSi") repaid
$2.7 million, plus accrued interest, of its $5.0 million loan from the Company.
Under an agreement between the Company and PSi, the remaining principal balance
of the loan was recorded as a prepayment of monthly software maintenance
payments due PSi from the Company through December 1995.
 
     Inventories decreased due to promotional sales events held in December 1995
and a $14.5 million increase in HSC's inventory carrying value adjustment
primarily related to product which is inconsistent with HSC's new sales and
merchandising philosophy. The inventory balance is net of a carrying value
adjustment of $33.3 million at December 31, 1995, which represents an increase
from $18.8 million at December 31, 1994.
 
     Capital expenditures for the year ended December 31, 1995, were $13.0
million. The Company estimates capital expenditures will range between $18.0
million and $21.0 million for 1996.
 
     The Company's Credit Facility was amended on September 28, 1995 and the
maximum borrowing availability was increased from $100.0 million to $150.0
million at that time. On that date, HSN pledged the capital stock of HSC and HSN
Realty, Inc. ("Realty"), the guarantors of the Credit Facility, to secure the
Company's obligation under the Credit Facility. On February 13, 1996, the
covenants in the Credit Facility were further amended to include the effect of,
among other things, certain of the restructuring and other charges as discussed
in Note F to the Consolidated Financial Statements included herein, to allow for
additional subordinated financing as discussed in Notes P and R to the
Consolidated Financial Statements included herein and, upon conclusion of the
additional financing, to reduce the maximum borrowing availability under the
Credit Facility to $120.0 million. Restrictions remain on repurchases of the
Company's common stock based upon future cash flow levels. On March 1, 1996, the
Company completed a private placement of $100.0 million of Convertible
Subordinated Debentures due March 1, 2006. The Company used the net proceeds to
repay borrowings under the Credit Facility leaving an outstanding loan balance
of $30.0 million with $90.0 million available for borrowing. The Company
anticipates that it will use its additional borrowing capacity to finance
working capital requirements, capital expenditures and general corporate
purposes.
 
     During 1996, management expects to pay cable distribution fees, totaling
$12.3 million, relating to current contracts with cable system operators to
carry HSC programming. Of this amount, $2.3 million is payable to a related
party.
 
     In July 1995, the Company paid $4.0 million for a 20.0% interest in Body By
Jake Enterprises, L.L.C. This investment is accounted for under the cost method.
 
     In management's opinion, available cash, internally generated funds and the
Credit Facility will provide sufficient capital resources to meet the Company's
foreseeable needs.
 
     As of February 29, 1996, the Company had a $25.0 million committed bank
credit line collateralized by the capital stock of HSC and Realty. In addition,
the Company had an additional uncommitted unsecured bank credit line offered on
a conditional basis. These credit lines back letters of credit which are used
exclusively to facilitate the purchase of imported inventory. Presentation of
letters of credit by vendors results in an immediate charge to the Company's
account with no interest charges incurred. Outstanding letters of credit, which
cannot exceed $25.0 million in total in accordance with the Credit Facility,
amounted to $11.6 million at February 29, 1996, on the committed and uncommitted
lines, leaving $13.4 million available.
 
                                       22
<PAGE>   26
 
     For the year ended December 31, 1995, the Company did not pay any cash
dividends and does not anticipate paying cash dividends in the immediate future.
 
     In 1994, the Company's Board of Directors authorized the repurchase of up
to an additional $75.0 million of the Company's common stock. In 1994, the
Company repurchased 1.3 million shares at a total cost of $13.1 million and in
the quarter ended March 31, 1995, the Company repurchased an additional 2.6
million shares at a total additional cost of $21.6 million. Under the terms of
the Credit Facility the Company is restricted from purchasing its common stock
until it meets certain cash flow ratios.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
     In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123") effective for transactions entered into after December
15, 1995. FAS 123 provides alternatives for the methods used by entities to
record compensation expense associated with its stock-based compensation plans.
Additionally, FAS 123 provides further guidance on the disclosure requirements
relating to stock-based compensation plans. Management believes that the
adoption of FAS 123 will not have a material impact on the financial condition
or the results of operations of the Company.
 
                                       23
<PAGE>   27
 
ITEM 8 -- CONSOLIDATED FINANCIAL STATEMENTS
 
                          INDEPENDENT AUDITORS' REPORT
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
THE BOARD OF DIRECTORS
HOME SHOPPING NETWORK, INC.
 
     We have audited the accompanying consolidated balance sheets of Home
Shopping Network, Inc. and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Home
Shopping Network, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three year period ended December 31, 1995 in conformity with generally
accepted accounting principles.
 
                                          /s/  KPMG PEAT MARWICK LLP
St. Petersburg, Florida
February 21, 1996
 
                                       24
<PAGE>   28
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
                                                                                      DECEMBER 31,
                                                                                 -----------------------
                                                                                   1995           1994
--------------------------------------------------------------------------------------------------------
                                                                                     (In thousands)
<S>                                                                              <C>            <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................................................  $ 25,164       $ 33,648
Accounts and notes receivable (net of an allowance for doubtful accounts of
  $1,685 and $1,738, respectively).............................................    23,634         43,657
Inventories, net...............................................................   101,564        118,801
Deferred income taxes..........................................................    24,484         22,108
Other current assets, net......................................................     8,149         10,632
                                                                                 --------       --------
         Total current assets..................................................   182,995        228,846
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment...............................................    90,581        106,144
Buildings and leasehold improvements...........................................    69,843         74,514
Furniture and other equipment..................................................    49,561         46,183
                                                                                 --------       --------
                                                                                  209,985        226,841
         Less accumulated depreciation and amortization........................   118,710        116,697
                                                                                 --------       --------
                                                                                   91,275        110,144
Land...........................................................................    17,093         17,774
Construction in progress.......................................................       406          3,182
                                                                                 --------       --------
                                                                                  108,774        131,100
OTHER ASSETS
Cable distribution fees, net ($34,803 and $34,174, respectively, to related
  parties).....................................................................    99,161         67,978
Deferred income taxes..........................................................    23,142             --
Long-term investments ($10,000 in a related party).............................    14,000         10,000
Other non-current assets.......................................................     8,223          8,575
                                                                                 --------       --------
                                                                                  144,526         86,553
                                                                                 --------       --------
                                                                                 $436,295       $446,499
                                                                                 ========       ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations....................................  $  1,555       $  1,690
Accounts payable...............................................................    84,297         75,264
Accrued liabilities:
  Programming fees ($2,260 and $26,591 respectively, to related parties).......    20,377         50,170
  Sales returns................................................................    10,832         12,304
  Litigation settlements.......................................................     6,140         14,450
  Treasury stock...............................................................        --         13,109
  Other........................................................................    52,223         38,786
                                                                                 --------       --------
         Total current liabilities.............................................   175,424        205,773
LONG-TERM OBLIGATIONS (net of current maturities)..............................   135,810         27,491
DEFERRED INCOME TAXES..........................................................        --          6,792
COMMITMENTS AND CONTINGENCIES..................................................        --             --
STOCKHOLDERS' EQUITY
Preferred stock -- $.01 par value; authorized 500,000 shares, no shares issued
  and outstanding..............................................................        --             --
Common stock -- $.01 par value; authorized 150,000,000 shares, issued
  77,718,379 and 77,553,329 at December 31, 1995 and 1994, respectively........       777            776
Class B -- convertible common stock -- $.01 par value; authorized, issued and
  outstanding 20,000,000 shares................................................       200            200
Additional paid-in capital.....................................................   169,057        167,463
Retained earnings..............................................................     7,677         69,560
Treasury stock -- 6,986,000 and 4,440,700 common shares, at cost, at December
  31, 1995 and 1994, respectively..............................................   (48,718)       (27,136)
Unearned compensation..........................................................    (3,932)        (4,420)
                                                                                 --------       --------
                                                                                  125,061        206,443
                                                                                 --------       --------
                                                                                 $436,295       $446,499
                                                                                 ========       ========
</TABLE>
 
The accompanying Notes to Consolidated Financial Statements are an integral part
                              of these statements.
 
                                       25
<PAGE>   29
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                                   YEARS ENDED DECEMBER 31,
                                                             ------------------------------------
                                                                1995         1994         1993
-------------------------------------------------------------------------------------------------
                                                               (In thousands, except per share
                                                                            data)
<S>                                                          <C>          <C>          <C>
NET SALES..................................................  $1,018,625   $1,126,514   $1,046,580
Cost of sales..............................................     701,678      730,504      704,040
                                                             ----------   ----------   ----------
          Gross profit.....................................     316,947      396,010      342,540
                                                             ----------   ----------   ----------
Operating expenses:
  Selling and marketing....................................     167,063      161,886      138,092
  Engineering and programming..............................      98,216       98,835       93,686
  General and administrative...............................      77,087       79,344       93,539
  Depreciation and amortization............................      38,854       29,066       24,172
  Other charges............................................      11,893           --           --
  Restructuring charges....................................       4,114           --           --
                                                             ----------   ----------   ----------
                                                                397,227      369,131      349,489
                                                             ----------   ----------   ----------
          Operating profit (loss)..........................     (80,280)      26,879       (6,949)
Other income (expense):
  Interest income..........................................       1,961        9,556       13,655
  Interest expense.........................................     (10,077)      (5,512)     (10,863)
  Miscellaneous............................................        (426)        (403)      (2,410)
  Litigation settlements...................................      (6,383)          --      (13,000)
                                                             ----------   ----------   ----------
                                                                (14,925)       3,641      (12,618)
                                                             ----------   ----------   ----------
Earnings (loss) before income taxes and extraordinary
  item.....................................................     (95,205)      30,520      (19,567)
Income tax expense (benefit)...............................     (33,322)      12,819       (4,028)
                                                             ----------   ----------   ----------
Earnings (loss) before extraordinary item..................     (61,883)      17,701      (15,539)
Extraordinary item -- loss on early extinguishment of
  long-term obligations (net of tax benefit of $567 and
  $4,395 for the years ended December 31, 1994 and 1993,
  respectively)............................................          --         (924)      (7,242)
                                                             ----------   ----------   ----------
NET EARNINGS (LOSS)........................................  $  (61,883)  $   16,777   $  (22,781)
                                                              =========    =========    =========
Earnings (loss) per common share:
  Earnings (loss) before extraordinary item................  $     (.69)  $      .19   $     (.18)
  Extraordinary item, net..................................          --         (.01)        (.08)
                                                             ----------   ----------   ----------
  Net earnings (loss)......................................  $     (.69)  $      .18   $     (.26)
                                                              =========    =========    =========
</TABLE>
 
The accompanying Notes to Consolidated Financial Statements are an integral part
                              of these statements.
 
                                       26
<PAGE>   30
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                CLASS B                                                         
                                              CONVERTIBLE   ADDITIONAL                         UNEARNED         
                                     COMMON     COMMON       PAID-IN     RETAINED   TREASURY   COMPEN-          
                                     STOCK       STOCK       CAPITAL     EARNINGS    STOCK      SATION     TOTAL
------------------------------------------------------------------------------------------------------------------
                                                                    (In thousands)
<S>                                  <C>      <C>           <C>          <C>        <C>        <C>        <C>
BALANCE AT DECEMBER 31, 1992.......   $671       $ 242       $115,846    $ 75,564   $(14,027)  $(8,147)   $170,149
Issuance of common stock upon
  exercise of stock options........     55          --         31,796          --         --        --      31,851
Issuance of common stock upon
  conversion of debentures.........     --          --             15          --         --        --          15
Unearned compensation related to
  executive stock award program....     --          --          1,009          --         --    (1,009)         --
Income tax benefit related to
  executive stock award program and
  stock options exercised..........     --          --         11,705          --         --        --      11,705
Expense related to executive stock
  award program....................     --          --             --          --         --     5,615       5,615
Conversion of Class B common stock
  to common stock..................     36         (36)            --          --         --        --          --
Net loss for the year ended
  December 31, 1993................     --          --             --     (22,781)        --        --     (22,781)
                                     ------      -----      ----------   --------   --------   --------   --------
BALANCE AT DECEMBER 31, 1993.......    762         206        160,371      52,783    (14,027)   (3,541)    196,554
Issuance of common stock upon
  exercise of stock options........      8          --          4,517          --         --        --       4,525
Unearned compensation related to
  employee equity participation
  plan.............................     --          --             --          --         --    (3,736)     (3,736)
Income tax benefit related to
  executive stock award program and
  stock options exercised..........     --          --          2,575          --         --        --       2,575
Expense related to executive stock
  award program....................     --          --             --          --         --     2,047       2,047
Expense related to employee equity
  participation plan...............     --          --             --          --         --       810         810
Purchases of treasury stock, at
  cost.............................     --          --             --          --    (13,109)       --     (13,109)
Conversion of Class B common stock
  to common stock..................      6          (6)            --          --         --        --          --
Net earnings for the year ended
  December 31, 1994................     --          --             --      16,777         --        --      16,777
                                     ------      -----      ----------   --------   --------   --------   --------
BALANCE AT DECEMBER 31, 1994.......    776         200        167,463      69,560    (27,136)   (4,420)    206,443
Issuance of common stock upon
  exercise of stock options........      1          --            902          --         --        --         903
Unearned compensation related to
  executive stock award program and
  stock options granted............     --          --             96          --         --       (63)         33
Unearned compensation related to
  employee equity participation
  plan.............................     --          --             --          --         --    (1,264)     (1,264)
Income tax benefit related to
  executive stock award program and
  stock options exercised..........     --          --            596          --         --        --         596
Expense related to executive stock
  award program....................     --          --             --          --         --       795         795
Expense related to employee equity
  participation plan...............     --          --             --          --         --     1,020       1,020
Purchases of treasury stock, at
  cost.............................     --          --             --          --    (21,582)       --     (21,582)
Net loss for the year ended
  December 31, 1995................     --          --             --     (61,883)        --        --     (61,883)
                                     ------      -----      ----------   --------   --------   --------   --------
BALANCE AT DECEMBER 31, 1995.......   $777       $ 200       $169,057    $  7,677   $(48,718)  $(3,932)   $125,061
                                     ======== ==========    =========    =========  =========  ========   =========
</TABLE>
 
The accompanying Notes to Consolidated Financial Statements are an integral part
                              of these statements.
 
