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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT
OF 1934



For The Fiscal Year Ended December 31, 2004



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XM SATELLITE RADIO INC.

(Exact name
of registrant as specified in its charter)



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Commission file number 333-39178



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 52-1805102                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



1500 ECKINGTON
PLACE, NE

WASHINGTON, D.C. 20002-2194

(Address of principal executive offices)

(Zip code)



202-380-4000

(Registrants telephone number, including area code)



Website: http://www.xmradio.com



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

Not Applicable



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

Not Applicable



---



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



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



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



The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2004 is $0.



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                              |  |                                                                         
|----------------------------- |  | ------------------------------------------------------------------------
|(Class)                       |  | (Outstanding as of February 28, 2005)                                   
|COMMON STOCK, $0.10 PAR VALUE |  | 125 SHARES (all of which are issued to XM Satellite Radio Holdings Inc.)



DOCUMENTS
INCORPORATED BY REFERENCE



Portions of the definitive proxy
statement for the Annual Meeting of Stockholders of XM Satellite Radio Holdings Inc., our parent company, to be held on May 26, 2005, to be filed within 120 days after the end of XM Satellite Radio Holdings Inc.s fiscal year, are incorporated
by reference into Part III, Items 10-14 of this Form 10-K. Our board of directors and executive officers are identical to those of XM Satellite Radio Holdings Inc.



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XM SATELLITE RADIO INC. AND SUBSIDIARIES



TABLE OF CONTENTS



|                                           |  |          |  |                                                                                                              |  |     
|------------------------------------------ |  | -------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|                                           |  |          |  |                                                                                                              |  | Page
|PART I                                     |  |         
|                                           |  | Item 1.  |  | Business                                                                                                     |  | 3   
|                                           |  | Item 2.  |  | Property                                                                                                     |  | 23  
|                                           |  | Item 3.  |  | Legal Proceedings                                                                                            |  | 23  
|                                           |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 23  
|                                           | 
|PART II                                    |  |         
|                                           |  | Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 23  
|                                           |  | Item 6.  |  | Selected Financial Data                                                                                      |  | 23  
|                                           |  | Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 25  
|                                           |  | Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 51  
|                                           |  | Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 52  
|                                           |  | Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 52  
|                                           |  | Item 9A. |  | Controls and Procedures                                                                                      |  | 52  
|                                           | 
|PART III                                   |  |         
|                                           |  | Item 10. |  | Directors and Executive Officers of the Registrants                                                          |  | 52  
|                                           |  | Item 11. |  | Executive Compensation                                                                                       |  | 52  
|                                           |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 52  
|                                           |  | Item 13. |  | Certain Relationships and Related Transactions                                                               |  | 52  
|                                           |  | Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 52  
|                                           | 
|PART IV                                    |  |         
|                                           |  | Item 15. |  | Exhibits and Consolidated Financial Statement Schedules                                                      |  | 52  
|                                           | 
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |  | F-1     





Except for any historical information, the matters we discuss in this Form 10-K contain forward-looking statements. Any statements in this Form 10-K that
are not statements of historical fact, are intended to be, and are, forward-looking statements under the safe harbor provided by Section 27(a) of the Securities Act of 1933. Without limitation, the words anticipates,
believes, estimates, expects, intends, plans and similar expressions are intended to identify forward-looking statements. The important factors we discuss below and under the caption
Managements Discussion and Analysis of Financial Condition and Results of Operations, as well as other factors identified in our filings with the SEC and those presented elsewhere by our management from time to time, could cause
actual results to differ materially from those indicated by the forward-looking statements made in this Form 10-K.



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EXPLANATORY NOTE



This annual report is filed by XM Satellite Radio Inc. (Inc. or the Company). Inc. is a wholly-owned
subsidiary of XM Satellite Radio Holdings Inc. (XM or Holdings). Unless the context requires otherwise, the terms we, our and us refer to Inc. and its subsidiaries.



This annual report and all other reports and amendments filed by us with the
SEC can be accessed, free of charge, through our website at http://www.xmradio.com/investor/investor_financial_and_company.html on the same day that they are electronically filed with the SEC.



PART I



ITEM 1. BUSINESS



We are
Americas leading satellite radio service company, providing music, entertainment and information programming for reception by vehicle, home and portable radios nationwide and over the internet for a monthly subscription fee to over 3.2 million
subscribers as of December 31, 2004. We believe XM Radio appeals to consumers because of our innovative and diverse programming, nationwide coverage, commercial-free music channels and digital sound quality.



The full 2005 channel lineup now includes more than 150 channels, featuring
over 65 commercial-free music channels; 30 news, talk and variety channels; 31 sports channels; 21 instant traffic and weather channels; one emergency alert channel; and premium channels available for an additional fee. We are continuing to add new
and innovative programming to our line-up in many different areas. Beginning with the 2005 season, we are the Official Satellite Radio Network of Major League Baseball (MLB) and offer a 24x7 MLB channel as well as play-by-play channels, including
Spanish-language broadcasts. We also have added Fox baseball anchor Kevin Kennedy and sports journalist Tony Kornheiser to our sports programming line-up for 2005, and we will continue our broadcast of football and mens and womens
basketball games from the Atlantic Coast, Pacific-10 and Big Ten Conferences. In October 2004, we debuted a new channel, XM Public Radio, which features award-winning radio broadcaster Bob Edwards. We frequently add new music programming, and in
fall 2004 launched exclusive music programs that feature Tom Petty, Snoop Dogg, Quincy Jones, Bonnie Raitt and other artists. Another of our new channels, launched in October 2004, features talk radio personalities Opie and Anthony. Our traffic and
weather channels, introduced in early 2004, report continuously updated information from 21 major markets such as New York, Los Angeles, Chicago and Washington, DC.



Our targeted market has been over 200 million registered vehicles in the United States along with over 100 million
households in the United States. Since our nationwide launch on November 12, 2001, we have built our subscriber base through multiple distribution channels, including an exclusive factory-installation distribution arrangement with General Motors,
arrangements with Honda, other automotive manufacturers and car audio dealers for factory and dealer installation, and arrangements with national electronics retailers which focus both on car radios and on radios for home and portable use.



Broad distribution of XM Radio through the new automobile
market is a central element of our business strategy. XM Radio is currently available in over 120 new vehicle models. Through an exclusive arrangement with us, General Motors, a major investor in our company, currently offers XM Radio in various
makes and models, including passenger cars, light trucks and SUVs, and for the 2005 model year expanded the XM Radio, factory-installed option to over 50 vehicle lines, including HUMMER, Buick, Cadillac, Chevrolet, GMC, Pontiac, Saab and Saturn
brand vehicles. In December 2004, General Motors announced that it had signed up its one millionth XM subscriber. Honda, a major investor in our company, currently offers XM Radio in certain Honda and most Acura models as a factory-installed feature
and other Honda models as a dealer-installed option. Toyota/Lexus/Scion, Nissan/Infiniti, Isuzu and Volkswagen/Audi offer XM Radio as a dealer-installed option in numerous popular makes and models. Volkswagen, Audi and Porsche also offer XM Radio as
a factory-installed feature in multiple 2005 models. In December 2004, we announced that Toyota has selected XM as its supplier for satellite delivered data services for Toyota, Lexus and Scion vehicles. Toyota will also offer XM radios as a
factory-installed option in Toyota and Lexus vehicles starting in 2006. Toyota will expand the number of models offering XM as a dealer-installed option in 2005. In addition, in 2005, Nissan chose XM to supply satellite-delivered data and telematics
services, such as in-vehicle messaging and XM NavTraffic.



XM
radios are available in the aftermarket under the Delphi, Pioneer, Alpine, Audiovox, Sony and Polk brand names at national consumer electronics retailers, such as Best Buy, Circuit City, Wal-Mart and other national and regional retailers. These
radios and other mass market products support our service in the automobile, home and portable markets.



As part of our strategy to make XM Radio available everywhere, we introduced in fall 2004 an on-line service through which more than 70 of our channels
can be received over the Internet, including through Microsofts Windows Media Player 10 and Windows XP Media Center Edition 2005. We also offer XM NavTraffic, the nations first real-time satellite traffic data service, for 20 major
metropolitan cities across the United States for a monthly fee and XM WX satellite weather service, a real-time graphical data weather service provided to the marine and aviation markets.



We have also created brand awareness through the many ways in which potential subscribers can experience the XM service. The
XM radios in General Motors vehicles come pre-activated with service so GMs dealers can offer the XM experience to new car prospects during vehicle test drives and to new car purchasers during the vehicle delivery process. The XM service
is available as a



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trial to GM new vehicle buyers, and GMs own internal research indicates that GM vehicle buyers provide
demonstrations, on average, seven times during the first 60 days of vehicle ownership. XM Radio is also available in many AVIS, Alamo and National rental cars. Also announced in 2004, with service to commence in 2005, XM Radio will be available on
JetBlue and AirTran airplanes, which serve over 20 million passengers per year. During 2004 we announced an exclusive multi-year strategic marketing alliance with Starbucks, which included the launch of the Starbucks Hear Music channel on XM.



We transmit the XM Radio signal throughout the continental
United States from our two satellites XM Rock and XM Roll. In February 2005 we launched our third satellite (XM-3), to be placed into one orbital slot. We will then move XM Roll to be collocated with XM Rock in the other orbital slot. In 2007, we
plan to launch another satellite (XM-4) to replace the collocated XM Rock and XM Roll. We also have a network of approximately 800 terrestrial repeaters, which receive and re-transmit the satellite signals in 60 cities to augment our satellite
signal coverage where it might otherwise be affected by buildings, tunnels or terrain. We hold one of only two licenses issued by the Federal Communications Commission to provide satellite digital audio radio service in the United States.



Recent Developments



Changes to Our Service. On February 28, 2005, we announced that we
are expanding our basic service package and that the monthly subscription price for our basic service will increase to $12.95 beginning April 2, 2005. Existing subscribers may lock in the current $9.99 monthly rate with a one-year period plan and
deeper discounts with a two, three, four or five-year prepaid plan until April 2, 2005. The expanded basic service will include the Internet service XM Radio Online (previously $3.99 per month) and the High Voltage Channel (previously $1.99 per
month), both of which were premium services prior to this change.



Launch of XM-3. We recently announced the successful launch of our XM-3 satellite. Liftoff occurred on February 28, 2005 at 10:51 pm EST off the Sea Launch Odyssey Launch Platform in open waters of the Pacific Ocean on the equator.
The XM-3 satellite was inserted into an optimized geosynchronous transfer orbit; at the present time the satellite is being raised into a geostationary orbit, utilizing its own power, where it will undergo in-orbit testing, and then be moved to its
operating orbital slot at approximately 85 degrees West Longitude. The initial handover should occur in the late March/April timeframe.



The Market For Satellite Radio



Based on our experience in the marketplace to date, as well as market research, we believe that there is a significant market for our satellite radio
service.



Initial Marketplace Results



Consumer response to our service has been positive. As of December 31,
2004, we had over 3.2 million subscribers. In 2003, we surpassed 1 million subscribers making us the second fastest mass market technology product to achieve 1 million subscribers (according to Greystone Communications, Yankee Group). Importantly,
we have achieved this subscriber growth while spending significantly less in costs to acquire a new subscriber (CPGA costs) than we had originally projected. A more in-depth discussion of our CPGA costs can be found under the heading
Managements Discussion and Analysis of Financial Condition and Results of Operations.



We have also received positive feedback from our subscribers. In three recent studies, 90% or more of our subscribers report being extremely
or very satisfied with XM (Q1 Brand Tracking Study, 2005 Price/Product Choice Model and 2005 Segmentation Study). We have also found a broad appeal of our service across age groups, with people in their twenties, thirties, forties and
fifties each representing comparable percentages of XM subscribers.



Marketing



Our marketing strategy is designed
to build awareness and demand among potential subscribers in our target markets and the advertising community. Our strategy also includes providing potential subscribers with the opportunity to experience the XM service, because it is available to
new car prospects during vehicle test drives of XM-enabled General Motors and Honda vehicles, on approximately 27,000 AVIS rental cars, and many Alamo and National rental cars. XM is currently available on AirTran airplanes and will be available on
Jet Blue planes later this year. Jet Blue and AirTran serve over 20 million passengers per year.



We promote XM Radio as the leader in the satellite radio category, offering appealing features compared to traditional radio. Our ongoing advertising and
promotional activities include television, radio and print advertising and distributing sample programming and marketing materials at retail outlets, concert venues, motor sports events and on the Internet to generate consumer interest. General
Motors and Honda continue to sponsor national and local print and television advertising that features the XM logo and message. In 2005 we will add promotional advertising featuring our new status as the Official Satellite Radio Network of Major
League Baseball.



XM Radio promotes subscriber acquisition
activities with both automobile original equipment and aftermarket radio manufacturers. This includes:



| |  |  | promotional campaigns directed towards automobile manufacturers and dealers;
| | - |  | ----------------------------------------------------------------------------



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| |  |  | in-store promotional campaigns, including displays located in electronics, music and other retail stores, rental car agencies and automobile dealerships;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | incentive programs for retailer sales forces; and
| | - |  | -------------------------------------------------



| |  |  | jointly funded local advertising campaigns with retailers.
| | - |  | ----------------------------------------------------------



Distribution



We market our satellite radio service through several distribution channels including automotive manufacturers and dealers, national and regional
electronics retailers, car audio dealers and mass retailers and rental car companies.



Automotive Manufacturers and Dealers. XM Radio is currently available as original equipment in over 120 new vehicle models.



Exclusive Distribution Agreement with General Motors. Under our agreement with OnStar Corporation, a subsidiary of
General Motors, for a 12-year period ending in September 2013, General Motors will exclusively distribute and market the XM Radio service and install XM radios in General Motors vehicles. General Motors sold over 4.8 million automobiles in 2004,
which represented more than 27% of the United States automobile market. General Motors currently offers XM Radio in over 50 vehicle lines of the 2005 model year, including passenger cars, light trucks and SUVs. GM factory installs the XM Radio
option in HUMMER, Buick, Cadillac, Chevrolet, GMC, Saturn, Saab and Pontiac brand vehicles. In December 2004, General Motors announced that it had signed up its one millionth XM subscriber. General Motors has made XM radios available in diverse
price categories, ranging from the Chevy Cobalt to the Cadillac Escalade. Under this agreement, we have substantial payment obligations to General Motors, including substantial guaranteed fixed payment obligations (2007 to 2009). General Motors
(together with the Sub-Trust of the General Motors Welfare Benefit Trust) is a major investor in XM.



Honda. Honda currently offers XM Radio in 12 models, including the Honda Accord EX, Hybrid, Odyssey, Ridgeline, and Element and Acura RL, TL, TSX
and MDX as a factory-installed feature and in the Pilot, S2000, CR-V and other Accord models as a dealer-installed option. During 2004, Acura introduced AcuraLink TM, which utilizes XMs NavTraffic service to provide drivers real time traffic
information for freeways in 20 major metropolitan areas. AcuraLink TM is factory installed on all 2005 model year Acura RLs. American Honda is a major investor in our company.



Toyota. During 2004, Toyota and XM entered into a distribution agreement whereby Toyota, Lexus and Scion will begin
offering XM radio and traffic data services as a factory installed option beginning with their 2006 model year vehicles. Toyota currently offers XM radio as a dealer-installed option in 12 models including the Camry, Land Cruiser, Scion xA, and xB
and xC and Lexus LS 300, LS 430 and LX 470.



Other
Automobile and Truck Manufacturers. Nissan/Infiniti, Isuzu and Volkswagen/Audi offer XM Radio as a dealer-installed option in numerous popular makes and models, including the Nissan Pathfinder and Titan, Infiniti G35 and FX45, the Audi A4, S4,
A6 and allroad quattro, and the Volkswagen Beetle and Jetta. Nissan recently chose XM to supply satellite-delivered data and telematics services, such as in-vehicle messaging and XM NavTraffic. We are continuing to seek additional distribution
agreements with other car manufacturers as well as large independent dealer groups. We are educating automobile dealers about XM Radio to develop sales and promotional campaigns that promote XM radios to new car buyers. In addition, we have
relationships with Freightliner Corporation and Pana Pacific, and XM radios are available in Freightliner and Peterbilt trucks. Volkswagen, Audi, and Porsche also offer XM Radio as a factory-installed feature in multiple 2005 models.



National and Regional Retail Electronics Distributors. XM radios and
XM-ready radios are available under the Delphi, Pioneer, Alpine, Panasonic and Sony brand names and are marketed and distributed together with the XM Radio service through major consumer electronics retail channels, including Best Buy, Circuit City,
Wal-Mart and other national and regional retailers. We develop in-store merchandising materials, including end-aisle displays for several retailers, and train the sales forces of all major retailers.



Brand Awareness and Other Distribution Arrangements.



Rental Cars. XM service became available in
June 2003 to Avis car rental customers in 30 major cities nationwide. During 2004, XM service also became available to National and Alamo car rental customers. Rental car companies currently offer XM service in approximately 27,000 vehicles.



Airplanes. XM Radio is now available on AirTran
airplanes and will become available on Jet Blue planes later in 2005.



Expanding Product Configurations. Beginning in 2004, a third generation of XM Radios, reflecting enhanced features and lower cost, became available to consumers.



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In 2004, we introduced the XM Delphi XM2go MyFi, the first personal, portable satellite radio. The
hand-held MyFi enables users to enjoy XM Radio in two ways: a live listening mode and a memory mode. The MyFis live mode enables users to listen live to all of XMs channels. MyFis memory modecalled
My XMallows users to store five hours or more of XM content, even when the unit is not in use. Two additional XM2go products will be available in 2005 under the Pioneer and Tao brand names. In fall 2004, Delphi introduced the
SKYFi2, the follow-up to the successful SKYFi, a plug and play device that can be adapted for home, automobile or portable use (boom box) that was introduced in 2002. The SKYFi2 features pause and replay functions, a first in
the satellite radio industry. In November 2004, Polk Audio introduced a component tuner for use with existing premium home audio systems. In August 2004, Audiovox introduced the XR9, a plug-and-play device that features a wireless FM modulator to
allow for listening on any FM radio and is capable of displaying up to 20 customized stock quotes. In May 2004, Delphi introduced the industrys smallest satellite radio, the XM Roady2, a new third generation plug-and-play device with built-in
wireless FM adapter for easy connection to any car or home radio as well as the first receiver capable of displaying up to 20 customized stock quotes. Delphi has begun offering the Delphi CD Audio System, the industrys first boom box capable
of playing AM/FM radio, XM radio, compact discs and MP3 files.



In October 2004, we commenced offering an online music service, offering internet users more than 65 XM commercial-free channels. In 2005, we will be offering XM NavTraffic, the nations first satellite traffic data service, for 20
major metropolitan cities across the United States.



To
facilitate attractive pricing for retail radio and automobile consumers, we have financial arrangements with certain radio manufacturers that include our subsidizing of certain radio component parts. We are pursuing additional agreements for the
manufacture and distribution of XM radios for the home and portable markets.



The XM Satellite Radio Service



Our satellite
radio channel offering includes channels designed to appeal to different groups of listeners, including urban and rural listeners of different ages, and to specific groups that our research has shown are most likely to subscribe to our service, and
thereby aggregate a large potential audience for our service. In addition to providing radio formats that are appealing to different groups, in every format we deliver we strive to provide an entertaining or informative listening experience.



The following is a list of channels included in our satellite
radio service offering as of March 1, 2005.



|           |  |                    |  |                          
|---------- |  | ------------------ |  | -------------------------
|           |  | Channel Name       |  | Channel Description      
|Preview    |  | XM Preview         |  | XM Preview               
|           |  |                   
|Decades    |  | The 40s            |  | Big Band/Swing/Forties   
|           |  | The 50s            |  | Fifties Hits             
|           |  | The 60s            |  | Sixties Hits             
|           |  | The 70s            |  | Seventies Hits           
|           |  | The 80s            |  | Eighties Hits            
|           |  | The 90s            |  | Nineties Hits            
|           |  |                   
|Country    |  | America            |  | Classic Country          
|           |  | Nashville!         |  | 90s & Today              
|           |  | X Country          |  | Progressive Country      
|           |  | Hanks Place       |  | Traditional Country      
|           |  | Bluegrass Junction |  | Bluegrass                
|           |  | The Village        |  | Folk                     
|           |  | Highway 16         |  | Top Country Hits         
|           |  |                   
|Pop & Hits |  | Top 20 on 20       |  | Top 20 Hits              
|           |  | KISS               |  | Pop Hits                 
|           |  | MIX                |  | Contemporary Hits        
|           |  | The Heart          |  | Love Songs               
|           |  | Sunny              |  | Beautiful Music          
|           |  | The Blend          |  | Adult Contemporary       
|           |  | Cinemagic          |  | Movie Soundtracks        
|           |  | On Broadway        |  | Show Tunes               
|           |  | U-Pop              |  | Euro & Global Chart Hits 
|           |  |                   
|Christian  |  | The Torch          |  | Christian Rock           
|           |  | The Fish           |  | Christian Pop            
|           |  | Spirit             |  | Gospel                   
|           |  |                   
|Rock       |  | Deep Tracks        |  | Deep Album Rock          
|           |  | Boneyard           |  | Hard Rock                
|           |  | XMU                |  | New Music                
|           |  | Fred               |  | Deep Classic Alternative 
|           |  | XM Café            |  | Modern/Soft Alternative  
|           |  | Top Tracks         |  | Classic Rock             
|           |  | Ethel              |  | 90s & Todays Alternative
|           |  | Squizz             |  | Hard Alternative         
|           |  | The Loft           |  | Acoustic/Rock            
|           |  | Music Lab          |  | Jambands/Progressive     



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|              |  |                             |  |                                       
|------------- |  | --------------------------- |  | --------------------------------------
|              |  | Channel Name                |  | Channel Description                   
|              |  | Unsigned!                   |  | Unsigned Artists                      
|              |  | Fungus                      |  | Punk/Hardcore/Ska                     
|              |  | Lucy                        |  | Classic Alternative Hits              
|              |  |                            
|Hip Hop/Urban |  | Soul Street                 |  | Classic Soul                          
|              |  | The Flow                    |  | Neo Soul                              
|              |  | Suite 62                    |  | Urban Adult                           
|              |  | The Groove                  |  | Old School R&B                        
|              |  | The Rhyme                   |  | Classic Hip-Hop/Rap                   
|              |  | RAW                         |  | Uncut Hip-Hop                         
|              |  | The City                    |  | Urban Top 40                          
|              |  |                            
|Jazz & Blues  |  | Real Jazz                   |  | Traditional Jazz                      
|              |  | Watercolors                 |  | Contemporary Jazz                     
|              |  | Beyond Jazz                 |  | Modern Jazz                           
|              |  | Franks Place               |  | Great Vocals/Standards                
|              |  | Bluesville                  |  | Blues                                 
|              |  |                            
|Lifestyle     |  | Hear Music                  |  | Starbucks Music                       
|              |  | Fine Tuning                 |  | Eclectic                              
|              |  | Audio Visions               |  | New Age                               
|              |  |                            
|Dance         |  | The Move                    |  | Underground Dance                     
|              |  | BPM                         |  | Dance Hits                            
|              |  | The System                  |  | Electronica                           
|              |  | Chrome                      |  | Disco                                 
|              |  |                            
|Latin         |  | Alegria                     |  | Latin Pop Hits                        
|              |  | Aguila                      |  | Regional Mexican                      
|              |  | Caliente                    |  | Salsa/Caribbean                       
|              |  | Luna                        |  | Latin Jazz                            
|              |  |                            
|World         |  | World Zone                  |  | World                                 
|              |  | The Joint                   |  | Reggae                                
|              |  | Ngoma                       |  | African                               
|              |  |                            
|Premium       |  | Playboy Radio               |  | Adult                                 
|              |  | High Voltage                |  | Opie & Anthony                        
|              |  |                            
|Classical     |  | XM Classics                 |  | Traditional Classical                 
|              |  | Vox                         |  | Opera/Classical Vocals                
|              |  | XM Pops                     |  | Popular Classical                     
|              |  |                            
|Kids          |  | Radio Disney                |  | Children                              
|              |  | XM Kids                     |  | Children                              
|              |  |                            
|News          |  | Fox News                    |  | News                                  
|              |  | CNN                         |  | News                                  
|              |  | CNN Headline News           |  | News                                  
|              |  | ABC News & Talk             |  | News & Talk                           
|              |  | The Weather Channel         |  | 24 Hr. Weather Radio                  
|              |  | CNBC                        |  | Network                               
|              |  | Bloomberg Radio             |  | Business News                         
|              |  | MSNBC                       |  | News & Business                       
|              |  | BBC World Service           |  | News                                  
|              |  | C-SPAN Radio                |  | World Affairs                         
|              |  | XM Public Radio             |  | US Govt & Public Affairs Public Radio
|              |  | CNN en Español              |  | News in Spanish                       
|              |  |                            
|Sports        |  | ESPN Radio                  |  | Sports Talk/Play-by- Play             
|              |  | ESPN News                   |  | Sports News                           
|              |  | Fox Sports Radio            |  | Sports News Talk                      
|              |  | The Sporting News           |  | Sports Talk                           
|              |  | NASCAR Radio                |  | NASCAR Racing                         
|              |  | NASCAR Radio 2              |  | In-Car Driver/Crew Audio              
|              |  | College SportsACC          |  | ACC Sports                            
|              |  | College SportsACC          |  | ACC Sports                            
|              |  | College SportsACC          |  | ACC Sports                            
|              |  | College SportsPAC-10       |  | PAC-10 Sports                         
|              |  | College SportsPAC-10       |  | PAC-10 Sports                         
|              |  | College SportsPAC-10       |  | PAC-10 Sports                         
|              |  | College SportsBig Ten      |  | Big Ten Sports                        
|              |  | College SportsBig Ten      |  | Big Ten Sports                        
|              |  | College SportsBig Ten      |  | Big Ten Sports                        
|              |  | MLB Home Plate              |  | 24x7 MLB talk & updates               
|              |  | MLB play-by-play en Espanol |  | MLB play-by-play in Spanish           
|              |  | Major League Baseball       |  | MLB play-by-play                      
|              |  | Major League Baseball       |  | MLB play-by-play                      
|              |  | Major League Baseball       |  | MLB play-by-play                      
|              |  | Major League Baseball       |  | MLB play-by-play                      
|              |  | Major League Baseball       |  | MLB play-by-play                      
|              |  | Major League Baseball       |  | MLB play-by-play                      



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##### Index to Financial Statements

|                            |  |                                              |  |                         
|--------------------------- |  | -------------------------------------------- |  | ------------------------
|                            |  | Channel Name                                 |  | Channel Description     
|                            |  | Major League Baseball                        |  | MLB play-by-play        
|                            |  | Major League Baseball                        |  | MLB play-by-play        
|                            |  | Major League Baseball                        |  | MLB play-by-play        
|                            |  | Major League Baseball                        |  | MLB play-by-play        
|                            |  | Major League Baseball                        |  | MLB play-by-play        
|                            |  | Major League Baseball                        |  | MLB play-by-play        
|                            |  | Major League Baseball                        |  | MLB play-by-play        
|                            |  | Major League Baseball                        |  | MLB play-by-play        
|                            |  |                                             
|Comedy                      |  | XM Comedy                                    |  | Comedy                  
|                            |  | Laugh USA                                    |  | Family Comedy           
|                            |  |                                             
|Talk & Variety              |  | Extreme XM                                   |  | Extreme Talk            
|                            |  | MTV                                          |  | MTV Radio               
|                            |  | VH1                                          |  | VH1 Radio               
|                            |  | Discovery Radio                              |  | Real Life Stories & News
|                            |  | E!                                           |  | Entertainment News      
|                            |  | Sonic Theater                                |  | Books & Drama           
|                            |  | Radio Classics                               |  | Old Time Radio          
|                            |  | Ask                                          |  | Experts & Advice        
|                            |  | America Right                                |  | Talk & Opinion          
|                            |  | America Left                                 |  | Progressive Talk        
|                            |  | The Power                                    |  | African American Talk   
|                            |  | Family Talk                                  |  | Christian Talk          
|                            |  | XM Live                                      |  | Special Events          
|                            |  | Open Road                                    |  | Truckers Channel       
|                            |  |                                             
|Instant Traffic and Weather |  | Boston                                       |  |                         
|                            |  | New York City                                |  |                         
|                            |  | Philadelphia                                 |  |                         
|                            |  | Baltimore                                    |  |                         
|                            |  | Washington, DC                               |  |                         
|                            |  | Pittsburgh                                   |  |                         
|                            |  | Detroit                                      |  |                         
|                            |  | Chicago                                      |  |                         
|                            |  | St. Louis                                    |  |                         
|                            |  | Minneapolis /St. Paul                        |  |                         
|                            |  | Seattle                                      |  |                         
|                            |  | San Francisco                                |  |                         
|                            |  | Los Angeles                                  |  |                         
|                            |  | San Diego                                    |  |                         
|                            |  | Phoenix                                      |  |                         
|                            |  | Dallas/Ft. Worth                             |  |                         
|                            |  | Houston                                      |  |                         
|                            |  | Atlanta                                      |  |                         
|                            |  | Tampa/St. Petersburg                         |  |                         
|                            |  | Orlando                                      |  |                         
|                            |  | Miami/Ft. Lauderdale                         |  |                         
|                            |  | Emergency InformationXM Emergency Alert 24/7 |  | Emergency Information   



Hallmarks of our
satellite radio channel lineup include:



Broad range of
music genrescommercial freeand live radio entertainment. We offer over 65 channels of music-oriented entertainment. Each channel is programmed in its own distinct format, many generally not previously available on radio, and some
newly created by us to appeal to emerging listening tastes. In early 2004, we shifted our approach to music programming, eliminating commercial advertisements on all of our music channels to enhance the listening experience.



Musical formats unavailable in many
terrestrial radio markets. XM Radio offers many music formats that are popular but currently unavailable in many markets. More than 64% of all commercial radio stations in markets measured by Arbitron use one of only five programming formats:
country; adult contemporary; news/talk/sports; oldies; or religious. Furthermore, the number of radio stations available to many consumers in their local market is limited in comparison to the 150 channels (plus premium channels), we offer on a
nationwide basis. We offer many types of music with significant popularity, as measured by recorded music sales and concert revenues, that are unavailable in many traditional AM/FM radio markets. Such music includes classical recordings and popular
blues music that have retail appeal but are not commonly played on traditional AM/FM radio. Recorded music sales of niche music formats such as classical, jazz, movie and Broadway soundtracks, religious programming, new age, childrens
programming and others comprised up to 22% of total recorded music sales in 2003. We have channels devoted to all of these formats and many other popular musical styles that are not currently heard in many small and medium sized markets, such as
heavy metal, modern electronic dance, disco and blues.



Superserve popular musical formats. We offer more specific programming choices than traditional AM/FM radio generally offers for even the most popular listening formats. For example, on traditional AM/FM radio oldies music is often
generalized on a single format. We segment this category by offering several channels devoted to the music of each decade from the 1940s to the 1990s. We also offer seven channels dedicated to urban formats and seven distinct country
music formats.



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##### Index to Financial Statements

Sports and Entertainment Programming. We offer a broad array of sports and variety programming,
including sports talk, ESPN Radio and ESPN News, the nations only dedicated NASCAR channels, three comedy channels, and an old-time radio channel. Our NASCAR, MTV and VH1 channels are exclusive to XM Radio. The ESPN Radio channel includes
play-by-play NBA and Major League Baseball games including the all-star games, playoffs, championships and World Series; and the channel also carries the college football Bowl Championship Series games. Our ACC, PAC10 and Big Ten channels
offer college football and basketball games.



In 2004, we
announced a multi-year agreement with Major League Baseball (MLB) to broadcast MLB games live nationwide, and to become the Official Satellite Radio provider of Major League Baseball. The agreement also grants us the rights to use the MLB
silhouetted batter logo and the collective marks of all 30 MLB clubs. For the 2005 through 2012 baseball seasons, we will carry both the regular season and the post-season MLB schedule of games, including the World Series. We have created a major
league baseball channel featuring original content, classic MLB games and other archived MLB material and intend to include all MLB programming in our basic service package. We will pay MLB up to $50 million for 2005 and $60 million per year
thereafter through 2012, with $120 million to be deposited into escrow in 2005. MLB has the option to extend the agreement for the 2013, 2014 and 2015 seasons, at the same $60 million annual compensation rate. We will also make incentive payments to
MLB for XM subscribers obtained through MLB and baseball club verifiable promotional programs.



This type of programming is not available in many radio markets and we believe it makes our service appealing to dedicated sports fans and listeners whose tastes are not served by existing AM/FM radio stations.



Local Traffic and Weather Programming. Beginning March
1, 2004, we launched our Instant Traffic and Weather service, a set of audio channels dedicated to keeping drivers and other listeners informed with in-depth up-to-the-moment updates on traffic and weather conditions in local markets. Each market
served has a dedicated channel, so listeners can tune to the channel/city of their choice and rely on instant traffic and weather to help aid their driving and planning decisions. These channels repeat weather and traffic information in a pattern
familiar to listeners. Markets served include Baltimore, Chicago, Dallas/Ft. Worth, Detroit, Houston, Los Angeles, New York City, Orlando, Philadelphia, Phoenix, Pittsburgh, San Francisco/Oakland, St. Louis, Tampa, Washington DC, Boston,
Minneapolis/St. Paul, Seattle, San Diego, Atlanta and Miami. The data is provided by Mobility Technologies for traffic information and by The Weather Channel for weather information. We create the audio for the channels from our headquarters
facility in Washington DC. We believe this is a valuable part of our service offering and that it offers several key advantages over what is currently available on terrestrial radio. These include near instant availability due to the pattern of
repeating information frequently, 24/7 availability of the service and wider availability as compared to terrestrial broadcasts available only to drivers within the coverage area.



A wide range of popular talk radio stars. Over the last two decades talk radio has emerged as a major component of
radio listening. We showcase many well-known talk radio personalities on our channels, including Bob Edwards, Bill OReilly, Sean Hannity, Michael Reagan, Al Franken, Janeane Garofolo, Phil Hendrie, Art Bell, Bruce Williams, Glenn Beck and many
others.



State-of-the-art facilities. We create most of
our music channels (as well as most of our comedy and childrens channels, NASCAR radio and the Open Road trucker channel) at our studio facilities in Washington DC, midtown Manhattan in New York City, and in Nashville at the Country Music Hall
of Fame and Museum. These interconnected facilities comprise an all digital radio complex that is one of the worlds largest, with over 80 sound-proof studios of different configurations. The studios tap a centralized digital database of over
200,000 CDs and more than 1.5 million recordings. We also have two performance studios for visiting artist interviews and performances.



Dedicated, highly skilled staff. Our dedicated and experienced radio programming and production talent and on-air staff includes leading radio and
music experts in their genres. Collectively, they hold over 300 gold records reflecting their involvement with the music industry, have more than a thousand years of radio programming experience, 62 record industry awards, two Emmy awards, four New
York Festival awards and include one Rock and Roll Hall of Fame inductee.



Superior digital sound quality. Our digital signal transmitted via satellite and our terrestrial repeater network provides nationwide, virtually uninterrupted coverage. Our internal research with small groups
of listeners indicates that most listeners cannot distinguish a song played over XM from the CD. Our digital sound quality is a particular benefit for music formats that have strong demand on a nationwide basis but have been relegated to AM stations
with weaker signals due to lack of available FM frequencies. By having specific channels dedicated to classic country, the 1940s and gospel, for example, we provide superior sound quality to formats that are traditionally found only on AM stations.



New Services



In October 2004, we introduced XM Radio Online, an internet radio service
with access to all of XMs commercial-free music channels plus two music channels available only on the internet. XM Radio Online also features two of XMs comedy channels, the Opie & Anthony channel and The Bob Edwards
Show from XM Public Radio. In April 2005, XM will expand its basic service to include the Internet Service XM Radio Online (previously $3.99 per month) and the High Voltage Channel, featuring the talk radio duo Opie & Anthony (previously
$1.99 per month).



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In fall 2004, we introduced XM NavTraffic, the nations first satellite traffic data service. XM
NavTraffic delivers current traffic information directly to a vehicle navigation system and displays local traffic data for the drivers personal route. The driver is able to see the traffic speed for specific roads, accident locations, road
closures and other incidents on the navigation map. XM NavTraffic also suggests alternate routes based on the current traffic conditions. Powered by NAVTEQ Traffic, XM NavTraffic is available for 20 major metropolitan cities across the United States
and is currently available as a standard feature of the 2005 Acura RL. In 2005, XM NavTraffic will be available in certain models of the Cadillac CTS and with certain aftermarket vehicle navigation systems. Honda recently announced that select
models of its Ridgeline truck will come standard with XM NavTraffic.



Subscriber and Advertising Revenue



We
primarily derive revenues from subscriber fees for our satellite radio service. We charge subscribers a monthly fee for over 150 channels of our programming. We also offer premium channels, which customers can subscribe to for an additional monthly
fee. We offer family plan discounts to subscribers who have multiple XM radios. We also offer pre-paid multi-year subscription discounts.



We also derive some revenues from advertising. Our non-commercial free channels, including our traffic and weather channels, provide what we believe is an
attractive advertising medium for national advertisers. We have advertising sales offices in several major media markets to sell directly to advertising agencies and media buying groups. We have sold advertising packages to a variety of advertisers
and agencies, including Honda, ADT, AirTran, UPS, GM, Cingular, Citrix and Sam Goody.



The XM Radio System



Our system provides
satellite radio to the continental United States and coastal waters using radio frequencies allocated by the FCC for satellite radio. These radio frequencies are within a range of frequencies called the S-Band. The XM Radio system is capable of
providing high quality satellite services to XM radios in automobiles, trucks, recreation vehicles and pleasure craft, as well as to fixed or portable XM radios in the home, office or other fixed locations. The XM Radio system uses a network
consisting of two high-power satellites, an uplink facility, and ground-based repeaters primarily in dense urban areas to provide coverage where the satellite signal is obstructed.



Consumer Hardware



XM Radios. We transmit XM content throughout the continental United States to vehicle, portable, home and plug and play radios. Many of our radios
are capable of receiving both XM content and traditional AM/FM stations. Beginning in the fall of 2004 we introduced the third generation of XM radios, offering enhanced features and more attractive pricing than earlier XM radios, as described above
under the heading DistributionBrand Awareness and Other Distribution Arrangements. We plan to continue to expand our product offerings in 2005 with the XM Connect-and-Play technology, new XM2go products and other
offerings.



Common Receiver Platform for Satellite
Radio. We have an agreement with Sirius Radio to develop a common receiver platform for satellite radios enabling consumers to purchase one radio capable of receiving both Sirius Radios and our services. The technology relating to the
common receiver platform is being jointly developed and funded by the two companies, who will share ownership of it. The development of this common receiver platform is consistent with FCC rules requiring interoperability with both licensed
satellite radio systems. As part of the agreement, each company has licensed to the other its intellectual property relating to the common receiver platform and its respective system.



Space Segment



Satellite System. Boeing Satellite Systems (BSS), has built, launched and delivered in-orbit two Boeing 702 high-power satellites for the XM Radio
system. The satellites were launched on March 18, 2001 and May 8, 2001, respectively, and are transmitting the XM signal.



In light of a progressive degradation problem with the solar array output power of XM Rock and XM Roll, we launched our third satellite (XM-3) in February
2005, to be placed into one orbital slot. We will then move XM Roll to be collocated with XM Rock in the other orbital slot. In 2007, we plan to launch XM-4 to replace the collocated XM Rock and XM Roll. In this way, we will have replacement
satellites in orbit and operating prior to the times XM Rock and XM Roll can no longer provide half service in collocated mode. We currently expect XM Rock and XM Roll to operate in collocated mode through the first quarter of 2008. Although we
presently do not intend to launch XM-4 until 2007, we could launch the satellite shortly after completion. Our commitments regarding XM-3 and XM-4 are described under Managements Discussion and Analysis of Financial Condition and Results
of OperationsFuture Operating and Capital Resource Requirements. With this plan, even if there is a problem putting XM-3 into operation, we believe we will be able to launch additional satellites prior to the time the solar array power
problem might cause the broadcast signal strength to fall below minimum acceptable levels.



Based on the consistency of the degradation trends (with no substantial improvement to date) and continuing analyses by BSS and us, we adjusted the estimated useful lives of XM Rock and XM Roll, with effect from
September 2002, to the period running through first quarter 2008 (approximately 6.75 years from launch). We will continue to monitor this situation carefully and may re-adjust the estimated useful lives of our in-orbit satellites based on future
information.



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In July 2004, we reached agreement with insurers covering 80% of the aggregate sum insured relating to
the progressive degradation problem with the solar array output power of XM Rock and XM Roll. We received a settlement rate equal to 44.5% of the proportionate amount covered by each of these insurers, representing a total recovery of approximately
$142 million. This settlement resolves any issues about the amount of loss sustained, includes a waiver by the settling insurance companies of any reductions based on salvage value, terminates any further risk to the settling insurers under the
policies and ends any other rights the settling insurers might have with regard to XM Rock and XM Roll or revenues generated by our continuing use of those satellites. We have collected all amounts due under the settlement. The portion of the
insurance proceeds related to claim payments was recorded as a reduction to the carrying values of XM Rock and XM Roll. In August 2004, we filed for arbitration to collect the remaining 20% of the sum insured utilizing the third-party dispute
resolution procedures under the policy.



Satellite
Transmission. Our satellites are deployed at 85 West Longitude and 115 West Longitude. At their designated orbital locations, the satellites receive audio signals from our programming center and retransmit the signals across the continental
United States. The satellites are 30° apart in longitude in order to enhance the probability of clear line-of-sight communication between the satellites and XM mobile radios.



The transmission coverage areas, or footprints, of our satellites encompass the 48 contiguous states and nearby coastal
waters. We have tailored these footprints to provide nearly uniform availability over the United States and to minimize transmission spillage across the United States borders into Canada and Mexico. Through a joint venture, we also have applied for
a broadcast license in Canada.



Our satellites transmit audio
programming within a 12.5 MHz bandwidth operating in the S-Band radio frequency spectrum that the FCC has allocated for our exclusive use. Megahertz is a unit of measurement of frequency. This 12.5 MHz bandwidth is subdivided into six carrier
transmission signals, four signals transmitted from our satellites and two signals transmitted by the terrestrial repeater network. The audio programming for XM Radio is carried on two satellite signals, and the remaining two satellite signals and
the terrestrial repeater signals repeat the audio programming to enhance overall signal reception. The transmission of higher quality sound requires the use of more kilobits per second than the transmission of lesser quality sound. We are currently
using our allocated bandwidth in such a way as to provide over 150 channels in 2005.



Insurance. We bear the risk of loss for our satellites, and we have obtained insurance to cover that risk. We obtain launch and in-orbit insurance policies from global space insurance underwriters. These
policies generally provide coverage for a total, constructive total or partial loss of the satellites that occurs during a period after launch. Our insurance will not cover the full cost of constructing, launching and insuring new satellites, nor
will it protect us from the adverse effect on our business operations due to the loss of a satellite. Our policies contain standard commercial satellite insurance provisions, including standard coverage exclusions. Since we have settled our claim on
XM Rock and XM Roll with most of our insurers under our in-orbit insurance policy, as described above under the heading Space SegmentSatellite System; XM Rock and XM Roll no longer have in-orbit coverage with the settling insurers.
We acquired and paid for launch and in-orbit insurance in January 2005 in connection with the launch of XM-3.



Ground Segment



Satellite Control. Our satellites are monitored by telemetry, tracking and control stations and are controlled by a spacecraft control station.
Each of the stations has a backup station. We have a contract with Telesat Canada, Inc., an experienced satellite operator, to perform the telemetry, tracking and control functions.



Broadcast Facility. Programming from both our studios and external sources is sent to our broadcast facility in
Washington, DC, which packages and retransmits signals to our satellites through the uplink station. In addition, financial services and certain administrative support are carried on at our Washington, DC facilities. Communications traffic between
the various XM Radio facilities is controlled by the network operating center. The network operating center monitors satellite signals and the terrestrial repeater network to ensure that the XM Radio system is operating properly. We have designed
and installed fault detection diagnostic systems to detect various system failures before they significantly impact our quality of service.