                                       27
<PAGE>   31
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                                                 YEARS ENDED DECEMBER 31,
                                                           ------------------------------------
                                                             1995         1994          1993
-----------------------------------------------------------------------------------------------
                                                                      (In thousands)
<S>                                                        <C>          <C>           <C>
Cash flows from operating activities:
  Net earnings (loss)....................................  $(61,883)    $  16,777     $ (22,781)
  Adjustments to reconcile net earnings (loss) to net
     cash provided by (used in) operating activities:
       Depreciation and amortization.....................    26,162        25,173        24,172
       Amortization of cable distribution fees...........    12,692         3,893            --
       Inventory carrying value adjustment...............    14,468        (6,455)       12,179
       Deferred income taxes.............................   (32,310)        5,649       (14,102)
       Loss on disposition of wholly-owned subsidiary....        --         2,854            --
       Loss on retirement of long-term obligations.......        --         1,491        11,637
       Change in Stock Appreciation Rights ("SAR's") and
          common stock issued for services provided......     1,911         1,310         8,449
       Provision for losses on accounts and notes
          receivable.....................................       440           377          (171)
       Equity in (earnings) losses of unconsolidated
          affiliates.....................................       302          (144)          589
       (Gain) loss on sale of assets.....................     6,040           106          (277)
       Liquidation of joint venture operation............        --            --           722
       Change in current assets and liabilities:
          (Increase) decrease in accounts receivable.....    12,576       (10,698)      (15,753)
          (Increase) decrease in interest receivable from
            related party................................        --         1,039        (1,039)
          (Increase) decrease in inventories.............     1,635        (1,416)       (4,056)
          (Increase) decrease in other current assets....     3,572        (3,313)       (1,175)
          Increase (decrease) in accounts payable........     9,362       (13,594)       26,683
          Increase (decrease) in accrued liabilities.....   (24,303)       24,687        29,923
       Increase in cable distribution fees...............   (43,874)      (71,871)           --
       Stock purchases for employee equity participation
          plan...........................................    (1,264)       (3,736)           --
                                                           --------      --------     ---------
          NET CASH PROVIDED BY (USED IN) OPERATING
            ACTIVITIES...................................   (74,474)      (27,871)       55,000
                                                           --------      --------     ---------
Cash flows from investing activities:
  Capital expenditures...................................   (13,004)      (18,602)      (15,491)
  Proceeds from sale of assets...........................     8,727         3,221           548
  Increase in long-term investments......................    (4,000)           --        (2,775)
  Proceeds from long-term notes receivable...............     3,169       133,325         4,892
  Increase in intangible assets..........................    (2,378)       (4,338)       (2,057)
  (Increase) decrease in other non-current assets........      (920)       (6,185)          683
                                                           --------      --------     ---------
          NET CASH PROVIDED BY (USED IN) INVESTING
            ACTIVITIES...................................    (8,406)      107,421       (14,200)
                                                           --------      --------     ---------
Cash flows from financing activities:
  Borrowings from secured credit facility................   120,000            --            --
  Payments for purchases of treasury stock...............   (34,691)           --            --
  Principal payments on and redemptions of long-term
     obligations.........................................   (11,816)     (110,993)     (206,506)
  Proceeds from issuance of common stock.................       903         4,525        31,851
  Borrowings from unsecured credit facilities............        --        25,000       150,000
                                                           --------      --------     ---------
          NET CASH PROVIDED BY (USED IN) FINANCING
            ACTIVITIES...................................    74,396       (81,468)      (24,655)
                                                           --------      --------     ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.....    (8,484)       (1,918)       16,145
Cash and cash equivalents at beginning of year...........    33,648        35,566        19,421
                                                           --------      --------     ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................  $ 25,164     $  33,648     $  35,566
                                                           ========      ========     =========
</TABLE>
 
The accompanying Notes to Consolidated Financial Statements are an integral part
                              of these statements.
 
                                       28
<PAGE>   32
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE A -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Home Shopping Network, Inc. (the "Company" or "HSN") is a holding company,
the subsidiaries of which conduct the day-to-day operations of the Company's
various business activities. The Company's primary business is electronic
retailing conducted by Home Shopping Club, Inc. ("HSC"), a wholly-owned
subsidiary of the Company.
 
     The following is a summary of the significant accounting policies of the
Company consistently applied in the preparation of the accompanying consolidated
financial statements.
 
1. CONSOLIDATION
 
     The consolidated financial statements include the accounts of the Company
and all wholly-owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated.
 
2. CASH AND CASH EQUIVALENTS
 
     For purposes of reporting cash flows, cash and cash equivalents include
cash and short-term investments. Short-term investments consist primarily of
U.S. Treasury Securities, auction preferred shares, U.S. Government agencies and
certificates of deposit with original maturities of less than 91 days.
 
3. ACCOUNTS AND NOTES RECEIVABLE
 
     HSN has a sales program with a deferred payment arrangement, "FlexPay",
which allows customers to charge their purchases to third party credit cards in
installments, generally over three consecutive months. FlexPay receivables
totaled $13,015,000 and $23,621,000 at December 31, 1995 and 1994, respectively.
At December 31, 1994 accounts and notes receivable included $3,000,000 due from
a former chairman of the Company's Board of Directors and a $5,000,000 note
receivable from a former wholly-owned subsidiary, Precision Systems, Inc.
("PSi").
 
4. INVENTORIES, NET
 
     Merchandise inventories are valued at the lower of cost or market, cost
being determined using the first-in, first-out method. Cost includes freight,
certain warehousing costs and other allocable overhead. Market is determined on
the basis of net realizable value, giving consideration to obsolescence and
other factors. Inventories are presented net of an inventory carrying adjustment
of $33,259,000 and $18,791,000 at December 31, 1995 and 1994, respectively.
 
5. PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment, including significant improvements, are
recorded at cost. Repairs and maintenance and any gains or losses on
dispositions are included in operations.
 
     Depreciation and amortization are provided on a straight-line basis to
allocate the cost of depreciable assets to operations over their estimated
service lives as follows:
 
<TABLE>
<CAPTION>
                                                                             DEPRECIATION/
                               ASSET CATEGORY                             AMORTIZATION PERIOD
    --------------------------------------------------------------------  -------------------
    <S>                                                                   <C>
    Computer and broadcast equipment....................................      3 to 10 Years
    Buildings...........................................................     30 to 40 Years
    Leasehold improvements..............................................      4 to 13 Years
    Furniture and other equipment.......................................      3 to 10 Years
</TABLE>
 
                                       29
<PAGE>   33
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Depreciation and amortization expense on property, plant and equipment was
$20,452,000, $22,540,000 and $21,911,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
 
     For income tax purposes, certain assets are depreciated using allowable
accelerated methods which result in different depreciation amounts than would be
calculated for financial statement purposes.
 
6. CABLE DISTRIBUTION FEES, NET
 
     The Company pays upfront fees for long-term cable contracts for carriage of
the Company's programming. These fees are amortized to expense on a
straight-line basis, over the terms of the respective contracts which range from
5 to 15 years. Amortization expense for cable distribution fees for the years
ended December 31, 1995 and 1994 was $12,692,000 and $3,893,000, respectively.
Accumulated amortization as of December 31, 1995 and 1994 was $16,585,000 and
$3,893,000, respectively.
 
     The Company periodically analyzes the value of its cable distribution fees
to determine if an impairment has occurred. The Company measures the potential
impairment of recorded cable distribution fees by the undiscounted value of
expected future operating cash flows in relation to its net capital investment.
Based on its analysis, the Company does not believe that an impairment of its
cable distribution fees has occurred.
 
7. OTHER NON-CURRENT ASSETS
 
     Other non-current assets consists primarily of goodwill which is recorded
at cost and amortized on a straight-line basis over its economic life, primarily
three years. In connection with the purchase of Internet Software, Inc. ("ISN")
during 1994, as discussed in Note E, goodwill increased by $5,239,000.
 
     Amortization expense for other non-current assets was $5,710,000,
$2,633,000 and $2,261,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. The increase in amortization expense during 1995 was related to
the sale of name lists for Ortho-Vent, Inc. ("Ortho-Vent"), one of the Company's
mail order subsidiaries, as discussed below and in Note F.
 
     Costs in connection with mailing lists developed for the Company's direct
response advertising business are amortized over a two year period. The total
amount of direct response advertising included in amortization expense for the
years ended December 31, 1995, 1994, and 1993, was $3,868,000, $1,982,000, and
$1,988,000, respectively. Due to the sale of the Ortho-Vent assets, the Company
no longer incurs these costs and all previously capitalized amounts were
written-off in 1995. All non-direct response advertising is expensed in the
period incurred.
 
8. NET SALES
 
     Revenues include merchandise sales and shipping and handling revenues, and
are reduced by incentive discounts and sales returns to arrive at net sales.
Revenues are recorded for credit card sales upon transaction authorization, and
for check sales upon receipt of customer payment, which does not vary
significantly from the time goods are shipped. The Company's sales policy allows
merchandise to be returned at the customer's discretion, generally up to 30
days. An allowance for returned merchandise is provided based upon past
experience.
 
9. INCOME TAXES
 
     The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("Statement 109").
Under Statement 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
 
                                       30
<PAGE>   34
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
 
10. EARNINGS (LOSS) PER SHARE
 
     Primary earnings (loss) per common share is based on net earnings (loss)
divided by the weighted average number of common shares outstanding giving
effect to stock options and convertible debt, when dilutive. Fully diluted
earnings per share is not materially different from primary earnings per share
in any period presented.
 
     The weighted average number of common shares outstanding was 90,782,000,
95,061,000 and 91,192,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
 
11. RECLASSIFICATIONS
 
     Certain amounts in the prior year's consolidated financial statements have
been reclassified to conform to the 1995 presentation.
 
NOTE B -- LONG-TERM INVESTMENTS
 
     In July 1995, the Company paid $4,000,000 for a 20% interest in Body By
Jake Enterprises, L.L.C. ("BBJ"). This investment is accounted for under the
cost method. Simultaneously, the Company entered into a long-term joint
marketing agreement with BBJ to provide for the sale and promotion of
merchandise through HSC and other distribution channels.
 
     The Company has a $10,000,000 investment consisting of 100,000 shares of
Series A non-voting preferred stock, $.01 par value, with a liquidation
preference of $100 per share, in The National Registry Inc. ("NRI"), which is
accounted for under the cost method. This investment is convertible into
6,336,154 shares of NRI common stock at the Company's option, however,
conversion to common stock is automatic in the event that cumulative gross
revenues for NRI reach $15,000,000. At December 31, 1995, one of the Company's
executive officers served as a director of NRI. J. Anthony Forstmann, a director
of the Company, is Chairman of NRI and had voting rights with respect to 28.3%
of NRI's common stock as of December 31, 1995.
 
NOTE C -- LONG-TERM OBLIGATIONS AND CREDIT FACILITIES
 
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                                                             DECEMBER 31,
                                                                        ----------------------
                                                                          1995          1994
----------------------------------------------------------------------------------------------
                                                                            (In thousands)
<S>                                                                     <C>            <C>
Secured $150,000,000 Revolving Credit Facility as amended February 13,
  1996, ("Credit Facility") which expires April 1, 1997 (unsecured
  prior to September 28, 1995). Borrowings can be used for general
  corporate purposes. The interest rate ranged from 6.25% to 8.81% and
  is tied to the London Interbank Offered Rate ("LIBOR"), plus an
  applicable margin based on the Company's total debt to operating
  cash flow ratio.....................................................  $135,000       $25,000
Unsecured 7.5% note, plus accrued interest, payable to related
  parties, in connection with a business acquisition, due on September
  1, 1996. See Note E.................................................     1,325         2,903
Other long-term obligations...........................................     1,040         1,278
                                                                        --------       -------
Total long-term obligations...........................................   137,365        29,181
Less current maturities...............................................     1,555         1,690
                                                                        --------       -------
Long-term obligations, net of current maturities......................  $135,810       $27,491
                                                                        ========       =======
</TABLE>
 
                                       31
<PAGE>   35
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Aggregate contractual maturities of long-term obligations are as follows:
 
<TABLE>
<CAPTION>
    ---------------------------------------------------------------------------------------
    YEARS ENDING
    DECEMBER 31,
    ---------------------------------------------------------------------------------------
                                                                             (In thousands)
    <S>                                                                      <C>
    1996...................................................................     $  1,555
    1997...................................................................      135,250
    1998...................................................................          270
    1999...................................................................          290
                                                                             --------------
                                                                                $137,365
                                                                             ===========
</TABLE>
 
     The Company's Credit Facility was amended on September 28, 1995 and the
maximum borrowing availability was increased from $100,000,000 to $150,000,000
at that time. On that date, HSN pledged the stock of HSC and HSN Realty, Inc.
("Realty"), the guarantors of the Credit Facility, to secure the Company's
obligation under the Credit Facility. On February 13, 1996, the covenants in the
Credit Facility were further amended to include the effect of, among other
things, certain of the restructuring and other charges as discussed in Note F
and to allow for additional subordinated financing as discussed in Note P. The
Credit Facility has yearly extension options beyond April 1997, if requested by
the Company, subject to approval of the participating banks. Under the Credit
Facility, the interest rate on borrowings is tied to the LIBOR, Federal Funds
Rate, or Prime Rate, at the Company's option, plus an applicable margin.
Commitment fee payments relating to the Credit Facility totaled $2,720,000 and
$170,000, respectively, during 1995 and 1994. The unamortized commitment fee
balance of $1,170,000 at December 31, 1995 is being amortized over the expected
remaining life of the agreement.
 
     Restrictions contained in the Credit Facility include, but are not limited
to, limitations on the encumbrance and disposition of assets, certain
restrictions on repurchases of the Company's common stock and the maintenance of
various financial covenants and ratios.
 
     The Company also has a $25,000,000 committed bank credit line secured by
the capital stock of HSC and Realty. In addition, the Company has an uncommitted
unsecured bank credit line offered on a conditional basis. On February 13, 1996,
the committed bank credit line was amended on the same terms as the Credit
Facility discussed above. These facilities back letters of credit, used
exclusively to facilitate the purchase of imported inventory. Presentation of
letters of credit by vendors results in an immediate charge to the Company's
account with no interest charges incurred. Outstanding letters of credit are
limited to a total of $25,000,000 at any time, under the terms of the Credit
Facility. At December 31, 1995, outstanding letters of credit amounted to
$14,052,000 leaving $10,948,000 of these bank credit lines available.
 
     The Company recognized extraordinary losses on the early extinguishment of
its long-term obligations as follows:
 
<TABLE>
<CAPTION>
    --------------------------------------------------------------------------------------
                                                                          DECEMBER 31,
                                                                      --------------------
                                                                       1994         1993
    --------------------------------------------------------------------------------------
                                                                         (In thousands)
    <S>                                                               <C>         <C>
    Total extinguished..............................................  $85,000     $160,152
                                                                      =======     ========
    Pre-tax loss net of discounts...................................  $(1,491)    $(11,637)
    Income tax benefit..............................................      567        4,395
                                                                      -------     --------
    Extraordinary loss..............................................  $  (924)    $ (7,242)
                                                                      =======     ========
</TABLE>
 
     There was no early extinguishment of long-term obligations during the year
ended December 31, 1995.
 
                                       32
<PAGE>   36
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE D -- INCOME TAXES
 
     A reconciliation of total income tax expense (benefit) to the amounts
computed by applying the statutory federal income tax rate to earnings (loss)
before income tax expense (benefit) and extraordinary item is shown as follows:
 
<TABLE>
<CAPTION>
    -------------------------------------------------------------------------------------------------
                                                                         YEARS ENDED DECEMBER 31,
                                                                     --------------------------------
                                                                       1995        1994        1993
    -------------------------------------------------------------------------------------------------
                                                                              (In thousands)
    <S>                                                              <C>          <C>         <C>
    Income tax expense (benefit) at the federal statutory rate of
      35% (effect of rate change in 1993 to 35% was $(196))........  $(33,322)    $10,682     $(6,848)
    Amortization and write-off of goodwill and other acquired
      intangibles and interest on adjustments proposed by the
      Internal Revenue Service ("IRS").............................     1,629       2,145       1,582
    State income tax expense (benefit), net of effect of federal
      taxes........................................................    (1,778)        803          71
    Executive compensation in excess of $1 million.................      (688)         --         688
    Sale of wholly-owned subsidiary................................        --        (920)         --
    Other, net.....................................................       837         109         479
                                                                     --------     -------     -------
                                                                     $(33,322)    $12,819     $(4,028)
                                                                     =========    ========    ========
</TABLE>
 
     The Company's effective tax expense (benefit) rate was (35.0)% for 1995,
42.0% for 1994; and (20.6)% for 1993.
 
     The components of income tax expense (benefit) attributable to operations
are as follows:
 
<TABLE>
<CAPTION>
    -------------------------------------------------------------------------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                                    ---------------------------------
                                                                      1995        1994         1993
    -------------------------------------------------------------------------------------------------
                                                                             (In thousands)
    <S>                                                             <C>          <C>         <C>
    CURRENT INCOME TAXES:
    Federal.......................................................  $ (1,023)    $ 4,791     $  8,753
    State.........................................................        11         584          870
                                                                    --------     -------     --------
                                                                      (1,012)      5,375        9,623
                                                                    --------     -------     --------
    DEFERRED INCOME TAXES:
    Net operating loss carry over.................................   (23,489)         --           --
    Depreciation for tax in excess of (less than) financial
      statements..................................................    (2,207)        683           55
    Sales returns.................................................       382         493         (471)
    Amortization of acquired intangible assets....................        --      (1,622)          47
    Provision for accrued liabilities.............................    (1,407)        956       (1,363)
    Inventory costing.............................................    (4,421)      1,330       (4,057)
    Litigation settlements........................................     1,859         542       (4,550)
    Deferred compensation.........................................       662         275         (907)
    State income taxes............................................    (1,786)        325         (618)
    IRS settlement................................................        --       1,794           --
    Amortization of long-term obligation issue costs..............        --          --         (718)
    Sales tax accrual.............................................       294         771           24
    Provision for uncollectible amounts...........................        (6)      2,585         (351)
    Amortization of cable distribution fees.......................    (1,775)       (530)          --
    Charitable contribution carryover.............................       (48)        244         (910)
    Valuation allowance...........................................       240         116          135
    Other, net....................................................      (608)       (518)          33
                                                                    --------     -------     --------
                                                                     (32,310)      7,444      (13,651)
                                                                    --------     -------     --------
                                                                    $(33,322)    $12,819     $ (4,028)
                                                                    =========    ========    =========
</TABLE>
 
     During the years ended December 31, 1994 and 1993, the Company recorded an
extraordinary item, loss on early extinguishment of long-term obligations, net
of the income tax effect. See Note C.
 
                                       33
<PAGE>   37
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
 
<TABLE>
<CAPTION>
    --------------------------------------------------------------------------------------
                                                                           DECEMBER 31,
                                                                        ------------------
                                                                          1995      1994
    --------------------------------------------------------------------------------------
                                                                          (In thousands)
    <S>                                                                 <C>        <C>
    CURRENT
    Deferred tax assets:
      Inventory costing...............................................  $ 10,339   $ 5,918
      Provision for accrued liabilities...............................     5,182     3,775
      Sales returns...................................................     3,794     4,176
      Litigation settlements..........................................     2,149     4,008
      Provision for uncollectible amounts.............................       614       608
      Deferred compensation...........................................     1,163     1,825
      Sales tax accrual...............................................       484       778
      Charitable contribution carryover...............................       714       666
      Other...........................................................        45       354
                                                                        --------   -------
              Net deferred tax assets.................................  $ 24,484   $22,108
                                                                        ========   =======
    NON-CURRENT
    Deferred tax liabilities (assets):
      Net operating loss carry over...................................  $(23,489)  $    --
      State income taxes..............................................    (2,419)     (633)
      Cable distribution fees.........................................    (2,305)     (530)
      Investment in unconsolidated subsidiaries.......................        --      (238)
      Installment sale................................................        --      (182)
      Other...........................................................    (1,759)     (915)
                                                                        --------   -------
                                                                         (29,972)   (2,498)
      Less valuation allowance........................................     1,235       995
                                                                        --------   -------
                                                                         (28,737)   (1,503)
      Depreciation for tax in excess of financial statements..........     5,409     7,616
      Capitalized costs of mailing lists..............................        --       539
      Other...........................................................       186       140
                                                                        --------   -------
              Net deferred tax liabilities (assets)...................  $(23,142)  $ 6,792
                                                                        ========   =======
</TABLE>
 
     The Company had taxable income (loss) and pre-tax book income (loss) for
the periods presented as follows:
 
<TABLE>
<CAPTION>
    ---------------------------------------------------------------------------------------
                                                                YEARS ENDED DECEMBER 31,
                                                              -----------------------------
                                                                1995      1994       1993
    ---------------------------------------------------------------------------------------
                                                                     (In thousands)
    <S>                                                       <C>        <C>       <C>
    Taxable income (loss)...................................  $(72,849)  $ 5,200   $  8,207
    Pre-tax book income (loss)..............................  $(95,205)  $29,029   $(31,204)
</TABLE>
 
     The primary differences between taxable income (loss) and pre-tax book
income (loss) are the gross effects of the deferred income taxes, exclusive of
the net operating loss carry over as detailed above. In addition to these
reconciling items, the Company recognized income tax deductions relating to the
issuance of common stock pursuant to the Company's executive stock award program
and the exercise of stock options ("Common Stock Deductions"), the income tax
benefit of which was recorded as an increase to additional
 
                                       34
<PAGE>   38
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
paid-in capital. During the years ended December 31, 1995, 1994 and 1993, the
Company incurred Common Stock Deductions of $1,445,000, $7,308,000 and
$31,697,000, respectively.
 
     Except for the effects of the reversal of net deductible temporary
differences and the effects of future Common Stock Deductions, the Company is
not currently aware of any factors which would cause any significant differences
between taxable income and pre-tax book income in future years. There can be no
assurances that there will not be significant differences in the future between
taxable income and pre-tax book income if circumstances change (for example,
changes in tax laws or the Company's financial condition or performance).
 
     During 1995, the Company incurred a tax loss of $72,849,000. The Company
will carryback $8,900,000 to prior taxable years to obtain an income tax refund.
The remaining tax loss of $63,949,000 will be carried forward and will expire on
December 31, 2010. Management believes that it will generate future taxable
income sufficient to realize this tax benefit prior to its expiration. New
management, which has substantial experience in the television retail business,
has been appointed and is establishing a new direction for the Company intended
to reverse operating losses experienced in 1995. The Company's plans are to
provide a proper inventory mix with respect to product assortment and price
point that attracts both first-time buyers and active buyers, and improved
inventory management.
 
     Management of the Company believes that through minimal growth in net
sales, calculated at cost of living increases of 3.5%, cost reduction measures
implemented during late 1995 and early 1996, and further anticipated reductions
resulting from expected capital expenditures, that both the net operating loss
carryforwards of $63,949,000 and a substantial portion of other deferred tax
assets presented above will be recovered within a three-year period.
Accordingly, the Company has recognized an asset related to these carryforward
and no valuation allowance has been provided. There can be no assurance,
however, that the Company will generate any earnings or any specific level of
continuing earnings in order to allow the Company to realize the benefits of the
net operating loss carryforward or other deferred tax assets.
 