Terrestrial Repeaters. Our terrestrial repeater system of approximately 800 repeaters in approximately 60 markets supplements the coverage of our
satellites. In some areas, satellite signals may be subject to blockages from tall buildings and other obstructions. Due to the satellites longitudinal separation, in most circumstances where reception is obscured from one satellite, XM Radio
is still available from the other satellite. In some urban areas with a high concentration of tall buildings, however, line-of-sight obstructions to both satellites may be more frequent. In such areas, we have installed and may continue to install
terrestrial repeaters to facilitate signal reception. Terrestrial repeaters are ground-based electronics equipment installed on rooftops or existing tower structures, where they receive the signal from one of the satellites, amplify it and
retransmit it at significantly higher signal strength to overcome any satellite signal obstruction.



Competition



We face
competition for both listeners and advertising dollars. In addition to pre-recorded entertainment purchased or playing in cars, homes and using portable players, we compete most directly with the following providers of radio or other audio services:



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Sirius Satellite Radio



Our direct competitor in satellite radio service is Sirius Radio, the only other FCC licensee for satellite radio service in
the United States. Sirius has announced that it had 1,143,258 subscribers as of December 31, 2004. Sirius broadcasts over 120 channels and offers certain programming that we do not offer. Sirius radio service is offered as an option on various car
model brands, certain of which do not also offer XM radio.



Traditional AM/FM Radio



Our
competition also includes traditional AM/FM radio. Unlike XM Radio, traditional AM/FM radio already has had a well established market for its services for many years and generally offers free broadcast reception paid for by commercial advertising
rather than by a subscription fee. Also, many radio stations offer information programming of a local nature, such as local news and sports, which XM Radio cannot offer as effectively as local radio. The AM/FM radio broadcasting industry is highly
competitive. Radio stations compete for listeners and advertising revenues directly with other radio stations within their markets on the basis of a variety of factors, including



| |  |  | program content;
| | - |  | ----------------



| |  |  | on-air talent;
| | - |  | --------------



| |  |  | transmitter power;
| | - |  | ------------------



| |  |  | source frequency;
| | - |  | -----------------



| |  |  | audience characteristics;
| | - |  | -------------------------



| |  |  | local program acceptance; and
| | - |  | -----------------------------



| |  |  | the number and characteristics of other radio stations in the market.
| | - |  | ---------------------------------------------------------------------



Currently, traditional AM/FM radio stations broadcast by means of analog signals, not digital transmission. We believe, however, that in the future
traditional AM/FM radio broadcasters will be able to transmit digitally into the bandwidth occupied by current AM/FM stations. Digital broadcasting offers higher sound quality than traditional analog signals. iBiquity Digital recently received FCC
approval to begin digital broadcasting in the AM and FM bands. Digital radio broadcast services have been expanding, and an increasing number of radio stations in the U.S. have begun digital broadcasting or are in the process of converting to
digital broadcasting. The technology permits broadcasters to transmit as many as five stations per frequency. To the extent that traditional AM/FM radio stations adopt digital transmission technology such as that offered by iBiquity and to the
extent such technology allows signal quality that rivals our own, any competitive advantage that we enjoy over traditional radio because of our digital signal would be lessened. Some radio stations also have begun reducing the number of commercials
per hour, expanding the range of music played on the air and experimenting with new formats in order to compete more directly with satellite radio. Several major radio companies recently banded together to launch an advertising campaign designed to
assert the benefits of traditional local AM/FM radio.



Internet Radio and Downloading Devices



Internet radio broadcasts have no geographic limitations and can provide listeners with radio programming from around the country and the world. According to an Arbitron study, 30 million Americans listened to internet radio each week in
January 2004. Although we believe that the current sound quality of Internet radio is below standard and may vary depending on factors that can distort or interrupt the broadcast, such as network traffic, we expect that improvements from higher
bandwidths, faster modems and wider programming selection may make Internet radio a more significant competitor in the future, in particular with our new XM Radio Online service.



There are a number of Internet-based audio formats in existence or in development that compete directly with XM Radio. For
example, Internet users with the appropriate hardware and software can download sound files for free or for a nominal charge and play them from their personal computers or from specialized portable players or compact disk players. The Apple iPod is
a portable digital music player that sells for approximately $100-$400 and allows users to download and purchase music through Apples iTunes Music Store, which features over 1 million songs and 8,000 audio books, as well as convert music on
compact disc to digital files. Apple sold over 4.4 million iPods during its fiscal 2004 year. The iPod enables consumers to buy and store up to 10,000 songs. In addition, iPods are compatible with certain car stereos and various home speaker
systems. Availability of music in the public MP3 audio standard has been growing in recent years with sound files available on the websites of online music retailers, artists and record labels and through numerous file sharing software programs.
These MP3 files can be played instantly, burned to a compact disk or stored in various portable players available to consumers. Although presently available formats have drawbacks such as hardware requirements and download bandwidth constraints,
which we believe would make XM Radio a more attractive option to consumers, Internet-based audio formats may become increasingly competitive as quality improves and costs are reduced.



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Direct Broadcast Satellite and Cable Audio



A number of companies provide specialized audio service through either
direct broadcast satellite or cable audio systems. These services are targeted to fixed locations, mostly in-home. The radio service offered by direct broadcast satellite and cable audio is often included as part of a package of digital services
with video service, and video customers therefore generally do not pay an additional monthly charge for the audio service.



Traffic News Services



A number of providers will also compete with the XM NavTraffic service. In December 2004, Sirius announced an agreement with NAVTEQ to provide real-time
traffic data to vehicles over its satellite radio network. Initially, the service will cover 30 markets, with traffic information being integrated into new in-car navigation systems. The service will provide regularly updated traffic information and
help select alternative routes. Clear Channel and Tele Atlas announced in 2004 that they are now able to deliver nationwide traffic information for the top 50 markets to in-vehicle navigation systems using RDS/TMC, the radio broadcast standard
technology for delivering traffic and travel information to drivers. There are also services that provide real-time traffic information to Internet-enabled cell phones or other hand held devices, but these are available only in limited markets.



Regulatory Matters



XM Radio and Sirius Radio received licenses from the FCC in October 1997 to
construct and operate satellite radio service systems. The FCC allocated 25 MHz for the service in a range of radio frequencies known as the S-Band, divided evenly between the two licensees.



As the owner of one of two FCC licenses to operate a commercial satellite
radio service in the United States, we are subject to regulatory oversight by the FCC. The operation of our system is subject to significant regulation by the FCC under authority granted under the Communications Act and related federal law.
Non-compliance by us with FCC rules and regulations could result in fines, additional license conditions, license revocation or other detrimental FCC actions. Any of these FCC actions may harm our business. There is no guarantee that the rules and
regulations of the FCC will continue to support our business plan.



Our FCC licenses, including our satellite licenses, are held by a subsidiary wholly owned by XM Radio. We are authorized to operate four satellites. The license for the XM Rock satellite expires in March 2009. The license for the XM Roll
satellite expires in May 2009. In February 2004, we applied to the FCC for authority to launch and operate XM-3 and XM-4 and to collocate XM Roll with XM Rock at the 115W orbital location. The FCC granted this application in January 2005. We need
authority from the FCC to operate our satellites at their precise orbital locations. The license term for each of XM-3 and XM-4 is for eight years and will begin on the date we certify to the FCC that each satellite has been successfully launched
and put into operation. We can seek authority from the FCC to operate our satellites beyond the expiration of their license terms. The U.S. government is responsible for coordinating our satellites through the International Telecommunication Union
(ITU) and must make periodic filings at the ITU.



In April
2004, in response to our introduction of traffic and weather channels, the National Association of Broadcasters (NAB) filed a Petition for Declaratory Ruling asking the FCC to prohibit us and Sirius Radio from (i) offering locally
oriented services on nationally distributed channels and (ii) using any technology that would permit delivery of content that would be aired on a receiver in one location that differs from content aired on a receiver in a different location.
In November 2004, the NAB withdrew this Petition but also stated that it may file a similar Petition in the future.



The FCC has indicated that it may in the future impose public service obligations, such as channel set-asides for educational programming, on satellite
radio licensees. In response to the NAB Petition for Declaratory Ruling, some entities have requested that the FCC take action to impose public service obligations on satellite radio licensees.



In August 2004, the FCC initiated a proceeding to determine whether it should
extend Emergency Alert System (EAS) obligations to satellite radio operators. We cannot predict what EAS obligations the FCC will impose on us or whether we will be able to comply with these obligations without significant cost.



The FCCs rules require interoperability with all licensed satellite
radio systems that are operational or under construction. The FCC conditioned our license on certification by us that our final receiver design is interoperable with the final receiver design of the other licensee, Sirius Radio, which uses a
different transmission technology than we use. We have previously certified and reconfirmed that we comply with this obligation. Although we believe that we are currently in compliance, the FCC has not expressly acknowledged our compliance. We have
signed an agreement with Sirius Radio to develop a common receiver platform combining the companies proprietary chipsets, but we have not completed final design of an operational radio using this platform. If the FCC were to interpret the
interoperability requirement in a manner that mandates a particular radio design, complying with this requirement could make the radios more difficult and costly to manufacture. In January 2005, the FCC asked us as well as Sirius to file a report
detailing the current status of efforts to develop an interoperable receiver.



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The FCC is currently conducting a rulemaking proceeding to establish rules for terrestrial repeater
transmitters, which we have deployed and plan to continue deploying to fill in gaps in satellite coverage. The FCC has proposed to permit us to deploy these facilities. Specifically, the FCC has proposed a form of blanket licensing for terrestrial
repeaters and service rules which would prohibit satellite radio licensees from using terrestrial repeating transmitters to originate local programming or transmit signals other than those received from the satellite radio satellites. Various
parties, including the National Association of Broadcasters, Wireless Communications Service (WCS) licensees, Multipoint Distribution Service (MDS) licensees, and Instructional Television Fixed Service (ITFS) licensees have asked the FCC to:



| |  |  | limit the number of repeaters operating at greater than 2 kW EIRP that may be deployed;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | limit the power level of the repeaters operating at greater than 2 kW EIRP that are deployed;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | delay consideration of terrestrial repeater rules until XM Radio and Sirius Radio provide additional information regarding planned terrestrial repeaters;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require individual licensing of each terrestrial repeater; and
| | - |  | --------------------------------------------------------------



| |  |  | impose a waiting period on the use of repeaters in order to determine if signal reception problems can be resolved through other means.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



Our deployment of terrestrial repeaters may be impacted by whatever rules the
FCC issues in this regard, although we believe these impacts are not likely to be material to our business. We have made a proposal to the FCC to set a 40 kW EIRP limit or, alternatively, a limit of 18 kW EIRP calculated by averaging power over 360
degrees, on the power of terrestrial repeaters. We have also proposed to coordinate with WCS licensees in certain cases prior to operating terrestrial repeaters above 2 kW EIRP. The coordination may include our providing filters in certain instances
to limit the interference WCS licensees claim will result from our operation of repeaters operating above 2 kW EIRP.



On November 1, 2001, the FCC issued a further request for comments on various proposals for permanent rules for the operation of terrestrial repeaters. We
have opposed some of these proposals. Some of the FCCs proposals and proposals made by other parties, if adopted by the FCC, could impact our ability to operate terrestrial repeaters, including requiring us to reduce the power of some of our
current repeaters, and subject us to monetary liability to compensate other FCC licensees that claim they receive interference from our repeaters.



We are currently operating terrestrial repeaters pursuant to Special Temporary Authority (STA) granted by the FCC in September 2001. This STA
authorizes us to operate our terrestrial repeaters for commercial service on a non-interference basis. Because the STA was conditioned on a non-interference basis, we are required to either reduce power or cease operating a repeater upon receipt of
a written complaint of interference. One party that opposed XM Radios request for STA has filed an application for review of the decision granting us an STA asking the FCC to reverse the decision and deny XM Radios STA request. This
Application for Review is pending. This STA expired on March 18, 2002. On March 11, 2002, we applied for an extension of this STA. Pursuant to the FCCs rules, we are permitted to and have been continuing to operate our terrestrial repeaters
pursuant to the STA pending a final determination on our extension request.



On November 26, 2003, we applied for STA to operate an additional forty-nine repeaters in new markets that are not authorized under our current STA to operate repeaters. This request was opposed by a coalition of WCS
licensees claiming that grant of this request would result in interference and would prejudice the outcome of the final rules governing repeaters. Our request was granted in September 2004 over these objections. This STA expires in March 2005, but
we can seek an extension.



The FCC also may adopt limits on
emissions of terrestrial repeaters to protect other services using nearby frequencies. While we believe that we will meet any reasonable non-interference standard for terrestrial repeaters, the FCC has no specific standard at this time, and the
application of such limits might increase our cost of using repeaters. Although we are optimistic that we will be able to construct and use terrestrial repeaters as needed, the development and implementation of the FCCs ultimate rules might
delay this process or restrict our ability to do so. We believe that it is not likely that an FCC order would materially impact the terrestrial repeater system design currently in operation.



We are required to coordinate the XM Radio system with systems operating in
the same frequency bands in adjacent countries. Canada and Mexico are the countries whose radio systems are most likely to be affected by satellite radio. The United States government, which conducts the coordination process, has entered into
coordination agreements with both the Canadian and Mexican governments.



We operate the communication uplinks between our satellites and earth stations in Washington, DC and Atlanta, GA in a band of radio frequencies that are used for several other services, such as fixed services, broadcast auxiliary services,
electronic news gathering services, and uplink feeder links for mobile satellite services. The FCC has granted us licenses for these earth stations. The license for our Washington, DC earth station expires in March 2011 and the license for our
Atlanta earth station expires in August 2019. We can seek authority from the FCC to extend these license terms.



14



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##### Table of Contents

##### Index to Financial Statements

We also need to protect our system from out-of-band emissions from licensees operating in adjacent
frequency bands:



| |  |  | WCS licensees operating in frequency bands adjacent to the satellite radios S-Band allocation must comply with certain out-of-band emissions limits imposed by the FCC to
protect satellite radio systems. These limits, however, are less stringent than those we proposed.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In July 2002, the FCC requested comment on a report issued by the National Telecommunications and Information Administration (NTIA) in which NTIA proposed to relocate
current Department of Defense (DOD) operations from the 1710-1755 MHz band to the 2360-2395 MHz band. In the event that these DOD operations are relocated to the 2360-2395 MHz band, we and Sirius Radio jointly proposed that the FCC apply
the same out-of-band emissions limits to these relocated users that are applied to WCS licensees. In November 2002, the FCC released an Order in this proceeding but did not address our concerns. We and Sirius Radio filed a Petition for
Reconsideration of this decision asking the FCC to consider our concerns. This Petition was denied in September 2004 because, in July 2003, the FCC initiated a separate rulemaking proceeding to implement NTIAs proposal to allow DOD and other
Federal government agencies to operate in the 2360-2395 MHz band in which the FCC proposed to address our concerns. The FCC also proposed to expand the frequency band used for non-governmental aeronautical telemetry from 2360-2385 MHz to 2360-2395
MHz. In this rulemaking, the FCC sought comment on what out-of-band emissions limit is necessary to protect satellite radio reception from interference. We and Sirius Radio jointly filed Comments proposing that the FCC apply the same out-of-band
emissions limit to new users in the 2360-2395 MHz band that is applied to WCS licensees. This proposal was opposed by non-governmental aeronautical telemetry operators that claimed that this out-of-band emissions limit is not necessary to protect
satellite radio reception from interference. In October 2004, the FCC declined to adopt the out-of-band emission limit we jointly proposed with Sirius Radio and instead adopted a less stringent limit.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In February 2002, the FCC initiated a rulemaking proceeding regarding rules for future licensees in the 2385-2390 MHz band, which will be able to provide both fixed and mobile
services. We proposed that the FCC apply the same out-of-band emission limits on these licensees that are applied to WCS licensees. In May 2002, the FCC issued a decision rejecting this proposal. In July 2002, we filed a Petition for Reconsideration
of this decision which is pending. In July 2003, the FCC initiated a rulemaking proposing to reverse its previous decision to allow these new licensees to operate in the 2385-2390 MHz band. In October 2004, the FCC adopted its proposal.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interference from other devices that operate on
an unlicensed basis may also adversely affect our signal:



| |  |  | In April 1998, the FCC proposed to establish rules for radio frequency (RF) lighting devices that operate in an adjacent radio frequency band. We opposed the proposal on
the grounds that the proliferation of this new kind of lighting and its proposed emissions limits, particularly if used for street lighting, may interfere with XM Radio. Sirius Radio also opposed this proposal. Jointly with Sirius Radio, we proposed
to the FCC an emissions limit for these RF lighting devices that we believe will protect DARS receivers from interference. In addition, we proposed that the FCC require existing RF lighting devices that exceed our proposed limit to cease operations.
A manufacturer of RF lights conducted tests which it claimed demonstrated that RF lights do not cause interference to our receivers. While our proposal was pending, these RF lights could be produced and used, which could adversely affect our signal
quality. In May 2003, the FCC terminated this proceeding because no party expressed a continuing interest in producing these RF lights. In July 2003, we and Sirius Radio asked the FCC to clarify that, by terminating this proceeding without
establishing any rules, the FCC is prohibiting RF lighting devices from operating in the adjacent radio frequency band and that, before the FCC considers permitting any such operations, it will either establish another rulemaking or provide us with
ample notice to object to any equipment certification application for an RF light designed to operate in this adjacent radio frequency band. In November 2004, the FCC declined to issue our requested clarification.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In May 2000, the FCC proposed to amend its rules to allow for the operation of devices incorporating ultra-wideband (UWB) technology on an unlicensed basis. We opposed this proposal
on the basis that the operation of these devices may interfere with XM Radio. Sirius Radio also opposed this proposal. In February 2002, the FCC decided to allow for the operation of these devices and, in doing so, adopted out-of-band emissions
limits for these devices that are less stringent than XM Radio and Sirius Radio proposed. In addition, the FCC stated that it intends to review and potentially relax these emissions limits and may allow for the operation of additional types of UWB
devices in the future. Jointly with Sirius Radio, we filed a Petition for Reconsideration of this decision and asked that the FCC impose stricter emissions limits on UWB devices. In February 2003, the FCC denied our Petition for Reconsideration and
did not impose the stricter emission limits that we requested. In addition, the FCC proposed to authorize additional types of UWB devices which may interfere with XM Radios operations. In August 2003, we and Sirius Radio jointly filed Comments
on an FCC proposal to allow UWB vehicular radar systems to operate in the 3.1 to 10.6 GHz band. We have asked the FCC to refrain from adopting its proposal until proponents of this technology demonstrate how they will avoid causing interference to
satellite radio. To the extent the FCC adopts its proposal without requiring this information, we asked the FCC to provide us with notice and opportunity to object to any equipment certification application for a UWB vehicular radar system in the
3.1 to 10.6 GHz band. In December 2004, the FCC issued a decision declining to allow UWB vehicular radar systems to operate in the 3.1 to 10.6 GHz band.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Index to Financial Statements

| |  |  | In May 2001, the FCC issued a notice of proposed rulemaking seeking to facilitate the development of new unlicensed spread spectrum wireless devices operating in a frequency band
adjacent to XM Radio. XM Radio and Sirius Radio opposed this proposal on the basis that the operation of these devices pursuant to the FCCs current emissions limits may interfere with XM Radios operations. In May 2002, the FCC issued a
decision rejecting our opposition.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In October 2001, the FCC initiated a rulemaking proceeding reviewing its rules for unlicensed devices. XM Radio proposed in this proceeding that the FCC adopt out-of-band emissions
limits for certain unlicensed devices sufficient to protect our system. XM Radio proposed that the FCC apply these emissions limits to products sold 18 months after a final rule is published. Sirius Radio filed a similar proposal. Some manufacturers
of unlicensed devices opposed these limits on the grounds that they would be too stringent and costly for them to meet. In July 2003, the FCC rejected the proposals of XM Radio and Sirius Radio on the grounds that they were beyond the scope of this
proceeding.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 2002, the FCC issued a notice of inquiry seeking input on whether it should authorize an increase in the power of unlicensed devices that operate in rural areas. Jointly
with Sirius Radio, we opposed this proposal because of the potential for unlicensed devices operating with increased power to interfere with satellite radio. In December 2003, the FCC initiated a rulemaking proceeding proposing to authorize an
increase in the power of unlicensed devices that operate in rural areas. In May 2004, jointly with Sirius Radio, we opposed this proposal. This proceeding is pending.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The FCC order granting our license determined that because we are a private satellite system providing a subscription
service on a non-common carrier basis, we would not be subject to the FCCs foreign ownership restrictions. However, such restrictions would apply to us if we were to offer non-subscription services, which may appear more lucrative to potential
advertisers than subscription services. The FCC also stated in its order that it may reconsider its decision not to subject satellite radio licensees to its foreign ownership restrictions.



In April 2004, the FCC initiated a proceeding with respect to terrestrial
digital radio in which it also inquired as to whether it should take action to prevent recording and Internet redistribution of musical recordings that are part of satellite radio broadcasts. In June 2004, we filed comments urging the FCC not to
take any action in this proceeding with respect to satellite radio. Sirius Radio filed a similar request. This proceeding is pending.



Intellectual Property



System Technology



We own the design of our system, including aspects of the technology used in communicating from the satellites, the design of the repeater network and
certain aspects of the design of and features that may be used in our radios. We have joint ownership of or a license to use the technology developed by the radio and chipset manufacturers. We also license various other technologies used in our
system. We have not acquired any intellectual property rights in the technology used in constructing and launching our satellites.



Our system design, our repeater system design and the specifications we supplied to our radio and chipset manufacturers incorporate or may in the future
incorporate some intellectual property licensed to us on a non- exclusive basis by WorldSpace, who has used this technology in its own non-United States satellite radio system. We also have the right to sublicense the licensed technology to any
third party, including chipset manufacturers, terrestrial repeater manufacturers and receiver manufacturers in connection with the XM Radio system.



We believe that the intellectual property rights used in our system were independently developed or duly licensed by us or by the technology companies who
supplied portions of our system. We cannot assure you, however, that third parties will not bring suit against us for patent or other infringement of intellectual property rights.



We have an agreement with Sirius Radio to develop a common receiver platform to facilitate the ability of consumers to
purchase one radio capable of receiving both our and Sirius Radios services. The technology relating to this common receiver platform will be jointly developed, funded and owned by the two companies. As part of the agreement, each company has
licensed to the other its intellectual property relating to the common receiver platform and to its system.



We currently own 33 patents relating to various aspects of our system, XM radios and their features, and have numerous other patents pending before the
United States Patent and Trademark Office.



Copyrights to
Programming



We must maintain music programming
royalty arrangements with and pay license fees to Broadcast Music, Inc. (BMI), the American Society of Composers, Authors and Publishers (ASCAP) and SESAC, Inc. These organizations negotiate with copyright users, collect royalties and distribute
them to songwriters and music publishers. We have reached five-year agreements with ASCAP and SESAC which establish the license fee amounts owed to those entities. We expect to establish license fees with BMI through negotiation. The royalty
arrangements with BMI may be more costly than anticipated.



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##### Table of Contents

##### Index to Financial Statements

Under the Digital Performance Right in Sound Recordings Act of 1995 and the Digital Millennium Copyright
Act of 1998, we also have to negotiate royalty arrangements with the copyright owners of the sound recordings. We have reached agreement with the Recording Industry Association of America, through its unincorporated division, SoundExchange,
establishing royalty payment arrangements for these performance rights.



The XM Trademark



We believe that XM
Radio will be seen as the complement to AM and FM radio. We have registered the trademark XM with the United States Patent and Trademark Office in connection with the transmission services offered by our company. Our brand name and logo
is generally prominently displayed on the surface of XM radios together with the radio manufacturers brand name. This identifies the equipment as being XM Radio-compatible and builds awareness of XM Radio. We intend to maintain our trademark
and registration. We are not aware of any material claims of infringement or other challenges to our right to use the XM trademark in the United States. We have also registered and intend to maintain trademarks of the names of certain of
our channels.



Personnel



As of December 31, 2004, we had 577 employees. In addition, we rely upon a
number of consultants, other advisors and outsourced relationships. The extent and timing of any increase in staffing will depend on the availability of qualified personnel and other developments in our business. None of our employees are
represented by a labor union, and we believe that our relationship with our employees is good.



RISK FACTORS



Potential investors are urged to read and consider the risk factors relating to an investment in XM Satellite Radio Holdings Inc. contained herein. Before making an investment decision, you should carefully
consider these risks as well as other information we include or incorporate by reference in this Annual Report on Form 10-K. The risks and uncertainties we have described are not the only ones facing our company. Additional risks and uncertainties
not presently known to us or that we currently consider immaterial may also affect our business operations.



You could lose money on your investment because we are in the early stages of generating revenues.



Unless we generate significant revenues, we may not be able to operate our business and service our indebtedness and you
could lose money on your investment. Our ability to generate revenues and ultimately to become profitable will depend upon several factors, including:



| |  |  | whether we can attract and retain enough subscribers to XM Radio;
| | - |  | -----------------------------------------------------------------



| |  |  | whether our XM Radio system continues to operate at an acceptable level;
| | - |  | ------------------------------------------------------------------------



| |  |  | our ability to maintain or lower the costs of obtaining and retaining subscribers; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | whether we compete successfully.
| | - |  | --------------------------------



Our aggregate expenditures and losses have been significant and are expected to grow.



As of December 31, 2004, we had incurred capital expenditures of $1.2 billion and aggregate net losses approximating $2.1
billion from our inception through December 31, 2004. We expect our aggregate net losses and negative cash flow to grow as we make payments under our various distribution contracts, incur marketing and subscriber acquisition costs and make interest
payments on our outstanding indebtedness. If we are unable ultimately to generate sufficient revenues to become profitable and have positive cash flow, you could lose money on your investment.



Demand for our service may be insufficient for us to become profitable.



Because we offer a relatively new service, we cannot estimate with any
certainty the potential consumer demand for such a service or the degree to which we will meet that demand. Among other things, continuing and increased consumer acceptance of XM Radio will depend upon:



| |  |  | whether we obtain, produce and market high quality programming consistent with consumers tastes;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | the willingness of consumers, on a mass-market basis, to pay subscription fees to obtain radio service;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | the cost and availability of XM radios; and
| | - |  | -------------------------------------------



| |  |  | the marketing and pricing strategies that we employ and that are employed by our competitors.
| | - |  | ---------------------------------------------------------------------------------------------



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##### Index to Financial Statements

If demand for our service does not develop and increase as expected, we may not be able to generate
enough revenues to generate positive cash flow or become profitable.



Our
inability to retain customers, including those who purchase or lease vehicles that include a subscription to our service, could adversely affect our financial performance.



| |  |  | We cannot predict how successful we will be at retaining customers who purchase or lease vehicles that include a subscription to our service as part of the promotion of our product.
Currently, we retain approximately 60% of the customers who receive a promotional subscription as part of the purchase or lease of a new vehicle, but that percentage does vary over time and the amount of data on the percentage is limited. We do not
know if the percentage will change as the number of customers with promotional subscriptions increases.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We experience subscriber turnover, or churn, with respect to our customers as well. Because we have been in commercial operations for a relatively short period of time, we cannot
predict the amount of churn we will experience over the longer term.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our inability to retain customers who purchase or lease new vehicles with our service beyond the promotional period and subscriber turnover could adversely affect our financial performance and results of operations.



Higher than expected subscriber acquisition costs could adversely affect
our financial performance.



We are still spending
substantial funds on advertising and marketing and in transactions with car and radio manufacturers and other parties to obtain or as part of the expense of attracting new subscribers. Although we have recently been able to reduce our subscriber
acquisition cost on a per subscriber basis and cost per gross addition, our ability to achieve cash flow breakeven within the expected timeframe depends on our ability to continue to maintain or lower these costs. If the costs of attracting new
subscribers or incentivizing other parties are greater than expected, our financial performance and results of operations could be adversely affected.



Large payment obligations under our distribution agreement with General Motors and other agreements may prevent us from becoming profitable or from achieving
profitability in a timely manner.



We have significant
payment obligations under our long-term distribution agreement with General Motors for the installation of XM radios in General Motors vehicles and the distribution of our service to the exclusion of other satellite radio services. These payment
obligations, which could total several hundred million dollars over the life of the contract, may prevent us from becoming profitable. A significant portion of these payments are fixed in amount, and we must pay these amounts even if General Motors
does not continue to meet or exceed performance targets in the contract. Although this agreement is subject to renegotiation in certain limited circumstances, we cannot predict the outcome of any such renegotiation. We also have significant payment
obligations under other agreements, including $50 million or $60 million per year under our recently announced agreement with Major League Baseball (MLB) to become the Official Satellite Radio Network of Major League Baseball. These payment
obligations could significantly delay our becoming profitable.



Failure to
timely replace our existing satellites could damage our business.



We have been disclosing since the third quarter of 2001 a progressive degradation problem with the solar array output power of Boeing 702 class satellites, including both XM Rock and XM Roll. Based on the consistency of the degradation
trends and continuing analyses by BSS and us, our management adjusted the estimated useful lives of our in-orbit satellites, with effect from September 2002, to the period running through first quarter 2008 (approximately 6.75 years from launch). We
launched our XM-3 satellite in February 2005, to be placed in one of our orbital slots. We will then move XM Roll to be collocated with XM Rock in the other orbital slot (which would allow partial use of XM Rock and XM Roll through the first quarter
of 2008). With this plan, even in the event there is a problem putting XM-3 into operation, we believe we will be able to launch additional satellites prior to the time the solar array power problem might cause the broadcast signal strength to fall
below minimum acceptable levels. However, we cannot assure you that such actions will allow us to maintain adequate broadcast signal strength, particularly in the event of a launch or operational failure of either XM-3 or XM-4. If either XM Rock or
XM Roll were to fail or suffer unanticipated additional performance degradation prematurely, or if there was a launch or operational failure of either XM-3 or XM-4, it likely would affect the quality of our service, and might interrupt the
continuation of our service and harm our business. This harm would continue until we successfully launched and operated one or more additional satellites.



A number of other factors could decrease the useful lives of our satellites, including:



| |  |  | defects in construction;
| | - |  | ------------------------



| |  |  | loss of on board station-keeping system;
| | - |  | ----------------------------------------



| |  |  | failure of satellite components that are not protected by back-up units;
| | - |  | ------------------------------------------------------------------------



| |  |  | electrostatic storms; and
| | - |  | -------------------------



| |  |  | collisions with other objects in space.
| | - |  | ---------------------------------------



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##### Index to Financial Statements

In addition, our network of terrestrial repeaters communicates principally with one satellite. If the
satellite communicating with the repeater network fails unexpectedly, we would have to repoint all the repeaters to communicate with the other satellite. This would result in a degradation of service that could last several days and could harm our
business.



Potential losses may not be covered by insurance.



Insurance proceeds may not fully cover our losses. For example, our
insurance may not cover the full cost of constructing, launching and insuring additional satellites, nor will it cover and we do not have protection against business interruption, loss of business or similar losses. Also, our insurance contains
customary exclusions, salvage value provisions, material change and other conditions that could limit our recovery. Further, any insurance proceeds may not be received on a timely basis in order to construct and launch additional satellites or take
other remedial measures. In addition, some of our policies are subject to limitations involving large deductibles or co-payments and policy limits that may not be sufficient to cover losses. If we experience a loss that is uninsured or that exceeds
policy limits, this may impair our ability to make timely payments on our outstanding notes and other financial obligations.



Competition from Sirius Satellite Radio and traditional and emerging audio entertainment providers could adversely affect our revenues.



In seeking market acceptance of our service, we encounter competition for
both listeners and advertising revenues from many sources, including Sirius Satellite Radio, the other U.S. satellite radio licensee; traditional and digital AM/FM radio; Internet based audio providers; MP3 players; direct broadcast satellite
television audio service; and cable systems that carry audio service. Sirius has announced that it had 1,143,258 subscribers as of December 31, 2004. Sirius broadcasts over 120 channels and offers certain programming that we do not offer. Sirius
radio service is offered as an option on various car model brands, certain of which do not also offer XM radio.



Unlike XM Radio, traditional AM/FM radio already has a well-established and dominant market presence for its services and generally offers free broadcast
reception supported by commercial advertising, rather than by a subscription fee. Also, many radio stations offer information programming of a local nature, such as news and sports reports, which XM Radio is not expected to offer as effectively as
local radio, or at all. To the extent that consumers place a high value on these features of traditional AM/FM radio, we are at a competitive disadvantage to the dominant providers of audio entertainment services. Some radio stations have begun
reducing the number of commercials per hour, expanding the range of music played on the air and experimenting with new formats in order to compete more directly with satellite radio. Several major radio companies recently launched an advertising
campaign designed to assert the benefits of traditional local AM/FM radio.



Digital radio broadcast services have been expanding, and an increasing number of radio stations in the U.S. have begun digital broadcasting or are in the process of converting to digital broadcasting. The technology
permits broadcasters to transmit as many as five stations per frequency. To the extent that traditional AM/FM radio stations adopt digital transmission technology such as that offered by iBiquity and to the extent such technology allows signal
quality that rivals our own, any competitive advantage that we enjoy over traditional radio because of our digital signal would be lessened.



Internet radio broadcasts have no geographic limitations and can provide listeners with radio programming from around the country and the world. According
to an Arbitron study, 30 million Americans listened to internet radio each week in January 2004. We expect that improvements from higher bandwidths, faster modems and wider programming selection will make Internet radio increasingly competitive, in
particular with our new XM internet service.



The Apple iPod, a
portable digital music player that stores up to 10,000 songs, allows users to download and purchase music through Apples iTunes Music Store, which features over 1 million songs and 8,000 audio books. Apple sold over 4.4 million iPods during
its fiscal 2004 year. The iPod is also compatible with certain car stereos and various home speaker systems.



We may need additional funding for our business plan and additional financing might not be available.



Although we believe we have sufficient cash and credit facilities available to fund our operations through the date on which we expect our business to
begin generating positive cash flow, we may need additional financing due to future developments or changes in our business plan. In addition, our actual funding requirements could vary materially from our current estimates. If additional financing
is needed, we may not be able to raise sufficient funds on favorable terms or at all. If we fail to obtain any necessary financing on a timely basis, a number of adverse effects could occur. We could default on our commitments to creditors or others
and may have to seek a purchaser for our business or assets.



We need to
obtain rights to programming, which could be more costly than anticipated.



Third-party content is an important part of the marketing of the XM Radio service and obtaining third-party content can be expensive. In 2004, we announced a multi-year agreement with Major League Baseball (MLB) to
broadcast MLB games live



19



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##### Index to Financial Statements

nationwide, and to become the Official Satellite Radio provider of Major League Baseball. We will pay MLB up to $50
million for 2005 and $60 million per year thereafter through 2012, with $120 million to be deposited into escrow in 2005. We also must negotiate and enter into music programming royalty arrangements with Broadcast Music, Inc., which we refer to as
BMI, and in the future will have to re-negotiate our existing arrangements with the American Society of Composers, Authors and Publishers, SESAC, Inc., and the Recording Industry Association of America. We expect to establish license fees with BMI
through negotiation and such royalty arrangements may be more costly than anticipated. Our ability to obtain necessary third-party content at a reasonable cost, complete the amendment of certain programming agreements in connection with changes to
our channel lineup and negotiate royalty arrangements will impact our financial performance and results of operations.



Weaker than expected market and advertiser acceptance of our XM radio service could adversely affect our advertising revenue and results of operations.



Our ability to generate advertising revenues will depend on several
factors, including the level and type of market penetration of our service, competition for advertising dollars from other media, and changes in the advertising industry and economy generally. We directly compete for audiences and advertising
revenues with Sirius Satellite Radio, the other satellite radio licensee, and traditional AM/FM radio stations, some of which maintain longstanding relationships with advertisers and possess greater resources than we do. Because we offer our radio
service to subscribers on a pay-for-service basis, certain advertisers may be less likely to advertise on our radio service.



The holders of Holdings Series C preferred stock and convertible notes issued in January 2003 have consent rights that may prevent Holdings from engaging in
transactions otherwise beneficial to holders of Holdings securities.



Under the terms of Holdings Series C preferred stock, the consent of holders of at least 60% of the Series C preferred stock is required before Holdings can take certain actions, including issuances of
additional equity securities and the incurrence of indebtedness under which Holdings must meet financial covenants to avoid default. These requirements could hamper Holdings ability to raise additional funds. The consent of holders of at least
60% of the Series C preferred stock is also required for transactions with affiliates, other than on an arms-length basis, and for any merger or sale of Holdings assets. The approval for a merger could make it difficult for a third party
to acquire Holdings and thus could depress Holdings stock price. As a result of the closing of Holdings January 2003 financing transactions, holders of our 10% senior secured discount convertible notes have similar consent rights.
Without the consent of greater than 50% of the notes held by the convertible notes investors, Holdings cannot take certain actions, including the:



| |  |  | issuance of Holdings Class A common stock in an amount that increases the amount outstanding on a fully diluted basis by 20% or more;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | incurrence of indebtedness with financial or operational covenants;
| | - |  | -------------------------------------------------------------------



| |  |  | entrance into certain transactions with affiliates; or
| | - |  | ------------------------------------------------------



| |  |  | merger or sale of all or substantially all of Holdings assets.
| | - |  | ---------------------------------------------------------------



We cannot assure you that these rights will be exercised in a manner consistent with your best interests.



Our substantial indebtedness could adversely affect our financial health, which could
reduce the value of our securities.



As of December 31,
2004, the total accreted value of our indebtedness was $1.1 billion ($622.1 million carrying value). The carrying amount will continue to increase during 2005 as our indebtedness accretes, and we may issue more debt securities if we believe we can
raise money on favorable terms. Most of our indebtedness will mature in 2009 and 2010. However, our substantial indebtedness could have important consequences to you. For example, it could:



| |  |  | increase our vulnerability to general adverse economic and industry conditions;
| | - |  | -------------------------------------------------------------------------------



| |  |  | limit our ability to fund future working capital, capital expenditures, research and development costs and other general corporate requirements;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working
capital, capital expenditures, research and development efforts and other general corporate purposes;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | place us at a competitive disadvantage compared to our competitors that have less debt; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



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##### Index to Financial Statements

Failing to comply with those covenants could result in an event of default, which, if not cured or
waived, could cause us to have to discontinue operations or seek a purchaser for our business or assets. In addition, the covenants allow us to incur more debt in the future, which could increase our total indebtedness.



The terms of the notes issued in our January 2003 financing transactions may not be
favorable to us, our creditors or our stockholders.



Under
the terms of the 10% senior secured discount convertible notes due 2009 issued to private investors in January 2003, we are subject to various restrictive covenants, including covenants that limit our ability to pay dividends and make other types of
restricted payments and incur indebtedness in particular. These covenants may significantly limit our ability to complete transactions or take other actions that could be in our interests or the interests of our creditors or stockholders.



We do not have the right to prepay or redeem the private
investor notes, but have the ability after four years to require the conversion of the notes into Holdings Class A common stock in limited circumstances. This mandatory conversion would only be available to us if:



| |  |  | we achieve break-even in our earnings before interest, taxes, depreciation and amortization;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Holdings Class A common stock trades at 200% of the conversion price then in effect;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | the amount of our outstanding indebtedness after conversion would be less than $250 million; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Holdings no longer has any Series C preferred stock outstanding.
| | - |  | ----------------------------------------------------------------



Our business may be impaired by third party intellectual property rights.



Development of the XM Radio system has depended largely upon the intellectual property that we have developed and licensed from third parties. If the
intellectual property that we have developed or use is not adequately protected, others will be permitted to and may duplicate the XM Radio system or service without liability. In addition, others may challenge, invalidate or circumvent our
intellectual property rights, patents or existing sublicenses. Some of the know-how and technology we have developed and plan to develop will not be covered by United States patents. Trade secret protection and contractual agreements may not provide
adequate protection if there is any unauthorized use or disclosure. The loss of necessary technologies could require us to obtain substitute technology of lower quality performance standards, at greater cost or on a delayed basis, which could harm
our business.



Other parties may have patents or pending patent
applications which will later mature into patents or inventions which may block our ability to operate our system or license our technology. We may have to resort to litigation to enforce our rights under license agreements or to determine the scope
and validity of other parties proprietary rights in the subject matter of those licenses. This may be expensive. Also, we may not succeed in any such litigation.



Third parties may assert claims or bring suit against us for patent or other infringement of intellectual property rights.
Any such litigation could result in substantial cost to, and diversion of effort by, our company, and adverse findings in any proceeding could subject us to significant liabilities to third parties; require us to seek licenses from third parties;
block our ability to operate the XM Radio system or license its technology; or otherwise adversely affect our ability to successfully develop and market the XM Radio system.



Rapid technological and industry changes could make our service obsolete.



The satellite industry and the audio entertainment industry are both
characterized by rapid technological change, frequent new product innovations, changes in customer requirements and expectations, and evolving industry standards. If we are unable to keep pace with these changes, our business may be unsuccessful.
Because we have depended on third parties to develop technologies used in key elements of the XM Radio system, more advanced technologies that we may wish to use may not be available to us on reasonable terms or in a timely manner. Further, our
competitors may have access to technologies not available to us, which may enable them to produce entertainment products of greater interest to consumers, or at a more competitive cost.



Failure to comply with FCC requirements could damage our business.



As an owner of one of two FCC licenses to operate a commercial satellite radio service in the United States, we are subject
to FCC rules and regulations, and the terms of our license, which require us to meet certain conditions such as interoperability of our system with the other licensed satellite radio system; coordination of our satellite radio service with radio
systems operating in the same range of frequencies in neighboring countries; and coordination of our communications links to our satellites with other systems that operate in the same frequency band. Non-compliance by us with these conditions could
result in fines, additional license conditions, license revocation or other detrimental FCC actions.



21



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##### Table of Contents

##### Index to Financial Statements

Interference from other users could damage our business.



We may be subject to interference from adjacent radio frequency users, such
as RF lighting and ultra-wideband (UWB) technology, if the FCC does not adequately protect us against such interference in its rulemaking process.



The FCC has not issued final rules authorizing terrestrial repeaters.



The FCC has not yet issued final rules permitting us to deploy terrestrial repeaters to fill gaps in satellite coverage. We are operating our repeaters on
a non-interference basis pursuant to a grant of special temporary authority from the FCC, which expired March 18, 2002. We have applied for an extension of this authority and can continue to operate our terrestrial repeaters pending a final
determination on this request. This authority is currently being challenged by operators of terrestrial wireless systems who have asserted that our repeaters may cause interference. Our deployment of terrestrial repeaters may be impacted by the
FCCs further actions, when taken.



Our service network or other ground
facilities could be damaged by natural catastrophes.



Since our ground-based network is attached to towers, buildings and other structures around the country, an earthquake, tornado, flood or other catastrophic event anywhere in the United States could damage our network, interrupt our service
and harm our business in the affected area. We do not have replacement or redundant facilities that can be used to assume the functions of our repeater network or of our central production and broadcast facility in the event of a catastrophic event.
Any damage to our repeater network would likely result in degradation of our service for some subscribers and could result in complete loss of service in affected areas. Damage to our central production and broadcast facility would restrict our
production of programming and require us to obtain programming from third parties to continue our service.



Consumers could steal our service.



Like all radio transmissions, the XM Radio signal is subject to interception. Pirates may be able to obtain or rebroadcast XM Radio without paying the subscription fee. Although we use encryption technology to
mitigate the risk of signal theft, such technology may not be adequate to prevent theft of the XM Radio signal. If widespread, signal theft could harm our business.



We depend on certain on-air talent and other people with special skills. If we cannot retain these people, our business could suffer.



We employ or independently contract with certain on-air
talent who maintain significant loyal audiences in or across various demographic groups. We cannot be certain that our on-air talent will remain with us or will be able to retain their respective audiences. If we lose the services of one or more of
these individuals, and fail to attract comparable on-air talent with similar audience loyalty, the attractiveness of our service to subscribers and advertisers could decline, and our business could be adversely affected. We also depend on the
continued efforts of our executive officers and key employees, who have specialized technical knowledge regarding our satellite and radio systems and business knowledge regarding the radio industry and subscription services. If we lose the services
of one or more of these employees, or fail to attract qualified replacement personnel, it could harm our business and our future prospects.



The market price of our securities could be hurt by substantial price and volume fluctuations.



Historically, securities prices and trading volumes for emerging companies fluctuate widely for a number of reasons,
including some reasons that may be unrelated to their businesses or results of operations. This market volatility could depress the price of our securities without regard to our operating performance. In addition, our operating results may be below
the expectations of public market analysts and investors. If this were to occur, the market price of our securities would likely significantly decrease.



Future issuances of Holdings Class A common stock could lower Holdings stock price and impair Holdings ability to raise funds in new stock offerings.



Holdings has issued and outstanding securities
exercisable for or convertible into a significant number of its shares of Class A common stock, including securities issued to General Motors, some of which accrue interest which is convertible into Holdings Class A common stock or give
Holdings the option to make interest or other payments in its Class A common stock or securities convertible into its Class A common stock. These existing instruments therefore could lead to a significant increase in the amount of Holdings
Class A common stock outstanding. As of December 31, 2004, Holdings had outstanding 208.2 million shares of its Class A common stock. On a pro forma basis as of December 31, 2004, if Holdings included the shares issuable upon conversion or exercise
of its outstanding securities, Holdings would have had 329.1 million shares of its Class A common stock outstanding on that date. Issuances of a large number of shares could adversely affect the market price of Holdings Class A common stock.
Most of the shares of Holdings Class A common stock that are not already publicly-traded, including those held by affiliates, have been registered by Holdings for resale into the public market. The sale into the public market of a large number
of privately-issued shares could adversely affect the market price of Holdings Class A common stock and could impair Holdings ability to raise funds in additional stock offerings.



22



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##### Index to Financial Statements

It may be hard for a third party to acquire us, and this could depress Holdings stock price.



Holdings is a Delaware company with unissued preferred stock, the terms of
which can be set by our board of directors. Holdings shareholder rights plan could make it difficult for a third party to acquireHoldings, even if doing so would benefit Holdings securityholders. The rights issued under the plan have
certain anti-takeover effects. The rights will cause substantial dilution to a person or group that attempts to acquire us in a manner or on terms not approved by our board of directors. The rights should not deter any prospective offeror willing to
negotiate in good faith with Holdings board of directors. Nor should the rights interfere with any merger or other business combination approved by our board of directors. However, anti-takeover provisions in Delaware law and the shareholder
rights plan could depress Holdings stock price and may result in entrenchment of existing management, regardless of their performance.



ITEM 2. PROPERTIES



Holdings owns
and we lease from Holdings approximately 150,000 square feet of executive offices, studio and production facilities located at 1500 Eckington Place, N.E., Washington, D.C. 20002. We lease approximately 19,000 square feet of office and technical
space in South Florida, 7,109 square feet in New York for studios and offices, approximately 1,500 square feet of space in Georgia as a backup facility and 6,564 square feet of space in Virginia for warehouse facilities. We also lease space for our
advertising sales offices in New York, Chicago, Los Angeles, San Francisco and Dallas and for our OEM sales and marketing office in Detroit. We use space in Tennessee for studios. We have also entered into license or lease agreements with regard to
our terrestrial repeater system throughout the United States.



ITEM 3. LEGAL PROCEEDINGS



Except for the
arbitration described above under the caption BusinessSpace Segment and the FCC proceedings described above under the caption BusinessRegulatory Matters, we are not a party to any material litigation. In the
ordinary course of business, we become aware from time to time of claims or potential claims, or may become party to legal proceedings arising out of various matters, such as contract matters, employment related matters, issues relating to our
repeater network, product liability issues, and copyright, patent, trademark or other intellectual property matters. Third parties may bring suit relating to such matters. We cannot predict the outcome of any such claim, potential claim or these
lawsuits and legal proceedings with certainty. Nevertheless, we believe that the outcome of any such claim, potential claim or proceeding, of which we are currently aware, even if determined adversely, would not have a material adverse effect on our
business, financial condition and results of operations.



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



No matters were submitted to a vote of security holders during the fourth quarter of 2004. Inc. is a wholly owned subsidiary of Holdings.



PART II



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



There is no established trading market for Inc.s common stock. Inc. is a wholly owned subsidiary of Holdings.



RECENT SALES OF UNREGISTERED SECURITIES



None.



DIVIDEND POLICY



The indentures governing Inc.s senior secured notes restrict Inc. from paying dividends to Holdings, which does not intend to pay cash dividends on
its Class A common stock in the foreseeable future. We anticipate that we will retain any earnings for use in our operations and the expansion of our business.



ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA



XM Satellite Radio Inc. and Subsidiaries



In
considering the following selected consolidated financial data, you should also read Inc.s consolidated financial statements and notes and the section captioned Managements Discussion and Analysis of Financial Condition and Results
of Operations. The consolidated statements of operations data for the five-year period ended December 31, 2004 and the consolidated balance sheets data as of December 31, 2004, 2003, 2002, 2001 and 2000 are derived from our consolidated
financial statements. These statements have been audited by KPMG LLP, independent registered accounting firm.



23



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##### Table of Contents

##### Index to Financial Statements

|                                                                             |  |                                   |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|---------------------------------------------------------------------------- |  | --------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                                             |  | Years Ended December 31,          |          
|                                                                             |  | 2004                              |           |   | 2003 |   |           | 2002 |  |   | 2001      |   |  | 2000 |          
|                                                                             |  | (In thousands, except share data) |          
|Consolidated Statements of Operations Data:                                  |  |                                   |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Revenue                                                                      |  | $                                 | 244,443   |   |      | $ | 91,781    |      |  | $ | 20,181    |   |  | $    | 533       |   |  | $ |          |  
|Operating Expenses:                                                          |  |                                   |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Cost of revenue                                                              |  |                                   | 205,262   |   |      |   | 150,773   |      |  |   | 126,555   |   |  |      | 113,403   |   |  |   | 33,630    |  
|Research & development (excludes depreciation & amortization, shown below)   |  |                                   | 23,513    |   |      |   | 12,285    |      |  |   | 10,843    |   |  |      | 13,689    |   |  |   | 11,948    |  
|General & administrative (excludes depreciation & amortization, shown below) |  |                                   | 28,366    |   |      |   | 27,822    |      |  |   | 27,777    |   |  |      | 19,990    |   |  |   | 16,960    |  
|Marketing (excludes depreciation & amortization, shown below)                |  |                                   | 304,316   |   |      |   | 200,267   |      |  |   | 169,165   |   |  |      | 93,584    |   |  |   | 13,016    |  
|Impairment of goodwill                                                       |  |                                   |          |   |      |   |          |      |  |   | 11,461    |   |  |      |          |   |  |   |          |  
|Depreciation & amortization                                                  |  |                                   | 145,775   |   |      |   | 156,927   |      |  |   | 117,202   |   |  |      | 42,180    |   |  |   | 3,573     |  
|                                                                             |  |                                   |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total operating expenses                                                     |  |                                   | 707,232   |   |      |   | 548,074   |      |  |   | 463,003   |   |  |      | 282,846   |   |  |   | 79,127    |  
|                                                                             |  |                                   |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Operating loss                                                               |  |                                   | (462,789  | ) |      |   | (456,293  | )    |  |   | (442,822  | ) |  |      | (282,313  | ) |  |   | (79,127   | )
|Other income (expense)                                                       |  |                                   |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Interest income                                                              |  |                                   | 1,592     |   |      |   | 794       |      |  |   | 2,621     |   |  |      | 14,102    |   |  |   | 27,200    |  
|Interest expense                                                             |  |                                   | (84,914   | ) |      |   | (104,250  | )    |  |   | (52,037   | ) |  |      | (15,157   | ) |  |   |          |  
|Loss from deleveraging transactions                                          |  |                                   | (76,621   | ) |      |   | (29,731   | )    |  |   |          |   |  |      |          |   |  |   |          |  
|Other income (expense)                                                       |  |                                   | 16        |   |      |   | (279      | )    |  |   | 653       |   |  |      | (607      | ) |  |   |          |  
|                                                                             |  |                                   |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net loss before income taxes                                                 |  |                                   | (622,716  | ) |      |   | (589,759  | )    |  |   | (491,585  | ) |  |      | (283,975  | ) |  |   | (51,927   | )
|Provision for deferred income taxes                                          |  |                                   | (27,317   | ) |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|                                                                             |  |                                   |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net loss                                                                     |  | $                                 | (650,033  | ) |      | $ | (589,759  | )    |  | $ | (491,585  | ) |  | $    | (283,975  | ) |  | $ | (51,927   | )
|                                                                             |  |                                   |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Other Data:                                                                  |  |                                   |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|EBITDA(1)                                                                    |  | $                                 | (393,619  | ) |      | $ | (329,376  | )    |  | $ | (324,967  | ) |  | $    | (240,740  | ) |  | $ | (75,554   | )
|Cash flow used in operating activities                                       |  | $                                 | (106,892  | ) |      | $ | (221,271  | )    |  | $ | (288,042  | ) |  | $    | (209,690  | ) |  | $ | (37,516   | )
|Cash flow (used in) provided by investing activities                         |  | $                                 | (8,406    | ) |      | $ | 6,687     |      |  | $ | (14,094   | ) |  | $    | (127,017  | ) |  | $ | (559,401  | )
|Cash flow provided by financing activities                                   |  | $                                 | 227,600   |   |      | $ | 298,077   |      |  | $ | 246,494   |   |  | $    | 195,884   |   |  | $ | 750,478   |  
|XM Subscriptions (end of period)(2)                                          |  |                                   | 3,229,124 |   |      |   | 1,360,228 |      |  |   | 347,159   |   |  |      | 27,733    |   |  |   |          |  
|                                                                             | 
|                                                                             |  | December 31,                      |          
|                                                                             |  | 2004                              |           |   | 2003 |   |           | 2002 |  |   | 2001      |   |  | 2000 |          
|                                                                             |  | (In thousands)                    |          
|Consolidated Balance Sheets Data:                                            |  |                                   |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Cash, cash equivalents and short-term investments                            |  | $                                 | 202,521   |   |      | $ | 90,219    |      |  | $ | 6,726     |   |  | $    | 72,664    |   |  | $ | 203,191   |  
|Restricted investments                                                       |  |                                   | 372       |   |      |   | 491       |      |  |   | 26,687    |   |  |      | 70,734    |   |  |   | 161,166   |  
|System under construction.                                                   |  |                                   | 153,595   |   |      |   | 22,058    |      |  |   | 18,558    |   |  |      | 18,597    |   |  |   | 645,939   |  
|Property and equipment, net                                                  |  |                                   | 436,169   |   |      |   | 682,997   |      |  |   | 814,966   |   |  |      | 887,768   |   |  |   | 50,052    |  
|Goodwill, net                                                                |  |                                   |          |   |      |   |          |      |  |   |          |   |  |      | 11,461    |   |  |   | 12,376    |  
|DARS license & intangible, net                                               |  |                                   | 148,391   |   |      |   | 149,629   |      |  |   | 153,732   |   |  |      | 155,207   |   |  |   | 151,845   |  
|Total assets                                                                 |  |                                   | 1,092,316 |   |      |   | 1,189,696 |      |  |   | 1,044,347 |   |  |      | 1,241,362 |   |  |   | 1,242,517 |  
|Total long-term debt, net of current portion                                 |  |                                   | 615,943   |   |      |   | 669,835   |      |  |   | 270,347   |   |  |      | 268,934   |   |  |   | 262,665   |  
|Total liabilities                                                            |  |                                   | 1,048,734 |   |      |   | 870,614   |      |  |   | 429,821   |   |  |      | 385,908   |   |  |   | 337,107   |  
|Stockholders equity                                                         |  |                                   | 43,582    |   |      |   | 319,082   |      |  |   | 614,526   |   |  |      | 855,454   |   |  |   | 905,410   |  

---

|(1) | Net loss before interest income, interest expense, income taxes, depreciation and amortization is commonly referred to in our business as EBITDA. EBITDA is not a measure
of financial performance under generally accepted accounting principles. Consistent with regulatory requirements, EBITDA includes Loss from Deleveraging Transactions and Other Income. We believe EBITDA is often a useful measure of a companys
operating performance and is a significant basis used by our management to measure the operating performance of our business. Because we have funded and completed the build-out of our system through the raising and expenditure of large amounts of
capital, our results of operations reflect significant charges for depreciation, amortization and interest expense. EBITDA, which excludes this information, provides helpful information about the operating performance of our business, apart from the
expenses associated with our physical plant or capital structure. EBITDA is frequently used as one of the bases for comparing businesses in our industry, although our measure of EBITDA may not be comparable to similarly titled measures of other
companies. EBITDA does not purport to represent operating loss or cash flow from operating activities, as those terms are defined under generally accepted accounting principles, and should not be considered as an alternative to those measurements as
an indicator of our performance.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



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##### Table of Contents

##### Index to Financial Statements

|                                                |  |                          |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |         |  
|----------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ---- | -------- | - |  | - | ------- | -
|                                                |  | Years Ended December 31, |         
|                                                |  | 2004                     |          |   | 2003 |   |          | 2002 |  |   | 2001     |   |  | 2000 |         
|                                                |  | (In thousands)           |         
|Reconciliation of Net Loss to EBITDA:           |  |                          |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |         |  
|Net loss as reported                            |  | $                        | (650,033 | ) |      | $ | (589,759 | )    |  | $ | (491,585 | ) |  | $    | (283,975 | ) |  | $ | (51,927 | )
|Add back non-EBITDA items included in net loss: |  |                          |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |         |  
|Interest income                                 |  |                          | (1,592   | ) |      |   | (794     | )    |  |   | (2,621   | ) |  |      | (14,102  | ) |  |   | (27,200 | )
|Interest expense                                |  |                          | 84,914   |   |      |   | 104,250  |      |  |   | 52,037   |   |  |      | 15,157   |   |  |   |        |  
|Provision for deferred income taxes             |  |                          | 27,317   |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Depreciation & amortization                     |  |                          | 145,775  |   |      |   | 156,927  |      |  |   | 117,202  |   |  |      | 42,180   |   |  |   | 3,573   |  
|                                                |  |                          |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |         |  
|EBITDA                                          |  | $                        | (393,619 | ) |      | $ | (329,376 | )    |  | $ | (324,967 | ) |  | $    | (240,740 | ) |  | $ | (75,554 | )
|                                                |  |                          |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |         |  

---

|(2) | We consider subscribers to be those who are receiving and have agreed to pay for our service, either by credit card or by invoice, including those that are currently in promotional
periods paid in part by vehicle manufacturers, as well as XM activated radios in vehicles for which we have a contractual right to receive payment for the use of our service. Radios that are revenue generating are counted individually as
subscribers. Promotional periods generally include the period of trial service plus 30 days to handle the receipt and processing of payments.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our financial condition and
consolidated results of operations. This discussion should be read together with our consolidated financial statements and related notes beginning on page F-1 of this report.



Overview



Our 2004 highlights include the following:



| |  | growing the XM business to over 3.2 million subscribers at year end, including over 1.8 million new subscribers added during the year,
|- |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  | the continued introduction of innovative retail products at attractive price points and broad OEM factory-installed penetration across numerous vehicle models,
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | expanding our programming line-up to include college football and basketball, The Starbucks Hear Music Channel, The Opie and Anthony Show, The Bob Edwards Show and
Public Radio. Starting in 2005 we will have the right to broadcast Major League Baseball (MLB) games for every MLB team nationwide,
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | ending 2004 with an annual recurring subscription revenue run rate of $318 million, and
|- |  | ---------------------------------------------------------------------------------------



| |  | continuing to grow gross margin (calculated as revenues less variable costs, which include revenue share & royalties, customer care & billing, cost of equipment and ad
sales) during 2004 while reducing our costs to acquire each new subscriber.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25



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##### Table of Contents

##### Index to Financial Statements

The key metrics we use to monitor our business growth and our operational results are: net subscriber
additions, ending subscribers, Average Monthly Subscription Revenue Per Subscriber (ARPU), Subscriber Acquisition Cost (SAC), Cost Per Gross Addition (CPGA) and EBITDA, presented as follows:



|                                                                                           |  |                          |           |   |      |   |           |  
|------------------------------------------------------------------------------------------ |  | ------------------------ | --------- | - | ---- | - | --------- | -
|                                                                                           |  | Years Ended December 31, |          
|                                                                                           |  | 2004                     |           |   | 2003 |  
|Net Subscriber Additions                                                                   |  |                          | 1,868,896 |   |      |   | 1,013,069 |  
|                                                                                           |  |                         
|Aftermarket, OEM & Other Subscribers                                                       |  |                          | 2,800,501 |   |      |   | 1,018,963 |  
|Subscribers in OEM Promotional Periods(1)                                                  |  |                          | 401,988   |   |      |   | 320,473   |  
|XM Activated Vehicles with Rental Car Companies(2)                                         |  |                          | 26,635    |   |      |   | 20,792    |  
|                                                                                           |  |                          |           |   |      |   |           |  
|Total Ending Subscribers(1)(2)(3)                                                          |  |                          | 3,229,124 |   |      |   | 1,360,228 |  
|                                                                                           |  |                         
|Average Monthly Subscription Revenue Per Subscriber(4)                                     |  | $                        | 8.68      |   |      | $ | 8.97      |  
|Average Monthly Subscription Revenue Per Aftermarket, OEM & Other Subscriber(4)            |  | $                        | 9.26      |   |      | $ | 9.59      |  
|Average Monthly Subscription Revenue Per Subscriber in OEM Promotional Periods(4)          |  | $                        | 5.82      |   |      | $ | 6.48      |  
|Average Monthly Subscription Revenue per XM Activated Vehicle with Rental Car Companies(4) |  | $                        | 9.26      |   |      | $ | 5.54      |  
|Subscriber Acquisition Costs (SAC)(5)                                                      |  | $                        | 62        |   |      | $ | 75        |  
|Cost Per Gross Addition (CPGA)(6)                                                          |  | $                        | 100       |   |      | $ | 137       |  
|EBITDA (in thousands)(7)                                                                   |  | $                        | (393,619  | ) |      | $ | (329,376  | )

---

|(1) | OEM promotional periods typically range from three months to one year in duration. At the time of sale, vehicle owners generally receive a 3-month trial subscription and are
included in OEM Promotional Subscribers. XM generally receives payment for two months of the 3-month trial subscription from the vehicle manufacturer. Promotional periods generally include the period of trial service plus 30 days to handle the
receipt and processing payments.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Rental car activity commenced in late June 2003.
|--- | ------------------------------------------------

|(3) | Ending subscribersPlease see definition and further discussion under Subscriber Count on page 50.
|--- | --------------------------------------------------------------------------------------------------

|(4) | Average Monthly Subscription Revenue per SubscriberPlease see definition and further discussion under Average Monthly Subscription Revenue Per Subscriber on page 31.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | SACPlease see definition and further discussion under Subscriber Acquisition Costson page 33.
|--- | ----------------------------------------------------------------------------------------------

|(6) | CPGAPlease see definition and further discussion under Cost Per Gross Additionon page 33.
|--- | ------------------------------------------------------------------------------------------

|(7) | EBITDAPlease see definition and further discussion under EBITDA on page 28.
|--- | ----------------------------------------------------------------------------



Holdings and Inc. have raised $3.2 billion of equity and debt net proceeds from inception through January 2005 from
investors and strategic partners to fund our operations. In 2004, we raised net proceeds of $697 million. This includes $177 million of net funds from the sale of Holdings Class A common stock in January 2004, $195 million of net funds from
the April 2004 issuance of our Senior Secured Floating Rate Notes due 2009 and $293 million of net funds from the November 2004 issuance of Holdings 1.75% Convertible Senior Notes due 2009, and $32 million in cash proceeds in connection with
GMs exercise of a warrant to purchase 10 million shares of Holdings Class A common stock at an exercise price of $3.18 per share. In January 2005, Holdings received an additional $98 million in net proceeds from the exercise of the over
allotment option on the November 2004 issuance of its 1.75% Convertible Senior Notes due 2009. From January 1, 2004 to December 31, 2004, holdings and Inc. eliminated, repaid or redeemed $597.3 million of carrying value, including accrued interest,
of debt and preferred securities, or approximately $617.0 million face value at maturity, through the issuance of 23.6 million shares of Holdings Class A common stock and the payment of $320.3 million of cash. In total, these de-leveraging
transactions eliminated over $900 million in future interest, dividends, accretion and principal payments as well as 27 million shares of incremental potential dilution. During 2004, we settled with insurers representing approximately 80% of the
insurance coverage on XM Rock and XM Roll for a total recovery of approximately $142 million. Provided that we meet the revenue, expense and cash flow projections of our business plan, we expect to be fully funded and will not need to raise
additional financing to continue operations.



We will continue
to incur operating losses until we substantially increase the number of our subscribers and develop a stream of cash flow sufficient to cover operating costs. We are focused on managing growth and containing costs while increasing subscribers and
scaling processes. We also have significant outstanding contracts and commercial commitments that need to be paid in cash or through credit facilities over the next several years, including to fund subsidies and distribution costs, particularly
under our arrangement with General Motors, programming costs, repayment of long-term debt, lease payments and service payments, as further described below under the heading Liquidity and Capital ResourcesContractual Obligations and
Commercial Commitments. Our ability to become profitable also depends upon other factors identified below under the heading Liquidity and Capital ResourcesFuture Operating and Capital Resource Requirements.



26



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##### Index to Financial Statements

Inc. was incorporated in Delaware in 1992 and Holdings became a holding company in early 1997. We emerged
from the development stage in the fourth quarter of 2001, following the commencement of our service in two test markets on September 25, 2001 and nationwide launch on November 12, 2001.



This annual report on Form 10-K is filed by XM Satellite Radio Inc. (Inc. or the Company). XM
Satellite Radio Holdings Inc. (XM or Holdings) is filing separately. The principal differences between the financial condition of Holdings and Inc., which are not significant in amount, are:



| |  |  | the ownership by XM of the corporate headquarters building since August 2001, and the lease of the building from XM by Inc.;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | the presence at XM of additional indebtedness not guaranteed by Inc.; and
| | - |  | -------------------------------------------------------------------------



| |  |  | the existence of cash balances at XM.
| | - |  | -------------------------------------



Accordingly, the results of operations for Inc. and its subsidiaries are substantially the same as the results for Holdings and its subsidiaries discussed
above except that Inc. incurs:



| |  |  | additional rent, less depreciation and amortization expense and less other income, in each case principally related to Inc.s rental of its corporate headquarters from
Holdings, which are intercompany transactions that have been eliminated in the Holdings financial statements;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | less interest expense principally related to the additional indebtedness at Holdings; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | less interest income because of the additional cash balances at Holdings.
| | - |  | -------------------------------------------------------------------------



Results of Operations



To explain our performance, we discuss our results of operations using the following revenue and expense categories that reflect the drivers of the
business.



Subscription Revenue



Subscription includes revenues from basic and premium
services, net of subscription-related promotions.



Activation Revenue



Activation
includes amortization of subscription activation fees over the estimated average life of a subscriber.



Equipment Revenue



Equipment includes revenue from XMs direct sales of radios, radio accessories, merchandise and any related shipping fees.



Net Ad Sales Revenue



Net Ad Sales includes revenue from sales of advertisements
and programming sponsorships to advertisers on the XM radio network, net of agency commissions.



Cost of Revenue



Costs of Revenue are those expenses directly related to the generation of subscriber and advertising revenue and have variable and fixed
components. Cost of Equipment, Revenue Share & Royalties, along with Customer Care & Billing tend to fluctuate along with increases and decreases in revenues and/or subscribers. Ad Sales, which includes internal and external costs directly
associated with selling advertisements on the XM network, tends to fluctuate with increases and decreases in advertising revenue. Satellite & Terrestrial, Broadcast & Operations and Programming & Content are not expected to fluctuate
directly with changes in revenue and/or subscribers.



Research & Development



Research & Development is a discretionary expense used primarily to drive new product development and radio component and radio unit cost reductions.



27



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##### Index to Financial Statements

General & Administrative



General & Administrative expenses include legal, human resources, accounting and other overhead costs.



Marketing



Marketing includes: Retention & Support, which are those
indirect costs, primarily labor, that are not associated with gaining a subscriber and are not expected to fluctuate directly with changes in revenue and/or subscribers; Subsidies & Distribution, which includes commissions to radio manufacturers
and distribution partners that are based on the number of radios or vehicles manufactured or the number of new subscribers added in the period; Marketing, which are those discretionary costs including advertising, media and events, as well as
marketing materials for retail and automotive dealer points of presence. Amortization of the GM Liability includes the straight-line accounting treatment of the fixed obligation to General Motors. We consider subscriber acquisition costs (SAC) to
include radio manufacturer subsidies, certain sales, activation and installation commissions, and hardware-related promotions. These costs are reported in subsidies & distribution on the consolidated statement of operations. Subscriber
acquisition costs also include the negative margins on equipment sales. (Subscriber acquisition costs do not include ongoing loyalty payments to retailers and distribution partners, payments under revenue sharing arrangements with radio
manufacturers and distributors and the amortization of the GM liability.) We consider Cost Per Gross Addition (CPGA) to include the amounts in SAC, as well as advertising, media and marketing expenses except for retention and support and the
amortization of the GM liability.



EBITDA



Net loss before interest income, interest expense, income
taxes, depreciation and amortization is commonly referred to in our business as EBITDA. EBITDA is not a measure of financial performance under generally accepted accounting principles. Consistent with regulatory requirements, EBITDA
includes Loss from Deleveraging Transactions and Other Income. We believe EDITDA is often a useful measure of a companys operating performance and is a significant basis used by our management to measure the operating performance of our
business. Because we have funded and completed the build-out of our system through the raising and expenditure of large amounts of capital, our results of operations reflect significant charges for depreciation, amortization and interest expense.
EBITDA, which excludes this information, provides helpful information about the operating performance of our business, apart from the expenses associated with our physical plant or capital structure. EBITDA is frequently used as one of the bases for
comparing businesses in our industry, although our measure of EBITDA may not be comparable to similarly titled measures of other companies. EBITDA does not purport to represent operating activities, as those terms are defined under generally
accepted accounting principles, and should not be considered as an alternative to those measurements as an indicator of our performance.



28



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##### Index to Financial Statements

|                                                                               |  |                                      |           |   |      |   |           |      |  |   |          |  
|------------------------------------------------------------------------------ |  | ------------------------------------ | --------- | - | ---- | - | --------- | ---- |  | - | -------- | -
|                                                                               |  | 2004                                 |           |   | 2003 |   |           | 2002 | 
|                                                                               |  | (In thousands, except share amounts) |          
|Revenue:                                                                       |  |                                      |           |   |      |   |           |      |  |   |          |  
|Subscription                                                                   |  | $                                    | 221,073   |   |      | $ | 78,275    |      |  | $ | 16,344   |  
|Activation                                                                     |  |                                      | 4,814     |   |      |   | 1,868     |      |  |   | 484      |  
|Equipment                                                                      |  |                                      | 7,261     |   |      |   | 6,692     |      |  |   | 757      |  
|Net ad sales                                                                   |  |                                      | 8,485     |   |      |   | 4,065     |      |  |   | 2,333    |  
|Other                                                                          |  |                                      | 2,810     |   |      |   | 881       |      |  |   | 263      |  
|                                                                               |  |                                      |           |   |      |   |           |      |  |   |          |  
|Total revenue                                                                  |  |                                      | 244,443   |   |      |   | 91,781    |      |  |   | 20,181   |  
|                                                                               |  |                                      |           |   |      |   |           |      |  |   |          |  
|Operating expenses                                                             |  |                                      |           |   |      |   |           |      |  |   |          |  
|Cost of revenue (excludes depreciation and amortization, shown below):         |  |                                      |           |   |      |   |           |      |  |   |          |  
|Revenue share & royalties                                                      |  |                                      | 50,676    |   |      |   | 26,440    |      |  |   | 12,790   |  
|Customer care & billing                                                        |  |                                      | 40,887    |   |      |   | 25,945    |      |  |   | 16,069   |  
|Cost of equipment                                                              |  |                                      | 11,557    |   |      |   | 9,797     |      |  |   | 1,679    |  
|Ad sales                                                                       |  |                                      | 6,165     |   |      |   | 3,257     |      |  |   | 1,870    |  
|Satellite & terrestrial                                                        |  |                                      | 35,922    |   |      |   | 39,692    |      |  |   | 44,818   |  
|Broadcast & operations:                                                        |  |                                      |           |   |      |   |           |      |  |   |          |  
|Broadcast                                                                      |  |                                      | 10,832    |   |      |   | 7,689     |      |  |   | 7,745    |  
|Operations                                                                     |  |                                      | 16,519    |   |      |   | 14,844    |      |  |   | 16,205   |  
|                                                                               |  |                                      |           |   |      |   |           |      |  |   |          |  
|Total broadcast & operations                                                   |  |                                      | 27,351    |   |      |   | 22,533    |      |  |   | 23,950   |  
|Programming & content                                                          |  |                                      | 32,704    |   |      |   | 23,109    |      |  |   | 25,379   |  
|                                                                               |  |                                      |           |   |      |   |           |      |  |   |          |  
|Total cost of revenue                                                          |  |                                      | 205,262   |   |      |   | 150,773   |      |  |   | 126,555  |  
|Research & development (excludes depreciation and amortization, shown below):  |  |                                      | 23,513    |   |      |   | 12,285    |      |  |   | 10,843   |  
|General & administrative (excludes depreciation and amortization, shown below) |  |                                      | 28,366    |   |      |   | 27,822    |      |  |   | 27,777   |  
|Marketing (excludes depreciation and amortization, shown below):               |  |                                      |           |   |      |   |           |      |  |   |          |  
|Retention & support                                                            |  |                                      | 13,272    |   |      |   | 7,873     |      |  |   | 9,857    |  
|Subsidies & distribution                                                       |  |                                      | 165,704   |   |      |   | 92,521    |      |  |   | 54,086   |  
|Advertising & marketing                                                        |  |                                      | 88,090    |   |      |   | 64,309    |      |  |   | 91,624   |  
|                                                                               |  |                                      |           |   |      |   |           |      |  |   |          |  
|Marketing                                                                      |  |                                      | 267,066   |   |      |   | 164,703   |      |  |   | 155,567  |  
|Amortization of GM liability                                                   |  |                                      | 37,250    |   |      |   | 35,564    |      |  |   | 13,598   |  
|                                                                               |  |                                      |           |   |      |   |           |      |  |   |          |  
|Total marketing                                                                |  |                                      | 304,316   |   |      |   | 200,267   |      |  |   | 169,165  |  
|Impairment of goodwill                                                         |  |                                      |          |   |      |   |          |      |  |   | 11,461   |  
|Depreciation & amortization                                                    |  |                                      | 145,775   |   |      |   | 156,927   |      |  |   | 117,202  |  
|                                                                               |  |                                      |           |   |      |   |           |      |  |   |          |  
|Total operating expenses                                                       |  |                                      | 707,232   |   |      |   | 548,074   |      |  |   | 463,003  |  
|                                                                               |  |                                      |           |   |      |   |           |      |  |   |          |  
|Operating loss                                                                 |  |                                      | (462,789  | ) |      |   | (456,293  | )    |  |   | (442,822 | )
|Interest income                                                                |  |                                      | 1,592     |   |      |   | 794       |      |  |   | 2,621    |  
|Interest expense                                                               |  |                                      | (84,914   | ) |      |   | (104,250  | )    |  |   | (52,037  | )
|Loss from deleveraging transactions                                            |  |                                      | (76,621   | ) |      |   | (29,731   | )    |  |   |         |  
|Other income                                                                   |  |                                      | 16        |   |      |   | (279      | )    |  |   | 653      |  
|                                                                               |  |                                      |           |   |      |   |           |      |  |   |          |  
|Provision for deferred income taxes                                            |  |                                      |           |   |      |   |           |      |  |   |          |  
|Net loss before income taxes                                                   |  |                                      | (622,716  | ) |      |   | (589,759  | )    |  |   | (491,585 | )
|Provision for deferred income taxes                                            |  |                                      | (27,317   | ) |      |   |          |      |  |   |         |  
|                                                                               |  |                                      |           |   |      |   |           |      |  |   |          |  
|Net loss                                                                       |  | $                                    | (650,033  | ) |      | $ | (589,759  | )    |  | $ | (491,585 | )
|                                                                               |  |                                      |           |   |      |   |           |      |  |   |          |  
|EBITDA(1)                                                                      |  | $                                    | (393,619  | ) |      | $ | (329,376  | )    |  | $ | (324,967 | )
|XM subscriptions (end of period) (2)                                           |  |                                      | 3,229,124 |   |      |   | 1,360,228 |      |  |   | 347,159  |  

---

|(1) | Net loss before interest income, interest expense, income taxes, depreciation and amortization is commonly referred to in our business as EBITDA. EBITDA is not a measure
of financial performance under generally accepted accounting principles. Consistent with regulatory requirements, EBITDA includes Loss from Deleveraging Transactions and Other Income. We believe EBITDA is often a useful measure of a companys
operating performance and is a significant basis used by our management to measure the operating performance of our business. Because we have funded and completed the build-out of our system through the raising and expenditure of large amounts of
capital, our results of operations reflect significant charges for depreciation, amortization and interest expense. EBITDA, which excludes this information, provides helpful information about the operating performance of our business, apart from the
expenses associated with our physical plant or capital structure. EBITDA is frequently used as one of the bases for comparing businesses in our industry, although our measure of EBITDA may not be comparable to similarly titled measures of other
companies. EBITDA does not purport to represent operating loss or cash flow from operating activities, as those terms are defined under generally accepted accounting principles, and should not be considered as an alternative to those measurements as
an indicator of our performance.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



29



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##### Table of Contents

##### Index to Financial Statements

|                                                |  |                |          |   |      |   |          |      |  |   |          |  
|----------------------------------------------- |  | -------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                |  | 2004           |          |   | 2003 |   |          | 2002 | 
|                                                |  | (In thousands) |         
|Reconciliation of net loss to EBITDA:           |  |                |          |   |      |   |          |      |  |   |          |  
|Net loss as reported                            |  | $              | (650,033 | ) |      | $ | (589,759 | )    |  | $ | (491,585 | )
|Add back non-EBITDA items included in net loss: |  |                |          |   |      |   |          |      |  |   |          |  
|Interest income                                 |  | $              | (1,592   | ) |      | $ | (794     | )    |  |   | (2,621   | )
|Interest expense                                |  |                | 84,914   |   |      |   | 104,250  |      |  |   | 52,037   |  
|Provision for deferred income taxes             |  |                | 27,317   |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                   |  |                | 145,775  |   |      |   | 156,927  |      |  |   | 117,202  |  
|                                                |  |                |          |   |      |   |          |      |  |   |          |  
|EBITDA                                          |  | $              | (393,619 | ) |      | $ | (329,376 | )    |  | $ | (324,967 | )
|                                                |  |                |          |   |      |   |          |      |  |   |          |  

---

|(2) | We consider subscribers to be those who are receiving and have agreed to pay for our service, either by credit card or by invoice, including those that are currently in promotional
periods paid for by vehicle manufacturers, as well as XM activated radios in vehicles for which we have a contractual right to receive payment for the use of our service. Radios that are revenue generating are counted individually as subscribers.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Year Ended December 31, 2004 Compared With
Year Ended December 31, 2003



XM Satellite Radio
Inc. and Subsidiaries



Revenue



Revenue. Our revenue consists of subscription fees, activation
charges, limited direct sales of radios, advertising sales, and revenue earned from royalties and invoice fees. In 2004, we recognized $244.4 million in total revenue, compared to $91.8 million in 2003, an increase of $152.6 million. During 2004,
subscription revenue comprised over 90% of our total revenues.



Subscribers. As of December 31, 2004, we had 3,229,124 subscribers, compared to 1,360,228 at December 31, 2003, an increase of 1,868,896 subscribers. Subscriber additions for the quarter ended December 31, 2004
include 490,941 retail, 219,955 OEM and 2,205 car rental subscribers. Our subscribers include 2,800,501 self-paying subscribers, 401,988 subscribers in OEM promotional periods (typically ranging from three months to one-year in duration) paid in
part by the vehicle manufacturers and 26,635 XM activated vehicles with rental car companies. Additionally, 376,049 family plan subscriptions at a multi-unit rate of $6.99 per radio per month are included in our total subscriber count. We consider
subscribers to be those who are receiving and have agreed to pay for our service, either by credit card or by invoice, including those who are currently in promotional periods paid for by vehicle manufacturers, as well as XM activated vehicles for
which we have a contractual right to receive payment for the use of our service. Radios that are revenue generating are counted individually as subscribers.



OEM Promotional Subscribers. OEM Promotional Subscribers are subscribers who have either a portion or all of their subscription fee
paid for by an OEM for a fixed period following the initial purchase or lease of the vehicle. Currently, at the time of sale, vehicle owners generally receive a 3-month prepaid trial subscription. XM generally receives two months of the 3-month
trial subscription from the vehicle manufacturer. Promotional periods generally include the period of trial service plus 30 days to handle the receipt and processing of payments. The automated activation program provides activated XM radios on
dealer lots for test drives. GM and Honda generally indicate the inclusion of 3 months free of XM service on the window sticker of XM-enabled vehicles. We measure the success of these programs based on the percentage that elect to receive the XM
service and convert to self-paying subscribers after the initial promotion periodwe refer to this as the conversion rate.



The OEMs started to offer promotional programs in late 2002. At that time, the XM enabled vehicles were delivered to the dealers with
inactive radios. Dealers or vehicle purchasers were required to call XM to activate a radio similar to an aftermarket consumer customer; not all XM-enabled vehicles were activated for the promotional subscription period. To streamline the process,
in late September 2003, we began implementing an auto activation program whereby the XM radios are being activated automatically upon delivery of the car to the dealer. In the first quarter of 2004, we started activating XM radios at the completion
of the car manufacturing process, which further reduces manual intervention in the process. Under our OEM promotional programs that ran from late 2002 through mid September 2003 (the primary program was the GM triple-play promotion), subscribers
were included in our OEM promotional subscriber count from the time of sign up on the system until such time as they transferred into our aftermarket, OEM and other subscriber count or were deactivated for non-payment in accordance with our normal
collection procedures. Under the auto-activation programs, subscribers are included in our OEM promotional subscriber count from the time of vehicle purchase or lease, through the period of trial service plus an additional 30 days. We measure
conversion rate three months after the period in which the trial service ends. Based on our experience it may take up to 90 days after the trial service ends for subscribers to respond to our marketing communications.



30



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##### Index to Financial Statements

The conversion rate for the GM triple-play program that ran through mid September 2003
averaged approximately 70%. The conversion rate for the year ended December 31, 2004 was 59% and reflects the auto activation program, with all XM-enabled vehicles activated for the promotional period. The fully automated factory activation program
has increased the number of subscribers provided by our OEM distribution channel, and we are focused on increasing the conversion rate by developing more refined marketing programs to convert promotional subscribers to self paying subscribers.



XM Activated Vehicles with Rental Car
Companies. Our subscribers also include 26,635 activated vehicles with rental car companies. For the initial model year 2003 XM-enabled rental vehicles, XM receives payments based on the use of XM service. Customers are charged $2.99 per day per
vehicle for use of the XM service, on which XM receives a revenue share. For subsequent model year 2004 and later vehicles, XM receives $10 per subscription per month.



Subscription Revenue. Subscription revenue was $221.1 million during 2004 compared to $78.3 million in 2003, an
increase of $142.8 million. Subscription revenue consists primarily of our monthly subscription fees charged to consumers, commercial establishments and fleets, which are recognized as the service is provided. Revenues received from vehicle
manufacturers for promotional service programs are included in subscription revenue. At the time of sale, vehicle owners generally receive a three-month trial subscription and are included in OEM promotional subscribers. Beginning in 2004, a
standard promotion of 3 months free was placed on the window sticker of all XM-enabled GM vehicles. We generally receive payment for two months of the three- month trial subscription period from the vehicle manufacturer. For 2004, subscription
revenue included $25.0 million from related parties for subscription fees paid under certain promotional agreements, compared with $8.5 million in 2003. Subscription revenue also includes revenues from premium channels and weather services. Our
subscriber arrangements are cancelable without penalty. Promotions and discounts are treated as a reduction to revenue during the period of the promotion. Sales incentives, consisting of rebates to subscribers, offset revenue. Discounts on equipment
sold with service are allocated to equipment and service based on relative fair value. In February 2005, we announced that we are expanding our basic service package and that the monthly subscription price for our basic service will increase to
$12.95 from $9.99 beginning April 2, 2005. Existing customers may lock in a discounted rate by signing up for a pre-paid plan of up to five years prior to April 2, 2005. The expanded basic service will include the internet service XM Radio Online
(previously $3.99 per month) and the High Voltage Channel (previously $1.99 per month), both of which were premium services prior to this change.



Average Monthly Subscription Revenue Per Subscriber. Average monthly subscription revenue per subscriber (ARPU) was approximately
$8.68 during 2004 and $8.97 during 2003. ARPU from our aftermarket, OEM and other subscribers was $9.26 during 2004, compared to $9.59 during 2003. The difference from our retail rate of $9.99 is due primarily to multi-year prepayment plan and
family plan discounts. ARPU from our OEM promotional subscribers was $5.82 during 2004, compared to $6.48 during 2003. ARPU from our rental car fleet subscribers was $9.26 during 2004, compared to $5.54 during 2003. Average monthly subscription
revenue per subscriber is derived from the total of earned subscription revenue (net of promotions and rebates) divided by the monthly weighted average number of subscribers for the period reported. Average monthly revenue per subscriber is a
measure of operational performance and not a measure of financial performance under generally accepted accounting principles. Average monthly revenue per subscriber will fluctuate based on promotions implemented in 2005, as well as the adoption rate
of multiyear prepayment plans, multiradio discount plans (such as the family plan), premium and data services. We expect that average monthly revenue per subscriber will increase in 2005. The increase in the monthly subscription price takes effect
for all billing cycles on or after April 2, 2005, and therefore, will be implemented over time.



Activation Revenue. Activation revenue is comprised of one-time activation charges billed to customers. Activation fees are non-refundable, and are
recognized on a pro-rata basis over the estimated 40-month life of the subscriber relationship. This estimate may be further refined in the future as additional historical data becomes available. During 2004, we recognized $4.8 million in activation
revenue compared to $1.9 million in 2003, an increase of $2.9 million due to an increase in subscribers. The growth in activation revenue will be impacted by the amount of discounts given as a result of the competitive environment, as well as
changes, if any, in the estimated life of the subscriber relationship.



Equipment Revenue. Equipment revenue is comprised of revenues from any direct sales of radios. Through December 31, 2004, the direct sales of radios have generally been for promotional purposes. During 2004, we recognized $7.3
million in equipment revenue compared to $6.7 million during 2003. For 2004, equipment revenue included $30,000 from direct sales of radios to related parties compared with $3.0 million in 2003 related to a one-time promotion that ended in 2003. We
expect revenue from the sale of equipment to increase proportionately with the increase in direct sales promotional activities as well as kiosk sales.



Net Ad Sales Revenue. Advertising revenue consists of sales of advertisements and program sponsorships on the XM network to advertisers that are
recognized in the period in which they are broadcast. Advertising revenue includes advertising aired in exchange for goods and services (barter), which is recorded at fair value. Advertising revenue is presented net of agency commissions in the
results of operations, which is consistent with industry practice. In 2004, we recognized $8.5 million in net advertising revenue compared to $4.1 million during 2003. These amounts are net of agency commissions, which were $1.0 million during 2004,
compared to $0.5 million during 2003. The increase in net advertising revenue is due primarily to increased demand for advertising on the XM network that results from our subscriber growth, listenership and audience reach. During 2004, we recognized
$1.8 million in advertising barter revenue compared to $1.2 million during 2003. For 2004, advertising revenue included $2.0 million from sales of advertisements to related parties compared with $512,000 in 2003. We expect advertising revenue to
increase during 2005 due to increased demand for advertising on the XM network resulting from our subscriber growth, listenership and audience reach.



31



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##### Index to Financial Statements

Other Revenue. Other revenue earned during 2004 consists of processing fees charged to invoiced
subscribers, royalty revenue from certain tuners manufactured, and other revenue. We recognized $2.8 million of other revenue during 2004 compared with $0.9 million during 2003, an increase of $1.9 million. The increase primarily reflects barter
revenue of $1.1 million relating to a non-monetary transaction entered into in February 2004 with a related party involving the exchange of radio subscriptions for the provision of certain marketing services and increased processing fees resulting
from our growth in subscribers.