     During 1994, the IRS completed its examination of the Company's federal
income tax returns for fiscal years 1986 through 1989 and proposed various
adjustments. The Company and the IRS agreed to settle all of the outstanding
issues with the exception of the deductibility of royalty payments made to a
then related party. The Company paid the assessments, totaling $15,000,000
including interest, related to all the issues except the royalty payments
covering all taxable periods through August 31, 1993. These assessments had
previously been accrued.
 
     Also in 1994, the IRS issued a Statutory Notice of Deficiency for fiscal
years 1986 through 1989 related to the royalty payments issue. The Company paid
the assessments, totaling $4,600,000 including interest, which had previously
been accrued. The Company continues to maintain that it has meritorious
positions regarding the deductibility of these payments and will file a refund
claim with the IRS during 1996.
 
     On May 12, 1995, the IRS completed its examination of the Company's federal
income tax returns for fiscal years 1990 and 1991, and proposed adjustments
resulting in income tax and interest deficiencies of $4,200,000, primarily
related to the royalty payments issue. On October 31, 1995, the Company and the
IRS agreed to settle all of the outstanding issues, except the royalty payments
issue, and the Company paid the resulting assessment of $1,100,000, including
interest. These assessments had previously been accrued. The Company has not yet
received a Statutory Notice of Deficiency relating to the royalty payments
issue. The Company will protest such assessment when received.
 
     The Company also made such royalty payments during fiscal years 1992
through 1993. The deductibility of these payments will also be challenged by the
IRS upon audit. The Company has made adequate provision for this issue for these
years.
 
                                       35
<PAGE>   39
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company's federal income tax returns for fiscal years 1992, 1993 and
1994 are currently under examination by the IRS. No proposed material
adjustments relating to such years, other than those discussed above, have been
brought to management's attention.
 
NOTE E -- BUSINESS COMBINATION
 
     On September 1, 1994, a wholly-owned subsidiary of the Company purchased
all the outstanding shares of ISN for cash of $2,097,000 and notes payable of
$2,903,000, see Note C, for a total of $5,000,000. The purchase method of
accounting was used to account for this business combination. Goodwill acquired
in connection with this transaction is being amortized over three years.
 
     Consolidated results of operations for the year ended December 31, 1994
include the results of ISN from its acquisition date. The results of operations
prior to the date of acquisition, were not significant to the Company's
consolidated results of operations and therefore pro forma effects are not
presented.
 
NOTE F -- OTHER CHARGES AND RESTRUCTURING CHARGES
 
     During 1995, the Company recorded $42,340,000 in pre-tax special charges.
 
     In connection with new management's sales and merchandising philosophy an
overall analysis of the Company's inventory was conducted and determined that
certain merchandise was not compatible with this new philosophy. As a result,
such merchandise will be liquidated through other than the Company's normal
retailing channels. Accordingly, management increased the Company's inventory
carrying value adjustment by $12,077,000 to $33,259,000 at December 31, 1995 to
reflect the net realizable value of the Company's inventory.
 
     During 1995, the Company recorded $11,893,000 in "Other Charges." These
consisted of severance pay of $3,978,000 related to a reduction in work force,
$4,800,000 of payments to certain executives as provided for under their
employment agreements in connection with the termination of their employment and
the write-off of certain equipment maintenance and contractual fees totaling
$1,812,000 related to service contracts which the Company will no longer
utilize. In addition, the Company recorded a write-down of inventory totaling
$1,303,000 to net realizable value based on the disposition of Ortho-Vent's
assets. An additional $2,400,000, related to name lists of Ortho-Vent were
written off and included in "Depreciation and Amortization."
 
     During 1995 the Company recorded restructuring charges of $4,114,000
covering employee and other costs related to the closing of its fulfillment
center in Reno, Nevada. The facility was closed by June 30, 1995. During 1995,
payments totaling $1,214,000 were made related to this charge leaving $2,900,000
accrued for future charges, at December 31, 1995.
 
     Interest expense includes $773,000 of bank fees related to the Company's
Credit Facility which have been amortized based on the Company's intent to seek
refinancing of this debt prior to its contractual maturity. Miscellaneous
expense includes the write-down of computer equipment no longer in use with a
net book value of $4,700,000.
 
     Estimated costs related to pending and settled litigation for the year
ended December 31, 1995 totaled $6,383,000.
 
NOTE G -- EMPLOYEE BENEFIT PLANS
 
     The Company offers a plan pursuant to Section 401(k) of the Internal
Revenue Code covering substantially all full-time employees. Matching employer
contributions are set at the discretion of the Board of Directors. The Company's
contributions for the years ended December 31, 1995, 1994 and 1993 were
$864,000, $824,000 and $667,000, respectively.
 
                                       36
<PAGE>   40
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     On December 28, 1994, the Board of Directors adopted the Home Shopping
Network, Inc. Employee Equity Participation Plan (the "Equity Plan"), effective
December 31, 1994. In January 1996, the Company received a favorable
determination letter stating that the Equity Plan is a qualified plan for IRS
purposes.
 
     The Equity Plan covers all employees who have completed one year of
service, at least 1,000 hours of service during that year, are at least 21 years
of age, are not highly compensated, and do not hold options to purchase shares
of HSN common stock.
 
     The Company contributed $5,000,000 which was used to purchase a total of
499,000 shares of common stock in 1994 and 1995 to fund the Equity Plan.
Employees who met the eligibility requirements on December 31, 1994 and June 30,
1995, will receive grants under the Equity Plan. The stock vests ratably at 20%
a year with the first vesting being effective as of the calendar year in which
the eligible employee has worked at least 1,000 hours. The Board of Directors
have not made the decision regarding any additional grants for any period
subsequent to June 30, 1995. The common stock in the Equity Plan is included in
the weighted average number of shares for the Company's earnings per share
calculation.
 
     The common stock when purchased was recorded as unearned compensation. For
the years ended December 31, 1995 and 1994, $1,020,000 and $810,000,
respectively, has been charged to expense based on the shares authorized for
granting and the vesting schedule discussed above. The fair value of the shares
which were unvested and as yet not authorized for grants at December 31, 1995 is
$2,858,000. Any future contributions to the Equity Plan will be subject to the
Board of Directors' approval.
 
NOTE H -- COMMITMENTS AND CONTINGENCIES
 
     The Company leases satellite transponders, computers, warehouse and office
space used in connection with its operations under various operating leases.
 
     Future minimum payments under non-cancellable operating leases are as
follows:
 
<TABLE>
<CAPTION>
    ---------------------------------------------------------------------------------------
   YEARS ENDING
   DECEMBER 31,
    ---------------------------------------------------------------------------------------
                                                                             (In thousands)
    <S>                                                                        <C>
    1996...................................................................     $ 13,541
    1997...................................................................       12,862
    1998...................................................................        7,981
    1999...................................................................        7,203
    2000...................................................................        6,959
    Thereafter.............................................................       30,352
                                                                                --------
                                                                                $ 78,898
                                                                                ========
</TABLE>
 
     Rent and lease expenses charged to operations were $13,263,000, $13,978,000
and $15,185,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
 
     During June 1995, in connection with the restructuring of its programming
the Company discontinued use of a satellite transponder which is under a
non-cancellable operating lease calling for monthly payments ranging from
$140,000 to $150,000 through December 2006. The Company subleased this satellite
transponder to a related party during 1995, as discussed in Note M. The sublease
expired on February 15, 1996, and the Company is currently seeking to sublease
the transponder or to sell its rights with respect to this satellite
transponder. The Company does not expect any material adverse financial impact
in connection with the lease.
 
     On December 28, 1992, HSC entered into affiliation agreements with Silver
King Communications, Inc. ("SKC") which provide for SKC's broadcast television
stations to air HSC programming on a full-time basis. The agreements have an
original term of five years, and are renewable for two successive five year
terms at
 
                                       37
<PAGE>   41
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
SKC's sole option. The affiliation agreements are cancelable by SKC with
eighteen months' written notice prior to the end of any scheduled term. The
notice period of non-renewal of the first term is scheduled to end on June 28,
1996, but is being extended by mutual agreement between SKC and the Company to
December 28, 1996. HSC pays an affiliation fee to SKC based on hourly rates and,
upon reaching certain sales levels, commissions on net sales. Expense related to
affiliation agreements with SKC for the years ended December 31, 1995, 1994 and
1993, was $41,332,000, $42,415,000 and $41,135,000, respectively, of which
$778,000, $1,865,000 and $996,000, respectively, represents commissions.
 
     In December 1995, the Company entered into a four-year employment agreement
with the Company's Executive Vice President of Administration, which is
automatically renewable for successive one-year terms unless either party
provides at least 180 days' written notice. The employment agreement provides
for an annual base salary of $235,000 per annum until December 1999, a signing
bonus of $50,000, and options to purchase 50,000 shares of the Company's common
stock at $8.50 per share. These options were granted under the terms of the 1996
Stock Option Plan for Employees ("1996 Employee Plan"), which plan is subject to
shareholder approval. See Note L.
 
     In November 1995, the Company entered into a four-year employment agreement
with the Company's President, which is automatically renewable for successive
one-year terms unless either party provides at least 180 days' written notice.
The employment agreement provides for an annual base salary of not less than
$500,000 and a $1,000,000 loan, evidenced by a note, bearing interest at 5.00%
per annum, with only interest, payable monthly. The loan will be used for the
purchase or renovation of a residence and will be secured by this property. The
note, which has not yet been drawn against, will be due upon the first
anniversary of the termination of the President. The employment agreement also
provides options to purchase 2,500,000 shares of the Company's common stock at
$8.50 per share. These options were granted under the terms of the 1996 Employee
Plan, which plan is subject to shareholder approval. See Note L.
 
     In September 1994, the Company entered into a three-year employment
agreement with its General Counsel which is automatically renewable for
successive one-year terms unless either party provides written notice by April
30 in any year. The agreement calls for an annual base salary of at least
$225,000 per year until August 1997 and options to purchase 100,000 shares of
the Company's common stock at $11.75 per share under the terms of the 1986 Stock
Option Plan for Employees.
 
     Termination of the above employment agreements by the Company other than
for cause will result in payment of the annual base salary amounts that would
have been payable had employment continued until the expiration of the
employment terms plus any annual bonus for the year of termination. In addition,
termination of employment following a change in control of the Company may
result in entitlement to all unpaid compensation and other benefits through the
term of the contracts.
 
     On August 11, 1993 a former Chairman of the Board of the Company, upon his
resignation, commenced a five-year consultancy and non-competition arrangement
with the Company during which period he receives $500,000 per year.
 
     The Company has entered into an amended five year agreement for inbound 800
service usage with MCI Telecommunications Corporation ("MCI") ending in August
2000 which requires minimum annual payments of $9,600,000. If the Company
terminates the agreement for reasons other than cause, payment of 50% of the
aggregate of the minimum amounts for the remainder of the unexpired term will be
due 30 days after the termination. The Company's payments to MCI for phone
services during the years ended December 31, 1995 and 1994 substantially
exceeded the above mentioned minimum.
 
     In addition, the Company has entered into an agreement with MCI covering
equipment maintenance for a term from April 1, 1996 through April 1, 2001,
requiring minimum annual payments of $2,676,000. Upon payment of $13,380,000
under the terms of the contract, the Company is no longer required to pay any
fees for these services. The Company will receive a credit for any annual fees
over $3,211,000.
 
                                       38
<PAGE>   42
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE I -- LITIGATION
 
     The Company has reached an agreement to settle a consolidated class action
pending in the Court of Common Pleas of Bucks County, Pennsylvania, relating to
the Company's pricing practices with respect to diamond and imitation diamond
jewelry sold to Pennsylvania residents between December 27, 1984 and May 20,
1991. Under the proposed settlement, customers who present adequate proof of
purchase of cubic zirconia or diamond jewelry during the class period will have
the option of receiving a cash payment or a discount certificate usable for the
purchase of HSN merchandise during the following twelve months. The maximum cash
payment required from the Company with respect to all costs relating to the
settlement is $2,500,000. The Company will be entitled to a refund of any
balance not used for these purposes. If certificates representing a maximum
discount of more than $5,200,000 would be issuable under the settlement, the
Company has the right to require that the certificates be pro-rated among those
who elect to receive them. The settlement is subject to approval by the Court
after notice and hearing.
 
     The Company believes it has accrued a balance sufficient to cover
anticipated costs in connection with the resolution of this and other pending
litigation.
 