Operating Expenses



Total Operating Expenses. Total operating expenses were $707.2
million for 2004 compared to $548.1 million in 2003, an increase of $159.1 million or 29%. The increase was due to an increase in cost of revenue of $54.5 million attributable to increased sales, an increase in marketing expenses of $104.0 million
due to increased distribution expenses as a result of the growth in subscribers as well as our efforts to attract and acquire new subscribers, an increase of $11.2 million in research & development expense due to costs associated with the
development of future telematics applications and new product engineering builds and an increase of $0.6 million in general & administrative expense, offset in part by a decrease of $11.1 million in depreciation & amortization.



Cost of Revenue. Cost of revenue includes revenue share &
royalties, customer care & billing costs, costs of radios associated with direct sales of radios, costs directly associated with sales of advertising, satellite & terrestrial operating costs, as well as costs related to broadcast &
operations and programming & content. These combined costs were $205.3 million for 2004, up from $150.8 million in 2003, an increase of $54.5 million or 36%.



Revenue Share & Royalties. Revenue share & royalties includes performance rights obligations
to composers, artists, and copyright owners for public performances of their creative works broadcast on XM, and royalties paid to radio technology providers and revenue share expenses associated with manufacturing and distribution partners and
content providers. These costs were $50.7 million in 2004 compared to $26.4 million in 2003. This increase of $24.3 million was a result of our growth in subscriber base and revenues. We expect these total costs to continue to increase as subscriber
growth continues.



Customer Care &
Billing. Customer care & billing operations expense includes expenses from outsourced customer care functions as well as internal IT costs associated with front office applications. These expenses were $40.9 million during 2004, compared
with $25.9 million during 2003, an increase of $15.0 million. This increase resulted from the increase in subscribers. We expect customer care & billing operations expense in total to increase as we continue to add subscribers, but we expect the
average cost per subscriber to decrease.



Cost of Equipment. During 2004, we incurred $11.6 million relating to promotional radios and radio kits that we sold directly to subscribers, compared to $9.8 million in 2003, an increase of $1.8 million. We expect the cost of
equipment to increase as we increase direct sales of equipment.



Ad Sales. Ad sales expense was $6.2 million in 2004 compared to $3.3 million in 2003, an increase of $2.9 million or 88%. The increase in ad sales expense is due primarily to an increase in staffing and
marketing costs to support ad sales growth. We expect ad sales costs to increase in support of expected advertising revenue growth.



Satellite & Terrestrial. Satellite & terrestrial includes: telemetry, tracking and control of our two satellites, in-orbit
satellite insurance and incentive payments, satellite uplink, and all costs associated with operating our terrestrial repeater network such as power, maintenance and lease payments. These expenses were $35.9 million in 2004, compared with $39.7
million in 2003, a decrease of $3.8 million or 10%. The decrease is primarily due to a decrease in repeater network optimization charges, a decrease in accrued XM Rock and XM Roll performance incentives payable to Boeing and a decrease in in-orbit
satellite insurance expense related to the partial settlement of insurance claims on XM Rock and XM Roll. We expect system operating costs to increase with the operation of a third satellite, XM-3, which we launched in the first quarter of 2005.



Broadcast & Operations



Broadcast. Broadcast expenses include costs
associated with the management and maintenance of the systems, software, hardware, production and performance studios used in the creation and distribution of XM-original and third party content. The advertising trafficking (scheduling and
insertion) functions are also included. Broadcast costs were $10.8 million for 2004, compared to $7.7 million in 2003, an increase of $3.1 million. The increase is primarily due to increased costs associated with enhancements to and maintenance of
the broadcast systems infrastructure. Broadcast costs are expected to increase with new content initiatives.



Operations. Operations, which includes facilities and information technology expense, was $16.5 million in 2004, compared with
$14.8 million in 2003, an increase of $1.7 million. The increase is mainly due to an increase in IT related costs and professional fees and an increase in the general operating costs associated with the corporate facility. These costs are expected
to increase in 2005 as we make additional investments in our back office systems to support the growth of the business.



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##### Index to Financial Statements

Programming & Content. Programming & content includes the creative and
production costs associated with our over 150 channels of XM-original and third party content. This includes costs of programming staff and fixed payments for third party content. Programming & content expense was $32.7 million during 2004,
compared with $23.1 million during 2003, an increase of $9.6 million or 42%. The increase is due to staffing and content related expenses in support of new 2004 programming initiatives, including 21 Instant Traffic and Weather channels, Opie &
Anthony and XM Public Radio. These costs are expected to increase significantly in 2005 from the launch of our MLB Home Plate channel and the live broadcast of Major League Baseball games as well as the full year of expense from other programming
initiatives launched in 2004.



Research &
Development. Research & development includes the costs of new product development, chipset design, and engineering. These combined expenses were $23.5 million in 2004, compared with $12.3 million in 2003, an increase of $11.2 million or 91%.
The increase in research and development expense primarily resulted from costs associated with the development of future telematics applications and new product engineering builds. In 2004, research and development expense included $9.6 million of
costs relating to the development of future telematics applications associated with a related party compared with $0 during 2003. Research and development expenses are expected to increase as we accelerate the development of future telematics
applications and new products, including interoperable radios.



General & Administrative. General & administrative expense was $28.4 million during 2004, compared with $27.8 million during 2003.



Marketing. Marketing includes the costs of retention & support, subsidies & distribution, advertising & marketing, and amortization of
our liability to GM. These combined costs were $304.3 million for 2004, compared to $200.3 million in 2003, an increase of $104.0 million or 52%. Marketing expense increased primarily due to increases in subsidies & distribution of $73.2 million
and advertising and marketing of $23.8 million.



Retention & Support. Personnel-related expenses comprise the majority of retention and support. In 2004, these costs were $13.3 million compared to $7.9 million in 2003, an increase of $5.4 million or 68%. The increase is due to
an increase in headcount and costs for professional services.



Subsidies & Distribution. We currently provide incentives and subsidies for the manufacture, purchase, installation and activation of XM radios to attract and retain our manufacturing and distribution
partners. Our subsidy and distribution costs are significant and totaled approximately $165.7 million during 2004, compared with $92.5 million during 2003, an increase of 73.2 million or 79%. This increase is due primarily to the increase in
subscribers, new activations, and GM vehicles equipped with XM radios. Subsidy and distribution expense will increase as the number of XM radios that are manufactured, installed and activated increase; however, we expect the cost per new subscriber
to decrease slightly.



Subscriber
Acquisition Costs. We consider subscriber acquisition costs to include radio manufacturer subsidies, certain sales, activation and installation commissions, and hardware-related promotions. These costs are reported in Subsidies &
Distribution. The negative margins from equipment sales are also included in subscriber acquisition costs. Subscriber acquisition costs do not include ongoing loyalty payments to retailers and distribution partners, payments under revenue sharing
arrangements with radio manufacturers and distributors and certain guaranteed payments to General Motors. During the years ended December 31, 2004, and 2003, we incurred expenses of $157.5 million, and $88.8 million, respectively, related to
subscriber acquisition costs. Our average subscriber acquisition cost was $62 and $75 during 2004 and 2003, respectively. The decline in SAC for 2004 as compared to 2003 is due primarily to the decline in manufacturer subsidies. We expect SAC to
decline slightly in 2005.



Advertising
& Marketing. Activities comprising these expenses include media, advertising, events and direct marketing programs. Advertising & marketing costs were $88.1 million during 2004, compared with $64.3 million during 2003, an increase of
$23.8 million or 37%. The increase is due primarily to our increased retail marketing and media advertising expenses.



Cost Per Gross Addition. We consider CPGA to include the amounts in SAC, as well as advertising, media and other discretionary
marketing expenses. In our financial statements, SAC costs are captured in Subsidies & Distribution and the negative margins from equipment sales, while CPGA costs are primarily captured by the combination of Subsidies & Distribution,
Advertising & Marketing, plus the negative margins from equipment sales. CPGA does not include marketing staff (included in Retention & Support) or the amortization of the GM guaranteed payments (included in Amortization of GM Liability).
During the years ended December 31, 2004 and 2003 we incurred CPGA expenses of $257.9 million, and $159.9 million, respectively. CPGA for 2004 and 2003 was $100 and $137, respectively. The decline in CPGA for 2004 as compared to 2003 is due to the
combined impacts of the declines in manufacturer subsidies, discretionary advertising and marketing expenses and an increase in the number of activations. We expect CPGA to decline slightly in 2005.



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##### Index to Financial Statements

Amortization of GM Liability. These costs include the amortization of annual fixed
guaranteed payment commitments to General Motors, aggregating to $439 million, under our long-term distribution agreement with the OnStar division of GM providing for the installation of XM radios in GM vehicles. Amortization of the GM liability was
$37.3 million for 2004, compared with $35.6 million for 2003. The distribution agreement was amended in June 2002 and then again in January 2003, as described under the captions Liquidity and Capital ResourcesContractual Obligations and
Commercial Commitments. As a result of the January 2003 amendment and GMs current roll out plans, commencing in February 2003 we began recognizing the fixed payments, which approximate $397.3 million, on a straight-line basis through
September 2013. In January 2003, we expensed the pro rata portion of the fixed payment that was based on the June 2002 amendment to the agreement. We expect these expenses to remain at $37.3 million per annum through September 2013.



Depreciation & Amortization. Depreciation & amortization
expense was $145.8 million during 2004, compared with $156.9 million during 2003, a decrease of $11.1 million or 7.0%. The decrease was due primarily to lower depreciation on XM Rock and XM Roll as a result of the August 2004 insurance proceeds of
approximately $134 million reducing the carrying values of our satellites in August 2004. Depreciation and amortization expense is expected to increase in 2005 when XM-3 is placed into service.



Interest Income. Interest income was $1.6 million during 2004,
compared with $0.8 million during 2003, an increase of $0.8 million or 100%. The increase was the result of higher average balances of cash and cash equivalents in 2004 as well as higher yields on our investments due to market conditions.



Interest Expense. Interest expense was $84.9 million
during 2004, compared with $104.3 million during 2003, a decrease of $19.4 million. Included in the interest expense for 2004 was a charge of $3.2 million attributable to the beneficial conversion feature on the exchange of $11.1 million carrying
value, or $13.4 million principal amount at maturity, of our 10% senior secured discount convertible notes due 2009 as compared to a charge of $7.2 million attributable to the beneficial conversion feature on the exchange of $24.0 million carrying
value, or $30.5 million principal amount at maturity, of our 10% senior secured discount convertible notes due 2009 in 2003. Excluding the beneficial conversion feature charge, the decrease in interest expense is primarily driven by an increase in
capitalization of interest costs due to increased capital expenditures for the system under construction.



Loss from Deleveraging Transactions. We recorded a loss of $76.6 million from the retirement of debt with a carrying value including accrued
interest of $206.1 million during 2004 and a loss of $29.7 million from the retirement of debt with a carrying value including accrued interest of $91.6 million during 2003.



Other Income (Expense). Other income was $16,000 in 2004 and $(279,000) 2003. The change is due primarily to losses
resulting from the disposition of fixed assets in 2003.



Provision for Deferred Income Taxes. We recorded a provision for deferred income taxes expense of $27.3 million and $0 during 2004 and 2003, respectively. The increase was the result of our recording of a deferred tax liability
related to indefinite lived assets that are amortized and deducted for tax purposes but are not amortized under generally accepted accounting principles. We will continue to incur tax expense as the indefinite lived assets are amortized for tax
purposes over the next 13 years.



Net Loss. Net loss for 2004 was $650.0
million, compared with $589.8 million for 2003, an increase of $60.2 million or 10%. The increase primarily reflects increases in operating expenses due to our subscriber growth, the provision for deferred income taxes and an increase in losses
associated with de-leveraging transactions, offset in part by the growth in our revenue and a decrease in interest expense.



EBITDA. Net loss before interest income, interest expense, income taxes, depreciation and amortization is commonly referred to in our business as
EBITDA. EBITDA is not a measure of financial performance under generally accepted accounting principles. EBITDA during 2004 was $(393.6) million, compared with $(329.4) million during 2003. Included in EBITDA are losses of $76.6 million
in 2004 and $29.7 million in 2003 recorded from the deleveraging transactions. The increased loss reflects our increase in operating costs as a result of our subscriber growth and increase in losses associated with de-leveraging transactions, offset
in part by revenue growth and margin improvement as well as a decline in the costs to acquire each new subscriber. Consistent with regulatory requirements, EBITDA includes Loss from Deleveraging Transactions and Other Income. We believe EBITDA is
often a useful measure of a companys operating performance and is a significant basis used by our management to measure the operating performance of our business. Because we have funded and completed the build-out of our system through the
raising and expenditure of large amounts of capital, our results of operations reflect significant charges for depreciation, amortization and interest expense. EBITDA, which excludes this information, provides helpful information about the operating
performance of our business, apart from the expenses associated with our physical plant or capital structure. EBITDA is frequently used as one of the bases for comparing businesses in our industry, although our measure of EBITDA may not be
comparable to similarly titled measures of other companies. EBITDA does not purport to represent operating activities, as those terms are defined under generally accepted accounting principles, and should not be considered as an alternative to those
measurements as an indicator of our performance. The reconciliation of net loss to EBITDA is as follows (in thousands):



|                                                |  |                         |          |   |      |   |          |  
|----------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | -
|                                                |  | Year Ended December 31, |         
|                                                |  | 2004                    |          |   | 2003 |  
|Net loss as reported                            |  | $                       | (650,033 | ) |      | $ | (589,759 | )
|Add back non-EBITDA items included in net loss: |  |                         |          |   |      |   |          |  
|Interest income                                 |  |                         | (1,592   | ) |      |   | (794     | )
|Interest expense                                |  |                         | 84,914   |   |      |   | 104,250  |  
|Provision for deferred income taxes             |  |                         | 27,317   |   |      |   |         |  
|Depreciation & amortization                     |  |                         | 145,775  |   |      |   | 156,927  |  
|                                                |  |                         |          |   |      |   |          |  
|EBITDA                                          |  | $                       | (393,619 | ) |      | $ | (329,376 | )
|                                                |  |                         |          |   |      |   |          |  



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##### Index to Financial Statements

Year Ended December 31, 2003 Compared With Year Ended December 31, 2002



XM Satellite Radio Inc. and Subsidiaries



Revenue.



Revenue. Our revenue consists of subscription fees, activation charges, limited direct sales of radios, advertising
sales, and revenue earned from royalties and invoice fees. In 2003, we recognized $91.8 million in total revenue, compared to $20.2 million in 2002, an increase of $71.6 million. During 2003, subscription revenue comprised over 85% of our total
revenues.



Subscribers.As of December
31, 2003, we had 1,360,228 subscribers, compared to 347,159 at December 31, 2002, an increase of 1,013,069 subscribers. Our subscribers at December 31, 2003 included 1,018,963 self-paying subscribers, 320,473 subscribers in OEM promotional periods
(typically ranging from three months to one-year in duration) paid for by the vehicle manufacturers and 20,792 XM activated vehicles with rental car companies. At the time of sale, vehicle owners generally receive a 3-month trial subscription and
are included in OEM promotional subscribers. XM generally receives two months of the 3-month trial subscription from the vehicle manufacturer. The number of subscribers electing to continue with the XM service beyond the initial OEM promotional
period, the conversion rate, has ranged from 65%-80% through the end of 2003 and averaged approximately 74% for 2003. Beginning in late September 2003, we began an interim auto activation program whereby XM-enabled radios in new vehicles
manufactured by General Motors and Honda are automatically activated to receive the XM service as a subscriber at the time of the sale to the vehicle purchaser. In March 2004, we began a fully automated factory activation program whereby XM-enabled
radios in new vehicles manufactured by General Motors are activated to receive the XM service at the time of manufacture. These vehicles are not included in our subscriber count until the vehicle is sold to a customer who becomes an OEM promotional
subscriber. The fully automated factory activation program was initiated to streamline the process for activating the XM service in vehicles that previously required the auto manufacturers dealers to contact our listener care center. The fully
automated factory activation program also provides activated radios on the dealer lots for test drives. In addition, GM will now provide standard on the window sticker 3 months free of XM service with every XM-enabled vehicle. We expect that the
implementation of the fully automated activation program will increase the number of subscribers provided by our OEM distribution channel, but will result in a decline in our overall conversion rate due to a larger number of cars activated for trial
service. Our subscribers also include 20,792 XM activated vehicles with rental car companies. For the initial model year 2003 XM-enabled rental vehicles, XM receives payments based on the use of XM service. Customers are charged $2.99 per day per
vehicle for use of the XM service, on which XM receives a revenue share. For subsequent model year 2004 and later vehicles, XM receives $10 per subscription per month. Additionally, 100,872 family plan subscriptions at a multi-unit rate of $6.99 per
radio per month are included in our total subscriber count. We consider subscribers to be those who are receiving and have agreed to pay for our service, either by credit card or by invoice, including those who are currently in promotional periods
paid for by vehicle manufacturers, as well as XM activated vehicles for which we have a contractual right to receive payment for the use of our service. Radios that are revenue generating are counted individually as subscribers.



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##### Index to Financial Statements

Subscription Revenue. Subscription revenue was $78.3 million during 2003 compared to $16.3 million
in 2002, an increase of $62.0 million. Subscription revenue consists primarily of our monthly subscription fees charged to consumers, commercial establishments and fleets, which are recognized as the service is provided. Revenues received from
vehicle manufacturers for promotional service programs are included in subscription revenue. At the time of sale, vehicle owners generally receive a three-month trial subscription and are included in OEM promotional subscribers. Beginning in 2004, a
standard promotion of 3 months free will be placed on the window sticker of all XM-enabled GM vehicles. We generally receive payment for two months of the three-month trial subscription period from the vehicle manufacturer. For 2003, subscription
revenue included $8.5 million from related parties for subscription fees paid under certain promotional agreements, compared with $184,000 in 2002. Subscription revenue also includes revenues from a premium service. Our subscriber arrangements are
cancelable without penalty. Promotions and discounts are treated as a reduction to revenue during the period of the promotion. Sales incentives, consisting of rebates to subscribers, offset revenue. Discounts on equipment sold with service are
allocated to equipment and service based on relative fair value.



Average Monthly Subscription Revenue Per Subscriber. Average monthly subscription revenue per subscriber (ARPU) was approximately $8.97 during 2003 and $9.43 during 2002. ARPU from our aftermarket, OEM and
other subscribers was $9.59 during 2003, compared to $9.54 during 2002. The difference from our retail rate of $9.99 is due primarily to multi-year prepayment plan and family plan discounts. ARPU from our OEM promotional subscribers was $6.48 during
2003, compared to $2.81 during 2002. The OEM promotional programs began in November 2002. ARPU from our rental car fleet subscribers was $5.54 during 2003. ARPU from our family plan subscribers was $6.91 during 2003. Average monthly subscription
revenue per subscriber is derived from the total of earned subscription revenue (net of promotions and rebates) divided by the monthly weighted average number of subscribers for the period reported. Average monthly revenue per subscriber is a
measure of operational performance and not a measure of financial performance under generally accepted accounting principles.



Activation Revenue. Activation revenue is comprised of one-time activation charges billed to customers. Activation fees are non-refundable, and are
recognized on a pro-rata basis over the estimated 40-month life of the subscriber relationship. We expect this estimate to be further refined in the future as additional historical data becomes available. During 2003, we recognized $1.9 million in
activation revenue compared to $0.5 million in 2002, an increase of $1.4 million due to an increase in subscribers.



Equipment Revenue. Equipment revenue is comprised of revenues from any direct sales of radios. Through December 31, 2003, the direct sales of
radios have generally been for promotional purposes. During 2003, we recognized $6.7 million in equipment revenue compared to $0.8 million during 2002. For 2003, equipment revenue included $3.0 million from direct sales of radios to related parties
compared with $72,000 in 2002.



Net Ad Sales Revenue.
Advertising revenue consists of sales of advertisements and program sponsorships on the XM network to advertisers that are recognized in the period in which they are broadcast. Advertising revenue includes advertising aired in exchange for goods and
services (barter), which is recorded at fair value. Advertising revenue is presented net of agency commissions in the results of operations, which is consistent with industry practice. In 2003, we recognized $4.1 million in net advertising revenue
compared to $2.3 million during 2002. These amounts are net of agency commissions, which were $486,000 during 2003, compared to $350,000 during 2002. The increase in net advertising revenue is due primarily to increased demand for advertising on the
XM network that results from our subscriber growth, listenership and audience reach. During 2003, we recognized $1.1 million in advertising barter revenue compared to $0.3 million during 2002. For 2003, advertising revenue included $512,000 from
sales of advertisements to related parties compared with $0 in 2002.



Other Revenue. Other revenue earned during 2003 consists of processing fees charged to invoiced subscribers, royalty revenue from certain tuners manufactured, and other revenue. We recognized $0.9 million of other revenue during 2003
compared with $0.3 million during 2002.



Operating Expenses



Total Operating Expenses. Total operating expenses were $548.1
million for 2003 compared to $463.0 million in 2002, an increase of $85.1 million or 18%. The increase was due primarily to an increase in cost of revenue of $24.2 million attributable to increased sales, an increase in marketing expenses of $31.1
million due to increased distribution expenses as a result of the growth in subscribers and an increase in depreciation and amortization of $39.7 million resulting from a reduction in the useful life of our satellites in third quarter of 2002,
offset in part by an impairment charge of $11.5 million relating to goodwill recognized in 2002.



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##### Index to Financial Statements

Cost of Revenue. Cost of revenue includes revenue share & royalties, customer care &
billing costs, costs of radios associated with direct sales of radios, costs directly associated with sales of advertising, satellite & terrestrial operating costs, as well as costs related to broadcast & operations and programming &
content. These combined costs were $150.8 million for 2003, up from $126.6 million in 2002, an increase of $24.2 million or 19%.



Revenue Share & Royalties. Revenue share & royalties includes performance rights obligations to composers, artists, and
copyright owners for public performances of their creative works broadcast on XM, and royalties paid to radio technology providers and revenue share payments to manufacturing and distribution partners and content providers. These costs were $26.4
million in 2003 compared to $12.8 million in 2002. This increase of $13.6 million was a result of our growth in subscriber base and revenues along with completion of negotiations for performance rights royalties.



Customer Care & Billing. Customer care &
billing operations expense includes expenses from outsourced customer care functions as well as internal IT costs associated with front office applications. These expenses were $25.9 million during 2003, compared with $16.1 million during 2002, an
increase of $9.8 million. This increase resulted from the increase in subscribers.



Cost of Equipment. During 2003, we incurred $9.8 million relating to promotional radios and radio kits that we sold directly to
subscribers, compared to $1.7 million in 2002.



Ad Sales. Ad sales expense was $3.3 million in 2003 compared to $1.9 million in 2002, an increase of $1.4 million or 74%. The increase in ad sales expense is due primarily to an increase in staffing and marketing costs to support ad
sales growth.



Satellite &
Terrestrial. Satellite & terrestrial includes: telemetry, tracking and control of our two satellites, in-orbit satellite insurance and incentive payments, satellite uplink, and all costs associated with operating our terrestrial repeater
network such as power, maintenance and lease payments. These expenses were $39.7 million in 2003, compared with $44.8 million in 2002, a decrease of $5.1 million or 11%. The decrease primarily resulted from previously accrued performance incentives
payable to Boeing relating to XM Rock and XM Roll that were reversed in 2003 as a result of the December 2003 amendment of our contract with Boeing, which removed this obligation.



Broadcast & Operations



Broadcast. Broadcast expenses include costs associated with the management and maintenance of the
systems, software, hardware, production and performance studios used in the creation and distribution of XM-original and third party content. The advertising trafficking (scheduling and insertion) functions are also included. Broadcast costs were
$7.7 million for 2003, compared to $7.7 million in 2002.



Operations. Operations, which includes facilities and back office information technology expense, was $14.8 million in 2003, compared with $16.2 million in 2002, a decrease of $1.4 million.



Programming & Content. Programming & content includes the
creative and production costs associated with our XM-original and third party content. This includes costs of programming staff and fixed payments for third party content. Programming & content expense was $23.1 million during 2003, compared
with $25.4 million during 2002, a decrease of $2.3 million or 9%. The decrease is due primarily to decreases in payroll and payroll related costs from a reduction in headcount which occurred in November 2002 and lower fixed payments to certain
content providers as a result of contract renegotiations.



Research & Development. Research & development includes the costs of new product development, chipset design, and engineering. These combined expenses were $12.3 million in 2003, compared with $10.8 million in 2002, an
increase of $1.5 million or 14%. The increase in research and development expense resulted from the development of four new products, XM PCR, Delphi XM Roady, XM Commander and XM Direct, brought to market in 2003, as well as the commencement of
activities under the joint development agreement with Sirius Radio.



General & Administrative. General & administrative expense was $27.8 million during 2003, compared with $27.8 million during 2002.



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##### Index to Financial Statements

Marketing. Marketing includes the costs of retention & support, subsidies & distribution,
advertising & marketing, and amortization of our liability to GM. These combined costs were $200.3 million for 2003, compared to $169.2 million in 2002, an increase of $31.1 million, or 18%. Marketing expense increased primarily due to increases
in subsidies & distribution of $38.4 million and amortization of GM liability of $22.0 million, offset in part by decreases in retention and support of $2.0 million and advertising and marketing of $27.3 million.



Retention & Support. Personnel-related expenses
comprise the majority of retention and support. In 2003, these costs were $7.9 million compared to $9.9 million in 2002, a decrease of $2.0 million or 20%, primarily due to a reduction in staffing levels, and a decrease in non-cash stock
compensation expense resulting from the reversal of an accrual relating to the Sony warrants. In September 2003, it was evident that Sony did not achieve the minimum performance target required for the vesting of its warrants. Therefore, the
non-cash compensation charges of $0.4 million recorded in prior years in relation to these warrants were reversed in 2003.



Subsidies & Distribution. We currently provide incentives and subsidies for the manufacture, purchase, installation and
activation of XM radios to attract and retain our manufacturing and distribution partners. Our subsidy and distribution costs are significant and totaled approximately $92.5 million during 2003, compared with $54.1 million during 2002, an increase
of $38.4 million or 71%. This increase is due primarily to the increase in subscribers, new activations, and GM vehicles equipped with XM radios, offset in part by a decrease in manufacturing subsidies resulting from changes in the subsidy timing
and lower subsidy rates.



Subscriber
Acquisition Costs. We consider subscriber acquisition costs to include radio manufacturer subsidies, certain sales, activation and installation commissions, and hardware-related promotions. These costs are reported in Subsidies &
Distribution. The negative margins from equipment sales are also included in subscriber acquisition costs. Subscriber acquisition costs do not include ongoing loyalty payments to retailers and distribution partners, payments under revenue sharing
arrangements with radio manufacturers and distributors and certain guaranteed payments to General Motors. During the years ended December 31, 2003, and 2002, we incurred expenses of $88.8 million, and $54.1 million, respectively, related to
subscriber acquisition costs. Our average subscriber acquisition cost was $75 and $116 during 2003 and 2002, respectively. The decline in SAC for 2003 as compared to 2002 is due primarily to the decline in manufacturer subsidies.



Advertising & Marketing. Activities comprising
these expenses include media, advertising, events and direct marketing programs. Advertising & marketing costs were $64.3 million during 2003, compared with $91.6 million during 2002, a decrease of $27.3 million or 30%. The decrease is due
primarily to our decreased purchase of consumer advertising media.



Cost Per Gross Addition. We consider CPGA to include the amounts in SAC, as well as advertising, media and other discretionary marketing expenses. In our financial statements, SAC costs are captured in
Subsidies & Distribution and the negative margins from equipment sales, while CPGA costs are primarily captured by the combination of Subsidies & Distribution, Advertising & Marketing, plus the negative margins from equipment sales. CPGA
does not include marketing staff (included in Retention & Support) or the amortization of the GM guaranteed payments (included in Amortization of GM Liability). During the years ended December 31, 2003, and 2002, we incurred CPGA expenses of
$159.9 million, and $145.5 million, respectively. CPGA for 2003 and 2002 was $137 and $425, respectively. The decline in CPGA for 2003 as compared to 2002 is due to the combined impacts of the declines in manufacturer subsidies, discretionary
advertising and marketing expenses and an increase in the number of activations.



Amortization of GM Liability. These costs include the amortization of annual fixed guaranteed payment commitments to General
Motors, aggregating to $439 million, under our long-term distribution agreement with the OnStar division of GM providing for the installation of XM radios in GM vehicles. Amortization of the GM liability was $35.6 million for 2003, compared with
$13.6 million for 2002. The distribution agreement was amended in June 2002 and then again in January 2003, as described under the captions Liquidity and Capital ResourcesCapital Resources and Financing. As a result of the January
2003 amendment and GMs current roll out plans, commencing in February 2003 we began recognizing the annual payments, which approximate $397.3 million, on a straight-line basis through September 2013. In January 2003, we expensed the pro rata
portion of the fixed payment that was based on the June 2002 amendment to the agreement.



Impairment of Goodwill. We recognized an impairment charge of $11.5 million during the fourth quarter of 2002.



Depreciation & Amortization. Depreciation & amortization expense was $156.9 million during 2003, compared with $117.2 million during 2002,
an increase of $39.7 million or 34%. The increase in depreciation and amortization expense primarily resulted from the reduction in the useful lives of our in-orbit satellites from 17.5 years to 6.75 years during the third quarter of 2002 due to a
solar array output power anomaly.



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##### Index to Financial Statements

Interest Income. Interest income was $0.8 million during 2003, compared with $2.6 million during
2002, a decrease of $1.8 million or 69%. The decrease was the result of lower yields on our investments due to market conditions as well as lower average balances of cash and cash equivalents in 2003.



Interest Expense. We recorded interest expense of $104.3 million and
$52.0 million during 2003 and 2002, respectively. The increase in interest expense is due to an increase in debt outstanding from the January 2003 and June 2003 financing transactions, as well as a charge of $7.2 million to interest expense
attributable to the beneficial conversion feature on the exchange of $24.0 million carrying value of our 10% senior secured discount convertible notes due 2009 into 8,072,081 shares of Holdings Class A common stock.



Loss from Deleveraging Transactions. We recorded a loss of $29.7
million from the retirement of debt with a carrying value including accrued interest of $91.6 million during 2003. No deleveraging transactions occurred during 2002.



Other Income (Expense). Other income (expense), net was $(0.3) million during 2003, compared with $0.7 during 2002. A
large part of the $1.0 million change was due to losses resulting from the disposition of fixed assets in 2003.



Net Loss. Net loss for 2003 was $589.8 million, compared with $491.6 million for 2002, an increase of $98.2 million or 20%. The increase primarily
reflects the losses recorded in other expense from our deleveraging transactions, increases in interest expense and increases in operating expenses, primarily depreciation and amortization expense, offset in part by the growth in our revenue.



EBITDA. Net loss before interest income, interest
expense, income taxes, depreciation and amortization is commonly referred to in our business as EBITDA. EBITDA is not a measure of financial performance under generally accepted accounting principles. EBITDA during 2003 was $(329.4)
million, compared with $(325.0) million during 2002. Included in the 2003 EBITDA are losses of $29.8 million recorded from the deleveraging transactions. Consistent with regulatory requirements, EBITDA includes Loss from Deleveraging Transactions
and Other Income (Expense). We believe EBITDA is often a useful measure of a companys operating performance and is a significant basis used by our management to measure the operating performance of our business. Because we have funded and
completed the build-out of our system through the raising and expenditure of large amounts of capital, our results of operations reflect significant charges for depreciation, amortization and interest expense. EBITDA, which excludes this
information, provides helpful information about the operating performance of our business, apart from the expenses associated with our physical plant or capital structure. EBITDA is frequently used as one of the bases for comparing businesses in our
industry, although our measure of EBITDA may not be comparable to similarly titled measures of other companies. EBITDA does not purport to represent operating activities, as those terms are defined under generally accepted accounting principles, and
should not be considered as an alternative to those measurements as an indicator of our performance.



The reconciliation of net loss to EBITDA is as follows (in thousands):



|                                                |  |                         |          |   |      |   |          |  
|----------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | -
|                                                |  | Year Ended December 31, |         
|                                                |  | 2003                    |          |   | 2002 |  
|Net loss as reported                            |  | $                       | (589,759 | ) |      | $ | (491,585 | )
|Add back non-EBITDA items included in net loss: |  |                         |          |   |      |   |          |  
|Interest income                                 |  |                         | (794     | ) |      |   | (2,621   | )
|Interest expense                                |  |                         | 104,250  |   |      |   | 52,037   |  
|Depreciation & amortization                     |  |                         | 156,927  |   |      |   | 117,202  |  
|                                                |  |                         |          |   |      |   |          |  
|EBITDA                                          |  | $                       | (329,376 | ) |      | $ | (324,967 | )
|                                                |  |                         |          |   |      |   |          |  



Liquidity and Capital Resources



Overview



At December 31, 2004, we had total cash and cash equivalents of $202.5
million, and working capital of $(12.3) million compared to total cash and cash equivalents of $90.2 million at December 31, 2003. The increase resulted from $227.6 million provided by financing activities, offset by $106.9 million used in operating
activities and $8.4 million used in investing activities. The proceeds from financing activities resulted from $304.9 million of capital contributions from Holdings and the issuance of Floating Rate Notes in April 2004 that yielded gross proceeds of
$200 million, offset in part by the repayment of $184.2 million of related party debt, repayments of secured debt of $83 million, and payments on other borrowings of $5.2 million. The financing activities completed during the year ended December 31,
2004, most of which were undertaken to retire or replace debt, are more fully discussed below. Investing activities consisted primarily of capital expenditures for the construction and launch of XM-3 and construction of XM-4, computer systems
infrastructure and broadcast facilities, and the construction of the backup uplink facility, offset in part by the proceeds from the third quarter settlement with insurers representing 80% of the insurance coverage on XM Rock and XM Roll. Cash flows
used in operating activities includes the net loss of $650.0 million, offset in part by the net cash provided by our operating assets and liabilities and the non-cash expenses included in the net loss.



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##### Index to Financial Statements

The weighted average payment plans that our subscribers have elected result in 6.9 months of advance
billing. Multi-year and other prepayment plans provide significant cash flows for us. During the year ended December 31, 2004, the increase in deferred revenue provided $98.5 million of cash. We expect the amount of deferred revenue will continue to
increase as the number of subscribers who pay in advance increases. The rate for our basic service will increase from $9.99 to $12.95 beginning April 2, 2005. Existing customers may lock in the $9.99 monthly rate with a prepaid plan of up to five
years until April 2, 2005. If the number of subscribers who choose a multiyear prepaid plan increases, the cash provided by the prepayments will also increase.



By comparison, at December 31, 2003, we had total cash and cash equivalents of $90.2 million, which excludes $0.1 million of restricted investments,
and working capital of $95.2 million. Cash and cash equivalents increased $83.5 million during 2003. The increase resulted from $298.1 million provided by financing activities and $6.7 million provided by investing activities, offset by $221.3
million used in operating activities. The proceeds from financing activities resulted primarily from a private placement in January 2003 that resulted in the issuance of our 10% Senior Secured Discount Convertible Notes that yielded gross proceeds
of $210 million and the issuance of our 12% Senior Secured Notes that yielded gross proceeds of $185 million. The financing activities completed during the year are more fully discussed below. Investing activities consisted primarily of proceeds
provided from the maturity of restricted investments. Cash flows used in operating activities includes the net loss of $584.5 million and the net cash used by our operating assets and liabilities, offset in part by non-cash expenses included in the
net loss.



We expect that our future working capital, capital
expenditures, and debt service requirements will be satisfied from existing cash and cash equivalents, augmented by the results of our future financing activities and, in the future, by cash generated from operations.



Sources of Cash



Holdings and Inc. raised $3.4 billion of equity and debt gross proceeds from
inception through December 2004 from investors and strategic partners to fund our operations. In 2004, we raised gross proceeds of $717 million. This includes $185.5 million of gross funds from the sale of Holdings Class A common stock in
January 2004, $200 million of gross funds from the April 2004 issuance of our Senior Secured Floating Rate Notes due 2009 and $300 million of gross funds from the November 2004 issuance of Holdings 1.75% Convertible Senior Notes due 2009. In
addition, in April 2004, Holdings received $31.8 million in cash proceeds in connection with GMs exercise of a warrant to purchase 10 million shares of its Class A common stock at an exercise price $3.18 per share. Provided that we meet the
revenue, expense and cash flow projections of our business plan, we expect to be fully funded and will not need to raise additional financing to continue operations. We intend to continue to refine our capital structure, reduce our level of
indebtedness and improve our liquidity position on an opportunistic basis.



November 2004 Financing Transaction



On November 23, 2004, Holdings completed an offering of $300 million aggregate principal amount of its 1.75% Convertible Senior Notes due December 1, 2009. The notes mature on December 1, 2009 and bear interest at an
annual rate of 1.75%. The initial purchasers of the notes were given an option to purchase an additional $100 million aggregate principal amount of notes within 60 days from the date of the issuance of the notes. In January 2005, Holdings received
an additional $100 million in gross proceeds from the exercise of this option on the notes. The notes may be converted by the holder, at its option, into shares of Holdings Class A common stock initially at a conversion rate of 20.0 shares of
Holdings Class A common stock per $1,000 principal amount, which is equivalent to an initial conversion price of $50.00 per share of Holdings Class A common stock (subject to adjustment in certain events), at any time until December 1,
2009. The notes are not redeemable at Holdings option prior to the stated maturity. Holdings expects to use the proceeds for working capital and general corporate purposes.



April 2004 Exercise of GM Warrant



In April 2004, Holdings received $31.8 million in cash proceeds in connection with GMs exercise of a warrant to
purchase 10 million shares of its Class A common stock at an exercise price $3.18 per share.



April 2004 Financing Transaction



On April 20, 2004, we completed an offering of $200 million of Inc.s Senior Secured Floating Rate Notes due May 1, 2009. Interest on the notes is 7.68% per annum through January 31, 2005 and thereafter is reset
quarterly at a rate equal to 550 basis points over LIBOR. The interest on the notes is payable quarterly in cash in arrears on February 1, May 1, August 1 and November 1, commencing on August 1, 2004. No scheduled principal payments are required to
be made prior to maturity. The notes, which are Inc.s senior secured obligations, are secured by substantially all of Inc.s assets, including the stock of Inc.s FCC license subsidiary, are guaranteed by us and rank equally in right
of payment with all of Inc.s other existing and future senior indebtedness and senior in right of payment to all of Inc.s existing and future subordinated indebtedness. At any time, Inc. may, at its option, redeem the notes, in whole or
in part, at declining redemption prices. The proceeds from this offering were used in part to repay outstanding balances under our revolving credit facility with GM.



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##### Index to Financial Statements

January 2004 Financing Transaction



On January 28, 2004, Holdings completed a public offering of 20 million shares of Holdings Class A Common Stock at
$26.50 per share, 13 million shares of which were offered for sale by certain selling stockholders. The remaining 7 million shares offered by us resulted in gross proceeds to us of $185.5 million. The proceeds from this offering were used in part to
repay the unvested portion of the 10% Senior Secured Convertible Note held by OnStar, a subsidiary of GM.



September 2003 Financing Transaction



On September 11, 2003, Holdings completed a public offering of 11.3 million shares of Holdings Class A Common Stock at $13.25 per share to Legg
Mason Funds Management, Inc., Legg Mason Capital Management, Inc. and another large institutional investor, each on behalf of its investment advisory clients. This offering resulted in gross proceeds of $150 million.



June 2003 Financing Transaction



On June 17, 2003, we completed an offering of $185 million, including $10
million related to the over-allotment option in July 2003, of Inc.s 12% Senior Secured Notes due June 15, 2010. Interest on the notes is payable every six months in cash, in arrears on December 15 and June 15, commencing on December 15, 2003.
The notes, which are Inc.s senior secured obligations, are secured by substantially all of Inc.s assets, are guaranteed by Holdings and will rank equally in right of payment with all of Inc.s other existing and future senior
indebtedness and senior in right of payment to all of Inc.s existing and future subordinated indebtedness. Inc. may, at its option, redeem the notes at declining redemption prices at any time on or after June 15, 2007. At any time on or prior
to June 15, 2006, Inc. may redeem a portion of the outstanding notes with the proceeds of certain equity offerings as long as the redemption occurs within 90 days of the date of the closing of such equity offering and at least $100 million aggregate
principal amount of notes remains outstanding after the redemption.



January 2003 Financing Transactions



In
January 2003, Holdings and we completed a private placement of $279.3 million aggregate principal amount at maturity of our 10% Senior Secured Discount Convertible Notes due December 31, 2009, which yielded gross proceeds of $210.0 million, and a
private placement of 5.6 million shares of Holdings Class A common stock, which yielded gross proceeds of $15.0 million. Concurrently with these transactions, we completed an exchange offer in which we exchanged $300.2 million aggregate
principal amount of Inc.s previously outstanding 14% Senior Secured Notes due 2010 for $438.0 million aggregate principal amount at maturity ($300.2 million accreted value as of March 15, 2003) of 14% Senior Secured Discount Notes due 2009,
cash and warrants to purchase Holdings Class A common stock.



In January 2003, General Motors provided us with a $100.0 million Senior Secured Credit Facility, maturing as late as December 2009, that enables us to make monthly draws to finance payments that become due under our distribution agreement
with OnStar Corporation and other GM payments. In January 2004, this facility was amended and became a revolver. Holdings and Inc. are co-borrowers under this credit facility. The outstanding principal amount of all draws will be due December 31,
2009 and bore interest at the applicable 90-day LIBOR rate plus 10% through December 31, 2003, and presently bear interest at a per annum rate of LIBOR plus 8%. Holdings will be able to make interest payments semi-annually in shares of its Class A
common stock having an aggregate fair market value at the time of payment equal to the amount of interest due. The fair market value will be based on the average daily trading prices of Holdings Class A common stock over the ten business days
prior to the day the interest payment is due. We have the option to prepay all draws in whole or in part at any time, and, with effect from the January 2004 amendment, may re-borrow prepaid amounts. Beginning in 2005, we will be required to prepay
the amount of any outstanding advances in an amount equal to the lesser of (i) 50% of our excess cash and (ii) the amount necessary to prepay the draws in full. In order to make draws under the credit facility, we are required to have a certain
minimum number of subscribers that are not originated by GM and a minimum pre-marketing cash flow.



In January 2003, we issued a 10% Senior Secured Convertible Note due December 31, 2009 in the amount of $89.0 million to General Motors subsidiary,
OnStar Corporation. The note was provided in lieu of our obligation to make $115 million in guaranteed payments to OnStar under the distribution agreement from 2003 to 2006. The note becomes convertible at the holders option on a quarterly
basis through 2006, at 90% of the then fair market value of Holdings Class A common stock but subject to a $5.00 per share minimum and escalation maximum (up to $20 per share) for each fiscal year. Interest is payable semi-annually in cash or
shares of Holdings Class A common stock, at Holdings option, at fair market value at the time of payment. In February 2004, we completed the redemption of the note. As part of the redemption, General Motors converted $7.8 million in
principal amount of the note, representing the entire principal amount of the note that had vested conversion rights at the time of the redemption, into 980,670 shares of Holdings Class A Common Stock in accordance with the terms of the note.
The remaining $81.2 million in principal amount plus accrued interest was repaid with cash.



In January 2003, General Motors provided Holdings with the ability to satisfy up to $35.0 million in future subscriber acquisition payments that we may owe to OnStar under the distribution agreement in shares of
Holdings Class A common stock, valued at fair market value at the time of each semi-annual payment.



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##### Index to Financial Statements

Other 2003 Equity Issuances



During the year ended December 31, 2003, Holdings issued 10.8 million shares of Holdings Class A common stock for
proceeds of $66 million under the Direct Stock Purchase Program (DSPP).



Uses of Cash



2004 De-leveraging and
Debt Repayment Transactions



During the year ended
December 31, 2004, Holdings and Inc. entered into agreements with certain holders of our notes to exchange $262.9 million carrying value including accrued interest, or $286.2 million fully accreted face value at maturity, for $97.5 million in cash
consideration and 11.4 million shares of Holdings Class A common stock. This includes the following de-leveraging transactions:



| |  |  | the redemption of $73.3 million carrying amount including accrued interest of our 12% Senior Secured Notes due 2010 for an aggregate redemption price of $81.7 million, which amount
included a redemption premium of $8.4 million;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the conversion of all of Holdings remaining outstanding $45.7 million of 7.75% Convertible Subordinated Notes into 3.7 million shares of Holdings Class A common stock;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the exchange of $132.8 million carrying value including accrued interest, or $157.1 million fully accreted face value at maturity, of our 14% Senior Secured Notes due 2009 for $15.8
million in cash consideration and 4.2 million shares of Holdings Class A common stock; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the conversion of $11.1 million carrying value including accrued interest, or $13.4 million fully accreted face value at maturity, of our 10% Senior Secure Discount Convertible
Notes due 2009 into 3.5 million shares of Holdings Class A common stock.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We recorded a loss of $76.6 million from these extinguishments on the consolidated statement of operations for the year ended December 31, 2004.



We completed the redemption of the $89.0 million 10% Senior Secured Convertible Note due 2009 held by Onstar. As part of the
redemption, Onstar converted $7.8 million in principal amount of the Note, representing the entire principal amount of the Note that had vested conversion rights at the time of the redemption, into 980,670 shares of the Holdings Class A common
stock in accordance with the terms of the Note. The remaining $81.2 million in principal amount plus accrued interest was repaid with cash. Also, we entered into agreements with certain holders of our 8.25% Series C convertible redeemable preferred
stock to convert $52.4 million including accrued dividends in shares of Holdings Series C preferred stock into 5.9 million shares of Holdings Class A common stock. We also entered into agreements with certain holders of our Series A
convertible preferred stock to convert $51.4 million carrying value, in shares of Series A preferred stock, into 5.4 million shares of Holdings Class A common stock. Additionally, we entered into agreements with certain holders of Class A
common stock warrants to exchange approximately 56,000 warrants convertible into 2.6 million shares of Holdings Class A common stock for 2.3 million shares of Holdings Class A common stock and received $9.4 million in cash proceeds from
the exercise of approximately 35,000 warrants converted into 3.0 million shares of Holdings Class A common stock.



As a result of these de-leveraging and debt repayment transactions, from January 1, 2004 to December 31, 2004, Holdings and the Company eliminated
approximately $597.3 million of carrying value including accrued interest of debt and preferred securities, or approximately $617.0 million of face amount at maturity. Holdings and the Company eliminated $90.4 million carrying value including
accrued interest ($89.0 million face amount at maturity) of the Companys 10% Senior Secured Convertible Note due 2009 held by Onstar, $73.3 million carrying value including accrued interest ($70.0 million face amount at maturity) of the
Companys 12% Senior Secured Notes due 2010, $45.7 million carrying value including accrued interest ($45.7 million face amount at maturity) of Holdings 7.75% Convertible Subordinated Notes due 2006, $132.8 million carrying value
including accrued interest ($157.1 million face amount at maturity) of the Companys 14% Senior Secured Notes due 2009, $35.3 million carrying value including accrued interest ($35.0 million face amount at maturity) of Holdings loan with
Boeing Satellite Systems, $103.0 million of the balance outstanding under our revolving credit and equity facility, plus accrued interest of $2.0 million, with GM, $11.1 million carrying value including accrued interest ($13.4 million face amount at
maturity) of their 10% Senior Secured Discount Convertible Notes due 2009, $52.4 million carrying value of Holdings Series C preferred stock and $51.4 million of Holdings Series A preferred stock. In total, these de-leveraging
transactions have eliminated over $900 million in future interest, dividends, accretion and principal payments as well as 27 million shares of Holdings incremental dilution. Holdings and the Company may eliminate additional debt, preferred
stock, warrants or other convertible securities in the future through the issuance of Holdings common stock, prepayments and redemptions, depending upon the attractiveness of particular opportunities.



As a result of our financings and other issuances of securities, the
conversion price of Holdings Series C preferred stock issued in August 2000 has been adjusted from $8.90 at December 31, 2003 to $8.78 at December 31, 2004, the exercise price of the warrants sold in March 2000 has been adjusted to $45.23 and
the number of warrant shares remained at 8.78. The exercise price of the warrants sold in January 2003 remained at $3.18 and the number of warrant shares remained at 85. There was no impact on the consolidated statement of operations as a result of
the adjustments to these prices.



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##### Index to Financial Statements

2003 De-leveraging and Debt Repayment Transactions



During the year ended December 31, 2003, Holdings issued 10.8 million shares
of Holdings Class A common stock for proceeds of $66 million under the Direct Stock Purchase Program (DSPP).



Concurrent with the funds raised through the DSPP, Holdings and Inc. entered into agreements with certain holders of notes to exchange $125.2 million
carrying value, or $160.1 million fully accreted face value at maturity, of the Companys notes, for $6.8 million in cash consideration and 19.2 million shares of Holdings Class A common stock. Also, concurrent with the funds raised
through the DSPP, Holdings and Inc. entered into agreements with certain holders of Holdings 8.25% Series B convertible redeemable preferred stock to exchange $19.7 million in shares of Holdings Series B preferred stock for $10.2 million
in cash consideration. Holdings and we also entered into agreements with certain holders of Holdings 8.25% Series C convertible redeemable preferred stock to exchange $101.0 million carrying value, in shares of Holdings Series C
preferred stock, for 12.0 million shares of Holdings; Class A common stock. Additionally, Holdings and Inc. entered into agreements with certain holders of Holdings Class A common stock warrants to exchange 55,846 warrants convertible into 4.7
million shares of Holdings Class A common stock for 3.6 million shares of common stock and received $13.0 million in cash proceeds from the exercise of 47,962 warrants converted into 4.1 million shares of Holdings Class A common stock.



As a result of these de-leveraging transactions, Holdings and
Inc. have eliminated approximately $245.9 million of carrying value including accrued interest of debt and preferred securities or approximately $280.7 million of face amount at maturity. We have eliminated $2.1 million carrying value including
accrued interest ($2.0 million face amount at maturity) of our 14% Senior Secured Notes due 2010, $65.5 million carrying value including accrued interest ($94.2 million face amount at maturity) of our 14% Senior Secured Discount Notes due 2009
issued in January 2003, $33.6 million carrying value including accrued interest ($33.4 million of face amount at maturity) of Holdings 7.75% Convertible Subordinated Notes due 2006, $24.0 million carrying value including accrued interest
($30.5 million face amount at maturity) of our 10% Senior Secured Discount Convertible Notes due 2009, $19.7 million of Holdings Series B preferred stock and $101.0 million carrying value of Holdings Series C preferred stock. In total,
these de-leveraging transactions have eliminated approximately $429 million in future interest, dividends, accretion and principal payments as well as 32 million shares of Holdings incremental dilution.



As a result of our financings and other issuances of securities, the
conversion price of Holdings Series C preferred stock issued in August 2000 was adjusted from $9.39 at December 31, 2002 to $8.90 at December 31, 2003, the exercise price of the warrants sold in March 2000 was adjusted to $45.24 and the number
of warrant shares was adjusted to 8.78. The exercise price of the warrants sold in January 2003 remained at $3.18 and the number of warrant shares remained at 85. There was no impact on the consolidated results of operations as a result of the
adjustments to these prices.



Future Operating and
Capital Resource Requirements



Our funding
requirements are based on our current business plan, which in turn is based on our operating experience to date and our available resources. We are pursuing a business plan designed to increase subscribers and revenues while reducing or maintaining
subscriber acquisition costs. Our plan contemplates our focusing on the new automobile market where we have relationships with automobile manufacturers, the continuing introduction of lower-priced and more user-friendly radio technology in the
retail aftermarket and the use of our most productive distribution channels.



We expect that our future working capital, capital expenditures, and debt service requirements will be satisfied from existing cash and cash equivalents and by cash generated from operations. Provided that we meet the
revenue, expense and cash flow projections of our business plan, we expect to be fully funded and will not need to raise additional financing to continue operations. Our business plan is based on estimates regarding expected future costs and
expected revenue. Our costs may exceed or our revenues may fall short of our estimates, our estimates may change, and future developments may affect our estimates. Any of these factors may increase our need for funds, which would require us to seek
additional financing to continue implementing our current business plan.



In addition, Holdings and Inc. may seek additional financing to undertake initiatives not contemplated by our current business plan or obtain additional cushion against possible shortfalls. We may pursue a range of
different sizes or types of financing as opportunities arise, particularly the sale of additional equity securities. We have and may continue to take advantage of opportunities to reduce our level of indebtedness and preferred stock in exchange for
issuing common or other equity securities, if these transactions can be completed on favorable terms.



In the event of unfavorable future developments, such as adverse developments in the debt and equity market of the type experienced during much of 2001
and 2002, we may not be able to raise additional funds on favorable terms or at all. Our ability to obtain additional financing depends on several factors, including future market conditions; our success or lack of success in developing,
implementing and marketing our satellite radio service; our future creditworthiness; and restrictions contained in



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##### Index to Financial Statements

agreements with our investors or lenders. Additional financings could increase our level of indebtedness or result in
further dilution to our equity holders. If we fail to obtain necessary financing on a timely basis, a number of adverse effects could occur, or we may have to revise our business plan.



Satellites



In September 2001, we notified our insurers of a progressive solar array power degradation problem with both satellites (this solar array output power
degradation issue is common to the first six Boeing 702 class satellites in orbitXM Rock and XM Roll were the fifth and sixth Boeing 702s launched). In February 2003, we filed Proofs of Loss with our insurers claiming that the pattern of
degradation on both satellites met the standard for constructive total loss under the terms of the insurance policies even though we would be able to operate the satellites and provide quality service to our subscribers for some continuing period of
time. In July 2004, we reached agreement with insurers covering 80% of the aggregate sum insured at a settlement rate equal to 44.5% of the proportionate amount covered by each of these insurers, representing a total recovery of approximately $142
million from these insurers. This settlement resolves any issues about the amount of loss sustained, includes a waiver by the settling insurance companies of any reductions based on salvage value, terminates any further risk to the settling insurers
under the policies and ends any other rights the settling insurers might have with regard to XM Rock and XM Roll or revenues generated by our continuing use of those satellites. We have collected all amounts due under the settlement. The portion of
the insurance proceeds related to claim payments was recorded as a reduction to the carrying values of XM Rock and XM Roll. In August 2004, we filed for arbitration to collect the remaining 20% of the sum insured utilizing the third-party dispute
resolution procedures under the policy. Any amounts received from this arbitration proceeding will be recorded as a reduction to the carrying values of XM Rock and Roll.



In February 2005 we launched our third satellite (XM-3), to be placed in one orbital slot. We will then move XM Roll to be
collocated with XM Rock in the other orbital slot. In 2007, we plan to launch an additional satellite (XM-4) to replace the collocated XM Rock and XM Roll. With this plan, even if there is a problem putting XM-3 into operation, we believe we will be
able to launch additional satellites prior to the time the solar array output power degradation issue might cause our broadcast signal strength to fall below minimum acceptable levels.



Satellite ContractXM Rock and XM Roll. As of December 31, 2004, Holdings and we had paid approximately $613.5
million, including financing charges and interest under the satellite contract related to XM Rock, or XM-2, XM Roll, or XM-1, XM-3 and XM-4. We originally entered into its satellite contract in March 1998 with Boeing Satellite Systems International,
Inc., or BSS, and have subsequently amended the contract, including in July 2003 and December 2003. Under the satellite contract, BSS has delivered two satellites in-orbit, XM Rock and XM Roll, supplied ground equipment and software used in the XM
Radio system and provided certain launch and operations support services.



Satellite Contract and Other CostsXM-3. Construction of our XM-3 satellite has been completed, including certain modifications to correct the solar array degradation issues experienced by XM Rock and XM
Roll discussed below, as well as other changes agreed with BSS discussed below. The payload of XM-3 is owned by the Company, and the bus of XM-3 is owned by Holdings. As of December 31, 2004, with respect to XM-3, we have deferred $15 million at an
interest rate of 8% through January 4, 2007. In May 2004, Holdings repaid in full a $35 million loan (plus accrued interest) outstanding from Boeing Capital. In February 2005 we launched our XM-3 satellite.



In addition to the modifications to address the solar array degradation
issues, BSS made certain alterations to optimize XM-3, launched in February 2005, for the specific orbital slot into which it will be placed. The aggregate remaining cost, excluding the above $15 million deferral, of the launch, optimization for the
specific orbital slot, appropriate software and certain pre and post-launch services of approximately $135 million was paid during the first half of 2004. Further, BSS has the right to earn performance incentive payments of up to $25.9 million,
excluding interest, based on the in-orbit performance of XM-3 over its design life of fifteen years.



Satellite InsuranceXM-3. In addition to the XM-3 related costs noted above, we acquired and paid for launch and in-orbit insurance in January
2005 in connection with the launch of XM-3.



Satellite
Contract and Other CostsXM-4. Holdings has committed in its satellite contract, as amended in July 2003, and by a separate August 2003 contract with Sea Launch Company, LLC, or Sea Launch, to acquire from BSS a fourth satellite, XM-4,
which should be available for shipment to the launch services provider by the end of 2005, and from Sea Launch the associated launch services for the satellite. Holdings will own XM-4. The fixed prices for XM-4 and the associated launch services
total $186.5 million, excluding in-orbit performance incentives and financing charges on certain amounts deferred prior to launch. As of December 31, 2004, satellite construction costs aggregating approximately $106.1 million were incurred, of which
$6 million was paid, and $100.1 million are deferred. Interest accrues monthly at a rate of 10.75% per annum through December 2004 and is payable thereafter on a current basis, pursuant to the December 2003 amendment, which extended the deferral
into early 2006 (unless the satellite is launched earlier). Most of the remaining portion of the fixed costs for XM-4 and the associated launch services are payable during construction with the last payment due one month following launch.



After launch of XM-4, BSS has the right to earn performance
incentive payments of up to $12 million, plus interest, over the first twelve years of in-orbit life, up to $7.5 million for performance above specification during the first fifteen years of in-orbit life, and up to $10 million for continued high
performance across the five year period beyond the fifteen year design life. If XM-3 operates satisfactorily, we may elect, under the above contracts, to defer launch of XM-4 and, as a result, approximately $50 million in payments related to launch
services could be postponed until the 2007 timeframe.



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##### Index to Financial Statements

Options to Procure Fifth Satellite and Associated Launch Services. Holdings also has obtained
fixed price options to acquire a fifth satellite from BSS, under the July 2003 amendment, on pricing and performance incentive terms similar to those applicable to XM-4 and associated launch services from Sea Launch under the August 2003 contract.



Contractual Obligations and Commercial Commitments



We are obligated to make significant payments under a
variety of contracts and other commercial arrangements, including the following:



Service Providers. We have entered into an agreement with a service provider for customer care functions to subscribers of our service. Employees of this service provider have access to our customer care
systems to establish customer accounts, activate radios, update program and account information and respond to general inquiries from subscribers. We pay an hourly rate for each customer care representative supporting our subscribers. During the
years ended December 31, 2004, 2003, and 2002, we incurred $21.5 million, $14.2 million, and $8.7 million, respectively, in relation to services provided for customer care functions. We changed service providers during 2003 and received reduced
hourly rates.



Programming Agreements. We have also
entered into various long-term programming agreements. Under the terms of these agreements, we are obligated to provide payments to other entities that may include fixed payments, advertising commitments and revenue sharing arrangements. During the
years ended December 31, 2004, 2003, and 2002, we incurred expenses of $26.5 million, $19.6 million and $20.3 million, respectively, in relation to these agreements. The amount of these costs will vary in future years, but is expected to increase
next year as the number of subscribers and advertising revenue increase. The amount of the costs related to these agreements cannot be estimated, but are expected to be substantial future costs. Of these amounts, $1.5 million, $391,000 and $339,000,
respectively, are included in Revenue Share & Royalties, and $10.2 million, $10.1 million, and $9.0 million, respectively, are included in Advertising & Marketing.



In October 2004, we announced a multi-year agreement with Major League Baseball to broadcast MLB games live nationwide and
to become the Official Satellite Radio provider of Major League Baseball. We will pay up to $50 million for 2005 and $60 million per year thereafter through 2012, with $120 million to be deposited into escrow in 2005. MLB has the option to extend
the agreement for the 2013, 2014 and 2015 seasons at the same $60 million annual compensation rate. We paid $10 million to MLB in October 2004. We will also make incentive payments to MLB for XM subscribers obtained through MLB and baseball club
verifiable promotional programs. No stock or warrants were included in this agreement.



Royalty Agreements. We have entered into fixed and variable revenue share payment agreements with performance rights organizations that expire as late as 2006. During the years ended December 31, 2004, 2003 and
2002, we incurred expenses of $13.7 million, $9.5 million and $9.5 million, respectively, in relation to these agreements.



Marketing & Distribution Agreements. We have entered into various joint sales, marketing and distribution agreements. Under the terms of these
agreements, we are obligated to provide incentives, subsidies and commissions to other entities that may include fixed payments, per-unit radio and subscriber amounts and revenue sharing arrangements. We subsidize the manufacture of certain
component parts of XM radios in order to provide attractive pricing to our customers. The subsidies are generally charged to expense when the radios are activated with XM service. The amount of these operational, promotional, subscriber acquisition,
joint development, and manufacturing costs related to these agreements cannot be estimated, but are expected to be substantial future costs. During the years ended December 31, 2004, 2003, and 2002, we incurred expenses of $94.5 million, $56.3
million and $55.7 million, respectively, in relation to these agreements, excluding expenses related to GM.



General Motors Distribution Agreement. We have significant payment obligations under our distribution agreement with General Motors. During the
term of the agreement, which expires 12 years from the commencement date of our commercial operations, GM has agreed to distribute the service to the exclusion of other S-band satellite digital radio services. We will also have a non-exclusive right
to arrange for the installation of XM radios in vehicles equipped with OnStar systems in non-GM vehicles that are sold for use in the United States. The agreement was amended in June 2002 and January 2003 to clarify certain terms in the agreement,
including extending the dates when certain initial payments are due to GM and confirming the date of our commencement of commercial operations, and to provide that we may make certain payments to GM in the form of indebtedness or shares of
Holdings Class A common stock, as described above under the caption Liquidity and Capital ResourcesCapital Resources and Financing XMs total cash payment obligations were not increased. We have significant annual, fixed
payment obligations to GM. As a result of the June 2002 amendment, we commenced recognizing these fixed payment obligations for the period ending through November 2005, which approximate $63.6 million, on a straight-line basis. However, due to the
January 2003 amendment to the Distribution Agreement and GMs current roll out plans which demonstrates a likelihood that GM will exceed minimum installation targets, in 2003 we are now prospectively recognizing these fixed payments, which
approximate $397.3 million, on a straight-line basis over the remaining term of the contract (September 2013). We have issued a 10% Senior Secured Convertible Note due 2009 with an aggregate principal amount of $89.0 million to OnStar in lieu of
making these fixed payments to OnStar for amounts otherwise due in 2003 through 2006. In February 2004, we completed the redemption of the note. As part of the redemption, GM



45



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##### Index to Financial Statements

converted $7.8 million in principal amount of the note, representing the entire principal amount of the note that had
vested conversion rights at the time of the redemption, into 980,670 shares of Holdings Class A common stock in accordance with the terms of the note. The remaining $81.2 million in principal amount plus accrued interest was repaid with cash.
Additional payments totaling $320.3 million are due as follows: $80.7 million in 2007, $106.7 million in 2008 and $132.9 million in 2009. We recorded $22.3 million of current prepaid expense to related party and $22.3 million of non-current prepaid
expense to related party in connection with the guaranteed fixed payments in the consolidated balance sheet at December 31, 2004.



In order to encourage the broad installation of XM radios in GM vehicles, we have agreed to subsidize a portion of the cost of XM radios, and to make
incentive payments to GM when the owners of GM vehicles with installed XM radios become subscribers to the Companys service. We must also share with GM a percentage of the subscription revenue attributable to GM vehicles with installed XM
radios, which percentage increases until there are more than 8 million GM vehicles with installed XM radios (at which point the percentage remains constant). During the second quarter of 2004, a clarification was agreed to by us and Onstar relating
to the implementation of certain aspects of revenue sharing contained within the distribution agreement. Accordingly, the revenue share expense is recognized as the related subscription revenue is earned. We recorded $3.6 million of current prepaid
expense to related party and $8.9 million of non-current prepaid expense to related party in connection with this revenue sharing arrangement in the consolidated balance sheet at December 31, 2004. We will also make available to GM bandwidth on its
system. As part of the agreement, OnStar provides certain call-center related services directly to XM subscribers who are also OnStar customers and we must reimburse OnStar for these XM-related call center services. The agreement is subject to
renegotiation at any time based upon the installation of radios that are compatible with a common receiver platform or capable of receiving Sirius Satellite Radios service. The agreement is subject to renegotiation if as of November 2005, and
at two-year intervals thereafter, GM does not achieve and maintain specified installation levels of GM vehicles capable of receiving the Companys service. The specified installation level of 1,240,000 units by November 2005 was achieved in
2004. The specified installation levels in future years will increase by the lesser of 600,000 units per year or amounts proportionate to target market shares in the satellite digital radio service market. There can be no assurances as to the
outcome of any such renegotiations. General Motors exclusivity obligations will discontinue if, by November 2005 and at two-year intervals thereafter, we fail to achieve and maintain specified minimum market share levels in the satellite
digital radio service market. Prior to 2001, we had not incurred any costs under the distribution agreement. During the years ended December 31, 2004, 2003 and 2002, we incurred total costs of $159.4 million, $108.3 million and $30.1 million,
respectively, under the distribution agreement.



Satellite
Contracts. We have entered into contractual agreements for our satellites that are more fully described under the heading Satellites.



Long-term debt



We have raised funds from the following issuances of long-term debt.



| |  |  | On January 28, 2003, we completed a three-part financing.
| | - |  | ---------------------------------------------------------



| |  |  | Holdings and Inc. issued $279.3 million aggregate principal amount at maturity of 10% Senior Secured Discount Convertible Notes in a private placement. Principal on the 10% Senior
Secured Discount Convertible Notes is payable at maturity, while interest accretes until January 1, 2006 and is thereafter payable semi-annually in cash or, at our option, in additional notes. If all of the interest was paid in additional notes,
these notes would have aggregated $412.6 million when they came due in 2009. Through December 31, 2004, we have extinguished $35.0 million carrying value, or $43.9 million face amount at maturity, of these notes.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Holdings and Inc. issued to OnStar, a subsidiary of General Motors, $89.0 million in aggregate principal amount of a 10% Senior Secured Convertible Note due December 31, 2009 in
lieu of our obligation to make $115 million in guaranteed payments from 2003 to 2006 under the General Motors distribution agreement. Principal on the OnStar note is payable at maturity, while interest, which is due semi-annually, is payable at
Holdings option in shares of Holdings Class A common stock. In February 2004, we completed the redemption of the note. As part of the redemption, General Motors converted $7.8 million in principal amount of the note, representing the
entire principal amount of the note that had vested conversion rights at the time of the redemption, into 980,670 shares of Holdings Class A Common Stock in accordance with the terms of the note. The remaining $81.2 million in principal amount
plus accrued interest was repaid with cash.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Holdings and Inc. completed an exchange of $300.2 million aggregate principal amount of the 14% Senior Secured Notes due 2010 for $438.0 million aggregate principal amount at
maturity ($300.2 million accreted value as of March 15, 2003) of 14% Senior Secured Discount Notes due 2009, cash and warrants to purchase Holdings Class A common stock. Principal on the 14% Senior Secured Discount Notes due 2009 is payable at
maturity, while interest accretes until December 31, 2005 and is thereafter payable semi-annually. Through December 31, 2004, we have extinguished $198.3 million carrying value, or $251.3 million face amount at maturity, of these notes.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | In June 2003, Inc. issued $185.0 million aggregate principal amount of 12% Senior Secured Notes due 2010, $10 million of which were issued in July 2003, pursuant to the
overallotment option. Principal on the 12% Senior Secured Notes due 2010 is payable at maturity, while interest is payable semi-annually. In 2004, we extinguished $70 million carrying value of our 12% Senior Secured Notes due 2010 for an aggregate
redemption cash price of $81.7 million, which amount included a redemption premium of $8.4 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In April 2004, we completed an offering of $200 million of Inc.s Senior Secured Floating Rate Notes due May 1, 2009. Interest on the notes is 7.68% per annum through January
31, 2005 and thereafter is reset quarterly at a rate equal to 550 basis points over LIBOR. The interest on the notes is payable quarterly in cash in arrears on February 1, May 1, August 1 and November 1, commencing on August 1, 2004. No scheduled
principal payments are required to be made prior to maturity. At any time, we may, at its option, redeem the notes, in whole or in part, at declining redemption prices.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Based on the various terms of our long-term debt, our ability to redeem any long-term debt is limited. Holdings and we
have and may continue to take advantage of opportunities to reduce our level of indebtedness in exchange for issuing equity securities, if these transactions can be completed on favorable terms.



Lease obligations. We have noncancelable operating leases for office
space and terrestrial repeater sites and noncancelable capital leases for equipment that expire over the next ten years. In December 2001, we determined that the planned number of terrestrial repeater sites could be reduced due to the relative
signal strength provided by our satellites. We recognized a charge of $26.3 million with respect to terrestrial repeater sites no longer required. This charge includes a lease termination liability of $8.6 million for 646 terrestrial repeater site
leases, which would reduce the future minimum lease payments. We recognized charges of $47,000, $4.8 million and $4.0 million in 2004, 2003 and 2002 respectively, in relation to additional costs associated with the termination of the remaining
leases. As of December 31, 2004 and 2003, we maintained a liability of $2.1 million and $4.1 million, respectively, for the estimated lease termination costs and costs to deconstruct the sites.



The following table represents our cash contractual obligations as of
December 31, 2004:



|                                   |  |                        |         |      |   |         |  |      |         |      |   |                |  |       |         |  |   |         |  |   |          
|---------------------------------- |  | ---------------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | -------------- |  | ----- | ------- |  | - | ------- |  | - | ---------
|                                   |  | Payments Due by Period
|Contractual Obligations            |  | 2005                   |         | 2006 |   | 2007    |  | 2008 |         | 2009 |   | 2010 andBeyond |  | Total
|                                   |  | (In thousands)        
|GM Distribution Agreement(1)       |  | $                      |        |      | $ |        |  | $    | 80,753  |      | $ | 106,688        |  | $     | 132,889 |  | $ |        |  | $ | 320,330  
|Long-term debt(1)                  |  |                        | 2,770   |      |   | 3       |  |      |        |      |   |               |  |       | 478,674 |  |   | 134,457 |  |   | 615,904  
|Capital Lease Obligations          |  |                        | 3,378   |      |   | 2,585   |  |      | 224     |      |   |               |  |       |        |  |   |        |  |   | 6,187    
|Major League Baseball Agreement(2) |  |                        | 75,000  |      |   | 25,000  |  |      | 60,000  |      |   | 60,000         |  |       | 60,000  |  |   | 180,000 |  |   | 460,000  
|Other Operating Agreements(3)      |  |                        | 62,531  |      |   | 66,718  |  |      | 36,460  |      |   | 28,890         |  |       | 22,442  |  |   | 20,250  |  |   | 237,291  
|Operating Lease Obligations        |  |                        | 20,686  |      |   | 11,079  |  |      | 8,813   |      |   | 6,985          |  |       | 6,894   |  |   | 53,811  |  |   | 108,268  
|XM-3(4)                            |  |                        | 496     |      |   |        |  |      | 15,000  |      |   |               |  |       |        |  |   |        |  |   | 15,496   
|XM-4(4)                            |  |                        | 26,700  |      |   | 104,300 |  |      | 49,500  |      |   |               |  |       |        |  |   |        |  |   | 180,500  
|                                   |  |                        |         |      |   |         |  |      |         |      |   |                |  |       |         |  |   |         |  |   |          
|Total                              |  | $                      | 191,561 |      | $ | 209,685 |  | $    | 250,750 |      | $ | 202,563        |  | $     | 700,899 |  | $ | 388,518 |  | $ | 1,943,976
|                                   |  |                        |         |      |   |         |  |      |         |      |   |                |  |       |         |  |   |         |  |   |          

---

|(1) | The above amounts do not include interest, which in some cases is variable in amount.
|--- | -------------------------------------------------------------------------------------

|(2) | Excludes up to $180 million payable in the event Major League Baseball exercises its option to extend the Agreement by up to three additional years. The last two years of our
contractual obligation will be deposited in escrow in 2005.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Other operating agreements include programming, marketing and royalty agreements.
|--- | ---------------------------------------------------------------------------------

|(4) | Exclude financing charges, in-orbit incentives, and launch insurance, and assumes launch of XM-4 in 2007.
|--- | ---------------------------------------------------------------------------------------------------------



The long-term debt payments due in 2009 include the maturity of our $186.5 million aggregate principal amount at maturity of
14% Senior Secured Discount Notes, which come due in 2009, the maturity of our $235.6 million aggregate principal amount at maturity of 10% Senior Secured Discount Convertible Notes, which come due in 2009, and the maturity of our $200.0 million
aggregate principal amount at maturity of Senior Secured Floating Rate Notes due 2009. The long-term debt payments due in 2010 and beyond include the maturity of our remaining outstanding $22.8 million of 14% Senior Secured Notes, which come due in
2010,



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##### Index to Financial Statements

and the maturity of our $115.0 million aggregate principal amount at maturity of 12% Senior Secured Notes due 2010. The
Company is dependent on Holdings to meet certain of its funding requirements and Holdings has indicated it presently intends to fund our ongoing business operations.



Related Party Transactions



We developed strategic relationships with certain companies that were instrumental in the construction and development of our system. In connection with
our granting to them of large supply contracts, some of these strategic companies have become large investors in us and have been granted rights to designate directors or observers to our board of directors. The negotiation of these supply contracts
and investments primarily occurred at or prior to the time these companies became related parties.



We are a party to a long-term distribution agreement with OnStar Corporation, a subsidiary of General Motors that provides for the installation of XM
radios in General Motors vehicles, as further described in Note 16. In connection with the development of our terrestrial repeater network, we were a party to a contract with Hughes Electronics Corporation. DIRECTV has provided consulting services
in connection with the development of our customer care center and billing operations. Hughes and DIRECTV ceased to be related parties during the three-month period ended March 31, 2004. We have arrangements with American Honda relating to the
promotion of the XM Service to new car buyers, the use of bandwidth on the XM System and the development of telematics services and technologies. We have an agreement with OnStar to make available use of our bandwidth. Clear Channel Communications
provides certain programming services to us. We had a sponsorship agreement with Clear Channel Entertainment to advertise our service at Clear Channel Entertainment concerts and venues. Premiere Radio Networks, a subsidiary of Clear Channel
Communications, had served as one of our advertising sales representatives. We also run advertisements on a spot and network basis on radio stations owned by Clear Channel. In addition, we lease 3 sites for our terrestrial repeaters from Clear
Channel Communications. Clear Channel Communications ceased to be a related party during the second quarter of 2004.



As of December 31, 2004, we are engaged in activities with GM and Honda to jointly promote new car buyers to subscribe to XM service. At December 31,
2004, there were approximately 402,000 subscribers in promotional periods (typically ranging from three months to one year in duration) paid for by the vehicle manufacturers. These subscriptions are included in our year-end subscriber total.
Subscriber revenues received from GM and Honda for these programs are recorded as related party revenue.



GM is one of our largest shareholders and Chester A. Huber, Jr., the president of OnStar, is a member of our and Holdings board of directors. Hughes
Electronics was one of our largest shareholders until January 2004 and was a subsidiary of GM until December 2003. Jack Shaw, a member of our and Holdings board of directors, was Chief Executive Officer of Hughes Electronics Corporation until
December 2003. Thomas G. Elliott, a member of our and Holdings board of directors, is Executive Vice President, Automobile Operations of American Honda Motor Company. DIRECTV, a subsidiary of Hughes Electronics, was a holder of Holdings
Series C preferred stock until January 2003.



We earned the
following revenue from transactions with related parties described above (in thousands):



|      |  |                          |        |      |   |        |  |   |    
|----- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ---
|      |  | Years ended December 31,
|      |  | 2004                     |        | 2003 |   | 2002  
|GM    |  | $                        | 21,374 |      | $ | 11,630 |  | $ | 256
|Honda |  |                          | 6,869  |      |   | 368    |  |   |   
|      |  |                          |        |      |   |        |  |   |    
|      |  | $                        | 28,243 |      | $ | 11,998 |  | $ | 256
|      |  |                          |        |      |   |        |  |   |    



We have incurred the
following costs in transactions with the related parties described above (in thousands):



|                                   |  |                              |         |        |   |              |  |       |    |  |   |      
|---------------------------------- |  | ---------------------------- | ------- | ------ | - | ------------ |  | ----- | -- |  | - | -----
|                                   |  | Year ended December 31, 2004
|                                   |  | GM                           |         | Hughes |   | ClearChannel |  | Honda
|Terrestrial repeater network       |  | $                            |        |        | $ | 7            |  | $     |   |  | $ |     
|Terrestrial repeater site leases   |  |                              |        |        |   |             |  |       | 31 |  |   |     
|Customer care & billing operations |  |                              | 363     |        |   |             |  |       |   |  |   |     
|Marketing                          |  |                              | 158,997 |        |   |             |  |       |   |  |   |     
|Research & development             |  |                              |        |        |   |             |  |       |   |  |   | 9,579



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##### Index to Financial Statements

|                                   |  |                              |         |        |   |              |  |   |      
|---------------------------------- |  | ---------------------------- | ------- | ------ | - | ------------ |  | - | -----
|                                   |  | Year ended December 31, 2003
|                                   |  | GM                           |         | Hughes |   | ClearChannel
|Terrestrial repeater network       |  | $                            |        |        | $ | 278          |  | $ |     
|Terrestrial repeater site leases   |  |                              |        |        |   |             |  |   | 60   
|Customer care & billing operations |  |                              | 960     |        |   |             |  |   |     
|Marketing                          |  |                              | 107,346 |        |   |             |  |   | 8,646



|                                   |  |                              |        |        |   |         |  |              |     |      |   |        |  |   |      
|---------------------------------- |  | ---------------------------- | ------ | ------ | - | ------- |  | ------------ | --- | ---- | - | ------ |  | - | -----
|                                   |  | Year ended December 31, 2002
|                                   |  | GM                           |        | Hughes |   | DIRECTV |  | ClearChannel |     | LCCI
|Terrestrial repeater network       |  | $                            |       |        | $ | 10,386  |  | $            |    |      | $ |       |  | $ | 3,089
|Terrestrial repeater site leases   |  |                              |       |        |   |        |  |              |    |      |   | 57     |  |   |     
|Customer care & billing operations |  |                              | 178    |        |   |        |  |              |    |      |   |       |  |   |     
|Marketing                          |  |                              | 29,915 |        |   |        |  |              | 125 |      |   | 10,182 |  |   |     
|General & administrative           |  |                              |       |        |   |        |  |              | 3   |      |   |       |  |   |     



Critical Accounting and Subscriber
Policies



The consolidated financial statements are
prepared in accordance with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available.
These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies that we
believe are most critical to understanding and evaluating our reported financial results include those pertaining to the following policies. Senior management has discussed with the audit committee of the board of directors the development and
selection of estimates and assumptions required for the following accounting policies:



| |  |  | Revenue RecognitionRevenue from subscribers consists of our monthly subscription fee, which is recognized as the service is provided, and a non-refundable activation
fee, which is recognized on a pro-rata basis over an estimated term of the subscriber relationship (currently 40 months), which was based upon market studies and managements judgment. We expect to refine this estimate as more data becomes
available. Promotions and discounts are treated as an offset to revenue during the period of promotion. Sales incentives, consisting of discounts and rebates to subscribers, offset earned revenue. Discounts to equipment which is sold with service
are allocated to equipment and service based on relative fair value. If the actual term of our subscriber relationships is significantly greater or less than our current estimate of 40 months, the period over which we recognize the non-refundable
activation fee will be extended or shortened to reflect the actual term of our subscriber relationships. Subscription and activation revenue accounted for more than 90% of our total revenue.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Estimates of payments due to manufacturers and distributorsPayments owed to manufacturing and distribution partners are expensed during the month in which the
manufacture, sale, and/or activation of the radio unit occurs. The amounts of these expenses are dependent upon units provided by our internal systems and processes, (such as subscriber management system and supply chain management system) and
partner systems and processes. However, due to lags in receiving manufacturing and sales data from partners, estimates of amounts due are necessary in order to record monthly expenses. In subsequent months when lagged data is received from partners,
expenses are reconciled, and adjusted where necessary. Since launching commercial operations, we continue to refine the estimation process based on an increased understanding of the timing lags, and close working relationships with our partners.
Generally, estimates recorded on our books are adjusted to actuals within one month.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Useful Life of Satellites and Spacecraft Control FacilitiesFollowing receipt of our satellites, we extended their expected lives from 15 years, the initial design life,
to 17.5 years based upon updated technical estimates we received from our satellite provider following our satellite launches. However, based on the consistency of the degradation trends (with no substantial improvement to date) and continuing
analyses by Boeing Satellite Systems and us, as described above under the heading Liquidity and Capital ResourcesFuture Operating and Capital Resource Requirements, we adjusted the estimated useful life of our in-orbit satellites
with effect from September 2002, to the period running through first quarter of 2008 (approximately 6.75 years from launch). We continue to monitor the situation and may need to re-adjust the estimated useful lives of our in-orbit satellites based
on future information. We are not recording an impairment at this time, due to our forecasted cash flows (which are sufficient to recover the system assets); however, should we reduce or not meet our
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Index to Financial Statements

forecasted cash flows or reduce further the estimated useful lives of the satellites, we may be required
to record an impairment (which may be substantial) at that time. An impairment, if recorded, would be calculated as the amount by which the carrying value of the assets exceeds the undiscounted future cash flows. At December 31, 2004, the combined
carrying value of XM-1 and XM-2 is $160.6 million. We have not adjusted the estimated useful lives of our spacecraft control facilities, as we believe that these facilities will continue to be used in our XM system. A significant decrease in the
estimated useful life of our satellites and spacecraft control facilities could have a material adverse impact on our operating results in the period in which the estimate is revised and in subsequent periods.



| |  |  | Programming AgreementsWe have entered into various programming agreements. Under the terms of these agreements, we are obligated to provide payments and commissions to
other entities that may include fixed payments, advertising commitments and revenue sharing arrangements. Fixed amounts due under programming agreements are recognized on a straight-line basis though the termination and/or renegotiation date defined
in the agreements. Revenue share agreements that contain minimum guarantees are recorded as an expense based upon the greater of the revenue share amount or a pro-rata portion of the guarantee over the guarantee period.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Distribution Agreement with General MotorsWe have significant payment obligations under our distribution agreement with General Motors, which was amended on January 28,
2003 to provide that we could make certain payments by issuance of indebtedness or shares of Class A common stock. The agreement is subject to renegotiation if as of November 2005, and at two-year intervals thereafter, GM does not achieve and
maintain specified installation levels of GM vehicles capable of receiving the Companys service. The specified installation level of 1,240,000 units by November 2005 was achieved in 2004. The specified installation levels in future years will
increase by the lesser of 600,000 units per year or amounts proportionate to target market shares in the satellite digital radio service market. In light of GMs initial roll-out plans, the June 2002 amendment of the distribution agreement and
managements assessment of the likelihood of renegotiating during the period ending 2005, we recognized the fixed payment obligations due to GM for the period through November 2005, which approximate $63.6 million, on a straight-line basis. In
light of the January 2003 amendment of the distribution agreement and GMs current roll out plans which demonstrate a likelihood of GM exceeding minimum installation targets, in 2003 we are prospectively recognizing fixed payment obligations to
GM, which approximate $397.3 million, on a straight-line basis through the remaining term of the agreement in September 2013. Additional fixed payment obligations beyond 2006 range from $80.7 million to approximately $132.9 million through 2009,
aggregating approximately $320.3 million.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | DARS License. We determined that our DARS license was an intangible asset having an indefinite useful life. While the DARS license has a renewable eight-year term, we believe
that the administrative fees necessary to renew the license are expected to be de minimis compared to the initial fee to obtain the license, and we have met all of the established milestones specified in the DARS license agreement. We also
anticipate no difficulties in renewing the license as long as we continue to adhere to the various regulatory requirements established in the license grant. Although we face competition from a variety of sources, we do not believe that the risk of
the technology becoming obsolete or that a decrease in demand for the DARS service is significant. Further, we believe that our license is comparable with the licenses granted to other broadcasters, which are also classified as indefinite lived
intangible assets. We understand that there continues to be deliberations concerning the application of this standard regarding the effect of the costs to renew FCC licenses. Our application of this standard could change depending upon the results
of these deliberations.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Subscriber Count. We consider subscribers to be those who are receiving and have agreed to pay for our service, either by credit card or by invoice, including those that are
currently in promotional periods, as well as XM activated radios in vehicles for which we have a contractual right to receive payment for the use of our service. Radios that are revenue generating are counted individually as subscribers.
Approximately 12% of our subscribers at year end were in promotional periods with sponsored accounts. A change in our methodology of counting subscribers that excluded subscribers in promotional periods with sponsored accounts would delay the timing
of the recognition of the subscriber until the end of the promotional period, which is generally 3 months. Subscribers with delinquent account balances are included in the subscriber count until such time as the radio is deactivated for non-payment
in accordance with our normal procedures.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Recent Accounting
Pronouncements



In December 2004, the Financial Accounting
Standards Board (FASB) issued SFAS No. 123R, Share Based Payment. SFAS 123R requires recognition of compensation expense for stock options granted to employees. The expense is equal to the grant-date fair value of the options
granted, and the expense is recorded over the vesting period. XMs Employee Stock Purchase Plan (ESPP) is also considered compensatory under the new standard, because we offer a discount greater than 5% and a look-back option. We are in the
process of evaluating whether we should make modifications to our ESPP. XM is required to adopt SFAS 123R in the 3rdquarter of 2005. Compensation expense will need to be recorded for new option awards and for the remaining vesting period of existing option grants. We expect that compensation expense of approximately $16 million will be recorded in the second half
of 2005 from the vesting of existing option grants. The amount of compensation expense that we record after adoption of SFAS 123R in 2005 and beyond will depend on the amount and timing of option activity.



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##### Index to Financial Statements

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



As of December 31, 2004, we do not have any derivative financial instruments. We do not hold or issue any free-standing derivatives. We invest our cash in
short-term commercial paper, investment-grade corporate and government obligations and money market funds. We have existing obligations related to our long-term debt agreements. As of December 31, 2004, we did not have significant cash flow exposure
to changing interest rates on our long-term debt because the interest rates of the majority of those securities are fixed. However, the estimated fair value of the fixed-rate debt is subject to market risk. As of December 31, 2004, we had
approximately $422 million in fixed-rate debt. We run the risk that market rates will decline and the required payments will exceed those based on current market rates. Under our current policies, we do not use interest rate derivative instruments
to manage our exposure to interest rate fluctuations.