     During 1995, the Company paid $14,450,000 relating to litigation
settlements accrued in 1993.
 
     The Company is also involved in various other lawsuits either as plaintiff
or defendant. In the opinion of management, the ultimate outcome of these
various lawsuits should not have a material impact on the Company's liquidity,
results of operations or financial condition.
 
NOTE J -- STOCKHOLDERS' EQUITY
 
     The holders of both classes of the Company's common stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available for the payment of dividends. In the
event of the liquidation, dissolution or winding up of the Company, the holders
of both classes of common stock are entitled to share ratably in all assets of
the Company remaining after provision for payment of liabilities. Shares of
Class B common stock are convertible at the option of the sole holder, Liberty
Media Corporation ("Liberty"), a wholly-owned subsidiary of Tele-Communications,
Inc. ("TCI"), into shares of common stock of the Company on a share-for-share
basis. In the event of conversion of the Class B common stock, the Class B
shares so converted will be retired and not subject to reissue.
 
     The holder of the Class B common stock votes together with the holders of
common stock on all matters submitted to stockholders, except that it has no
vote in the election of 25% of the Board of Directors. The holder of the Class B
common stock is entitled to cast ten votes per share on all other matters.
 
     As of December 31, 1995, Liberty's beneficial ownership and voting rights
were 41.4% and 80.4%, respectively.
 
NOTE K -- ANTICIPATED CHANGE IN CONTROL
 
     In November 1995, Liberty and the new Chairman of the Company's Board of
Directors (the "Chairman"), entered into an agreement, which related to, among
other things, SKC's acquisition of control of the Company through the transfer
to SKC of the common stock and Class B common stock owned by Liberty ("Company
Shares"). Pursuant to the agreement between the Chairman and Liberty and certain
other agreements entered into at such time, SKC would acquire the Company Shares
(which shares represent a majority of the voting power of the outstanding equity
securities of the Company) in exchange for additional shares of SKC's common
stock and Class B stock. If such transactions are consummated, the Chairman, who
became Chairman of the Board and Chief Executive Officer of SKC in August 1995
and acquired a significant number of options to acquire SKC common stock at such
time, would also control securities of SKC representing a majority of the
outstanding voting power of that entity. In addition, in connection with such
 
                                       39
<PAGE>   43
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
transfer of the Company Shares, TCI would acquire beneficial ownership of a
substantial additional equity interest in SKC and, through such ownership of SKC
securities, would continue to have a substantial equity interest in the Company.
 
     The consummation of each of the foregoing transactions is subject to the
satisfaction of certain conditions, including, but not limited to, receipt of
FCC approval, and approval of transaction in which it is to acquire the Company
Shares by the stockholders of SKC. In addition, SKC's acquisition of control of
the Company referred to above, will constitute a "change in control" of the
Company which will require an amendment to the Credit Facility. See Note P.
There can be no assurance that the transactions described above will be
consummated.
 
NOTE L -- STOCK OPTIONS AND AWARDS
 
     The Company has granted options to purchase common stock under option plans
as follows:
 
     The Board of Directors authorized the issuance of a total of 18,700,000
shares for the 1996 Employee Plan and the 1996 Stock Option Plan for Directors
("1996 Director Plan"), subject to shareholder approval at the Company's annual
meeting of shareholders.
 
     The 1996 Employee Plan provides for the grant of options to purchase common
stock at fair market value, subject to the discretion of the
Compensation/Benefits Committee of the Board of Directors, as of the date of
grant. The options vest annually and equally over five years, unless otherwise
specified by the Compensation/Benefits Committee of the Board of Directors,
beginning one year from the date of grant, and expire ten years from the date of
grant. During 1995, the Company granted options for 15,950,000 shares which
vests over a four year period of which 13,400,000 were to the Chairman of the
Board, 2,500,000 were to the new President and Chief Executive Officer, and
50,000 were to the Executive Vice President of Administration, all at $8.50 per
share.
 
     The 1996 Director Plan provides for issuance of options to outside
directors. Options for 5,000 shares of common stock are automatically granted
upon appointment to the Board of Directors, and options for an additional 5,000
shares are granted annually thereafter. Options provide for purchase at fair
market value on the date of grant, vest over three years, and expire five years
from the date of vesting.
 
     The 1987 Cable Operators Stock Option Plan, as amended, provided for the
issuance of options to purchase common stock at or above the fair market value
at the date of grant in exchange for entering into affiliation agreements to
carry the Company's programming for up to seven years. All outstanding options
were exercised or cancelled on or before June 1, 1994. The price of these
options ranged between $5.56 and $6.49.
 
     The 1986 Stock Option Plan for Employees, as amended, provides for the
grant of options to purchase common stock at the fair market value at date of
grant. The options generally vest annually and equally over five years beginning
one year from the date of grant, and expire ten years from the date of grant.
 
     The 1986 Stock Option Plan for Outside Directors, as amended, provides for
the grant of options to purchase common stock at fair market value as of the
date of grant. The options vest equally over two years beginning on the date of
grant and expire five years from the date they vest. During 1992, the Board of
Directors and shareholders approved certain amendments to the plan. The
amendments provide for additional option grants after five years of service and,
in addition, the number of shares of common stock subject to option under the
plan was increased to 1,630,000 shares.
 
                                       40
<PAGE>   44
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of changes in outstanding options under the stock option plans
except for the 1996 Employee Plan and the 1996 Director Plan, which are subject
to shareholder approval, as discussed above, is as follows:
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                                               STOCK OPTION PLANS
                                     -----------------------------------------------------------------------
                                       CABLE
                                     OPERATORS          EMPLOYEES             OUTSIDE DIRECTORS
                                     ---------   -----------------------   -----------------------    TOTAL
                                      OPTIONS    OPTIONS    PRICE RANGE    OPTIONS    PRICE RANGE    OPTIONS
------------------------------------------------------------------------------------------------------------
                                                       (In thousands, except price range)
<S>                                  <C>         <C>       <C>     <C>     <C>       <C>     <C>     <C>
Total authorized...................    27,500     10,000                    1,630                     39,130
                                      =======     ======                   ======                     ======
Outstanding -- December 31, 1992...     4,325      2,934   $ 3.25-  8.23      300    $ 3.36-  6.61     7,559
  Granted..........................        49      1,063   $ 8.50- 14.63      180    $14.75- 14.75     1,292
  Exercised........................    (3,305)    (1,781)  $ 3.25-  6.96     (216)   $ 3.36-  6.61    (5,302)
  Canceled.........................      (524)      (115)  $ 4.41-  9.88      (54)   $ 4.98-  4.98      (693)
                                     ---------   -------                   -------                   -------
Outstanding -- December 31, 1993...       545      2,101   $ 3.25- 14.63      210    $ 5.45- 14.75     2,856
  Granted..........................        --      3,316   $10.25- 12.25       --               --     3,316
  Exercised........................      (336)      (335)  $ 3.71-  9.88      (30)   $ 5.45-  5.45      (701)
  Canceled.........................      (209)      (419)  $ 4.41- 14.63       --               --      (628)
                                     ---------   -------                   -------                   -------
Outstanding -- December 31, 1994...        --      4,663   $ 3.25- 14.63      180    $14.75- 14.75     4,843
  Granted..........................        --        195   $ 6.75-  9.00       90    $10.38- 10.38       285
  Exercised........................        --       (165)  $ 3.25-  8.50       --               --      (165)
  Canceled.........................        --       (755)  $ 4.41- 14.63       --               --      (755)
                                     ---------   -------                   -------                   -------
Outstanding -- December 31, 1995...        --      3,938   $ 3.25- 14.63      270    $10.38- 14.75     4,208
                                      =======     ======                   ======                     ======
Options exercisable................        --      2,425   $ 3.25- 14.63      210    $10.38- 14.75     2,635
                                      =======     ======                   ======                     ======
Available for grant................        --      2,978                      724                      3,702
                                      =======     ======                   ======                     ======
</TABLE>
 
     During the year ended December 31, 1995, 165,050 shares of common stock
were issued in connection with the exercise of stock options for which the
Company received $903,000 in cash.
 
     In October 1990, the Company adopted the 1990 Executive Stock Award Program
(the "Program") pursuant to which 2,990,000 shares of common stock were granted
to certain key employees and consultants. The Program was funded exclusively by
the contribution of shares of common stock owned by a former chairman of the
board and a former president of the Company. The Company did not issue any
additional shares of stock in connection with the Program. The shares granted
under the Program are distributed in five equal annual installments commencing
one year from the grant date. Participants in the Program are entitled to
receive dividends, if declared, on their unvested shares and certain officers
are entitled to voting rights with respect to their unvested shares. Forfeitures
are reissued at the discretion of the Compensation/Benefits Committee of the
Board of Directors.
 
     Under this Program and another award of stock, the amount amortized and
expensed relating to the compensation earned was $795,000, $2,047,000, and
$5,615,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
 
     In 1993, the former president and chief executive officer of HSN received
SAR's with respect to 984,876 shares of the Company's common stock at an
exercise price of $8.25 per share. The SAR's vested upon termination of his
employment and were exercised during September 1995, at $10.13 per share.
Compensation expense (benefit) recognized by the Company for the SAR's during
the years ended December 31, 1995, 1994 and 1993 was ($758,000), ($1,547,000)
and $2,834,000, respectively. In addition, $1,345,000 of expense related to the
exercise of these SAR's is included in "Other Charges."
 
                                       41
<PAGE>   45
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE M -- RELATED PARTY TRANSACTIONS
 
     Currently, the Company is involved in several agreements with related
parties and has made payments to those related parties as follows.
 
     Effective August 25, 1995 the Chairman and Chief Executive Officer of SKC
was appointed to the Company's board of directors and was appointed Chairman of
the Company's Board of Directors effective November 27, 1995. The Company has
affiliation agreements with SKC for which the Company paid $42,651,000 in 1995.
See Note H.
 
     HSC has entered into affiliation agreements with cable operators which are
wholly or partially owned by TCI. In addition, certain officers of Liberty and
TCI served, or continue to serve, on the Company's Board of Directors. The
managing general partner of certain cable systems which carry the Company's
programming, was appointed to HSN's Board of Directors in July 1993. TCI also
has an ownership interest in these cable systems. Payments to the above related
parties for cable commissions and advertising were $7,150,000, $7,269,000, and
$4,300,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Cable distribution fees paid to related parties were $28,715,000 and $8,673,000
for the years ended December 31, 1995 and 1994, respectively. Additional
commitments for cable distribution fees to related parties totaled $1,630,000 at
December 31, 1995. In addition, the Company received $896,000 in payments for
rental of a satellite transponder during 1995 from a wholly owned subsidiary of
TCI.
 
     On April 28, 1992, the Company purchased 100,000 shares of Series A
Preferred Stock of NRI. Pursuant to the purchase of these shares, HSN provides
office space to NRI beginning in 1993. The Company charged NRI $68,000 and
$65,000, respectively, for rent during the years ended December 31, 1995 and
1994. The Chairman and Chief Executive Officer of NRI was appointed to the Board
of Directors of the Company on April 30, 1992. At December 31, 1995, one of the
Company's executive officers served as a director of NRI. See Notes B and Q.
 
     Prior to 1994, the Company received a variety of products and services from
entities related through common ownership and management with the former
Chairman of the Company's Board of Directors and his immediate family members.
These transactions were considered related party transactions until the
resignation of the former Chairman of the Company's Board of Directors in August
1993. Subsequent to his resignation, these transactions are no longer considered
related party, but are included for disclosure purposes for periods prior to
January 1, 1994. Transactions with these entities are summarized as follows:
 
     1. COMPUTER SOFTWARE LICENSE AGREEMENT:  In 1985, the Company entered into
a license agreement for computer software with Pioneer Data Processing, Inc.,
which provided for continuing monthly payments of 1% of HSC's gross profit, as
defined. The amount expensed in connection with this agreement was $297,000 for
the year ended December 31, 1993.
 
     2. COMMISSIONS ON INVENTORY:  Certain inventory in the form of returned
merchandise, rejects and small lot saleable inventory were disposed of through
Western Hemisphere, Inc. ("Western") for a 15% commission. Sales by the related
party were less than 1% of total sales. The Company also provided certain
equipment and space located at or in close proximity to each of the Company's
four fulfillment centers, free of charge. The Company terminated this
arrangement in 1993. Commissions were $561,000 for the year ended December 31,
1993.
 