Presented below is an analysis of our financial instruments as of December 31, 2004 that are sensitive to changes in interest rates. The tables demonstrate the change in market value of the instruments calculated for an instantaneous
parallel shift in interest rates, plus or minus 50 basis points, or BPS, 100 BPS and 150 BPS. With respect to our fixed-rate debt, the sensitivity table below illustrates market values, or the price at which the debt would trade should
interest rates fall or rise in the range indicated, assuming similar terms and similar assessment of risk by our lenders. Market values are determined using quoted market prices or market rates on comparable instruments as of December 31, 2004.



|                                           |  |                                                                           |       |                             |   |                                                                           |  |            |       |          |   |           |  |           |       |  |   |       |  |   |      
|------------------------------------------ |  | ------------------------------------------------------------------------- | ----- | --------------------------- | - | ------------------------------------------------------------------------- |  | ---------- | ----- | -------- | - | --------- |  | --------- | ----- |  | - | ----- |  | - | -----
|                                           |  | Interest Rate Risk (in millions) as of December 31, 2004                 
|                                           |  | Valuation of Securities Given an Interest Rate Decrease of X Basis
Points |       | No Change in Interest Rates |   | Valuation of Securities Given an Interest Rate Increase of X Basis
Points
|                                           |  | (150 BPS)                                                                 |       | (100 BPS)                   |   | (50 BPS)                                                                  |  | Fair Value |       | (50 BPS) |   | (100 BPS) |  | (150 BPS)
|14% senior secured notes due 2010          |  | $                                                                         | 26.9  |                             | $ | 26.3                                                                      |  | $          | 25.8  |          | $ | 25.3      |  | $         | 24.9  |  | $ | 24.4  |  | $ | 23.9 
|14% senior secured discount notes due 2009 |  |                                                                           | 201.0 |                             |   | 196.9                                                                     |  |            | 192.9 |          |   | 189.1     |  |           | 185.3 |  |   | 181.6 |  |   | 178.0
|12% senior secured notes due 2010          |  |                                                                           | 144.6 |                             |   | 141.6                                                                     |  |            | 138.7 |          |   | 135.9     |  |           | 133.1 |  |   | 130.4 |  |   | 127.8



This sensitivity
analysis provides only a limited, point-in-time view of the market risk sensitivity of certain of our financial instruments. The actual impact of market interest rate changes on our financial instruments may differ significantly from the impact
shown in the sensitivity analysis. The 10% senior secured discount convertible notes due 2009, with an estimated combined fair value of approximately $2.5 billion at December 31, 2004 are not included in the above analysis as the fair value of the
notes is not significantly exposed to interest rate changes. The holders of the notes may convert their notes into Holdings Class A common stock at a conversion price of $3.18 per share at any time prior to maturity. Due to the conversion
feature of the instrument, coupled with the current price of Holdings Class A common stock, the fair value of the notes is linked largely to the price of Holdings Class A common stock. Included in our fixed-rate debt are $9.0 million of
capital leases and notes payable that are not included in the analysis as the carrying amounts approximate fair value because of their short maturity.



As of December 31, 2004, we had $200.0 million of variable-rate debt, an increase of $150.0 million from December 31, 2003. Accordingly, any changes in
interest rates would be more significant as of December 31, 2004 in comparison to December 31, 2003. A change of one percentage point in the interest rate applicable to the $200.0 million of variable-rate debt at December 31, 2004 would result in a
fluctuation of approximately $2.0 million in our annual interest expense. We believe that our exposure to interest rate risk is not material to our results of operations.



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##### Index to Financial Statements

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The consolidated financial statements of XM Satellite Radio Inc., including consolidated balance sheets as of December 31, 2004 and 2003, and consolidated statements of operations, consolidated statements of
stockholders equity and consolidated statements of cash flows for the three-year period ended December 31, 2004 and notes to the consolidated financial statements, together with a report thereon of KPMG LLP, dated March 25, 2005, are attached
hereto as pages F-1 through F-51.



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None.



ITEM 9A. CONTROLS AND PROCEDURES



Disclosure Controls and Procedures



Our
management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective. During the three-month period ended December 31, 2004, no changes were made in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



The information is incorporated herein by reference to Holdings definitive 2005 Proxy Statement. Holdings and Inc. have the same directors and executive officers.



ITEM 11. EXECUTIVE COMPENSATION



The information is incorporated herein by reference to Holdings definitive 2005 Proxy Statement. Holdings and Inc. have the same directors and executive officers.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The information is incorporated herein by reference to Holdings definitive 2005 Proxy Statement. Holdings and Inc. have the same directors and
executive officers.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information is incorporated herein by reference to Holdings definitive 2005 Proxy Statement. Holdings and Inc. have the same directors and executive officers.



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information is incorporated herein by reference to Holdings definitive 2005 Proxy Statement.



ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



(a)(1) The following Consolidated Financial Statements and reports of independent registered public accounting firm for XM Satellite Radio Inc. are
included in Item 8 of this Form 10-K:



Report of Independent Registered Public Accounting Firm.



Consolidated Balance Sheets as of December 31, 2004 and 2003.



Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002.



Consolidated Statements of Stockholders Equity for the years ended December 31, 2004, 2003 and 2002.



Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002.



Notes to Consolidated Financial Statements.



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##### Index to Financial Statements

(a)(2) The following consolidated financial statement schedule is filed as part of this report and
attached hereto as page F-44:



Schedule IValuation and Qualifying Accounts for Inc.



All other schedules for which provision is made in the applicable accounting regulations of the Commission have been included in the Consolidated Financial Statements of XM Satellite Radio Inc. or the notes thereto,
are not required under the related instructions or are inapplicable, and therefore have been omitted.



(a)(3) The following exhibits are either provided with this Form 10-K or are incorporated herein by reference:



EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                                                                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                           
|3.1^        |  | Restated Certificate of Incorporation of XM Satellite Radio Holdings Inc.                                                                                                                                                                                                                                                                                             
|            | 
|3.2         |  | Amended and Restated Bylaws of XM Satellite Radio Holdings Inc. (incorporated by reference to Holdings Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, filed with
the SEC on November 12, 2003).                                                                                                                                             
|            | 
|3.3         |  | Restated Certificate of Incorporation of XM Satellite Radio Inc. (incorporated by reference to Inc.s Registration Statement on Form S-4, File No. 333-39178).                                                                                                                                                                                                        
|            | 
|3.4         |  | Amended and Restated Bylaws of XM Satellite Radio Inc. (incorporated by reference to Inc.s Registration Statement on Form S-4, File No. 333-39178).                                                                                                                                                                                                                  
|            | 
|3.5         |  | Certificate of Amendment of Restated Certificate of Incorporation of XM Satellite Radio Holdings Inc. (incorporated by reference to Amendment No. 1 to Holdings Registration Statement on
Form S-3, File No. 333-89132).                                                                                                                                             
|            | 
|3.6         |  | Certificate of Amendment of Restated Certificate of Incorporation of XM Satellite Radio Holdings Inc. (incorporated by reference to Holdings Annual Report on Form 10-K, filed with the
SEC on March 31, 2003).                                                                                                                                                      
|            | 
|4.1         |  | Form of Certificate for Holdings Class A common stock (incorporated by reference to Exhibit 3 to Holdings Registration Statement on Form 8-A, filed with the SEC on September 23,
1999).                                                                                                                                                                            
|            | 
|4.2         |  | Form of Certificate for Holdings 8.25% Series B Convertible Redeemable Preferred Stock (incorporated by reference to Holdings Registration Statement on Form S-1, File No.
333-93529).                                                                                                                                                                              
|            | 
|4.3         |  | Certificate of Designation Establishing the Voting Powers, Designations, Preferences, Limitations, Restrictions and Relative Rights of Holdings 8.25% Series B Convertible Redeemable
Preferred Stock due 2012 (incorporated by reference to Holdings Annual Report on Form 10-K for the fiscal year ended December 31, 1999, filed with the SEC on March 16, 2000).
|            | 
|4.4         |  | Warrant Agreement, dated March 15, 2000, between XM Satellite Radio Holdings Inc. as Issuer and United States Trust Company of New York as Warrant Agent (incorporated by reference to
Holdings Registration Statement on Form S-1, File No. 333-39176).                                                                                                             
|            | 
|4.5         |  | Warrant Registration Rights Agreement, dated March 15, 2000, between XM Satellite Radio Holdings Inc. and Bear, Stearns & Co., Inc., Donaldson, Lufkin and Jenrette Securities Corporation,
Salomon Smith Barney Inc. and Lehman Brothers Inc. (incorporated by reference to Holdings Registration Statement on Form S-1, File No. 333-39176).                       
|            | 
|4.6         |  | Form of Warrant (incorporated by reference to Holdings Registration Statement on Form S-1, File No. 333-39176).                                                                                                                                                                                                                                                      
|            | 
|4.7         |  | Certificate of Designation Establishing the Powers, Preferences, Rights, Qualifications, Limitations and Restrictions of the 8.25% Series C Convertible Redeemable Preferred Stock due 2012
(incorporated by reference to Holdings Registration Statement on Form S-1, File No. 333-39176).                                                                          
|            | 
|4.8         |  | Form of Certificate for Holdings 8.25% Series C Convertible Redeemable Preferred Stock (incorporated by reference to Holdings Registration Statement on Form S-1, File No.
333-39176).                                                                                                                                                                              
|            | 
|4.9         |  | Indenture, dated as of March 15, 2000, between XM Satellite Radio Inc. and United States Trust Company of New York (incorporated by reference to Inc.s Registration Statement on Form
S-4, File No. 333-39178).                                                                                                                                                      



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                             
|4.10        |  | Registration Rights Agreement, dated March 15, 2000, between XM Satellite Radio Inc. and Bear, Stearns & Co. Inc., Donaldson, Lufkin and Jenrette Securities Corporation, Salomon Smith
Barney Inc. and Lehman Brothers Inc. (incorporated by reference to Inc.s Registration Statement on Form S-4, File No. 333-39178).                                                                              
|            | 
|4.11        |  | Form of 14% Senior Secured Note due 2010 of XM Satellite Radio Inc. (incorporated by reference to Inc.s Registration Statement on Form S-4, File No. 333-39178).                                                                                                                                                                                                                                       
|            | 
|4.12        |  | Rights Agreement, dated as of August 2, 2002, between XM Satellite Radio Holdings Inc. and Equiserve Trust Company as Rights Agent (incorporated by reference to XMs Current Report on
Form 8-K, filed with the SEC on August 2, 2002).                                                                                                                                                                
|            | 
|4.13        |  | Supplemental Indenture, dated as of November 15, 2001, by and between XM Satellite Radio Inc. and The Bank of New York (successor to United States Trust Company of New York) (incorporated by
reference to Holdings Current Report on Form 8-K, filed with the SEC on December 6, 2001).                                                                                                              
|            | 
|4.14        |  | Indenture, dated as of January 28, 2003, among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., XM Equipment Leasing LLC and The Bank of New York (incorporated by reference to
XMs Current Report on Form 8-K, filed with the SEC on January 29, 2003).                                                                                                                                     
|            | 
|4.15        |  | Security Agreement, dated as of January 28, 2003, among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., XM Equipment Leasing LLC, and The Bank of New York (incorporated by
reference to XMs Current Report on Form 8-K, filed with the SEC on January 29, 2003).                                                                                                                           
|            | 
|4.16        |  | Amended and Restated Security Agreement, dated as of January 28, 2003, between XM Satellite Radio Inc. and The Bank of New York (incorporated by reference to XMs Current Report on Form
8-K filed with the SEC on January 29, 2003).                                                                                                                                                                  
|            | 
|4.17        |  | Intercreditor and Collateral Agency Agreement (General Security Agreement), dated as of January 28, 2003, by and among the Noteholders named therein, The Bank of New York, as trustee, General
Motors Corporation, OnStar Corporation and The Bank of New York, as collateral agent (incorporated by reference to XMs Current Report on Form 8-K filed with the SEC on January 29, 2003).             
|            | 
|4.18        |  | Intercreditor and Collateral Agency Agreement (FCC License Subsidiary Pledge Agreement), dated as of January 28, 2003, by and among the Noteholders named therein, The Bank of New York, as
trustee, General Motors Corporation, OnStar Corporation and The Bank of New York, as collateral agent (incorporated by reference to XMs Current Report on Form 8-K filed with the SEC on January 29, 2003).
|            | 
|4.19        |  | Warrant Agreement, dated as of January 28, 2003, between XM Satellite Radio Holdings Inc. and The Bank of New York (incorporated by reference to XMs Current Report on Form 8-K filed
with the SEC on January 29, 2003).                                                                                                                                                                               
|            | 
|4.20        |  | Amended and Restated Amendment No. 1 to Rights Agreement, dated as of January 22, 2003, by and among XM Satellite Radio Holdings Inc. and Equiserve Trust Company, N.A. (incorporated by
reference to XMs Current Report on Form 8-K filed with the SEC on January 29, 2003).                                                                                                                          
|            | 
|4.21        |  | Form of 10% Senior Secured Discount Convertible Note due 2009 (incorporated by reference to XMs Current Report on Form 8-K filed with the SEC on January 29, 2003).                                                                                                                                                                                                                                    
|            | 
|4.22        |  | Global 14% Senior Secured Discount Note due 2009 (incorporated by reference to XMs Current Report on Form 8-K filed with the SEC on January 29, 2003).                                                                                                                                                                                                                                                 
|            | 
|4.23        |  | Global Common Stock Purchase Warrant (incorporated by reference to XMs Current Report on Form 8-K filed with the SEC on January 29, 2003).                                                                                                                                                                                                                                                             
|            | 
|4.24        |  | Second Supplemental Indenture, dated as of December 23, 2002, by and among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., XM Equipment Leasing LLC and The Bank of New York, as
trustee (incorporated by reference to XMs Current Report on Form 8-K filed with the SEC on January 15, 2003).                                                                                              
|            | 
|4.25        |  | Third Supplemental Indenture, dated January 27, 2003, among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., XM Equipment Leasing LLC and The Bank of New York, as trustee
(incorporated by reference to XMs Current Report on Form 8-K filed with the SEC on January 29, 2003).                                                                                                             
|            | 
|4.26        |  | Indenture, dated as of June 17, 2003, among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc. and The Bank of New York, as trustee (incorporated by reference to XMs Registration
Statement on Form S-4, File No. 333-106823).                                                                                                                                                                 



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                                                                                 
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                     
|4.27        |  | Form of 12% Senior Secured Note due 2010 (incorporated by reference to Exhibit A to Exhibit 4.26 hereof).                                                                                                                                                                                                                                       
|            | 
|4.28        |  | First Supplemental Indenture, dated as of June 12, 2003, by and among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., XM Equipment Leasing LLC and The Bank of New York
(incorporated by reference to XMs Registration Statement on Form S-4, File No. 333-106823).                                                                 
|            | 
|4.29        |  | First Amendment to Security Agreement, dated as of June 12, 2003, by and among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., XM Equipment Leasing LLC and The Bank of New York
(incorporated by reference to XMs Registration Statement on Form S-4, File No. 333-106823).                                                        
|            | 
|4.30        |  | Warrant to purchase XM Satellite Radio Holdings Inc. Class A Common Stock, dated July 31, 2003, issued to Boeing Satellite Systems International, Inc. (incorporated by reference to XMs
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003).                                            
|            | 
|4.31        |  | Amendment No. 2 to Rights Agreement between XM Satellite Radio Holdings Inc. and Equiserve Trust Company, N.A. (incorporated by reference to XMs Current Report on Form 8-K, filed with
the SEC on April 21, 2004).                                                                                                                            
|            | 
|4.32        |  | Indenture, dated as of April 20, 2004, among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc. and The Bank of New York, as trustee (incorporated by reference to XMs Current
Report on Form 8-K, filed with the SEC on April 23, 2004).                                                                                               
|            | 
|4.33        |  | Form of Senior Secured Floating Rate Note due 2009 (incorporated by reference to Exhibit A to Exhibit 4.32 hereof).                                                                                                                                                                                                                             
|            | 
|4.34        |  | Indenture, dated as of November 23, 2004, between XM Satellite Radio Holdings Inc. and the Bank of New York, as trustee (incorporated by reference to XMs Current Report on Form 8-K,
filed with the SEC on November 23, 2004).                                                                                                                
|            | 
|4.35        |  | Registration Rights Agreement, dated as of November 23, 2004, between XM Satellite Radio Holdings Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to XMs Current Report
on Form 8-K, filed with the SEC on November 23, 2004).                                                                                                    
|            | 
|4.36        |  | Form of 1.75% Senior Convertible Note Due 2009 (incorporated by reference to XMs Current Report on Form 8-K, filed with the SEC on November 23, 2004).                                                                                                                                                                                         
|            | 
|10.1*       |  | Third Amended and Restated Shareholders and Noteholders Agreement, dated as of June 16, 2003, by and among XM Satellite Radio Holdings Inc. and certain shareholders and noteholders named
therein (incorporated by reference to XMs Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003).
|            | 
|10.2        |  | Second Amended and Restated Registration Rights Agreement, dated as of January 28, 2003, by and among XM Satellite Radio Holdings Inc. and certain shareholders and note holders named therein
(incorporated by reference to XMs Current Report on Form 8-K filed with the SEC on January 29, 2003).                                           
|            | 
|10.3^*      |  | Technology Licensing Agreement by and among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., WorldSpace Management Corporation and American Mobile Satellite Corporation, dated as of
January 1, 1998, amended by Amendment No. 1 to Technology Licensing Agreement, dated June 7, 1999.                                              
|            | 
|10.4*       |  | Second Amended and Restated Distribution Agreement, dated as of January 28, 2003, by and among XM Satellite Radio Holdings Inc., XM Satellite Radio Inc. and OnStar Corporation, a division of
General Motors Corporation (incorporated by reference to XMs Current Report on Form 8-K filed with the SEC on January 29, 2003).                
|            | 
|10.5^       |  | Form of Indemnification Agreement between XM Satellite Radio Holdings Inc. and each of its directors and executive officers.                                                                                                                                                                                                                    
|            | 
|10.6        |  | 1998 Shares Award Plan (incorporated by reference to XMs Registration Statement on Form S-8, File No. 333-106827).                                                                                                                                                                                                                             
|            | 
|10.7^       |  | Form of Employee Non-Qualified Stock Option Agreement.                                                                                                                                                                                                                                                                                          
|            | 
|10.8        |  | Employee Stock Purchase Plan (incorporated by reference to XMs Registration Statement on Form S-8, File No. 333-106827).                                                                                                                                                                                                                       
|            | 
|10.9^       |  | Non-Qualified Stock Option Agreement between Gary Parsons and XM Satellite Radio Holdings Inc., dated July 16, 1999.                                                                                                                                                                                                                            



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                                                                                                                    
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                        
|10.10^      |  | Non-Qualified Stock Option Agreement between Hugh Panero and XM Satellite Radio Holdings Inc., dated July 1, 1998, as amended.                                                                                                                                                                                                                                                     
|            | 
|10.11^      |  | Form of Director Non-Qualified Stock Option Agreement.                                                                                                                                                                                                                                                                                                                             
|            | 
|10.12*      |  | Joint Development Agreement, dated February 16, 2000, between XM Satellite Radio Inc. and Sirius Satellite Radio Inc. (incorporated by reference to XMs quarterly report on Form 10-Q for
the quarter ended March 31, 2000, filed with the SEC on May 12, 2000).                                                                                                                  
|            | 
|10.13       |  | XM Satellite Radio Holdings Inc. Talent Option Plan (incorporated by reference to XMs Registration Statement on Form S-8, File No. 333-65022).                                                                                                                                                                                                                                    
|            | 
|10.14       |  | Assignment and Novation Agreement, dated as of December 5, 2001, between Holdings, XM Satellite Radio Inc. and Boeing Satellite Systems International Inc. (incorporated by reference to
XMs Current Report on Form 8-K filed with the SEC on December 6, 2001).                                                                                                                  
|            | 
|10.15*      |  | Third Amended and Restated Satellite Purchase Contract for In-Orbit Delivery, dated as of May 15, 2001, between XM Satellite Radio Inc. and Boeing Satellite Systems International Inc.
(incorporated by reference to Amendment No. 1 to XMs Registration Statement on Form S-3, File No. 333-89132).                                                                             
|            | 
|10.16*      |  | Amendment to the Satellite Purchase Contract for In-Orbit Delivery, dated as of December 5, 2001, between XM Satellite Radio Inc. and Boeing Satellite Systems International Inc. (incorporated
by reference to Holdings Current Report on Form 8-K filed with the SEC on December 6, 2001).                                                                                      
|            | 
|10.17       |  | Amended and Restated Note Purchase Agreement, dated as of June 16, 2003, by and among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc. and certain investors named therein
(incorporated by reference to XMs Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003).                                                  
|            | 
|10.18       |  | Amendment No. 1 to Note Purchase Agreement, dated as of January 28, 2003, by and among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc. and certain investors named therein
(incorporated by reference to XMs Current Report on Form 8-K filed with the SEC on January 29, 2003).                                                                                        
|            | 
|10.19       |  | Amended and Restated Director Designation Agreement, dated as of February 1, 2003, by and among XM Satellite Radio Holdings Inc. and the shareholders and note holders named therein
(incorporated by reference to XMs Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, filed with the SEC on May 15, 2003).                                                   
|            | 
|10.20       |  | GM/DIRECTV Director Designation Agreement, dated as of January 28, 2003, among XM Satellite Radio Holdings Inc., General Motors Corporation and DIRECTV Enterprises LLC (incorporated by
reference to XMs Current Report on Form 8-K filed with the SEC on January 29, 2003).                                                                                                     
|            | 
|10.21       |  | Amended and Restated Assignment and Use Agreement, dated as of January 28, 2003, between XM Satellite Radio Inc. and XM Radio Inc. (incorporated by reference to XMs Current Report on
Form 8-K filed with the SEC on January 29, 2003).                                                                                                                                          
|            | 
|10.22       |  | Credit Agreement, dated as of January 28, 2003, among XM Satellite Radio Inc., as a borrower, and XM Satellite Radio Holdings Inc., as a borrower, and General Motors Corporation, as lender
(incorporated by reference to XMs Current Report on Form 8-K filed with the SEC on January 29, 2003).                                                                                
|            | 
|10.23       |  | Employment Agreement, dated as of June 21, 2002, between XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc., and Joseph J. Euteneuer (incorporated by reference to XMs
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, filed with the SEC on August 14, 2002).                                                                                       
|            | 
|10.24       |  | Form of 2003 Executive Stock Option Agreement (incorporated by reference to XMs Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, filed with the SEC on May 15,
2003).                                                                                                                                                                                          
|            | 
|10.25*      |  | Amended and Restated Amendment to the Satellite Purchase Contract for In-Orbit Delivery, dated May 2003, by and between XM Satellite Radio Inc. and XM Satellite Radio Holdings Inc. and Boeing
Satellite Systems International, Inc. (incorporated by reference to XMs Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003).
|            | 
|10.26*      |  | July 2003 Amendment to the Satellite Purchase Contract for In-Orbit Delivery, dated July 31, 2003, by and between XM Satellite Radio Inc. and XM Satellite Radio Holdings Inc. and Boeing
Satellite Systems International, Inc. (incorporated by reference to XMs Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003).      



56



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                           
|10.27*      |  | Contract for Launch Services, dated August 5, 2003, between Sea Launch Limited Partnership and XM Satellite Radio Holdings Inc. (incorporated by reference to XMs Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003).                                                                                                         
|            | 
|10.28       |  | Amendment No. 1 to Amended and Restated Director Designation Agreement, dated as of September 9, 2003, by and among XM Satellite Radio Holdings Inc. and the shareholders and noteholders named
therein (incorporated by reference to XMs Quarterly Report in Form 10-Q for the quarter ended September 30, 2003 filed with the SEC on November 12, 2003).                           
|            | 
|10.29       |  | December 2003 Amendment to the Satellite Purchase Contract for In-Orbit Delivery, dated December 19, 2003, by and between XM Satellite Radio Inc. and XM Satellite Radio Holdings Inc. and
Boeing Satellite Systems International, Inc. (incorporated by reference to XMs Annual Report on Form 10-K for the year ended December 31, 2003, filed with the SEC on March 15, 2004).    
|            | 
|10.30       |  | First Amendment to Credit Agreement, dated January 13, 2004, by and between XM Satellite Radio Inc., XM Satellite Radio Holdings Inc. and General Motors Corporation (incorporated by reference
to XMs Annual Report on Form 10-K for the year ended December 31, 2003, filed with the SEC on March 15, 2004).                                                                       
|            | 
|10.31       |  | First Amendment to Second Amended and Restated Distribution Agreement, dated as of January 13, 2004, by and among OnStar Corporation, XM Satellite Radio Holdings Inc., and XM Satellite Radio
Inc. (incorporated by reference to XMs Annual Report on Form 10-K for the year ended December 31, 2003, filed with the SEC on March 15, 2004).                                        
|            | 
|10.32       |  | Form of Amendment to Third Amended and Restated Shareholders and Noteholders Agreement, dated as of January 13, 2004, by and among XM Satellite Radio Holdings Inc. and the parties thereto
(incorporated by reference to XMs Annual Report on Form 10-K for the year ended December 31, 2003, filed with the SEC on March 15, 2004).                                                
|            | 
|10.33       |  | Form of Amended and Restated Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filing, from XM 1500 Eckington LLC to Elisabeth Zajic for the benefit of Merrill Lynch Mortgage
Lending, Inc., dated as of August 9, 2004 (incorporated by reference to XMs Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, filed with the SEC on August 9, 2004).
|            | 
|10.34       |  | Form of Amended and Restated Secured Promissory Note, made as of August 9, 2004, by XM 1500 Eckington LLC in favor of Merrill Lynch Mortgage Lending, Inc. (incorporated by reference to
XMs Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, filed with the SEC on August 9, 2004).                                                                               
|            | 
|10.35       |  | Form of Indemnity and Guaranty Agreement, made as of August 9, 2004, by XM Satellite Radio Holdings Inc. in favor of Merrill Lynch Mortgage Lending, Inc. (incorporated by reference to
XMs Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, filed with the SEC on August 9, 2004).                                                                                
|            | 
|10.36       |  | Form of Employment Agreement, dated as of August 6, 2004, between XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc., and Gary Parsons (incorporated by reference to XMs
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, filed with the SEC on August 9, 2004).                                                                                         
|            | 
|10.37       |  | Form of Employment Agreement, dated as of August 6, 2004, between XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc., and Hugh Panero (incorporated by reference to XMs
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, filed with the SEC on August 9, 2004).                                                                                          
|            | 
|10.38       |  | Form of 2004 Non-Qualified Stock Option Agreement (incorporated by reference to XMs Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, filed with the SEC on August 9,
2004).                                                                                                                                                                                        
|            | 
|21.1        |  | Subsidiaries of XM Satellite Radio Inc.                                                                                                                                                                                                                                                                                                                                               
|            | 
|23.1        |  | Consent of Independent Registered Accounting Firm.                                                                                                                                                                                                                                                                                                                                    
|            | 
|31.1        |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).                                                                                                                                                                                                                                                                                     
|            | 
|31.2        |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).                                                                                                                                                                                                                                                                                     



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|            |  |                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                 
|32.1        |  | Written Statement of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

---

|^ | Incorporated by reference to XMs Registration Statement on Form S-1, File No. 333-83619.
|- | -----------------------------------------------------------------------------------------

|* | Pursuant to the Commissions Orders Granting Confidential Treatment under Rule 406 of the Securities Act of 1933 or Rule 24(b)-2 under the Securities Exchange Act of 1934,
certain confidential portions of this Exhibit were omitted by means of redacting a portion of the text.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(b) Exhibits.



XM Satellite Radio Inc. hereby files as part of this Form 10-K the Exhibits listed in the Index to Exhibits.



(c) Consolidated Financial Statement Schedules.



The following consolidated financial statement schedule is filed herewith:



Schedule IValuation and Qualifying
Accounts.



Schedules not listed above have
been omitted because they are inapplicable or the information required to be set forth therein is provided in the Consolidated Financial Statements of XM Satellite Radio Inc. or notes thereto.



58



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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.



XM SATELLITE RADIO INC.By:

/s/ HUGH PANEROHugh Panero President and Chief Executive Officer




Date: March 28, 2005



Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on the dates indicated:



|                           |  |                                                                                               |  |               
|-------------------------- |  | --------------------------------------------------------------------------------------------- |  | --------------
|Signature                  |  | Title                                                                                         |  | Date          
|/S/ HUGH PANERO            |  | President, Chief Executive Officer and Director    (Principal Executive Officer)              |  | March 28, 2005
|Hugh Panero                |  |                                                                                              
|                           |  |                                                                                              
|/S/ JOSEPH J. EUTENEUER    |  | Executive Vice President, Chief Financial Officer (Principal Financial and AccountingOfficer) |  | March 28, 2005
|Joseph J. Euteneuer        |  |                                                                                              
|                           |  |                                                                                              
|/S/ GARY M. PARSONS        |  | Chairman of the Board of Directors                                                            |  | March 28, 2005
|Gary M. Parsons            |  |                                                                                              
|                           |  |                                                                                              
|/S/ NATHANIEL A. DAVIS     |  | Director                                                                                      |  | March 28, 2005
|Nathaniel A. Davis         |  |                                                                                              
|                           |  |                                                                                              
|/S/ THOMAS J. DONOHUE      |  | Director                                                                                      |  | March 28, 2005
|Thomas J. Donohue          |  |                                                                                              
|                           |  |                                                                                              
|/S/ THOMAS G. ELLIOTT      |  | Director                                                                                      |  | March 28, 2005
|Thomas G. Elliott          |  |                                                                                              
|                           |  |                                                                                              
|/S/ GEORGE HAYWOOD         |  | Director                                                                                      |  | March 28, 2005
|George Haywood             |  |                                                                                              
|                           |  |                                                                                              
|/S/ CHESTER A. HUBER, JR.  |  | Director                                                                                      |  | March 28, 2005
|Chester A. Huber, Jr.      |  |                                                                                              
|                           |  |                                                                                              
|/S/ JARL MOHN              |  | Director                                                                                      |  | March 28, 2005
|Jarl Mohn                  |  |                                                                                              
|                           |  |                                                                                              
|/S/ PIERCE J. ROBERTS, JR. |  | Director                                                                                      |  | March 28, 2005
|Pierce J. Roberts, Jr.     |  |                                                                                              
|                           |  |                                                                                              
|/S/ JACK SHAW              |  | Director                                                                                      |  | March 28, 2005
|Jack Shaw                  |  |                                                                                              



59



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INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES



XM SATELLITE RADIO INC. AND SUBSIDIARIES



|                                                        |  |     
|------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm |  | F-2 
|                                                        | 
|Consolidated Balance Sheets                             |  | F-3 
|                                                        | 
|Consolidated Statements of Operations                   |  | F-4 
|                                                        | 
|Consolidated Statements of Cash Flows                   |  | F-5 
|                                                        | 
|Consolidated Statements of Stockholders Equity         |  | F-6 
|                                                        | 
|Notes to Consolidated Financial Statements              |  | F-7 
|                                                        | 
|Schedule IValuation and Qualifying Accounts            |  | F-44



F-1



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##### Table of Contents

##### Index to Financial Statements

Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholder

XM Satellite Radio Inc.:



We have audited the accompanying consolidated balance sheets of XM Satellite
Radio Inc. and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the years in the three-year period ended December
31, 2004. Our audits also included the related consolidated financial statement schedule presented as Schedule I. These consolidated financial statements and the consolidated financial statement schedule 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 the standards of the Public Company Accounting Oversight Board (United States). 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 XM Satellite Radio Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the consolidated 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 LLP



McLean, Virginia

March 25, 2005



F-2



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##### Index to Financial Statements

XM SATELLITE RADIO INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



DECEMBER 31,
2004 AND 2003



|                                                                                                  |  |                                   |            |   |      |   |            |  
|------------------------------------------------------------------------------------------------- |  | --------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                  |  | 2004                              |            |   | 2003 |  
|                                                                                                  |  | (in thousands, except share data) |           
|ASSETS                                                                                            |  |                                   |            |   |      |   |            |  
|Current assets:                                                                                   |  |                                   |            |   |      |   |            |  
|Cash and cash equivalents                                                                         |  | $                                 | 202,521    |   |      | $ | 90,219     |  
|Restricted investments                                                                            |  |                                   |           |   |      |   | 116        |  
|Accounts receivable, net of allowance for doubtful accounts of $1,551 and $796                    |  |                                   | 20,182     |   |      |   | 13,160     |  
|Due from subsidiaries/affiliates                                                                  |  |                                   | 1,412      |   |      |   | 95,693     |  
|Due from related parties                                                                          |  |                                   | 5,367      |   |      |   | 5,176      |  
|Prepaid and other current assets                                                                  |  |                                   | 59,967     |   |      |   | 40,478     |  
|                                                                                                  |  |                                   |            |   |      |   |            |  
|Total current assets                                                                              |  |                                   | 289,449    |   |      |   | 244,842    |  
|                                                                                                  |  |                                  
|Other assets:                                                                                     |  |                                   |            |   |      |   |            |  
|Restricted investments, net of current portion                                                    |  |                                   | 372        |   |      |   | 375        |  
|System under construction                                                                         |  |                                   | 153,595    |   |      |   | 22,058     |  
|Property and equipment, net of accumulated depreciation and amortization of $456,063 and $311,808 |  |                                   | 436,169    |   |      |   | 682,997    |  
|DARS license                                                                                      |  |                                   | 141,227    |   |      |   | 141,200    |  
|Intangibles, net of accumulated amortization of $5,698 and $4,433                                 |  |                                   | 7,164      |   |      |   | 8,429      |  
|Deferred financing fees, net of accumulated amortization of $14,192 and $9,067                    |  |                                   | 36,616     |   |      |   | 42,772     |  
|Related party prepaid expenses, net of current portion                                            |  |                                   | 25,901     |   |      |   | 44,521     |  
|Prepaid and other assets, net of current portion                                                  |  |                                   | 1,823      |   |      |   | 2,502      |  
|                                                                                                  |  |                                   |            |   |      |   |            |  
|Total assets                                                                                      |  | $                                 | 1,092,316  |   |      | $ | 1,189,696  |  
|                                                                                                  |  |                                   |            |   |      |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                              |  |                                   |            |   |      |   |            |  
|Current liabilities:                                                                              |  |                                   |            |   |      |   |            |  
|Current portion of long-term debt                                                                 |  | $                                 | 6,148      |   |      | $ | 3,249      |  
|Accounts payable                                                                                  |  |                                   | 59,155     |   |      |   | 39,784     |  
|Accrued expenses                                                                                  |  |                                   | 86,196     |   |      |   | 57,512     |  
|Accrued network optimization expenses                                                             |  |                                   | 2,148      |   |      |   | 4,136      |  
|Due to related parties                                                                            |  |                                   | 27,610     |   |      |   | 2,103      |  
|Accrued interest                                                                                  |  |                                   | 5,552      |   |      |   | 3,070      |  
|Deferred revenue                                                                                  |  |                                   | 114,951    |   |      |   | 39,722     |  
|                                                                                                  |  |                                   |            |   |      |   |            |  
|Total current liabilities                                                                         |  |                                   | 301,760    |   |      |   | 149,576    |  
|Related party long-term debt, net of current portion                                              |  |                                   |           |   |      |   | 141,891    |  
|Long-term debt, net of current portion                                                            |  |                                   | 615,943    |   |      |   | 527,944    |  
|Due to related parties, net of current portion                                                    |  |                                   | 38,911     |   |      |   | 23,921     |  
|Deferred revenue, net of current portion                                                          |  |                                   | 37,396     |   |      |   | 14,162     |  
|Other non-current liabilities                                                                     |  |                                   | 54,724     |   |      |   | 13,120     |  
|                                                                                                  |  |                                   |            |   |      |   |            |  
|Total liabilities                                                                                 |  |                                   | 1,048,734  |   |      |   | 870,614    |  
|                                                                                                  |  |                                   |            |   |      |   |            |  
|Stockholders equity:                                                                             |  |                                   |            |   |      |   |            |  
|Common stock, par value $0.10; 3,000 shares authorized, 125 shares issued and outstanding         |  |                                   |           |   |      |   |           |  
|Additional paid-in capital                                                                        |  |                                   | 2,158,402  |   |      |   | 1,783,869  |  
|Accumulated deficit                                                                               |  |                                   | (2,114,820 | ) |      |   | (1,464,787 | )
|                                                                                                  |  |                                   |            |   |      |   |            |  
|Total stockholders equity                                                                        |  |                                   | 43,582     |   |      |   | 319,082    |  
|                                                                                                  |  |                                   |            |   |      |   |            |  
|Commitments and contingencies                                                                     |  |                                   |            |   |      |   |            |  
|Total liabilities and stockholders equity                                                        |  | $                                 | 1,092,316  |   |      | $ | 1,189,696  |  
|                                                                                                  |  |                                   |            |   |      |   |            |  



See accompanying notes
to consolidated financial statements.



F-3



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##### Index to Financial Statements

XM SATELLITE RADIO INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS



YEARS
ENDED DECEMBER 31, 2004, 2003 AND 2002



|                                                                             |  |                |          |   |      |   |          |      |  |   |          |  
|---------------------------------------------------------------------------- |  | -------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                             |  | 2004           |          |   | 2003 |   |          | 2002 | 
|                                                                             |  | (in thousands) |         
|Revenue                                                                      |  | $              | 244,443  |   |      | $ | 91,781   |      |  | $ | 20,181   |  
|                                                                             |  |                |         
|Operating expenses                                                           |  |                |          |   |      |   |          |      |  |   |          |  
|Cost of revenue (excludes depreciation & amortization, shown below)          |  |                | 205,262  |   |      |   | 150,773  |      |  |   | 126,555  |  
|Research & development (excludes depreciation & amortization, shown below)   |  |                | 23,513   |   |      |   | 12,285   |      |  |   | 10,843   |  
|General & administrative (excludes depreciation & amortization, shown below) |  |                | 28,366   |   |      |   | 27,822   |      |  |   | 27,777   |  
|Marketing (excludes depreciation & amortization, shown below)                |  |                | 304,316  |   |      |   | 200,267  |      |  |   | 169,165  |  
|Impairment of goodwill                                                       |  |                |         |   |      |   |         |      |  |   | 11,461   |  
|Depreciation & amortization                                                  |  |                | 145,775  |   |      |   | 156,927  |      |  |   | 117,202  |  
|                                                                             |  |                |          |   |      |   |          |      |  |   |          |  
|Total operating expenses                                                     |  |                | 707,232  |   |      |   | 548,074  |      |  |   | 463,003  |  
|                                                                             |  |                |          |   |      |   |          |      |  |   |          |  
|Operating loss                                                               |  |                | (462,789 | ) |      |   | (456,293 | )    |  |   | (442,822 | )
|Other income (expense):                                                      |  |                |          |   |      |   |          |      |  |   |          |  
|Interest income                                                              |  |                | 1,592    |   |      |   | 794      |      |  |   | 2,621    |  
|Interest expense                                                             |  |                | (84,914  | ) |      |   | (104,250 | )    |  |   | (52,037  | )
|Loss from deleveraging transactions                                          |  |                | (76,621  | ) |      |   | (29,731  | )    |  |   |         |  
|Other income (expense)                                                       |  |                | 16       |   |      |   | (279     | )    |  |   | 653      |  
|                                                                             |  |                |          |   |      |   |          |      |  |   |          |  
|Net loss before income taxes                                                 |  |                | (622,716 | ) |      |   | (589,759 | )    |  |   | (491,585 | )
|                                                                             |  |                |          |   |      |   |          |      |  |   |          |  
|Provision for deferred income taxes                                          |  |                | (27,317  | ) |      |   |         |      |  |   |         |  
|                                                                             |  |                |          |   |      |   |          |      |  |   |          |  
|Net loss                                                                     |  | $              | (650,033 | ) |      | $ | (589,759 | )    |  | $ | (491,585 | )
|                                                                             |  |                |          |   |      |   |          |      |  |   |          |  



See accompanying notes
to consolidated financial statements.



F-4



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##### Index to Financial Statements

XM SATELLITE RADIO INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



YEARS
ENDED DECEMBER 31, 2004, 2003 AND 2002



|                                                                            |  |                |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------- |  | -------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                            |  | 2004           |          |   | 2003 |   |          | 2002 | 
|                                                                            |  | (in thousands) |         
|Cash flows from operating activities:                                       |  |                |          |   |      |   |          |      |  |   |          |  
|Net loss                                                                    |  | $              | (650,033 | ) |      | $ | (589,759 | )    |  | $ | (491,585 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                |          |   |      |   |          |      |  |   |          |  
|Provision for doubtful accounts                                             |  |                | 3,218    |   |      |   | 2,077    |      |  |   | 493      |  
|Depreciation and amortization                                               |  |                | 145,775  |   |      |   | 156,927  |      |  |   | 117,202  |  
|Amortization of deferred financing fees and discount                        |  |                | 17,676   |   |      |   | 15,496   |      |  |   | 4,479    |  
|Non-cash stock-based compensation                                           |  |                | 2,020    |   |      |   | 3,003    |      |  |   | 1,507    |  
|Impairment of goodwill                                                      |  |                |         |   |      |   |         |      |  |   | 11,461   |  
|Accretion of interest                                                       |  |                | 53,222   |   |      |   | 45,227   |      |  |   |         |  
|Non-cash loss on conversion or redemption of notes                          |  |                | 66,279   |   |      |   | 29,904   |      |  |   |         |  
|Provision for deferred income taxes                                         |  |                | 27,317   |   |      |   |         |      |  |   |         |  
|Other                                                                       |  |                | (15      | ) |      |   | (663     | )    |  |   | (330     | )
|Changes in operating assets and liabilities:                                |  |                |          |   |      |   |          |      |  |   |          |  
|Increase in accounts receivable                                             |  |                | (8,407   | ) |      |   | (11,480  | )    |  |   | (3,772   | )
|(Increase)/decrease in due from related parties                             |  |                | (191     | ) |      |   | 802      |      |  |   | (1,477   | )
|Increase in prepaid and other current assets                                |  |                | (190     | ) |      |   | (7,897   | )    |  |   | 5,666    |  
|Increase in accounts payable and accrued expenses                           |  |                | 52,657   |   |      |   | 80,496   |      |  |   | 25,940   |  
|Increase in due to related parties                                          |  |                | 82,835   |   |      |   | 24,225   |      |  |   | 30,332   |  
|Increase in deferred revenue                                                |  |                | 98,463   |   |      |   | 41,587   |      |  |   | 11,242   |  
|Increase/(decrease) in accrued interest                                     |  |                | 2,482    |   |      |   | (11,216  | )    |  |   | 800      |  
|                                                                            |  |                |          |   |      |   |          |      |  |   |          |  
|Net cash used in operating activities                                       |  |                | (106,892 | ) |      |   | (221,271 | )    |  |   | (288,042 | )
|                                                                            |  |                |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities:                                       |  |                |          |   |      |   |          |      |  |   |          |  
|Purchase of property and equipment                                          |  |                | (25,912  | ) |      |   | (15,663  | )    |  |   | (35,624  | )
|Additions to system under construction                                      |  |                | (116,537 | ) |      |   | (2,672   | )    |  |   | (32,813  | )
|Net maturity of short-term investments                                      |  |                |         |   |      |   |         |      |  |   | 10,296   |  
|Net maturity of restricted investments                                      |  |                | 119      |   |      |   | 22,750   |      |  |   | 44,047   |  
|Insurance proceeds from satellite recoveries                                |  |                | 133,924  |   |      |   |         |      |  |   |         |  
|Other investing activities                                                  |  |                |         |   |      |   | 2,272    |      |  |   |         |  
|                                                                            |  |                |          |   |      |   |          |      |  |   |          |  
|Net cash (used in) provided by investing activities                         |  |                | (8,406   | ) |      |   | 6,687    |      |  |   | (14,094  | )
|                                                                            |  |                |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities:                                       |  |                |          |   |      |   |          |      |  |   |          |  
|Proceeds from sale of common stock and capital contribution                 |  |                | 304,846  |   |      |   | 11,768   |      |  |   | 249,150  |  
|Proceeds from issuance of 10% notes                                         |  |                |         |   |      |   | 108,132  |      |  |   |         |  
|Proceeds from issuance of 12% notes                                         |  |                |         |   |      |   | 185,000  |      |  |   |         |  
|Proceeds from issuance of floating rate discount notes                      |  |                | 200,000  |   |      |   |         |      |  |   |         |  
|Repayment of 12% senior secured notes                                       |  |                | (70,000  | ) |      |   |         |      |  |   |         |  
|Repayment of 14% senior secured notes                                       |  |                | (13,028  | ) |      |   |         |      |  |   |         |  
|Repayment of related party long-term debt                                   |  |                | (81,194  | ) |      |   |         |      |  |   |         |  
|Payments on related party facility                                          |  |                | (103,034 | ) |      |   |         |      |  |   |         |  
|Payments on other borrowings                                                |  |                | (5,174   | ) |      |   | (2,722   | )    |  |   | (2,440   | )
|Payments for deferred financing costs                                       |  |                | (4,816   | ) |      |   | (4,101   | )    |  |   | (216     | )
|                                                                            |  |                |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                   |  |                | 227,600  |   |      |   | 298,077  |      |  |   | 246,494  |  
|                                                                            |  |                |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                        |  |                | 112,302  |   |      |   | 83,493   |      |  |   | (55,642  | )
|Cash and cash equivalents at beginning of period                            |  |                | 90,219   |   |      |   | 6,726    |      |  |   | 62,368   |  
|                                                                            |  |                |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of period                                  |  | $              | 202,521  |   |      | $ | 90,219   |      |  | $ | 6,726    |  
|                                                                            |  |                |          |   |      |   |          |      |  |   |          |  



See accompanying notes
to consolidated financial statements.