     As of December 31, 1994 and 1993, the Company had a $4,500,000 liability
recorded to Western which was paid during 1995. This amount related to
cancellation of the computer software license agreement pursuant to which
Western provided certain liquidation and related services, as noted above, and
all other existing agreements and arrangements excluding certain assignment,
secrecy and non-compete agreements. In connection with this and other litigation
settlements, the former chairman of the Company's board of directors
 
                                       42
<PAGE>   46
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
paid HSN $3,000,000 during 1995. This amount was recorded in accounts and notes
receivable, as of December 31, 1994.
 
     The Company purchased certain equipment from PSi and paid license and
system maintenance fees related to this equipment of $1,316,000 and $3,545,000,
respectively, for the year ended December 31, 1993. The former chairman of HSN
owns a controlling position in PSi's outstanding stock. Until August 1993, HSN
and PSi also shared a common board member, and officer. Subsequent to August 11,
1993, PSi is no longer considered a related party due to the resignation of
certain members of PSi's board of directors, and the resignation of a former
chairman of the board of the Company.
 
NOTE N -- CONSOLIDATED STATEMENTS OF CASH FLOWS
 
     Supplemental disclosure of cash flow information:
 
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                                                                 YEARS ENDED DECEMBER 31,
                                                                ---------------------------
                                                                 1995      1994      1993
-------------------------------------------------------------------------------------------
                                                                      (In thousands)
<S>                                                             <C>       <C>       <C>
CASH PAID DURING THE PERIOD FOR:
  Interest....................................................  $ 6,896   $ 5,899   $13,872
  Income taxes................................................    1,707    25,922     2,815
CASH RECEIVED FOR:
  Income tax refund...........................................   11,258     3,492     2,300
</TABLE>
 
     Supplemental information of non-cash investing and financing activities:
 
- During 1995 and 1994, the Company purchased 1,335,000 and 2,545,000 shares,
  respectively, of treasury stock for which the Company paid $34,691,000 in
  1995.
 
- During the year ended December 31, 1993, $15,000 of the Company's 5 1/2%
  Convertible Subordinated Debentures were converted into 2,293 shares of common
  stock.
 
- As discussed in Note E, in connection with the purchase of ISN, the Company
  issued notes payable totaling $2,903,000.
 
- During the years ended December 31, 1994 and 1993, RMS converted 559,456 and
  3,600,000 shares, respectively, of Class B common stock into shares of common
  stock.
 
- On March 27, 1995, PSi repaid $2,700,000, plus accrued interest, of its
  $5,000,000 loan from the Company. Under an agreement between the Company and
  PSi, the remaining principal balance of the loan was recorded as a prepayment
  of future monthly software maintenance payments through December 1995.
 
NOTE O -- QUARTERLY RESULTS (UNAUDITED)
 
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                               QUARTER      QUARTER         QUARTER          QUARTER
                                                ENDED        ENDED           ENDED            ENDED
                                              MARCH 31,     JUNE 30,     SEPTEMBER 30,     DECEMBER 31,
-------------------------------------------------------------------------------------------------------
                                                     (Table in thousands, except per share data)
<S>                                           <C>           <C>          <C>               <C>
YEAR ENDED DECEMBER 31, 1995
  Net sales.................................  $ 243,610     $246,659       $ 239,894         $288,462
  Gross profit..............................     81,675       80,503          77,583           77,186(c)
  Net loss..................................     (8,799)(a)   (9,736)        (17,701)(b)      (25,647)(d)
  Loss per common share.....................       (.10)        (.11)           (.20)            (.28)
</TABLE>
 
                                       43
<PAGE>   47
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                               QUARTER      QUARTER         QUARTER          QUARTER
                                                ENDED        ENDED           ENDED            ENDED
                                              MARCH 31,     JUNE 30,     SEPTEMBER 30,     DECEMBER 31,
-------------------------------------------------------------------------------------------------------
                                                     (Table in thousands, except per share data)
<S>                                           <C>           <C>          <C>               <C>
YEAR ENDED DECEMBER 31, 1994
  Net sales.................................  $ 274,215     $274,005       $ 276,612         $301,682
  Gross profit..............................     98,600       95,202          97,620          104,588
  Earnings before extraordinary item........      6,651        1,908           7,349            1,793
  Net earnings..............................      6,651        1,908           6,425            1,793
  Earnings per common share:
     Before extraordinary item..............        .07          .02             .08(e)           .02
     Net earnings...........................        .07          .02             .07(e)           .02
</TABLE>
 
---------------
 
(a) The quarter ended March 31, 1995 included $2,041,000 of "Restructuring
    Charges".
(b) During the quarter ended September 30, 1995, the Company recorded "Other
    Charges" of $5,427,000, litigation expense of $3,200,000, and $2,400,000 of
    additional "Depreciation and Amortization".
(c) During the quarter ended December 31, 1995, cost of sales included an
    additional inventory carrying value adjustment of $12,077,000.
(d) The fourth quarter of 1995 included $6,466,000 of "Other Charges",
    $2,073,000 in additional "Restructuring Charges," and $8,656,000 of other
    expense items, including $3,183,000 of litigation expense.
(e) The difference between earnings before extraordinary item and net earnings
    for the quarter ended September 30, 1994 represents a loss from the early
    extinguishment of long-term obligations.
 
     The Company believes that seasonality does impact its business, but not to
the same extent it impacts the retail industry in general.
 
NOTE P -- SUBSEQUENT EVENT
 
     On February 15, 1996, the Company announced it was seeking $100,000,000 of
additional financing through a proposed private placement of convertible
subordinated debentures that will not be registered under the Securities Act of
1933.
 
     On February 13, 1996, the Company amended its Credit Facility, as discussed
in Note C, and agreed that upon consummation of the sale of the subordinated
debentures the amount available for borrowing under the Credit Facility would be
reduced by 30% of the principal amount of subordinated debentures sold. In
addition, the covenants were amended to give consent to the anticipated change
in control, as discussed in Note K, subject to the Company obtaining at least
$50,000,000 in net proceeds from the sale of the subordinated debentures. There
can be no assurance that such private placement can be completed on terms
satisfactory to the Company.
 
                                       44
<PAGE>   48
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE Q -- FINANCIAL INSTRUMENTS
 
     The additional disclosure below of the estimated fair value of financial
instruments was made in accordance with the requirements of Statements of
Financial Accounting Standards No. 107. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies, when available.
 
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                      DECEMBER 31, 1995        DECEMBER 31, 1994
                                                    ---------------------     -------------------
                                                    CARRYING      FAIR        CARRYING     FAIR
                                                     AMOUNT       VALUE        AMOUNT     VALUE
-------------------------------------------------------------------------------------------------
                                                                   (In thousands)
<S>                                                 <C>         <C>           <C>        <C>
Cash and cash equivalents.........................  $  25,164   $  25,164     $ 33,648   $ 33,648
Other non-current assets..........................      4,290       4,290        1,309      1,309
Long-term investments.............................     14,000      21,424       10,000      7,875
Long-term obligations.............................   (137,365)   (137,365)     (29,181)   (29,181)
</TABLE>
 
     The carrying value of cash and cash equivalents and other non-current
assets are a reasonable estimate of their fair value.
 
     There are no available current market prices for the $4,000,000 long-term
investment in Body by Jake Enterprises LLC as the investment is in a private
company. The Company has no reason to believe there has been a deterioration in
the investment value below its cost basis, and as such a total of $4,000,000 is
included in the 1995 Fair Value table above.
 
     The amount set out in the table above as the fair value of long-term
investment in NRI at December 31, 1995 and 1994 has been determined using the
trading price of NRI's common stock on those dates. Management is of the
opinion, however, that the fair value of this investment is not readily
determinable. The Company's investment is in the preferred stock of NRI which is
not publicly traded and, therefore, does not have an established market price.
In addition, if the Company were to convert its investment to common stock, its
investment would represent 20.7% of NRI's outstanding common stock at December
31, 1995. It is not anticipated that the Company would be able to sell its
holdings without adversely affecting the market price of the NRI common stock
and the amount realized in the event of a sale.
 
     In early 1995, NRI indicated that it believes the adequacy of cash
resources and the ability to continue operations is dependent upon achieving
sales and obtaining additional capital to continue, among other things, the
development, testing and marketing of its products. On March 15, 1995, NRI sold
4,000,000 shares of common stock to a third party investor for $4,000,000. In
addition, on January 30, 1996 NRI completed an equity financing pursuant to
which certain investors purchased from NRI 800 shares of NRI Series B Preferred
Stock for a gross cash purchase price of $8,000,000, before commissions and
expenses. Based in part on these capital infusions, which provided NRI funds to
continue the development, testing and marketing of its products, management
believes that continuing to carry the Company's investment in NRI at cost is
appropriate. The Company's maximum exposure on the NRI investment is the
$10,000,000 carrying value.
 
     The fair value of the Company's long-term obligations at December 31, 1995
and 1994 approximates the carrying value because the underlying instrument is a
variable rate note that reprices frequently.
 
NOTE R -- EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT
          AUDITORS' REPORT
 
     On March 1, 1996, the Company completed a private placement of $100,000,000
of Convertible Subordinated Debentures due March 1, 2006, (the "Debentures").
The Debentures, which are unsecured and subordinated to all existing and future
senior debt of the Company, bear interest at 5 7/8% per annum payable in arrears
each March 1 and September 1. The Debentures are convertible into shares of the
Company's common stock at any time prior to redemption, repurchase or maturity,
at a conversion price of $12.00 per
 
                                       45
<PAGE>   49
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
share, subject to adjustment in certain circumstances. The Debentures are not
redeemable by the Company prior to March 1, 1998. Thereafter, the Debentures may
be redeemed at the option of the Company in whole or in part at specified prices
provided that until March 1, 1999, the debentures may not be redeemed unless the
closing price of the common stock equals or exceeds 140% of the specified
conversion price for at least 20 out of 30 consecutive trading days ending
within 20 calendar days before the notice of redemption is mailed. Based on the
terms of the Credit Facility amendment discussed in Note P, the maximum
borrowing availability under the Credit Facility was reduced to $120,000,000.
The Company used the net proceeds to repay borrowings under its Credit Facility
leaving an outstanding loan balance of $30,000,000 with $90,000,000 available
for borrowing.
 
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE
 
     Not Applicable
 
                                       46
<PAGE>   50
 
                                    PART III
 
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information set forth under the caption "Election of Directors" in the
Proxy Statement dated March 1996, for the Annual Meeting of Stockholders to be
held May 9, 1996, is incorporated herein by reference.
 
ITEM 11 -- EXECUTIVE COMPENSATION
 
     The information set forth under the captions "Summary Compensation Table"
and "Employment Agreements" in the Proxy Statement dated March 1996, for the
Annual Meeting of Stockholders to be held May 9, 1996, is incorporated herein by
reference.
 
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     Security ownership by management as outlined under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement
dated March 1996, for the Annual Meeting of Stockholders to be held May 9, 1996,
is incorporated herein by reference.
 
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information set forth under the captions "Compensation of Directors and
Executive Directors" and "Certain Transactions and Business Relationships" in
the Proxy Statement dated March 1996, for the Annual Meeting of Stockholders to
be held on May 9, 1996, is incorporated herein by reference.
 
                                    PART IV
 
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
 
     (a) List of Documents filed as part of this Report:
 
          (1) Financial Statement Schedule
 
<TABLE>
<CAPTION>
SCHEDULE                                                                                  PAGE
 NUMBER                                                                                  NUMBER
--------                                                                                 ------
<C>       <S>                                                                            <C>
   II     -- Valuation and Qualifying Accounts.........................................    56
</TABLE>
 
     The report of the Company's independent auditors with respect to the above
listed financial statement schedule appears on page 55.
 
     All other financial statements and schedules not listed have been omitted
since the required information is included in the Consolidated Financial
Statements or the notes thereto, or is not applicable or required.
 
          (2) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                            DESCRIPTION
-------       -----------------------------------------------------------------------------------
<C>      <C>  <S>
    3.1   --  Restated Certificate of Incorporation of the Company filed as Exhibit 3.1 to the
              Company's Annual Report on Form 10-K for the year ended August 31, 1987, is
              incorporated herein by reference.
    3.2   --  Amendment to Restated Certificate of Incorporation of the Company filed as Exhibit
              3.2 to the Company's Annual Report on Form 10-K for the year ended August 31, 1987,
              is incorporated herein by reference.
    3.3   --  Amendment filed December 17, 1986, to the Restated Certificate of Incorporation of
              the Company filed as Exhibit 3.3 to the Company's Annual Report on Form 10-K for
              the year ended August 31, 1987, is incorporated herein by reference.
</TABLE>
 
                                       47
<PAGE>   51
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                            DESCRIPTION
-------       -----------------------------------------------------------------------------------
<C>      <C>  <S>
    3.4   --  Amended By-Laws of the Company filed as Exhibit 3.4 to the Company's Annual Report
              on Form 10-K for the year ended December 31, 1993, are incorporated herein by
              reference.
    3.5   --  Certificates of Amendment of By-Laws dated September 18, 1995 and February 27,
              1996.
    4.0   --  Indenture dated as of March 1, 1996 between the Company and United States Trust
              Company of New York, as Trustee relating the Company's 5.875% Convertible
              Subordinated Debentures due March 1, 2006.
  *10.1   --  Employment Agreement dated March 5, 1986, by and between Roy M. Speer and the
              Company, filed as Exhibit 10.10 to the Company's Form S-1 Registration Statement
              #33-4356, dated May 13, 1986, is incorporated herein by reference.
  *10.2   --  Amended 1986 Stock Option Plan for Outside Directors dated August 1, 1986, filed as
              Exhibit 10.32 to the Company's Form S-1 Registration Statement #33-8560, dated
              October 15, 1986, is incorporated herein by reference.
  *10.3   --  1986 Stock Option Plan for Employees dated August 1, 1986, filed as Exhibit 10.33
              to the Company's Form S-1 Registration Statement #33-8560, dated October 15, 1986,
              is incorporated herein by reference.
   10.4   --  Lease Agreement dated December 1, 1986, by and between G&M Properties, a Nevada
              partnership and Home Shopping Network Realty, Inc., a subsidiary of the Company
              filed as Exhibit 10.53 to the Company's Form S-1 Registration Statement #33-12527,
              dated May 4, 1987, is incorporated herein by reference.
   10.5   --  Option Agreement dated December 1, 1986, by and between G&M Properties, a Nevada
              partnership and Home Shopping Network Realty, Inc., a subsidiary of the Company
              filed as Exhibit 10.54 to the Company's Form S-1 Registration Statement #33-12527,
              dated May 4, 1987, is incorporated herein by reference.
   10.6   --  Lease Agreement dated January 30, 1987, by and between G&M Properties, a Nevada
              partnership and Home Shopping Network Realty, Inc., a subsidiary of the Company
              filed as Exhibit 10.55 to the Company's Form S-1 Registration Statement #33-12527,
              dated May 4, 1987, is incorporated herein by reference.
   10.7   --  Lease Agreement dated January 30, 1987, by and between G&M Properties, a Nevada
              partnership and Home Shopping Network Realty, Inc., a subsidiary of the Company
              filed as Exhibit 10.56 to the Company's Form S-1 Registration Statement #33-12527,
              dated May 4, 1987, is incorporated herein by reference.
   10.8   --  License Agreement dated as of July 16, 1986, between Home Shopping Network, Inc.,
              and Canadian Home Shopping Network, Ltd., filed as Exhibit 10.61 to the Company's
              Form S-1 Registration Statement #33-12527, dated May 4, 1987, is incorporated
              herein by reference.
  *10.9   --  Form of 1990 Executive Stock Award Program dated October 17, 1990, as amended,
              filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year
              ended August 31, 1991, is incorporated herein by reference.
 *10.10   --  Third and Fourth Amendments to 1986 Stock Option Plan for Outside Directors, filed
              as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended
              August 31, 1991, is incorporated herein by reference.
  10.11   --  Distribution Agreement by and between Home Shopping Network, Inc. and Precision
              Systems, Inc. dated as of July 31, 1992 filed as Exhibit 10.1 to the Precision
              Systems, Inc. Form 10, Registration Statement No. 0-20068 and filed April 14, 1992,
              is incorporated herein by reference.
  10.12   --  Tax Sharing Agreement by and between Home Shopping Network, Inc. and Precision
              Systems, Inc. dated as of July 31, 1992 filed as Exhibit 10.3 to the Precision
              Systems, Inc. Form 10, Registration Statement No. 0-20068 and filed April 14, 1992,
              is incorporated herein by reference.
</TABLE>
 
                                       48
<PAGE>   52
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                            DESCRIPTION
-------       -----------------------------------------------------------------------------------
<C>      <C>  <S>
  10.13   --  Software License Agreement by and between Home Shopping Network, Inc. and Precision
              Systems, Inc. dated as of July 31, 1992 filed as Exhibit 10.4 to the Precision
              Systems, Inc. Form 10, Registration Statement No. 0-20068 and filed April 14, 1992,
              is incorporated herein by reference.
  10.14   --  Software Development Agreement by and between Home Shopping Network, Inc. and
              Precision Systems, Inc. dated as of July 31, 1992 filed as Exhibit 10.6 to the
              Precision Systems, Inc. Form 10, Registration Statement No. 0-20068 and filed April
              14, 1992, is incorporated herein by reference.
  10.15   --  Stock Purchase Agreement by and between Home Shopping Network, Inc. and The
              National Registry Inc. dated April 28, 1992 filed as Exhibit 10.29 to the Company's
              Annual Report on Form 10-K for the year ended August 31, 1992, is incorporated
              herein by reference.
  10.16   --  Form of Distribution Agreement between Home Shopping Network, Inc. and Silver King
              Communications, Inc. ("SKC") dated as of December 28, 1992 filed as Exhibit 10.1 to
              the SKC Registration Statement on Form 10, as amended, Registration Statement No.
              0-20570, is incorporated herein by reference.
  10.17   --  Form of Affiliation Agreements between Home Shopping Club, Inc. and SKC dated as of
              December 28, 1992 filed as Exhibit 10.2 to the SKC Registration Statement on Form
              10, as amended, Registration Statement No. 0-20570, is incorporated herein by
              reference.
  10.18   --  Form of Amendment dated as of July 28, 1994 to Affiliation Agreements between Home
              Shopping Club, Inc. and SKC filed as Exhibit 10.19 to the Company's Annual Report
              on Form 10-K for the year ended December 31, 1994 is incorporated herein by
              reference.
  10.19   --  Form of Tax Sharing Agreement between Home Shopping Network, Inc. and SKC dated as
              of December 28, 1992 filed as Exhibit 10.4 to the SKC Registration Statement on
              Form 10, as amended, Registration Statement No. 0-20570, is incorporated herein by
              reference.
  10.20   --  Amended and Restated System Maintenance and Support Agreement effective as of
              February 2, 1993 between Home Shopping Network, Inc. and Precision Systems, Inc.
              filed as Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year
              ended December 31, 1993, is incorporated herein by reference.
  10.21   --  Credit Card Program Agreement, dated as of February 16, 1994, by and among Home
              Shopping Network, Inc., participating subsidiaries and General Electric Capital
              Corporation filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for
              the year ended December 31, 1993, is incorporated herein by reference.
 *10.22   --  First, Second, Third and Fourth Amendments to the 1986 Stock Option Plan for
              Employees filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for
              the year ended December 31, 1993, are hereby incorporated herein by reference.
 *10.23   --  Employment Agreement between Home Shopping Network, Inc. and Gerald F. Hogan, dated
              as of February 23, 1993 filed as Exhibit 10.32 to the Company's Annual Report on
              Form 10-K for the year ended December 31, 1993, is hereby incorporated herein by
              reference.
 *10.24   --  First Amendment, effective as of August 4, 1994, to Employment Agreement between
              Home Shopping Network, Inc. and Gerald F. Hogan filed as Exhibit 10.27 to the
              Company's Annual Report on Form 10-K for the year ended December 31, 1994, is
              incorporated herein by reference
  10.25   --  Second Amended and Restated Credit Agreement $100,000,000 Three-Year Revolving
              Credit Facility, dated as of August 30, 1994 among Home Shopping Network, Inc.,
              Home Shopping Club, Inc., the signatory banks, LTCB Trust Company as Agent, Bank of
              Montreal and The Bank of New York, each as a Co-Agent, and LTCB Trust Company as
              Administrative Agent, as amended filed as Exhibit 10.28 to the Company's Annual
              Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by
              reference.
</TABLE>
 
                                       49
<PAGE>   53
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                            DESCRIPTION
-------       -----------------------------------------------------------------------------------
<C>      <C>  <S>
 *10.26   --  Amended and Restated Home Shopping Network, Inc. Retirement Savings Plan and Trust
              Agreements, which incorporates by reference the Home Shopping Network, Inc.
              Retirement Savings and Employee Stock Ownership Plan and Trust filed as Exhibit
              10.33 to the Company's Annual Report on Form 10-K for the year ended December 31,
              1993 is incorporated herein by reference.
 *10.27   --  Home Shopping Network, Inc. Employee Stock Purchase Plan and Part-Time Employee
              Stock Purchase Plan filed as Exhibit 10.30 to the Company's Annual Report on Form
              10-K for year ended December 31, 1994 is incorporated herein by reference.
 *10.28   --  Home Shopping Network, Inc. Employee Equity Participation Plan and Agreement and
              Declaration of Trust filed as Exhibit 10.31 to the Company's Annual Report on Form
              10-K for the year ended December 31, 1994 is incorporated herein by reference.
 *10.29   --  Employment Agreement between Home Shopping Network, Inc. and David F. Dyer, dated
              as of August 16, 1994 filed as Exhibit 10.32 to the Company's Annual Report on Form
              10-K for the year ended December 31, 1994 is incorporated herein by reference.
 *10.30   --  Employment Agreement between Home Shopping Network, Inc. and Barry S. Augenbraun,
              dated as of September 1, 1994 filed as Exhibit 10.33 to the Company's Annual Report
              on Form 10-K for the year ended December 31, 1994 is incorporated herein by
              reference.
  10.31   --  First Amendment, dated as of March 29, 1995, to the Second Amended and Restated
              Credit Agreement filed as Exhibit 10.37 to the Company's Quarterly Report on Form
              10-Q for the quarter ended June 30, 1995, is incorporated herein by reference.
  10.32   --  Second Amendment, dated as of June 28, 1995, to the Second Amended and Restated
              Credit Agreement filed as Exhibit 10.38 to the Company's Quarterly Report on Form
              10-Q for the quarter ended June 30, 1995, is incorporated herein by reference.
  10.33   --  Third Amendment, dated as of September 28, 1995, to the Second Amended and Restated
              Credit Agreement filed as Exhibit 10.39 to the Company's Quarterly Report on Form
              10-Q for the quarter ended September 30, 1995, is incorporated herein by reference.
  10.34   --  Letter of Credit Facility dated as of September 28, 1995, filed as Exhibit 10.40 to
              the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
              1995, is incorporated herein by reference.
 *10.35   --  Employment Agreement between Home Shopping Network, Inc. and James G. Held, dated
              as of November 24, 1995.
 *10.36   --  Employment Agreement between Home Shopping Network, Inc. and Mary Ellen Pollin,
              dated as of December 15, 1995.
  10.37   --  Fourth Amendment, dated as of February 13, 1996, to the Second Amended and Restated
              Credit Agreement.
     11   --  Computation of net earnings (loss) per share.
     21   --  List of Subsidiaries of the Company.
     27   --  Financial Data Schedule (for SEC use only).
</TABLE>
 
---------------
 
          
  *  Reflects management contracts and compensatory plans.
           
 (b) Reports on Form 8-K
     None.
 
                                       50
<PAGE>   54
 
                                   SIGNATURES
 
     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
March 28, 1996
                                          HOME SHOPPING NETWORK, INC.
 
                                          By:       /s/  JAMES G. HELD
 
                                            ------------------------------------
                                                       James G. Held
                                               President and Chief Executive
                                                           Officer
 
     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 28, 1996.
 
<TABLE>
<CAPTION>
                  SIGNATURE                                 TITLE
---------------------------------------------   ------------------------------
<C>                                             <S>                              <C>
                  /s/  JAMES G. HELD            President, Chief Executive
---------------------------------------------     Officer and Director
                    James G. Held

                 /s/  KEVIN J. McKEON           Executive Vice President,
---------------------------------------------     Chief Financial Officer and
                    Kevin J. McKeon               Treasurer (Principal
                                                  Financial Officer)

                /s/  BRIAN J. FELDMAN           Vice President and Controller
---------------------------------------------     (Chief Accounting Officer)
                   Brian J. Feldman

                   /s/  BARRY DILLER            Chairman of the Board and
---------------------------------------------     Director
                     Barry Diller

                 /s/  PETER R. BARTON           Director
---------------------------------------------
                   Peter R. Barton

               /s/  ROBERT R. BENNETT           Director
---------------------------------------------
                  Robert R. Bennett

                 /s/  JOHN M. DRAPER            Director
---------------------------------------------
                   John M. Draper

           /s/  J. ANTHONY FORSTMANN            Director
---------------------------------------------
                J. Anthony Forstmann

              /s/  LEO J. HINDERY, JR.          Director
---------------------------------------------
                 Leo J. Hindery, Jr.