F-5



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##### Table of Contents

##### Index to Financial Statements

XM SATELLITE RADIO INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002



|                                 |  |                                  |  |                          |   |                    |   |           |                          |   |            |   |  |   |          |  
|-------------------------------- |  | -------------------------------- |  | ------------------------ | - | ------------------ | - | --------- | ------------------------ | - | ---------- | - |  | - | -------- | -
|                                 |  | Common Stock                     |  | AdditionalPaid-inCapital |   | AccumulatedDeficit |   |           | TotalStockholdersEquity |  
|                                 |  | Shares                           |  | Amount                   |   |                    |  
|                                 |  | (in thousands except share data) | 
|Balance at January 1, 2002       |  | 125                              |  | $                        |  |                    | $ | 1,238,898 |                          | $ | (383,444   | ) |  | $ | 855,454  |  
|Contributions to paid in capital |  |                                 |  |                          |  |                    |   | 249,150   |                          |   |           |   |  |   | 249,150  |  
|Non-cash stock compensation      |  |                                 |  |                          |  |                    |   | 1,507     |                          |   |           |   |  |   | 1,507    |  
|Net loss                         |  |                                 |  |                          |  |                    |   |          |                          |   | (491,585   | ) |  |   | (491,585 | )
|                                 |  |                                  |  |                          |   |                    |   |           |                          |   |            |   |  |   |          |  
|Balance at December 31, 2002     |  | 125                              |  |                          |  |                    |   | 1,489,555 |                          |   | (875,029   | ) |  |   | 614,526  |  
|Contributions to paid in capital |  |                                 |  |                          |  |                    |   | 291,312   |                          |   |           |   |  |   | 291,312  |  
|Non-cash stock compensation      |  |                                 |  |                          |  |                    |   | 3,003     |                          |   |           |   |  |   | 3,003    |  
|Net loss                         |  |                                 |  |                          |  |                    |   |          |                          |   | (589,759   | ) |  |   | (589,759 | )
|                                 |  |                                  |  |                          |   |                    |   |           |                          |   |            |   |  |   |          |  
|Balance at December 31, 2003     |  | 125                              |  |                          |  |                    |   | 1,783,870 |                          |   | (1,464,788 | ) |  |   | 319,082  |  
|Contributions to paid in capital |  |                                 |  |                          |  |                    |   | 372,513   |                          |   |           |   |  |   | 372,513  |  
|Non-cash stock compensation      |  |                                 |  |                          |  |                    |   | 2,020     |                          |   |           |   |  |   | 2,020    |  
|Net loss                         |  |                                 |  |                          |  |                    |   |          |                          |   | (650,033   | ) |  |   | (650,033 | )
|                                 |  |                                  |  |                          |   |                    |   |           |                          |   |            |   |  |   |          |  
|Balance at December 31, 2004     |  | 125                              |  | $                        |  |                    | $ | 2,158,403 |                          | $ | (2,114,821 | ) |  | $ | 43,582   |  
|                                 |  |                                  |  |                          |   |                    |   |           |                          |   |            |   |  |   |          |  



See accompanying notes
to consolidated financial statements.



F-6



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##### Table of Contents

##### Index to Financial Statements

XM SATELLITE RADIO INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003 AND 2002



(1) Summary of Significant
Accounting Policies and Practices



(a) Nature of
Business



XM Satellite Radio Inc. (the
Company or Inc.), was incorporated on December 15, 1992 in the State of Delaware for the purpose of operating a digital audio radio service (DARS) under a license from the Federal Communications Commission
(FCC). XM Satellite Radio Holdings Inc. (XM or Holdings) was formed as a holding company for XMSR on May 16, 1997. The Companys satellites, Rock and Roll, were successfully launched
on March 18, 2001 and May 8, 2001, respectively. The Company commenced commercial operations in two markets on September 25, 2001 and completed its national rollout on November 12, 2001.



(b) Principles of Consolidation and Basis of Presentation



The consolidated financial statements include the accounts of XM Satellite
Radio Inc. and its subsidiaries. All significant intercompany transactions and accounts have been eliminated.



In the Companys opinion, the accompanying consolidated financial statements reflect all adjustments, consisting of only normal recurring entries,
necessary for a fair presentation of the consolidated financial position of XM Satellite Radio Inc. as of December 31, 2004 and 2003, and the results of operations and cash flows for the years ended December 31, 2004, 2003 and 2002. Certain
reclassifications have been made to prior-period amounts to conform with the 2004 presentation, including the reclassification of ad sales expense and certain revenue share payments to cost of revenue.



(c) Cash and Cash Equivalents



The Company considers short-term, highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company had the following cash and cash equivalents balances (in thousands):



|                                |  |              |         |      |   |       
|------------------------------- |  | ------------ | ------- | ---- | - | ------
|                                |  | December 31,
|                                |  | 2004         |         | 2003
|Cash on deposit                 |  | $            | 4,184   |      | $ | 6,729 
|Money market funds              |  |              | 198,337 |      |   | 83,490
|                                |  |              |         |      |   |       
|Total cash and cash equivalents |  | $            | 202,521 |      | $ | 90,219
|                                |  |              |         |      |   |       



(d) Restricted
Investments



Restricted investments consist of fixed income securities
and are stated at amortized cost plus accrued interest income. At December 31, 2004 and 2003, restricted investments represented securities held in escrow to secure the Companys future performance with regard to certain contracts and
obligations, which include certain facility leases and other secured credits. The investments are principally money market funds and certificates of deposit. There were no gross unrealized holding gains at December 31, 2004 and 2003. The amortized
cost and fair value of the restricted investments at December 31, 2004 and 2003, were as follows (in thousands):



|                                                          |  |                |     |            |   |    
|--------------------------------------------------------- |  | -------------- | --- | ---------- | - | ---
|                                                          |  | Amortized Cost |     | Fair Value
|At December 31, 2004:                                     |  |                |     |            |   |    
|                                                          |  |               
|Collateral for letters of credit and other secured credit |  | $              | 372 |            | $ | 372
|                                                          |  |                |     |            |   |    
|At December 31, 2003:                                     |  |                |     |            |   |    
|                                                          |  |               
|Contract escrow                                           |  | $              | 116 |            | $ | 116
|Collateral for letters of credit and other secured credit |  |                | 375 |            |   | 375
|                                                          |  |                |     |            |   |    
|Total restricted investments                              |  | $              | 491 |            | $ | 491
|                                                          |  |                |     |            |   |    



F-7



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##### Table of Contents

##### Index to Financial Statements

(e) Accounts Receivable



Accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is the Companys best
estimate of the amount of probable losses in the Companys existing accounts receivable. The Company estimates the allowance based on the Companys actual write-off experience.



(f) Inventory



Inventory is valued at weighted average cost and consists of finished goods. The Company had $2.9 million and $2.6 million of inventory at December 31,
2004 and 2003, respectively, which are included in Prepaid and other current assets on the Consolidated Balance Sheets.



(g) Property and Equipment



Property and equipment are carried at cost less accumulated depreciation and amortization. Equipment under capital leases is stated at the present value
of minimum lease payments. Depreciation and amortization is calculated using the straight-line method over the following estimated useful lives:



|                                                          |  |                                              
|--------------------------------------------------------- |  | ---------------------------------------------
|Spacecraft system                                         |  | 6.75 years                                   
|                                                          | 
|Terrestrial repeater network                              |  | 5  10 years                                 
|                                                          | 
|Spacecraft control and uplink facilities                  |  | 17.5 years                                   
|                                                          | 
|Broadcast facilities                                      |  | 3  7 years                                  
|                                                          | 
|Computer systems                                          |  | 3  7 years                                  
|                                                          | 
|Building and improvements                                 |  | 20 years                                     
|                                                          | 
|Furniture and fixtures                                    |  | 3  7 years                                  
|                                                          | 
|Equipment under capital leases and leasehold improvements |  | Lesser of useful life or remaining lease term



Depreciation of the
Companys in-orbit satellites commenced in May and June 2001 upon acceptance from Boeing Satellite Systems (BSS). Amortization and depreciation of the ground systems/spacecraft control facilities and related computer systems commenced on
September 25, 2001, which was the date the service was launched in the Companys lead markets. Depreciation of the broadcast facilities and the terrestrial repeaters commenced when they were placed in service.



In September 2001, the Company notified its insurers of a progressive solar
array power degradation problem with both satellites (this solar array output power degradation issue is common to the first six Boeing 702 class satellites in orbitXM Rock and XM Roll were the fifth and sixth Boeing 702s launched). In
February 2003, the Company filed Proofs of Loss with its insurers claiming that the pattern of degradation on both satellites met the standard for constructive total loss under the terms of the insurance policies even though the Company would be
able to operate the satellites and provide quality service to its subscribers for some continuing period of time.



F-8



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##### Table of Contents

##### Index to Financial Statements

In July 2004, the Company reached agreement with insurers covering 80% of the aggregate sum insured at a
settlement rate equal to 44.5% of the proportionate amount covered by each of these insurers, representing a total recovery of approximately $142 million from these insurers. This settlement resolves any issues about the amount of loss sustained,
includes a waiver by the settling insurance companies of any reductions based on salvage value, terminates any further risk to the settling insurers under the policies and ends any other rights the settling insurers might have with regard to XM Rock
and XM Roll or revenues generated by the Companys continuing use of those satellites. The Company has collected all amounts due under the settlement. The portion of the insurance proceeds related to claim payments, totaling $133.9 million, was
recorded as a reduction to the carrying values of XM Rock and XM Roll. In August 2004, the Company filed for arbitration to collect the remaining 20% of the sum insured utilizing the third-party dispute resolution procedures under the policy. Any
amounts received from this arbitration proceeding will be recorded as a reduction to the carrying values of XM Rock and XM Roll.



In February 2005, the Company launched its third satellite (XM-3), to be placed into one orbital slot. The Company will then move XM Roll to be collocated
with XM Rock in the other orbital slot. In 2007, the Company plans to launch an additional satellite (XM-4) to replace the collocated XM Rock and XM Roll. With this plan, even in the event there is a problem putting XM-3 into operation, the Company
believes it will be able to launch additional satellites prior to the time the solar array output power degradation issue might cause the Companys broadcast signal strength to fall below minimum acceptable levels.



Based on the consistency of the degradation trends (with no substantial
improvement to date) and continuing analyses by BSS and the Company, the Companys management adjusted the estimated useful lives of its in-orbit satellites, with effect from September 2002, to the period running through first quarter 2008
(approximately 6.75 years from launch). The Companys management will continue to monitor this situation carefully and may re-adjust the estimated useful lives of its in-orbit satellites based on future information. The Company has not recorded
any impairment due to its forecasted cash flows (which are sufficient to recover the system assets); however, should the Company reduce or not meet its forecasted cash flows or reduce further the estimated useful lives of the satellites, it may be
required to record an impairment (which may be substantial) at that time. The Company has not adjusted the estimated useful lives of its spacecraft control facilities, as it believes these facilities will continue to be of use in its system as XM-3
and XM-4 are launched.



Had the Company used 6.75 years for the
life of the satellites from the in-service date, the net loss attributable to common stockholders would have been impacted as follows:



|                                                   |  |                                               |          |   |      |   |          |      |  |   |          |  
|-------------------------------------------------- |  | --------------------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                   |  | Year ended December 31,                       |         
|                                                   |  | 2004                                          |          |   | 2003 |   |          | 2002 | 
|                                                   |  | (amounts in thousands, except per share data) |         
|Net loss as reported                               |  | $                                             | (650,033 | ) |      | $ | (589,759 | )    |  | $ | (491,585 | )
|Add effect of change on depreciation of satellites |  |                                               |         |   |      |   |         |      |  |   | (31,622  | )
|                                                   |  |                                               |          |   |      |   |          |      |  |   |          |  
|Adjusted net loss                                  |  | $                                             | (650,033 | ) |      | $ | (589,759 | )    |  | $ | (523,207 | )
|                                                   |  |                                               |          |   |      |   |          |      |  |   |          |  



In accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to
be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be
disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for
sale would be presented separately in the appropriate asset and liability sections of the balance sheet.



Goodwill and intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently, if events
and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the assets fair value.



(h) DARS License, Goodwill and Other Intangible Assets



The Company adopted the provisions of SFAS No. 141, Business Combinations(SFAS No. 141) and SFAS No. 142, Goodwill and Other Intangible Assets(SFAS No. 142) as of January 1, 2002. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations. SFAS
No. 141 establishes criteria which intangible assets acquired in a business combination must meet in order to be recognized and reported separately from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimated useful lives be amortized over their respective
estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 144.



F-9



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##### Table of Contents

##### Index to Financial Statements

In applying the standards established by SFAS No. 142, the Company determined that its DARS license was
an intangible asset having an indefinite useful life. While the DARS license has a renewable eight-year term, the Company believes that the administrative fees necessary to renew the license will be de minimiscompared to the initial fee to
obtain the license, and the Company has met all of the established milestones specified in the FCC license agreement. The Company also anticipates no difficulties in renewing the license as long as the Company continues to adhere to the various
regulatory requirements established in the license grant. Although the Company faces competition from a variety of sources, the Company does not believe that the risks of the technology becoming obsolete or of a decrease in demand for the DARS
service are significant. Further, the Company believes that its license is comparable with the licenses granted to other broadcasters, which are also classified as indefinite-lived intangible assets. Upon adoption, the Company was required to
evaluate its existing acquired intangible assets and goodwill, and to make any necessary reclassifications in order to conform to the new classification criteria in SFAS No. 141 for recognition separate from goodwill. The Company was also required
to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments. Since the Companys DARS license, with a carrying amount of $144.0 million at January 1, 2002, is an
intangible asset having an indefinite useful life, it was tested for impairment in accordance with the provisions of SFAS No. 142. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite
life. Based on the Companys analysis, no impairment existed. In connection with SFAS No. 142s transitional goodwill impairment evaluation, the Company was required to perform an assessment of whether there was an indication that goodwill
was impaired as of the date of adoption. The goodwill balance was $11.5 million as of January 1, 2002 (the date the Company implemented SFAS No. 142). The Company identified one reporting unit and determined the carrying value; the fair value of the
reporting unit was computed by determining its enterprise value, which consisted of the Companys market capitalization and the fair value of its long-term debt. The Company determined that the fair value exceeded the carrying value and that
there were no indications that goodwill had been impaired as of January 1, 2002, the date of implementation.



Amortization of the DARS license did not begin until September 25, 2001, when the Company commenced commercial operations, and no amortization has been
taken since January 1, 2002, when the Company adopted SFAS No. 142. Amortization expense for the other intangibles was $1.3 million, $1.3 million and $1.5 million during the years ended December 31, 2004, 2003 and 2002, respectively. The Company did
not begin amortizing acquired programming agreements until September 25, 2001, when the Company commenced commercial operations. The Company is continuing to amortize intangible assets consisting of programming and receiver agreements that had a
carrying value of $7.2 million and $8.4 million, respectively, as of December 31, 2004 and 2003, respectively, over their estimated useful lives of 10 years. The estimated amortization for the programming and receiver agreements for the years ended
2005 to 2008 is $1.3 million for each year.



In connection with
the January 2003 financing transactions (see Note 3), the carrying value of the DARS license was reduced by $2.8 million, which was allocated as a discount associated with the fair value of the consideration provided to certain of these investors at
the time of the issuance of the 10% Senior Secured Discount Convertible Notes.



As part of the annual impairment testing in 2002, the Company performed an assessment of the fair value of its sole reporting unit as defined by SFAS No. 142 and compared it to the carrying value of its reporting
unit. The Companys market capitalization had fallen below the Companys book value, indicating that the reporting units indefinite lived intangible assets, goodwill and the DARS license, may be impaired. During 2002, the Company
recorded an impairment charge of $11.5 million to write-off the entire net book value of its goodwill upon completing the annual impairment review required by SFAS No. 142, as fully described in Note 5.



(i) Deferred Financing Fees and Other Assets



Deferred financing fees consist primarily of legal, accounting, printing and
investment banking fees as well as fees paid for lines of credit associated with the Companys debt financing. Deferred financing fees are amortized over the life of the corresponding debt facility.



(j) Revenue Recognition



The Company derives revenue primarily from basic and premium subscriber
subscription and activation fees as well as advertising, direct sales of equipment and royalties.



Revenue from subscribers, which is generally billed in advance, consists of (i) fixed charges for service, which are recognized as the service is provided
and (ii) non-refundable activation fees that are recognized ratably over the expected 40-month life of the customer relationship. Direct activation costs are expensed as incurred. Promotions for free or discounted service are treated as a reduction
to revenue during the period of the promotion. Sales incentives, consisting of rebates to subscribers, are recorded as reductions to revenue when claimed. Discounts to equipment which are sold with service are allocated to equipment and service
based on relative fair value. Subscription and activation revenue accounted for over 90% of total revenues.



The Company recognizes advertising revenue from sales of advertisements in the period in which the advertisement is broadcast. Agency fees are presented
as a reduction to revenue in the consolidated statement of operations. Advertising revenue for



F-10



---

##### Table of Contents

##### Index to Financial Statements

the years ended December 31, 2004, 2003 and 2002, respectively, included advertisements sold in exchange for goods and
services (barter) recorded at fair value. Revenue from barter transactions is recognized when advertisements are broadcast. Merchandise or services received are charged to expense when received or used. Barter transactions are not significant to the
Companys consolidated financial statements.



Equipment
revenue is recognized at the time of shipment or delivery of the equipment. Royalty and other revenue is recognized when earned.



(k) Stock-Based Compensation



The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principle Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations including FASB Interpretation (FIN) No. 44, Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB opinion No. 25 issued in March 2000, and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation,as amended by SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure,issued in December of 2002. Under APB 25, compensation expense is based upon the difference, if any, on the date of grant, between the fair value of the Companys stock and the exercise price.
All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123.



At December 31, 2004, the Company had two stock-based employee compensation plans, which are described more fully in Note 11. The following table
illustrates the effect on net loss if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.



|                                                                                                              |  |                                               |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                              |  | 2004                                          |          |   | 2003 |   |          | 2002 | 
|                                                                                                              |  | (amounts in thousands, except per share data) |         
|Net loss, as reported                                                                                         |  | $                                             | (650,033 | ) |      | $ | (589,759 | )    |  | $ | (491,585 | )
|Add: stock-based employee compensation expense included in net loss, net of tax                               |  |                                               |         |   |      |   |         |      |  |   | 941      |  
|Less: Total stock-based employee compensation expense determined under fair value-based method for all awards |  |                                               | (30,456  | ) |      |   | (25,769  | )    |  |   | (23,067  | )
|                                                                                                              |  |                                               |          |   |      |   |          |      |  |   |          |  
|Pro forma net loss                                                                                            |  | $                                             | (680,489 | ) |      | $ | (615,528 | )    |  | $ | (513,711 | )
|                                                                                                              |  |                                               |          |   |      |   |          |      |  |   |          |  



For SFAS No. 123
disclosures purposes, the weighted average-fair value of each employee option grant has been estimated as of the date of grant using the Black-Scholes option-pricing model. The assumptions used are described more fully in Note 11.



(l) Research & Development



Research & development costs are expensed as incurred.



(m) Advertising & Marketing



Advertising & marketing costs, including media, events, training and
marketing materials for retail and automotive dealer points of presence, are discretionary costs that are expensed as incurred. These costs are included in marketing. During the years ended December 31, 2004, 2003, and 2002, the Company expensed
approximately $88.1 million, $64.3 million and $91.6 million, respectively.



(n) Income Taxes



Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the tax benefits and consequences in future years of differences between the tax bases of assets and liabilities and
the financial reporting amounts at each year-end and operating loss and tax credit carryforwards, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the sum of taxes payable for the period and the change during the period in deferred tax assets and liabilities.



(o) Accounting Estimates



The preparation of the Companys consolidated financial statements in
conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the reporting period. The estimates involve judgments with respect to, among other things, various future factors which are difficult to predict and are beyond the control
of the Company. Significant estimates include valuation of the Companys investment in



F-11



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##### Table of Contents

##### Index to Financial Statements

the DARS license and its identification as an asset with an indefinite life, the allowance for doubtful accounts, the
valuation of intangible assets, the recoverability of the long-lived assets, the costs to terminate certain terrestrial repeater site leases, the estimated life of a subscribers subscription, the payments to be made to distributors and
manufacturers for radios sold or activated, the amount of royalties to be paid on radios and/or components manufactured or revenue generated, the amount of license fees payable to Broadcast Music, Inc., the amount of stock-based compensation
arrangements and the valuation allowances against deferred tax assets. Accordingly, actual amounts could differ from these estimates.



Payments owed to manufacturing and distribution partners are expensed during the month in which the manufacture, sale, and/or activation of the radio unit
occurs. The amounts of these expenses are dependent upon units provided by internal Company systems and processes (i.e. subscriber management system and supply chain management system) and partner systems and processes. However, due to lags in
receiving manufacturing and sales data from partners, estimates of amounts due are necessary in order to record monthly expenses. In subsequent months when lagged data is received from partners, expenses are reconciled, and adjusted where necessary.
Since launching commercial operations, the Company continues to refine the estimation process based on an increased understanding of the timing lags, and close working relationships with business partners. Estimates recorded on the Companys
books are generally adjusted to actuals within one month.



(p) Reclassifications



Certain 2003 and
2002 amounts have been reclassified to conform to the current year presentation.



(q) Derivative Instruments and Hedging Activities



The Company has reviewed its contracts and has determined that it has no free-standing or embedded derivative instruments. The Company does not engage in
hedging activities.



(2) Liquidity



The Company is devoting its efforts to market its digital audio radio service and to
increase its subscriber base. This effort involves substantial risk and future operating results will be subject to significant business, economic, regulatory, technical, and competitive uncertainties and contingencies. The Company commenced
commercial operations in the fourth quarter of 2001 and has an accumulated deficit of $2.1 billion as of December 31, 2004. Holdings and the Company have raised $3.1 billion of equity and debt net proceeds from inception through December 31, 2004
from investors and strategic partners to fund their operations. In 2004, Holdings and the Company raised $697 million of net funds. This includes $177 million of net funds raised from the sale of Holdings Class A common stock in January 2004,
$195 million of net funds raised from the issuance of the Senior Secured Floating Rate Notes due 2009 and $293 million from the issuance of the 1.75% convertible Senior Notes due 2009 in November 2004. In April 2004, Holdings and the Company also
received $32 million in cash proceeds in connection with GMs exercise of a warrant to purchase 10 million shares of Holdings Class A common stock at an exercise price of $3.18 per share. During the third quarter of 2004, the Company
settled with insurers representing approximately 80% of the insurance coverage on XM Rock and XM Roll for a total recovery of approximately $142 million, further augmenting the Companys liquidity. In 2003, the Company raised $601 million of
net funds. This also includes $206 million of net funds raised in the January 2003 financing transactions, $179 million of net funds raised in the June 2003 transaction (including $10 million raised in July 2003 from the exercise of an
over-allotment option), $150 million of net funds raised in the September 2003 transactions and $66 million of net funds raised through the Direct Stock Purchase Program in 2003. The January 2003 financing transactions also included $250 million of
payment deferrals and a line of credit. The proceeds received have been used to acquire the Companys DARS license, make required payments for the Companys system, including the satellites, terrestrial repeater system, and ground
networks, and for working capital and operating expenses. Provided that the Company meets the revenue, expense and cash flow projections of its business plan, the Company expects to be fully funded and will not need to raise additional financing to
continue operations. The Companys business plan is based on estimates regarding expected future costs and expected revenue. The costs may exceed or the revenues may fall short of Companys estimates, the estimates may change, and future
developments may affect the Companys estimates. Any of these factors may increase the Companys need for funds, which would require the Company to seek additional financing to continue implementing the current business plan. The Company
is dependent on Holdings to meet certain of its funding requirements, and Holdings has indicated that it presently intends to fund the Companys ongoing business operations.



(3) Recent Financing and De-leveraging Transactions



(a) November 2004 Financing



Offering of 1.75% Convertible Senior Notes due 2009



On November 23, 2004, Holdings completed the sale of $300 million aggregate principal amount of its 1.75% Convertible Senior
Notes due 2009. The notes mature on December 1, 2009 and bear interest at an annual rate of 1.75%. In January 2005, the over-allotment option was exercised and an additional $100 million aggregate principal amount of notes were issued. The notes may
be converted by the holder, at its option, into shares of Holdings Class A common stock initially at a conversion rate of 20.0 shares of



F-12



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##### Table of Contents

##### Index to Financial Statements

Holdings Class A common stock per $1,000 principal amount, which is equivalent to an initial conversion price of
$50.00 per share of Holdings Class A common stock (subject to adjustment in certain events), at any time until December 1, 2009. The notes are not redeemable at the Companys option prior to the stated maturity.



(b) August 2004 Mortgage Refinancing



Holdings refinanced its floating rate mortgage on August 9, 2004, with a
remaining outstanding principal balance of $27.7 million, relating to its facility in Washington, D.C. for a new balance of $33.3 million at a fixed rate of 6.01% due in 2014. Holdings incurred $0.5 million in financing costs associated with the
transaction. The new mortgage loan is secured by the building for XMs corporate headquarters in Washington, D.C. and an escrow of $4.1 million at December 31, 2004.



(c) April 2004 Financing



Offering of Senior Secured Floating Rate Notes due 2009



On April 20, 2004, the Company completed an offering of $200 million of
Inc.s Senior Secured Floating Rate Notes due May 1, 2009. Interest on the notes is 7.68% per annum through January 31, 2005 and thereafter is reset quarterly at a rate equal to 550 basis points over LIBOR. The interest on the notes is payable
quarterly in cash in arrears on February 1, May 1, August 1 and November 1, commencing on August 1, 2004. No scheduled principal payments are required to be made prior to maturity. The notes, which are Inc.s senior secured obligations, are
secured by substantially all of Inc.s assets, including the stock of Incs FCC license subsidiary, are guaranteed by the Company and rank equally in right of payment with all of Inc.s other existing and future senior indebtedness
and senior in right of payment to all of Inc.s existing and future subordinated indebtedness. At any time, Inc. may, at its option, redeem the notes, in whole or in part, at declining redemption prices. The proceeds from this offering were
used in part to repay outstanding balances under the Companys revolving credit facility with General Motors (GM).



(d) April 2004 Exercise of GM Warrant



In April 2004, Holdings received $31.8 million in cash proceeds in connection with GMs exercise of a warrant to purchase 10 million shares of
Holdings Class A common stock at an exercise price $3.18 per share.



(e) January 2004 Financing



Offering of share of Holdings Class A common stock



On January 28, 2004, Holdings completed a public offering of 20 million shares of its Class A Common Stock at $26.50 per share, 13 million shares of which
were offered for sale by certain selling stockholders. The 7 million shares offered by the Company resulted in gross proceeds of $185.5 million. The proceeds from this offering were used in part to repay the unvested portion of the 10% Senior
Secured Convertible Note due December 31, 2009 to Onstar Corporation (Onstar), a subsidiary of GM. In connection with the sale of Holdings Class A common stock in the January 2004 Class A common stock offering, the Company entered
into agreements with the selling stockholders to convert $11.0 million carrying value, or $13.3 million fully accreted face value at maturity, of 10% Senior Secured Discount Convertible Notes into 3.5 million shares of Holdings Class A common
stock, $52.4 million including accrued dividends in shares of Holdings Series C preferred stock into 5.9 million shares of Class A common stock and 3.6 million shares of Holdings Series A convertible preferred stock into 3.6 million
shares of Holdings Class A common stock. The proceeds were held at Holdings to fund the operations of the Company on an as-needed basis.



(f) September 2003 Financing



Offering of shares of Holdings Class A common stock



On September 11, 2003, Holdings completed a public offering of 11.3 million shares of its Class A Common Stock at $13.25 per share to Legg Mason Funds
Management, Inc., Legg Mason Capital Management, Inc., and another large institutional investor, each on behalf of its investment advisory clients. This offering resulted in gross proceeds of $150 million. The proceeds of the September 2003
financing transactions were held at Holdings to fund the operations of the Company on an as-needed basis.



(g) June 2003 Financing



Offering of 12% Senior Secured Notes due 2010



On June 17, 2003, the Company completed an offering of $175 million of Inc.s 12% Senior Secured Notes due June 15, 2010. In July 2003, an additional
$10 million of these 12% senior secured notes due 2010 were issued upon exercise of the over-allotment option. Interest on the notes is payable every six months in cash in arrears on December 15 and June 15, commencing on December 15, 2003. The
notes, which are Inc.s senior secured obligations, are secured by substantially all of Inc.s assets, are guaranteed by Holdings and will rank equally in right of payment with all of Inc.s other existing and future senior
indebtedness and senior in right of payment to all of Inc.s existing and future subordinated indebtedness. Inc. may, at its option, redeem the notes at declining redemption prices at any time on or after June 15, 2007. At any time on or prior
to June 15, 2006, Inc. may redeem a portion of the outstanding notes with the proceeds of certain equity offerings as long as the redemption occurs within 90 days of the date of the closing of such equity offering and at least $100 million aggregate
principal amount of notes remains outstanding after the redemption.



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##### Table of Contents

##### Index to Financial Statements

(h) January 2003 Financing



On January 28, 2003, Holdings and the Company completed (1) an exchange of over $300 million of the $325 million aggregate
principal amount of outstanding debt issued by Inc., (2) a restructuring of $250 million in payment obligations to General Motors Corporation (GM) due through 2006, and (3) a private placement resulting in gross proceeds to the Company
of $225 million.



14% Senior Secured Discount Notes Issued
in Exchange



The Company accepted for exchange $300.2
million aggregate principal amount of the previously outstanding $325.0 million of Inc.s 14% Senior Secured Notes due 2010 (Old Notes). For each $1,000 principal amount of notes tendered for exchange, the tendering holder received:



| |  |  | $1,459 principal amount at maturity of 14% Senior Secured Discount Notes due 2009 (New Notes) issued by Inc. and guaranteed by Holdings;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a warrant to purchase 85 shares of Holdings Class A common stock at an exercise price of $3.18 per share; and
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | $70 in cash.
| | - |  | ------------



The exercise price of each warrant may be paid either in cash or without the payment of cash by reducing the number of shares of Holdings Class A common stock that would be obtainable upon the exercise of a
warrant. The warrants are fully vested and expire December 31, 2009. The face value of the New Notes is reduced by a discount of $61.0 million associated with the fair value of the related warrants. The fair value of the warrants was calculated
using a Black-Scholes based methodology. The face value of these notes is also reduced by an allocation of the unamortized discount on the Old Notes of $52.4 million. This exchange was accounted for as a troubled debt restructuring, and therefore,
the modification of terms has been accounted for prospectively from the time of the restructuring. The New Notes were reported on the Companys consolidated balance sheet as of December 31, 2003 as follows (in thousands):



|                                              |  |   |          |  
|--------------------------------------------- |  | - | -------- | -
|Face amount of notes at January 28, 2003      |  | $ | 300,176  |  
|Discount at January 28, 2003                  |  |   | (113,402 | )
|                                              |  |   |          |  
|Carrying amount of notes at January 28, 2003  |  | $ | 186,774  |  
|Discount amortization/interest accretion      |  |   | 31,270   |  
|Extinguishments                               |  |   | (40,964  | )
|                                              |  |   |          |  
|Carrying amount of notes at December 31, 2003 |  | $ | 177,080  |  
|                                              |  |   |          |  



Restructuring of GM
Obligations



Under certain agreements with General Motors
(GM) and its subsidiary, OnStar Corporation (OnStar), Holdings and the Company issued to OnStar a 10% Senior Secured Convertible Note due December 31, 2009 with an aggregate principal amount of $89 million in lieu of
Inc.s obligation to make $115 million in guaranteed payments from 2003 to 2006 under the distribution agreement with OnStar Corporation. Holdings and the Company also entered into a $100 million credit facility with GM and issued a warrant to
GM to purchase 10 million shares of Holdings Class A common stock at an exercise price of $3.18 per share. The warrant is fully vested and expires after five years. The Company determined that the fair value of the warrant was $25.2 million,
and the unamortized amount is included in deferred financing fees on the Companys consolidated balance sheet as of December 31, 2003 and 2004. The fair value of the warrant was calculated using a Black-Scholes based methodology. The note
issued to OnStar is convertible and the warrant exercisable only to the extent GM would not beneficially own more than 19.9% of Holdings Class A common stock, unless the Company and GM otherwise agree and certain stockholder approvals are
obtained.



OnStar will be able to convert the note into shares
of Holdings Class A common stock pursuant to a vesting schedule so that on each date prior to and including December 31, 2006 that the Company would have been obligated to make scheduled guaranteed payments under the distribution agreement, a
pro rata portion of the OnStar note corresponding to the scheduled guaranteed payment will become convertible at the option of OnStar at a conversion price equal to 90% of the fair market value of a share of Holdings Class A common stock
(calculated as described above) on the date of conversion; provided that, the conversion price will be not less than $5 per share nor greater than $10 per share during 2003, not less than $5 per share nor greater than $15 per share during 2004, and
not less than $5 per share nor greater than $20 per share thereafter. As described in Note 9(e), in February 2004, the Company completed the redemption of the OnStar note.





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##### Table of Contents

##### Index to Financial Statements

GM provided Holdings and the Company and Inc. with a $100.0 million Senior Secured Credit Facility,
maturing as late as December 2009, that enables the Company to make monthly draws to finance payments that become due under the Companys distribution agreement with OnStar Corporation and other GM payments. This facility was amended in January
2004 and became a revolver. Holdings and the Company are co-borrowers under this credit facility. The outstanding principal amount of all draws will be due December 31, 2009 and bear interest at the applicable 90-day LIBOR rate plus 10% through
December 31, 2003, and effective January of 2004 bears interest at a per annum rate of LIBOR plus 8%. Holdings and the Company will be able to make interest payments semiannually in shares of Holdings Class A common stock having an aggregate
fair market value at the time of payment equal to the amount of interest due. The fair market value will be based on the average daily trading prices of Holdings Class A common stock over the ten business days prior to the day the interest
payment is due. The Company has the option to prepay all draws in whole or in part at any time, and, with effect from the January 2004 amendment, may re-borrow prepaid amounts. Beginning in 2005, the Company will be required to prepay the amount of
any outstanding advances in an amount equal to the lesser of (i) 50% of the Companys excess cash and (ii) the amount necessary to prepay the draws in full. In order to make draws under the credit facility, the Company is required to have a
certain minimum number of subscribers that are not originated by GM and a minimum pre-marketing cash flow.



GM provided the Company with the ability to make up to $35.0 million in future subscriber bounty payments (subscriber acquisition payments)
that the Company may owe to OnStar under the distribution agreement in shares of Holdings Class A common stock, valued at fair market value at the time of payment.



Private Placement of 10% Senior Secured Discount Convertible Notes and Holdings Class A Common Stock



Holdings and the Company sold $210.0 million of 10%
Senior Secured Discount Convertible Notes due December 31, 2009 to certain institutional and accredited investors, including some of its current investors. Holdings and the Company are co-obligors on these new investor notes. At any time, a holder
of new investor notes may convert all or part of the accreted value of its notes at a conversion price of $3.18 per share. The face value of the 10% senior secured discount convertible notes is reduced by a discount of $2.8 million associated with
the fair value of the consideration provided to certain of these investors at the time of issuance. The face value of these notes is further reduced by a beneficial conversion feature of $68.9 million. These notes are reported on the Companys
consolidated balance sheet as of December 31, 2003 as follows (in thousands):



|                                         |  |   |         |  
|---------------------------------------- |  | - | ------- | -
|Face amount of notes at January 28, 2003 |  | $ | 210,000 |  
|Warrant discount at January 28, 2003     |  |   | (2,842  | )
|Beneficial conversion feature            |  |   | (68,879 | )
|                                         |  |   |         |  
|Carrying amount at January 28, 2003      |  | $ | 138,279 |  
|Discount amortization/interest accretion |  |   | 21,402  |  
|Extinguishments                          |  |   | (16,165 | )
|                                         |  |   |         |  
|Carrying amount at December 31, 2003     |  | $ | 143,516 |  
|                                         |  |   |         |  



The Company is not
able to prepay or redeem the new investor notes. Beginning four years after the issuance of the new investor notes, Holdings will be able to convert all, but not less than all of the notes at the conversion price if: (i) shares of Holdings
Class A common stock have traded on the Nasdaq National Market or a national securities exchange for the previous 30 trading days at 200% of the conversion price, (ii) the Company reported earnings before interest income and expense, other income,
taxes, depreciation (including amounts related to research and development) and amortization greater than $0 for the immediately preceding quarterly period for which the Company reports its financial results, (iii) immediately following such
conversion, the aggregate amount of Holdings and its subsidiaries indebtedness is less than $250 million, and (iv) no shares of Holdings Series C preferred stock remain outstanding.



Holdings has committed to refer (or may provide directly as described below)
one of the investors in its January 2003 convertible notes offering to potential sources of freely tradable shares of its Class A common stock for borrowing and hedging activities through January 2005. Should these referrals not result in this
investor obtaining a stock loan, Holdings may issue up to 7.5 million shares to this investor for a purchase price payable by an interest-bearing promissory note and concurrently enter into a repurchase/resale agreement with this investor at the
same purchase price, with a repurchase or resale to occur after two years. Through January 2005, the Company has not been required to issue additional shares under the repurchase/resale agreement.





F-15



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##### Table of Contents

##### Index to Financial Statements

Holdings also sold $15.0 million of its Class A common stock at a per share purchase price of $2.70 to a
private investor and issued a warrant to purchase 900,000 shares of its Class A common stock at an exercise price of $3.18 per share to R. Steven Hicks, who joined Holdings board of directors in connection with these transactions. This warrant
was valued at $2.3 million using a Black-Scholes based methodology, and the unamortized amount is included in deferred financing fees on the consolidated balance sheet as of December 31, 2003 and 2004.



The proceeds of the January 2003 financing transactions were held at Holdings
to fund the operations of the Company on an as-needed basis.



De-leveraging
Transactions



2004 De-leveraging Transactions



During 2004, Holdings and the Company entered into
agreements with certain holders of their notes to exchange $262.9 million carrying value including accrued interest, or $286.2 million fully accreted face value at maturity, for $97.5 million in cash consideration and 11.4 million shares of
Holdings Class A common stock. This includes the following de-leveraging transactions:



| |  |  | the redemption of $73.3 million carrying amount including accrued interest of our 12% Senior Secured Notes due 2010 for an aggregate redemption price of $81.7 million, which amount
included a redemption premium of $8.4 million;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the conversion of all of Holdings remaining outstanding $45.7 million of 7.75% Convertible Subordinated Notes into 3.7 million shares of Holdings Class A common stock;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the exchange of $132.8 million carrying value including accrued interest, or $157.1 million fully accreted face value at maturity, of our 14% Senior Secured Notes due 2009 for $15.8
million in cash consideration and 4.2 million shares of Holdings Class A common stock;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the conversion of $11.1 million carrying value including accrued interest, or $13.4 million fully accreted face value at maturity, of our 10% Senior Secured Discount Convertible
Notes due 2009 into 3.5 million shares of Holdings Class A common stock; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company recorded a loss of $76.6 million from these extinguishments in other expense on the consolidated statement of operations for the year ended December 31, 2004.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We completed the redemption of the $89.0 million
10% Senior Secured Convertible Note due 2009 held by Onstar. As part of the redemption, Onstar converted $7.8 million in principal amount of the Note, representing the entire principal amount of the Note that had vested conversion rights at the time
of the redemption, into 980,670 shares of Holdings Class A common stock in accordance with the terms of the Note. The remaining $81.2 million in principal amount plus accrued interest was repaid with cash. Also, the Company entered into
agreements with certain holders of Holdings 8.25% Series C convertible redeemable preferred stock to convert $52.4 million including accrued dividends in shares of Holdings Series C preferred stock into 5.9 million shares of
Holdings Class A common stock. The Company also entered into agreements with certain holders of Holdings Series A convertible preferred stock to convert $51.4 million carrying value, in shares of Holdings Series A preferred stock,
into 5.4 million shares of Holdings Class A common stock. Additionally, the Company entered into agreements with certain holders of Holdings Class A common stock warrants to exchange approximately 56,000 warrants convertible into 2.6
million shares of Holdings Class A common stock for 2.3 million shares of Holdings Class A common stock and received $9.4 million in cash proceeds from the exercise of approximately 35,000 warrants converted into 3.0 million shares of
Holdings Class A common stock.



As a result of these
de-leveraging and debt repayment transactions, during 2004 Holdings and the Company eliminated approximately $597.3 million of carrying value including accrued interest of debt and preferred securities, or approximately $617.0 million of face amount
at maturity. Holdings and the Company eliminated $90.4 million carrying value including accrued interest ($89.0 million face amount at maturity) of the Companys 10% Senior Secured Convertible Note due 2009 held by Onstar, $73.3 million
carrying value including accrued interest ($70.0 million face amount at maturity) of the Companys 12% Senior Secured Notes due 2010, $45.7 million carrying value including accrued interest ($45.7 million face amount at maturity) of
Holdings 7.75% Convertible Subordinated Notes due 2006, $132.8 million carrying value including accrued interest ($157.1 million face amount at maturity) of the Companys 14% Senior Secured Notes due 2009, $35.3 million carrying value
including accrued interest ($35.0 million face amount at maturity) of Holdings loan with Boeing Satellite Systems, $103.0 million of the balance outstanding under their revolving credit and equity facility, plus accrued interest of $2.0
million, with GM, $11.1 million carrying value including accrued interest ($13.4 million face amount at maturity) of their 10% Senior Secured Discount Convertible Notes due 2009, $52.4 million carrying value of Holdings Series C preferred
stock and $51.4 million of Holdings Series A preferred stock.



2003 De-leveraging Transactions



During
2003, the Holdings and the Company entered into agreements with certain holders of its notes to exchange $125.2 million carrying value, or $160.1 million fully accreted face value at maturity, of the Companys notes, for $6.8 million in cash
consideration and 19.2 million shares of Holdings Class A common stock. The Company recorded a net loss of $29.7 million from these debt extinguishments in other expense on the consolidated statement of operations for the year ended December
31, 2003.





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##### Table of Contents

##### Index to Financial Statements

As a result of these de-leveraging transactions, during 2003 Holdings and the Company eliminated
approximately $245.9 million of carrying value including accrued interest of debt and preferred securities or approximately $280.7 million of face amount at maturity. The Company eliminated $2.1 million carrying value including accrued interest
($2.0 million face amount at maturity) of its 14% Senior Secured Notes due 2010, $65.5 million carrying value including accrued interest ($94.2 million face amount at maturity) of its 14% Senior Secured Discount Notes due 2009 issued in January
2003, and $24.0 million carrying value including accrued interest ($30.5 million face amount at maturity) of its 10% Senior Secured Discount Convertible Notes due 2009.