            /s/  JOHN C. MALONE, PH.D.          Director
---------------------------------------------
                John C. Malone, Ph.D.

              /s/  GEORGE C. MCNAMEE            Director
---------------------------------------------
                  George C. McNamee

            /s/  ELI J. SEGAL                   Director
---------------------------------------------
                 Eli J. Segal
</TABLE>
 
                                       51
<PAGE>   55
 
                                                                      EXHIBIT 11
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
                  COMPUTATION OF NET EARNINGS (LOSS) PER SHARE
 
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                                                    YEARS ENDED DECEMBER 31,
                                                                  -----------------------------
                                                                    1995      1994       1993
-----------------------------------------------------------------------------------------------
                                                                    (In thousands, except per
                                                                         share amounts)
<S>                                                               <C>        <C>       <C>
Primary earnings (loss) per share:
  Weighted average shares outstanding
     Common Stock...............................................    70,782    72,843     67,802
     Class B Common Stock.......................................    20,000    21,352     23,390
  Shares assumed to be issued upon the exercise of common stock
     options under the treasury stock method....................        --       866         --
                                                                  --------   -------   --------
                                                                    90,782    95,061     91,192
                                                                  ========   =======   ========
  Earnings (loss) before extraordinary item.....................  $(61,883)  $17,701   $(15,539)
  Extraordinary item, net of taxes..............................        --      (924)    (7,242)
                                                                  --------   -------   --------
  Net earnings (loss)...........................................  $(61,883)  $16,777   $(22,781)
                                                                  ========   =======   ========
  Earnings (loss) per share before extraordinary item...........  $   (.69)  $   .19   $   (.18)
  Extraordinary item per share, net of taxes....................        --      (.01)      (.08)
                                                                  --------   -------   --------
  Net earnings (loss) per share.................................  $   (.69)  $   .18   $   (.26)
                                                                  ========   =======   ========
Fully diluted earnings (loss) per share:(2)
  Weighted average shares outstanding
     Common Stock...............................................    70,782    72,843     67,802
     Class B Common Stock.......................................    20,000    21,352     23,390
  Shares assumed to be issued upon the exercise of common stock
     options under the treasury stock or modified treasury stock
     method.....................................................       298       872      2,182
  Shares assumed to be issued upon the conversion of the
     Company's 5 1/2% convertible debentures....................        --        --        938
                                                                  --------   -------   --------
                                                                    91,080    95,067     94,312
                                                                  ========   =======   ========
  Earnings (loss) before extraordinary item.....................  $(61,883)  $17,701   $(15,539)
  Interest expense adjustment(1)................................        --        --        205
                                                                  --------   -------   --------
  Earnings (loss) before extraordinary item.....................   (61,883)   17,701    (15,334)
  Extraordinary item, net of taxes..............................        --      (924)    (7,242)
                                                                  --------   -------   --------
  Net earnings (loss)...........................................  $(61,883)  $16,777   $(22,576)
                                                                  ========   =======   ========
  Earnings (loss) per share before extraordinary item...........  $   (.68)  $   .19   $   (.16)
  Extraordinary item per share, net of taxes....................        --      (.01)      (.08)
                                                                  --------   -------   --------
  Net earnings (loss) per share.................................  $   (.68)  $   .18   $   (.24)
                                                                  ========   =======   ========
</TABLE>
 
---------------
 
(1) Interest expense, net of taxes, that would not have been incurred had
     conversion of the Company's 5 1/2% convertible debentures taken place at
     the beginning of the period.
(2) The amounts in earnings (loss) per share on the fully diluted basis are
     solely shown in this exhibit. Because the amounts are the same as the
     primary calculation for the year ended December 31, 1994 and are
     antidilutive for the years ended December 31, 1995 and 1993, respectively,
     (decrease the loss per share), they are not required to be presented
     elsewhere in this Form 10-K.
 
                                       52
<PAGE>   56
 
                                                                      EXHIBIT 21
 
              LIST OF SUBSIDIARIES OF HOME SHOPPING NETWORK, INC.
 
                             A DELAWARE CORPORATION
 
                              AS OF MARCH 1, 1996
 
<TABLE>
<CAPTION>
                                                                                    STATE OF
                                                                                  INCORPORATION
                                                                                  -------------
<S>                                                                               <C>
Home Shopping Club, Inc.........................................................   Delaware
  d/b/a Home Shopping Club
     Telemation
     HSN Spree
     HSC Spree
     Home Shopping Network
     HSN
Home Shopping Network Outlets, Inc..............................................   Delaware
  d/b/a HSC Outlet
     Home Shopping Network Outlet
     HSN Liquidation Center
Home Shopping Services, Inc.....................................................   Delaware
  d/b/a Home Shopping Services of Delaware, Inc.
     HSN Direct, Inc
     d/b/a Innovations in Living
       HSN Direct Joint Ventures
       HSN Direct
       Home Shopping Showcase
HSN Capital Corporation.........................................................   Nevada
HSN Credit Corporation..........................................................   Delaware
HSN Entertainment Events, Inc...................................................   Delaware
HSN Entertainment Holding Company, Inc..........................................   Delaware
HSN Entertainment Joint Ventures II, Inc........................................   Delaware
  d/b/a/ Pacific Media Ventures
HSN Fulfillment, Inc............................................................   Delaware
HSN Fulfillment of Iowa, Inc....................................................   Delaware
HSN Fulfillment of Nevada, Inc..................................................   Delaware
HSN Fulfillment of Virginia, Inc................................................   Delaware
HSN Insurance, Inc..............................................................   Florida
HSN Interactive, Inc............................................................   Delaware
HSN Lifeway Health Products, Inc d/b/a HSN Products, Inc........................   Delaware
HSN Liquidation, Inc............................................................   Delaware
HSN Liquidation, Inc. of Florida................................................   Delaware
HSN Mail Order, Inc.............................................................   Delaware
  d/b/a HSN By Mail
     HSC By Mail
     Designer Direct
       Home Shopping Values
       Private Showing -- Jewelry Values by Mail
       HSN Media Merchandise
       Heroes Collector's Club
HSN Realty, Inc.................................................................   Delaware
  d/b/a HSN Realty of Delaware, Inc.
HSN Redi-Med, Inc...............................................................   Delaware
HSN Television Shopping Mall, Inc...............................................   Delaware
HSN Transportation, Inc.........................................................   Delaware
</TABLE>
 
                                       53
<PAGE>   57
 
<TABLE>
<CAPTION>
                                                                                    STATE OF
                                                                                  INCORPORATION
                                                                                  -------------
<S>                                                                               <C>
HSN Travel, Inc.................................................................   Delaware
Internet Shopping Network, Inc..................................................   California
MarkeTechs, Services, Inc.......................................................   Delaware
  d/b/a/ Petals & Presents
National Call Center, Inc.......................................................   Delaware
Ortho-Vent, Inc.................................................................   Delaware
Vela Research, Inc..............................................................   Delaware
World Rez, Inc..................................................................   Delaware
  d/b/a Home Shopping Travel
  World Rez Inc. of Delaware
</TABLE>
 
                                       54
<PAGE>   58
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
Home Shopping Network, Inc.
 
     Under date of February 21, 1996, we reported on the consolidated balance
sheets of Home Shopping Network, Inc. and subsidiaries as of December 31, 1995
and 1994 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three year period ended
December 31, 1995, as contained in Item 8 of the Company's 1995 Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedule as
listed in Item 14. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
 
     In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
 
                                          /s/  KPMG Peat Marwick LLP
 
St. Petersburg, Florida
February 21, 1996
 
                                       55
<PAGE>   59
 
                                                                     SCHEDULE II
 
                  HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                                                  ADDITIONS
                                                            ---------------------
                                                 BALANCE     CHARGED     CHARGED                   BALANCE
                                                   AT          TO       TO OTHER                     AT
                                                BEGINNING   COSTS AND   ACCOUNTS--  DEDUCTIONS--     END
                 DESCRIPTION                    OF PERIOD   EXPENSES    DESCRIBE    DESCRIBE(1)   OF PERIOD
----------------------------------------------  ---------   ---------   ---------   -----------   ---------
                                                                      (In thousands)
<S>                                             <C>         <C>         <C>         <C>           <C>
Allowance for doubtful accounts:
  Year ended December 31, 1995................   $ 1,738     $ 2,851     $    --      $(2,904)     $ 1,685
                                                 =======     =======    ========    =========      =======
  Year ended December 31, 1994................   $ 1,627     $ 1,866     $    --      $(1,755)     $ 1,738
                                                 =======     =======    ========    =========      =======
  Year ended December 31, 1993................   $ 1,798     $ 2,025     $    --      $(2,196)     $ 1,627
                                                 =======     =======    ========    =========      =======
Allowance for doubtful other current assets:
  Year ended December 31, 1995................   $    --     $    --     $    --      $    --      $    --
                                                 =======     =======    ========    =========      =======
  Year ended December 31, 1994................   $ 6,200     $    --     $    --      $(6,200)     $    --
                                                 =======     =======    ========    =========      =======
  Year ended December 31, 1993................   $ 6,200     $    --     $    --      $    --      $ 6,200
                                                 =======     =======    ========    =========      =======
</TABLE>
 
---------------
 
(1) Accounts written off as uncollectible.
 
                                       56
<PAGE>   60
 
BOARD OF DIRECTORS
BARRY DILLER
Chairman
Home Shopping Network
Chairman and Chief Executive Officer
Silver King Communications, Inc.
New York, NY
 
JAMES G. HELD
President and Chief Executive Officer
Home Shopping Network, Inc.
 
PETER R. BARTON
President
Liberty Media Corporation
Englewood, Colorado
 
ROBERT R. BENNETT
Senior Vice President and Chief Financial Officer
Liberty Media Corporation
Englewood, Colorado
 
JOHN M. DRAPER
Consultant to
Liberty Media Corporation
Englewood, Colorado
 
J. ANTHONY FORSTMANN
Chairman
The National Registry Inc.
St. Petersburg, Florida
 
LEO J. HINDERY, JR.
Managing General Partner
InterMedia Partners
San Francisco, California
 
JOHN C. MALONE, PH.D.
President and Chief Executive Officer
Tele-Communications, Inc.
Denver, Colorado
 
GEORGE C. MCNAMEE
Chairman
First Albany Companies, Inc.
Albany, New York
 
ELI J. SEGAL
Former assistant to the President of the United States
Washington, DC
 
OFFICERS
JAMES G. HELD
President and Chief Executive Officer
 
BARRY S. AUGENBRAUN
Executive Vice President,
General Counsel and Secretary
 
BRIAN J. FELDMAN
Vice President and Controller
 
HONORE A. LE BRUN, III
Executive Vice President
Broadcast and Cable Affiliate Sales
 
KEVIN J. MCKEON
Executive Vice President, Chief
Financial Officer and Treasurer
 
MARY ELLEN POLLIN
Executive Vice President
Administration
 
STOCKHOLDER INFORMATION
 
CORPORATE
HEADQUARTERS
2501 118th Avenue North
St. Petersburg, Florida 33716-1900
(813) 572-8585
Mailing address:
Post Office Box 9090
Clearwater, Florida 34618-9090
 
STOCK EXCHANGE
Home Shopping Network is listed on the New York Stock Exchange. The ticker
symbol is HSN.
 
TRANSFER AGENT
AND REGISTRAR
For address changes, account consolidation, registration changes, lost stock
certificates and other stockholder services, contact:
  The Bank of New York
  101 Barclay Street
  New York, New York 10286
  (800) 524-4458
 
INVESTOR RELATIONS AND CORPORATE COMMUNICATIONS
The Company maintains an office to assist analysts, investment professionals,
stockholders, potential stockholders, press and media. Inquiries are welcome by
telephone or letter at the corporate headquarters.
 
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Barnett Tower, Suite 1600
200 Central Avenue
St. Petersburg, Florida 33701
 
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on May 9, 1996 at 10:00 a.m. at
the Holiday Inn, 3535 Ulmerton Road, St. Petersburg/Clearwater, Florida
 
GETTING ON-LINE
WITH HSN
INTERNET SHOPPING
NETWORK (ISN)
At the World Wide Web (WWW) access line, type
"http://www.internet.net".
<PAGE>   61
 
                          HOME SHOPPING NETWORK, INC.
                               1995 ANNUAL REPORT