(4) Related Party Transactions



The Company had the following amounts due from related parties at December 31, 2004 and 2003 (in thousands):



|                                  |  |              |       |      |   |      
|--------------------------------- |  | ------------ | ----- | ---- | - | -----
|                                  |  | December 31,
|                                  |  | 2004         |       | 2003
|General Motors Corporation (GM) |  | $            | 3,708 |      | $ | 4,124
|Honda                             |  |              | 1,659 |      |   | 1,052
|                                  |  |              |       |      |   |      
|Total                             |  | $            | 5,367 |      | $ | 5,176
|                                  |  |              |       |      |   |      



The Company had the
following amount as related party prepaid expense at December 31, 2004 and December 31, 2003 (in thousands):



|   |  |              |        |      |   |       
|-- |  | ------------ | ------ | ---- | - | ------
|   |  | December 31,
|   |  | 2004         |        | 2003
|GM |  | $            | 57,061 |      | $ | 66,782



The Company had the
following amounts outstanding to related parties at December 31, 2004 and 2003 (in thousands):



|              |  |              |        |      |   |       
|------------- |  | ------------ | ------ | ---- | - | ------
|              |  | December 31,
|              |  | 2004         |        | 2003
|GM            |  | $            | 66,106 |      | $ | 25,204
|Honda         |  |              | 415    |      |   |      
|Hughes        |  |              |       |      |   | 59    
|Clear Channel |  |              |       |      |   | 761   
|              |  |              |        |      |   |       
|Total         |  | $            | 66,521 |      | $ | 26,024
|              |  |              |        |      |   |       



The Company had the
following long-term related party debt at December 31, 2004 and December 31, 2003 (in thousands):



|   |  |              |   |      |   |        
|-- |  | ------------ | - | ---- | - | -------
|   |  | December 31,
|   |  | 2004         |   | 2003
|GM |  | $            |  |      | $ | 141,891



Beginning in the
fourth quarter of 2002, the Company engaged in activities with GM and Honda to jointly promote XM service subscriptions to new car buyers. At December 31, 2004, there were approximately 402,000 subscribers in promotional periods (typically ranging
from three months to one year in duration) paid for by the vehicle manufacturers. These subscriptions are included in the Companys subscriber total. Revenues earned from related parties, primarily from these subscriptions, are as follows (in
thousands):



|      |  |                          |        |      |   |        |  |   |    
|----- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ---
|      |  | Years ended December 31,
|      |  | 2004                     |        | 2003 |   | 2002  
|GM    |  | $                        | 21,374 |      | $ | 11,630 |  | $ | 256
|Honda |  |                          | 6,869  |      |   | 368    |  |   |   
|      |  |                          |        |      |   |        |  |   |    
|Total |  | $                        | 28,243 |      | $ | 11,998 |  | $ | 256
|      |  |                          |        |      |   |        |  |   |    



F-17



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##### Table of Contents

##### Index to Financial Statements

The Company has relied upon certain related parties for legal, technical, marketing and other services
during the years ended December 31, 2004, 2003 and 2002. Total costs incurred in transactions with related parties are as follows (in thousands):



|                                   |  |                              |         |        |   |              |  |       |    |  |   |      
|---------------------------------- |  | ---------------------------- | ------- | ------ | - | ------------ |  | ----- | -- |  | - | -----
|                                   |  | Year ended December 31, 2004
|                                   |  | GM                           |         | Hughes |   | ClearChannel |  | Honda
|Terrestrial repeater network       |  | $                            |        |        | $ | 7            |  | $     |   |  | $ |     
|Terrestrial repeater site leases   |  |                              |        |        |   |             |  |       | 31 |  |   |     
|Customer care & billing operations |  |                              | 363     |        |   |             |  |       |   |  |   |     
|Marketing                          |  |                              | 158,997 |        |   |             |  |       |   |  |   |     
|Research and development           |  |                              |        |        |   |             |  |       |   |  |   | 9,579



|                                   |  |                              |         |        |   |              |  |   |      
|---------------------------------- |  | ---------------------------- | ------- | ------ | - | ------------ |  | - | -----
|                                   |  | Year ended December 31, 2003
|                                   |  | GM                           |         | Hughes |   | ClearChannel
|Terrestrial repeater network       |  | $                            |        |        | $ | 278          |  | $ |     
|Terrestrial repeater site leases   |  |                              |        |        |   |             |  |   | 60   
|Customer care & billing operations |  |                              | 960     |        |   |             |  |   |     
|Marketing                          |  |                              | 107,346 |        |   |             |  |   | 8,646



|                                   |  |                              |        |        |   |         |  |              |     |      |   |        |  |   |      
|---------------------------------- |  | ---------------------------- | ------ | ------ | - | ------- |  | ------------ | --- | ---- | - | ------ |  | - | -----
|                                   |  | Year ended December 31, 2002
|                                   |  | GM                           |        | Hughes |   | DIRECTV |  | ClearChannel |     | LCCI
|Terrestrial repeater network       |  | $                            |       |        | $ | 10,386  |  | $            |    |      | $ |       |  | $ | 3,089
|Terrestrial repeater site leases   |  |                              |       |        |   |        |  |              |    |      |   | 57     |  |   |     
|Customer care & billing operations |  |                              | 178    |        |   |        |  |              |    |      |   |       |  |   |     
|Marketing                          |  |                              | 29,915 |        |   |        |  |              | 125 |      |   | 10,182 |  |   |     
|General & administrative           |  |                              |       |        |   |        |  |              | 3   |      |   |       |  |   |     



(a) GM



In 1999, the Company established a distribution
agreement with GM (see Note 16 (f)). Under the terms of the agreement, GM distributes the XM Radio Service in various models of its vehicles. This agreement was amended in June 2002 and January 2003 and continues to be clarified as XMs
business operations and working relationship with GM continues to evolve.



(b) Honda



The
Company has arrangements with Honda relating to the promotion of the XM service to new buyers, the use of bandwidth on the XM system and the development of telematics services and technologies. There were no Honda related party expenses in 2002 or
2003.



F-18



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##### Table of Contents

##### Index to Financial Statements

(c) Hughes



In 1999, the Company entered into a terrestrial repeater manufacturing agreement with Hughes (see Note 16(e)). Hughes ceased
to be a related party in January 2004.



(d) DIRECTV



In 1999, the Company entered into a consulting
services agreement with DIRECTV. The agreement provides for DIRECTV professionals to aid the Companys efforts in establishing its customer care center and billing operations on a time and materials basis. DIRECTV ceased to be a related party
in January 2004. There were no DIRECTV related party expenses in 2003 or 2004.



(f) Clear Channel



Clear Channel Communications provides certain programming services to the Company. In 2000, the Company entered into a sponsorship agreement with SFX Marketing, now Clear Channel Entertainment, to advertise and promote the Companys
service at Clear Channel Entertainment events and venues. Since 2000, Premiere Radio Networks, a subsidiary of Clear Channel Communications, had served as one of the Companys ad sales representatives. Under separate agreements, the Company
also runs advertisements on a spot and network basis on radio stations owned by Clear Channel Communications. In addition, the Company leases 3 sites for its terrestrial repeaters from Clear Channel Communications. Clear Channel ceased to be a
related party in the second quarter of 2004.



(g) LCCI



In 1999, the Company entered into the LCCI Services
Contract (see Note 16(d)), and LCCI also provides certain ongoing consulting engineering work for the Company relating to the terrestrial repeater network on a time and materials basis. LCCI ceased to be a related party in 2002.



(h) Holdings



Through December 31, 2004, Holdings provided funding to the Company of
$1,936 million through both public and private equity and debt offerings that it had completed.



In August 2001, the Companys facility lease for its corporate headquarters was amended and Holdings became the Companys new landlord (Note 16
(m)). The Company incurred facility costs relating to the rental of this office space from Holdings of $4,289,000 for the years ended December 31, 2003 and 2004.



(5) Impairment Charge for Goodwill



In 2002, as part of the annual impairment testing, the Company performed an assessment of the fair value of its sole reporting unit as defined by SFAS No.
142 and compared it to the carrying value of its reporting unit. The Companys market capitalization had fallen below the Companys book value, indicating that the reporting units indefinite lived intangible assets, goodwill and the
DARS license may be impaired under the test established by SFAS No. 142.



The
Company determined the fair value of its assets on a class-by-class basis. The fair values of the Companys assets were based upon the expected cash flow from the Companys business, as adjusted for the investment and time that would be
required to develop the Companys business, and assuming a discount rate that reflects the degree of risk involved with this type of business. The fair value of the DARS license was in excess of its net book value, and therefore, no impairment
was recorded. After valuing all of the Companys remaining assets, the total value of the identifiable, individual tangible and intangible assets was in excess of the value of entire Company based upon market capitalization under SFAS No. 142.
As such, no value was ascribed to the Companys goodwill. Therefore, the Company recorded an impairment charge of $11.5 million to write-off the net book value of its goodwill as of November 30, 2002.



F-19



---

##### Table of Contents

##### Index to Financial Statements

(6) System Under Construction



The Company has capitalized costs related to the development of its XM Radio System to the extent that they have future
benefits. The amounts recorded as system under construction consist of the following (in thousands):



|                                |  |              |         |      |   |       
|------------------------------- |  | ------------ | ------- | ---- | - | ------
|                                |  | December 31,
|                                |  | 2004         |         | 2003
|Spacecraft system               |  | $            | 145,702 |      | $ | 21,931
|Spacecraft control facilities   |  |              | 7,893   |      |   | 127   
|                                |  |              |         |      |   |       
|Total system under construction |  | $            | 153,595 |      | $ | 22,058
|                                |  |              |         |      |   |       



(7) Property and Equipment



Property and equipment consists of the following (in
thousands):



|                                                        |  |      |          |   |      |   |          |  
|------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                        |  | 2004 |          |   | 2003 |  
|Spacecraft system                                       |  | $    | 387,302  |   |      | $ | 521,226  |  
|Terrestrial system                                      |  |      | 268,026  |   |      |   | 267,730  |  
|Spacecraft control and uplink facilities                |  |      | 28,360   |   |      |   | 27,016   |  
|Broadcast facilities                                    |  |      | 60,829   |   |      |   | 59,143   |  
|Leasehold improvements                                  |  |      | 19,350   |   |      |   | 19,303   |  
|Computer systems, furniture and fixtures, and equipment |  |      | 128,365  |   |      |   | 100,387  |  
|                                                        |  |      |          |   |      |   |          |  
|                                                        |  |      | 892,232  |   |      |   | 994,805  |  
|Accumulated depreciation                                |  |      | (456,063 | ) |      |   | (311,808 | )
|                                                        |  |      |          |   |      |   |          |  
|Property and equipment, net                             |  | $    | 436,169  |   |      | $ | 682,997  |  
|                                                        |  |      |          |   |      |   |          |  



In December 2001, the
Company conducted a network optimization study and determined that the planned number of terrestrial repeater sites could be reduced due to the relative signal strength provided by XMs satellites. The Company established a formal plan and
recognized a charge of $26.3 million for the year ended December 31, 2001 with respect to the terrestrial repeater sites no longer required. The costs are principally related to the site acquisition and build-out of the identified sites. The charges
of $47,000, $4.8 million and $4.0 million in 2004, 2003 and 2002, respectively, represent additional costs associated with terminating leases on terrestrial repeater sites no longer required. These charges have been recorded in satellite &
terrestrial on the consolidated statements of operations for each of the years in the three-year period ended December 31, 2004. In 2004, 2003 and 2002, the Company paid $2.0 million, $2.9 million and $10.4 million, respectively, in relation to
costs associated with the termination of the remaining leases. At December 31, 2004 and 2003, the Company had recorded a lease termination accrual of $2.1 million and $4.1 million, respectively which represents an estimate of the costs to terminate
the remaining leases based on managements judgment, advice of lease consultants, and early negotiations with landlords. The liability also includes the estimated costs to deconstruct the existing sites, which are based upon quotes from
contractors. At December 31, 2004, 57 leases remain to be terminated.



(8)
Deferred Financing Fees



Deferred financing fees consist
of the following at December 31, 2004 and 2003 (in thousands):



|                                                                                                                                |  |              |         |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------ | -
|                                                                                                                                |  | December 31, |        
|                                                                                                                                |  | 2004         |         |   | 2003 |  
|14% senior secured discount notes due 2009                                                                                      |  | $            | 3,486   |   |      | $ | 6,424  |  
|14% senior secured notes due 2010                                                                                               |  |              | 622     |   |      |   | 622    |  
|12% senior secured notes due 2010                                                                                               |  |              | 4,118   |   |      |   | 6,510  |  
|10% senior secured discount convertible notes due 2009                                                                          |  |              | 10,150  |   |      |   | 10,666 |  
|Senior secured floating rate notes due 2009                                                                                     |  |              | 4,819   |   |      |   |       |  
|Valuation of warrants issued to related party in conjunction with credit facilities                                             |  |              | 25,151  |   |      |   | 25,151 |  
|Valuation of warrants issued to related party in conjunction with the issuance of 10% senior secured discount convertible
notes |  |              | 2,288   |   |      |   | 2,288  |  
|Valuation of warrants issued to vendors                                                                                         |  |              | 174     |   |      |   | 178    |  
|                                                                                                                                |  |              |         |   |      |   |        |  
|                                                                                                                                |  | $            | 50,808  |   |      | $ | 51,839 |  
|Less accumulated amortization                                                                                                   |  |              | (14,192 | ) |      |   | (9,067 | )
|                                                                                                                                |  |              |         |   |      |   |        |  
|Deferred financing fees, net                                                                                                    |  | $            | 36,616  |   |      | $ | 42,772 |  
|                                                                                                                                |  |              |         |   |      |   |        |  



F-20



---

##### Table of Contents

##### Index to Financial Statements

(9) Long-Term Debt



Long-term debt at December 31, 2004 and 2003 consists of the following (in thousands):



|                                                       |  |              |         |   |      |   |         |  
|------------------------------------------------------ |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                       |  | December 31, |        
|                                                       |  | 2004         |         |   | 2003 |  
|14% Senior Secured Notes due 2010 (Old Notes)          |  | $            | 22,824  |   |      | $ | 22,824  |  
|Less: unamortized discount                             |  |              | (3,367  | ) |      |   | (3,726  | )
|14% Senior Secured Notes due 2009 (New Notes)          |  |              | 162,897 |   |      |   | 262,211 |  
|Less: unamortized discount                             |  |              | (44,284 | ) |      |   | (85,131 | )
|12% Senior Secured Notes due 2010                      |  |              | 115,000 |   |      |   | 185,000 |  
|10% Senior Secured Discount Convertible Notes due 2009 |  |              | 213,958 |   |      |   | 205,068 |  
|Less: unamortized discount                             |  |              | (53,897 | ) |      |   | (61,552 | )
|Senior Secured Floating Rate Notes due 2009            |  |              | 200,000 |   |      |   |        |  
|Notes payable                                          |  |              | 2,773   |   |      |   | 2,644   |  
|Related party long-term debt                           |  |              |        |   |      |   | 141,891 |  
|Capital leases                                         |  |              | 6,187   |   |      |   | 3,855   |  
|                                                       |  |              |         |   |      |   |         |  
|Total debt                                             |  | $            | 622,091 |   |      | $ | 673,084 |  
|Less: current installments                             |  |              | (6,148  | ) |      |   | (3,249  | )
|                                                       |  |              |         |   |      |   |         |  
|Long-term debt, excluding current installments         |  | $            | 615,943 |   |      | $ | 669,835 |  
|                                                       |  |              |         |   |      |   |         |  



The following table
presents a summary of the debt activity in 2004 (in thousands):



|                                              |  |                  |         |   |                     |   |                      |  |                 |       |                   |   |        |                             |   |         |                  |  |   |          |   |  |   |         |  
|--------------------------------------------- |  | ---------------- | ------- | - | ------------------- | - | -------------------- |  | --------------- | ----- | ----------------- | - | ------ | --------------------------- | - | ------- | ---------------- |  | - | -------- | - |  | - | ------- | -
|                                              |  | December 31,2003 |         |   | Issuances/Additions |   | DiscountAmortization |  | InterestExpense |       | InterestAccretion |   |        | Retirements/Extinguishments |   |         | December 31,2004 | 
|14% Senior Secured Notes due 2010 (Old Notes) |  | $                | 22,824  |   |                     | $ |                     |  | $               |      |                   | $ |       |                             | $ |        |                  |  | $ |         |   |  | $ | 22,824  |  
|Less: discount                                |  |                  | (3,726  | ) |                     |   |                     |  |                 | 359   |                   |   |       |                             |   |        |                  |  |   |         |   |  |   | (3,367  | )
|14% Senior Secured Notes due 2009 (New Notes) |  |                  | 262,211 |   |                     |   |                     |  |                 |      |                   |   |       |                             |   | 25,857  |                  |  |   | (125,171 | ) |  |   | 162,897 |  
|Add: accretion of interest                    |  |                  |        |   |                     |   |                     |  |                 |      |                   |   | 33,458 |                             |   | (25,857 | )                |  |   | (7,601   | ) |  |   |        |  
|Less: discount                                |  |                  | (85,131 | ) |                     |   |                     |  |                 | 3,050 |                   |   |       |                             |   |        |                  |  |   | 37,797   |   |  |   | (44,284 | )
|12% Senior Secured Notes due 2010             |  |                  | 185,000 |   |                     |   |                     |  |                 |      |                   |   |       |                             |   |        |                  |  |   | (70,000  | ) |  |   | 115,000 |  
|10% Senior Secured Discount Convertible Notes |  |                  | 205,068 |   |                     |   |                     |  |                 |      |                   |   |       |                             |   | 19,895  |                  |  |   | (11,005  | ) |  |   | 213,958 |  
|Add: accretion of interest                    |  |                  |        |   |                     |   |                     |  |                 |      |                   |   | 19,964 |                             |   | (19,895 | )                |  |   | (69      | ) |  |   |        |  
|Less: discount                                |  |                  | (61,552 | ) |                     |   |                     |  |                 | 4,502 |                   |   |       |                             |   |        |                  |  |   | 3,153    |   |  |   | (53,897 | )
|Senior Secured Floating Rate Notes due 2009   |  |                  |        |   |                     |   | 200,000              |  |                 |      |                   |   |       |                             |   |        |                  |  |   |         |   |  |   | 200,000 |  
|Notes payable                                 |  |                  | 2,644   |   |                     |   | 1,223                |  |                 |      |                   |   |       |                             |   |        |                  |  |   | (1,094   | ) |  |   | 2,773   |  
|Related party long-term debt                  |  |                  | 141,891 |   |                     |   | 50,185               |  |                 |      |                   |   |       |                             |   |        |                  |  |   | (192,076 | ) |  |   |        |  
|Capital leases                                |  |                  | 3,855   |   |                     |   | 6,412                |  |                 |      |                   |   |       |                             |   |        |                  |  |   | (4,080   | ) |  |   | 6,187   |  
|                                              |  |                  |         |   |                     |   |                      |  |                 |       |                   |   |        |                             |   |         |                  |  |   |          |   |  |   |         |  
|Total                                         |  | $                | 673,084 |   |                     | $ | 257,820              |  | $               | 7,911 |                   | $ | 53,422 |                             | $ |        |                  |  | $ | (370,146 | ) |  | $ | 622,091 |  
|                                              |  |                  |         |   |                     |   |                      |  |                 |       |                   |   |        |                             |   |         |                  |  |   |          |   |  |   |         |  



Future maturities of
long-term debt are as follows as of December 31, 2004:



|                         |  |   |        
|------------------------ |  | - | -------
|Year ending December 31: |  |  
|2005                     |  | $ | 6,148  
|2006                     |  |   | 2,588  
|2007                     |  |   | 224    
|2008                     |  |   |       
|2009                     |  |   | 478,674
|Thereafter               |  |   | 134,457
|                         |  |   |        
|Total debt               |  | $ | 622,091
|                         |  |   |        



F-21



---

##### Table of Contents

##### Index to Financial Statements

(a) 14% Senior Secured Notes



On March 15, 2000, the Company closed a private placement of 325,000 units, each unit consisting of $1,000 principal amount
of Old Notes and one warrant to purchase 8.024815 shares of Holdings Class A common stock at a price of $49.50 per share. The Company realized net proceeds of $191.5 million, excluding $123.0 million, used to acquire securities that were used
to pay interest payments due under the notes for the first three years. The $325.0 million face value of the notes was offset by a discount of $65.7 million associated with the fair value of the related warrants. In January 2003, the Company
completed an exchange of 300,176 Old Notes for $438.0 million principal amount at maturity of New Notes, warrants to purchase 25.5 million shares of Holdings Class A common stock at a price of $3.18 per share and $21.0 million in cash. The
face value of the New Notes was offset by a discount of $61.0 million associated with the fair value of the related warrants. The face value of these notes is also reduced by a discount of $52.4 million associated with the allocation of the discount
on the Old Notes. As of December 31, 2004 and December 31, 2003, the Company had amortized $17.0 million and $13.8 million of the discount, respectively. During the year ended December 31, 2003, the Company extinguished $2.0 million principal amount
at maturity, of Old Notes plus accrued interest and $65.5 million carrying value including accrued interest, or $94.2 million fully accreted face value at maturity, of New Notes by issuing 8.5 million shares of Holdings Class A common stock.
During the year ended December 31, 2004, the Company also extinguished $132.8 million carrying value including accrued interest, or $157.1 million fully accreted face value at maturity, of New Notes by issuing 4.2 million shares of Holdings
Class A common stock and paying $15.7 million in cash.



(b) 12% Senior Secured Notes



On June
17, 2003, the Company sold $175 million of 12% senior secured notes due June 15, 2010 to certain institutional and accredited investors, including some of its current investors. In July 2003, an additional $10 million of these 12% senior secured
notes due 2010 were issued pursuant to the over-allotment option. During the year ended December 31, 2004, the Company extinguished $70 million carrying value of 12% Senior Secured Notes due 2010 for an aggregate redemption cash price of $81.7
million, which amount included a redemption premium of $8.4 million.



(c) 10% Senior Secured Discount Convertible Notes



On January 28, 2003, the Company sold $210.0 million of 10% senior secured discount convertible notes due December 31, 2009 to certain institutional and accredited investors, including some of its current investors.
The $210 million face value of the notes was offset by a discount of $2.8 million associated with the fair value of the consideration provided to certain of these investors at the time of issuance. In connection with this transaction, the Company
also recognized a beneficial conversion feature of $68.9 million. During the year ended December 31, 2003, the Company also exchanged $24.0 million carrying value including accrued interest, or $30.5 million principal amount at maturity, of 10%
senior secured discount convertible notes due 2009 by issuing 8.1 million shares of Holdings Class A common stock. The Company recorded the discount of $7.2 million attributable to the beneficial conversion of these exchanged notes to interest
expense during the year ended December 31, 2003. During the year ended December 31, 2004, the Company exchanged $11.1 million carrying value including accrued interest, or $13.4 million fully accreted face value at maturity, of 10% Senior Secured
Discount Convertible Notes for 3.5 million shares of Holdings Class A common stock The Company recorded the discount of $3.1 million attributable to the beneficial conversion of these exchanged notes to interest expense during the year ended
December 31, 2004. The Company may require conversion on or after January 28, 2007 of all of the notes into shares of Holdings Class A common stock at a conversion price of $3.18 per share. The holders of the notes may convert their notes into
Holdings Class A common stock at any time prior to maturity.



(d) Senior Secured Floating Rate Notes



On April 20, 2004, the Company completed an offering of $200 million of Inc.s Senior Secured Floating Rate Notes due May 1, 2009. Interest on the notes is 7.68% per annum through January 31, 2005 and thereafter is reset quarterly at a
rate equal to 550 basis points over LIBOR. The interest on the notes is payable quarterly in cash in arrears on February 1, May 1, August 1 and November 1, commencing on August 1, 2004. No scheduled principal payments are required to be made prior
to maturity. At any time, the Company may, at its option, redeem the notes, in whole or in part, at declining redemption prices.



(e) Related Party Notes



On January 28, 2003, Holdings and Inc. issued to Onstar, a subsidiary of GM, a 10% senior secured convertible note due December 31, 2009 with an aggregate
principal amount of $89.0 million in lieu of Inc.s obligation to make $115.0 million in guaranteed payments from 2003 to 2006 under the distribution agreement with Onstar. In February 2004, the Company completed the redemption of the 10%
senior secured convertible note. As part of the redemption, GM converted $7.8 million in principal amount of the note, representing the entire principal amount of the note that had vested conversion rights at the time of the redemption, into 980,670
shares of Holdings Class A Common Stock in accordance with the terms of the note. The remaining $81.2 million in principal amount plus accrued interest was repaid with cash. GM also provided the Company with the ability to make up to $35.0
million in future subscriber acquisition payments that the Company may owe to Onstar under the distribution agreement in shares of Class A common stock and provided the Company with a $100.0 million credit facility agreement. The credit facility was
amended in January 2004 and became a revolver providing for borrowings up to a maximum of $100 million through maturity of the facility in December 2009. The Company incurred $52.8 million in expenses due to Onstar which is reported in marketing
expenses on the



F-22



---

##### Table of Contents

##### Index to Financial Statements

Companys consolidated statement of operations for the year ended December 31, 2003. Of this amount, $50.0 million
was drawn from the credit facility and $2.8 million relates to subscriber acquisition payments due to Onstar that may be paid in Class A common stock. During the year ended December 31, 2004, the Company incurred $50.2 million in expenses due to
Onstar which is reported in marketing expenses on the Companys consolidated statement of operations and repaid in total $103.0 million which represented all of the balances outstanding under the facilities.



(f) Notes Payable



The Company has established notes payable for two credit facilities to vendors for the
deferral of up to $6.0 million in amounts owed. These notes accrue interest at 6%. The outstanding balance of one of these notes was repaid during the year ended December 31, 2004. As of December 31, 2004, the balance due on the remaining credit
facility was $2.8 million and payable in 2005. Holdings also issued warrants in connection with these notes. The fair value of these warrants is $169,000 and is included in deferred financing fees.



(10) Fair Value of Financial Instruments



The following table presents the carrying amounts and estimated fair values
of the Companys financial instruments at December 31, 2004 and 2003 (in thousands). The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.



|                                      |  |                |         |            |   |                |  |            |         |  |   |          
|------------------------------------- |  | -------------- | ------- | ---------- | - | -------------- |  | ---------- | ------- |  | - | ---------
|                                      |  | December 31,  
|                                      |  | 2004           |         | 2003      
|                                      |  | CarryingAmount |         | Fair Value |   | CarryingAmount |  | Fair Value
|Financial assets:                     |  |                |         |            |   |                |  |            |         |  |   |          
|Cash and cash equivalents             |  | $              | 202,521 |            | $ | 202,521        |  | $          | 90,219  |  | $ | 90,219   
|Restricted investments                |  |                | 372     |            |   | 372            |  |            | 491     |  |   | 491      
|Accounts receivable                   |  |                | 20,182  |            |   | 20,182         |  |            | 108,853 |  |   | 108,853  
|Due from related parties              |  |                | 5,367   |            |   | 5,367          |  |            | 5,176   |  |   | 5,176    
|Letters of Credit                     |  |                |        |            |   | 4              |  |            |        |  |   | 4        
|Financial liabilities:                |  |                |         |            |   |                |  |            |         |  |   |          
|Accounts payable                      |  |                | 59,155  |            |   | 59,155         |  |            | 39,784  |  |   | 39,846   
|Accrued expenses                      |  |                | 86,196  |            |   | 86,196         |  |            | 57,512  |  |   | 57,512   
|Accrued network optimization expenses |  |                | 2,148   |            |   | 2,148          |  |            | 4,136   |  |   | 4,136    
|Due to related parties                |  |                | 66,521  |            |   | 66,521         |  |            | 26,024  |  |   | 26,024   
|Total debt                            |  |                | 622,091 |            |   | 3,095,914      |  |            | 673,084 |  |   | 2,313,704
|Other non-current liabilities         |  |                | 54,724  |            |   | 54,724         |  |            | 13,120  |  |   | 13,120   



The carrying amounts
shown in the table are included in the consolidated balance sheets under the indicated captions. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:



Cash and cash equivalents, accounts receivable, due from
related parties, accounts payable, accrued expenses, accrued XM-4 liability, accrued network optimization expenses, due to related parties and other non-current liabilities: The carrying amounts approximate fair value because of the short
maturity of these instruments.



Restricted
investments: The fair values of debt securities (held-to-maturity investments) are based on quoted market prices at the reporting date for those or similar investments.



Letters of credit: The value of the letters of credit is based on the fees paid to obtain the letters
of credit.



Long-term debt: The fair
value of the Companys long-term debt is determined by either estimation by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the
Companys bankers or by quoted market prices at the reporting date for the traded debt securities.



(11) Stock-Based Compensation



The Company operates stock plans, the details of which are described below.



1998 Shares Award Plan and Talent Option Plan



On June 1, 1998, Holdings adopted the 1998 Shares Award Plan (the 1998 Plan) under which employees, consultants, and non-employee directors may be granted options to purchase shares of Holdings Class A common stock of the
Company. The Company has authorized 25,000,000 shares of Holdings Class A common stock under the 1998 Plan. The options are exercisable in installments determined by the compensation committee of the Companys board of directors. The
options expire as determined by the committee, but no later than ten years from the date of grant.





F-23



---

##### Table of Contents

##### Index to Financial Statements

In May 2000,Holdings adopted the XM Talent Option Plan (Talent Plan) under which non-employee
programming consultants to the Company may be granted options to purchase shares of Class A common stock of the Company. The Company authorized 500,000 shares of Class A common stock under the Talent Plan. The options are exercisable in installments
determined by the talent committee of the Companys board of directors. The options expire as determined by the talent committee, but no later than ten years from the date of the grant.



Transactions and other information relating to the 1998 Plan for the years
ended December 31, 2004, 2003 and 2002 are summarized below:



|                            |  |                     |   |  |                                  |      
|--------------------------- |  | ------------------- | - |  | -------------------------------- | -----
|                            |  | Outstanding Options
|                            |  | Number ofShares     |   |  | Weighted- Average Exercise Price
|Balance, January 1, 2002    |  | 5,498,940           |   |  | $                                | 16.62
|Options granted             |  | 2,765,352           |   |  |                                  | 12.93
|Options canceled or expired |  | (633,457            | ) |  |                                  | 17.13
|Options exercised           |  | (15,772             | ) |  |                                  | 9.47 
|                            |  |                     |   |  |                                  |      
|Balance, December 31, 2002  |  | 7,615,063           |   |  | $                                | 15.24
|Options granted             |  | 5,548,305           |   |  |                                  | 5.99 
|Options canceled or expired |  | (517,762            | ) |  |                                  | 15.37
|Options exercised           |  | (680,568            | ) |  |                                  | 11.36
|                            |  |                     |   |  |                                  |      
|Balance, December 31, 2003  |  | 11,965,038          |   |  | $                                | 11.21
|Options granted             |  | 4,945,285           |   |  |                                  | 23.86
|Options canceled or expired |  | (690,454            | ) |  |                                  | 12.75
|Options exercised           |  | (1,533,708          | ) |  |                                  | 11.27
|                            |  |                     |   |  |                                  |      
|Balance, December 31, 2004  |  | 14,686,161          |   |  | $                                | 15.37
|                            |  |                     |   |  |                                  |      



F-24



---

##### Table of Contents

##### Index to Financial Statements

|             |  |                |              |                   |           |                                          |            |                               |   |                   |  |                               |  |   |      
|------------ |  | -------------- | ------------ | ----------------- | --------- | ---------------------------------------- | ---------- | ----------------------------- | - | ----------------- |  | ----------------------------- |  | - | -----
|December 31, |  | Exercise Price |              | NumberOutstanding |           | Weighted-AverageRemainingContractualLife |            | Weighted-AverageExercisePrice |   | NumberExercisable |  | Weighted-AverageExercisePrice
|2002         |  | $              | 2.13-$9.52   |                   | 2,214,875 |                                          | 7.37 years |                               | $ | 8.46              |  | 1,523,261                     |  | $ | 9.17 
|             |  | $              | 9.55-$14.99  |                   | 2,698,371 |                                          | 8.41 years |                               | $ | 13.76             |  | 908,247                       |  | $ | 12.10
|             |  | $              | 15.00-$18.69 |                   | 1,959,457 |                                          | 8.26 years |                               | $ | 17.58             |  | 745,019                       |  | $ | 17.65
|             |  | $              | 18.82-$45.44 |                   | 742,360   |                                          | 7.53 years |                               | $ | 35.12             |  | 524,301                       |  | $ | 35.23
|             |  |                |              |                   |           |                                          |            |                               |   |                   |  |                               |  |   |      
|2003         |  | $              | 2.67         |                   | 2,100     |                                          | 9.01 years |                               | $ | 2.67              |  | 0                             |  | $ | 0.00 
|             |  | $              | 2.77-$5.34   |                   | 4,995,218 |                                          | 9.17 years |                               | $ | 5.31              |  | 41,452                        |  | $ | 3.72 
|             |  | $              | 5.67-$14.99  |                   | 4,404,292 |                                          | 7.12 years |                               | $ | 11.54             |  | 2,723,468                     |  | $ | 10.86
|             |  | $              | 15.00-$45.44 |                   | 2,563,428 |                                          | 7.21 years |                               | $ | 22.16             |  | 1,848,581                     |  | $ | 23.67
|             |  |                |              |                   |           |                                          |            |                               |   |                   |  |                               |  |   |      
|2004         |  | $              | 2.67         |                   | 1,400     |                                          | 8.01 years |                               | $ | 2.67              |  | 0                             |  | $ | 0    
|             |  | $              | 2.77-$5.34   |                   | 4,070,954 |                                          | 8.16 years |                               | $ | 5.31              |  | 1,110,887                     |  | $ | 5.27 
|             |  | $              | 5.67-$9.52   |                   | 1,722,330 |                                          | 5.43 years |                               | $ | 8.54              |  | 1,544,812                     |  | $ | 8.71 
|             |  | $              | 9.57-$14.99  |                   | 1,901,784 |                                          | 6.56 years |                               | $ | 13.72             |  | 1,366,955                     |  | $ | 13.35
|             |  | $              | 15.00-$18.69 |                   | 1,571,089 |                                          | 6.32 years |                               | $ | 17.46             |  | 1,559,757                     |  | $ | 17.47
|             |  | $              | 18.83-$22.00 |                   | 2,514,255 |                                          | 9.13 years |                               | $ | 21.98             |  | 9,268                         |  | $ | 19.34
|             |  | $              | 22.31-$24.43 |                   | 1,606,666 |                                          | 9.52 years |                               | $ | 24.35             |  | 33,569                        |  | $ | 22.96
|             |  | $              | 24.47-$43.50 |                   | 1,278,583 |                                          | 7.92 years |                               | $ | 31.78             |  | 572,400                       |  | $ | 34.97
|             |  | $              | 43.69-$45.44 |                   | 19,100    |                                          | 5.68 years |                               | $ | 44.52             |  | 19,100                        |  | $ | 44.52
|             |  |                |              |                   |           |                                          |            |                               |   |                   |  |                               |  |   |      



Under the 1998 Plan,
there were 6,216,748, 4,613,501 and 3,700,828 stock options exercisable at December 31, 2004, 2003 and 2002, respectively. At December 31, 2004, there were 7,941,670 shares available under the plan for future grants. During 2004, the Company granted
10,000 restricted shares. As of December 31, 2004 and 2003, 357,000 and 291,500 options had been granted under the Talent Plan, respectively. At December 31, 2004, there were 143,000 options available under the plan for future grant. In 2004, 2003
and 2002, the Company recognized $2.0 million, $2.1 million and $1.4 million of non-cash stock-based compensation expense.



The per share weighted-average fair value of employee options granted during the year ended December 31, 2004, 2003 and 2002 was $16.08, $4.72 and $10.88,
respectively, on the date of grant using the Black-Scholes Option Pricing Model with the following weighted-average assumptions:



|                              |  |                         |   |  |               |   |  |               |  
|----------------------------- |  | ----------------------- | - |  | ------------- | - |  | ------------- | -
|                              |  | Year ended December 31, |  
|                              |  | 2004                    |   |  | 2003          |   |  | 2002          |  
|Expected dividend yield       |  | 0                       | % |  | 0             | % |  | 0             | %
|Volatility                    |  | 82.75                   | % |  | 107.38        | % |  | 122.25        | %
|Risk-free interest rate range |  | 2.79% to 3.93           | % |  | 2.30% to 3.37 | % |  | 2.63% to 4.91 | %
|Expected life                 |  | 5 years                 |   |  | 5 years       |   |  | 5 years       |  
|                              |  |                         |   |  |               |   |  |               |  



Employee Stock
Purchase Plan



In 1999, Holdings established an
employee stock purchase plan that provides for the issuance of 300,000 shares of Holdings Class A common stock, which was increased to 600,000 shares in 2001 and 1,000,000 shares in 2003. All employees whose



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##### Index to Financial Statements

customary employment is more than 20 hours per week and for more than five months in any calendar year are eligible to
participate in the stock purchase plan, provided that any employee who would own 5% or more of Holdings total combined voting power immediately after an offering date under the plan is not eligible to participate. Eligible employees must
authorize the Company to deduct an amount from their pay during offering periods established by the compensation committee. The purchase price for shares under the plan will be determined by the compensation committee but may not be less than 85% of
the lesser of the market price of the common stock on the first or last business day of each offering period. As of December 31, 2004, 2003 and 2002, Holdings had issued a cumulative total of 570,311, 528,044 and 402,380 shares, respectively,
under this plan. At December 31, 2004, there were 429,689 shares available under the plan for future sale.



The per share weighted-average fair value of purchase rights granted was $23.79, $5.22 and $4.80 for the years ended December 31, 2004, 2003 and 2002,
respectively. The estimates were calculated at the grant date using the Black-Scholes Option Pricing Model with the following assumptions at December 31, 2004, 2003 and 2002:



|                              |  |                         |   |  |               |   |  |            |  
|----------------------------- |  | ----------------------- | - |  | ------------- | - |  | ---------- | -
|                              |  | Year ended December 31, |  
|                              |  | 2004                    |   |  | 2003          |   |  | 2002       |  
|Expected dividend yield       |  | 0                       | % |  | 0             | % |  | 0          | %
|Volatility                    |  | 82.75                   | % |  | 107.38        | % |  | 122.25     | %
|Risk-free interest rate range |  | 0.90% to 2.11           | % |  | 0.90% to 1.22 | % |  | 1.57%-1.79 | %
|Expected life                 |  | 0.24 years              |   |  | 0.24 years    |   |  | 0.24 years |  
|                              |  |                         |   |  |               |   |  |            |  



The Company applies
APB 25 in accounting for stock-based compensation for both plans and, accordingly, no compensation cost has been recognized for its stock options and stock purchase plan in the financial statements other than for performance based stock options, for
options granted with exercise prices below fair value on the date of grant and for repriced options under FIN No. 44. During 2004, 2003 and 2002, the Company incurred $0, $0 and $1.1 million, respectively, in compensation cost for these options.



(12) Profit Sharing and Employee Savings Plan



On July 1, 1998, the Company adopted a profit sharing and employee savings
plan under Section 401(k) of the Internal Revenue Code. This plan allows eligible employees to defer the maximum percentage of their compensation allowable under law on a pre-tax basis through contributions to the savings plan. The Company
contributed $0.50 in 2004, 2003 and 2002 for every dollar the employees contributed up to 6% of compensation, which amounted to $0.8 million, $0.7 million and $0.7 million, respectively.



(13) Interest Cost



The Company capitalizes a portion of interest cost as a component of the cost of the XM Radio System. The following is a summary of interest cost incurred
during December 31, 2004, 2003 and 2002 (in thousands):



|                                 |  |      |         |      |   |         |  |   |       
|-------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | ------
|                                 |  | 2004 |         | 2003 |   | 2002   
|Interest cost capitalized        |  | $    | 16,157  |      | $ | 828     |  | $ |      
|Interest cost charged to expense |  |      | 84,914  |      |   | 104,250 |  |   | 52,037
|                                 |  |      |         |      |   |         |  |   |       
|Total interest cost incurred     |  | $    | 101,071 |      | $ | 105,078 |  | $ | 52,037
|                                 |  |      |         |      |   |         |  |   |       



The Company exceeded
its capitalization threshold and incurred a charge to interest of $84.9 million and $104.3 million during 2004 and 2003, respectively. In 2002, the Company had no items that were considered qualified expenditures.



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##### Table of Contents

##### Index to Financial Statements

(14) Income Taxes



The provision for the income taxes for the three years ended December 31, 2004 consists of the following:



Taxes on income included in the Statements of Operations consists of the
following (in thousands):



|                            |  |              |        |      |   |      |  |   |  
|--------------------------- |  | ------------ | ------ | ---- | - | ---- |  | - | -
|                            |  | December 31,
|                            |  | 2004         |        | 2003 |   | 2002
|Current taxes:              |  |              |        |      |   |      |  |   |  
|Federal                     |  | $            |       |      | $ |     |  | $ | 
|State                       |  |              |       |      |   |     |  |   | 
|                            |  |              |        |      |   |      |  |   |  
|Total current taxes         |  |              |       |      |   |     |  |   | 
|                            |  |              |        |      |   |      |  |   |  
|Deferred taxes:             |  |              |        |      |   |      |  |   |  
|Federal                     |  | $            | 23,486 |      | $ |     |  | $ | 
|State                       |  |              | 3,831  |      |   |     |  |   | 
|                            |  |              |        |      |   |      |  |   |  
|Total deferred taxes        |  |              | 27,317 |      |   |     |  |   | 
|                            |  |              |        |      |   |      |  |   |  
|Total tax expense (benefit) |  | $            | 27,317 |      | $ |     |  | $ | 
|                            |  |              |        |      |   |      |  |   |  



A reconciliation of
the statutory tax expense, assuming all income is taxed at the statutory rate applicable to the income and the actual tax expense is as follows (in thousands):



|                                                                                     |  |              |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                     |  | December 31, |         
|                                                                                     |  | 2004         |          |   | 2003 |   |          | 2002 | 
|Income (loss) before taxes on income, as reported in the statements of income        |  | $            | (622,717 | ) |      | $ | (589,759 | )    |  | $ | (491,585 | )
|                                                                                     |  |              |          |   |      |   |          |      |  |   |          |  
|Theoretical tax benefit on the above amount at 35%                                   |  |              | (217,951 | ) |      |   | (206,416 | )    |  |   | (172,055 | )
|State tax, net of federal benefit                                                    |  |              | (21,795  | ) |      |   | (20,642  | )    |  |   | (23,989  | )
|Increase in taxes resulting from permanent differences, net                          |  |              | 36,282   |   |      |   | 16,930   |      |  |   | 4,111    |  
|Increase in taxes resulting from change in effective tax rate on valuation allowance |  |              |         |   |      |   | 12,507   |      |  |   |         |  
|Change in valuation allowance                                                        |  |              | 230,781  |   |      |   | 197,621  |      |  |   | 191,933  |  
|                                                                                     |  |              |          |   |      |   |          |      |  |   |          |  
|Taxes on income for the reported year                                                |  | $            | 27,317   |   |      | $ |         |      |  | $ |         |  
|                                                                                     |  |              |          |   |      |   |          |      |  |   |          |  



The $230.8 million
increase in the valuation allowance includes a $27.3 million increase that was required because the Company determined that it was not appropriate under generally accepted accounting principles to offset deferred tax assets against deferred tax
liabilities related to indefinite lived assets that cannot be scheduled to reverse in the same period. The Company does not expect to settle this liability in the foreseeable future.



In addition to the $230.8 million increase in the valuation, a further increase in the Companys valuation allowance of
$55.6 million was incurred in 2004 from net equity transactions. This increase in the valuation allowance was due to the tax benefits of the exercise of nonqualified stock options and the recording of assets with a greater tax basis than book value,
net of the loss of deferred tax assets in debt-for-equity exchanges. The $55.6 million increase in equity was subject to a $55.6 million equity account valuation allowance, resulting in no change to the Companys net equity.



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##### Table of Contents

##### Index to Financial Statements

At December 31, 2004, 2003 and 2002, deferred income tax consists of future tax assets/(liabilities)
attributable to the following (in thousands):



|                                                         |  |              |          |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                         |  | December 31, |         
|                                                         |  | 2004         |          |   | 2003 |   |          | 2002 | 
|Deferred tax assetsCurrent:                             |  |              |          |   |      |   |          |      |  |   |          |  
|Deferred revenue                                         |  | $            | 44,256   |   |      | $ | 15,293   |      |  | $ | 3,970    |  
|Other deferred tax assetscurrent                        |  |              | 2,963    |   |      |   | 2,465    |      |  |   |         |  
|                                                         |  |              |          |   |      |   |          |      |  |   |          |  
|Gross total deferred tax assetsCurrent                  |  |              | 47,219   |   |      |   | 17,758   |      |  |   | 3,970    |  
|Valuation allowance for deferred tax assetscurrent      |  |              | (45,933  | ) |      |   | (16,846  | )    |  |   | (3,642   | )
|                                                         |  |              |          |   |      |   |          |      |  |   |          |  
|Net deferred assetscurrent                              |  |              | 1,286    |   |      |   | 912      |      |  |   | 328      |  
|                                                         |  |              |          |   |      |   |          |      |  |   |          |  
|Deferred tax assetsNoncurrent:                          |  |              |          |   |      |   |          |      |  |   |          |  
|Net operating loss/other tax attribute carryovers        |  | $            | 500,425  |   |      | $ | 426,550  |      |  | $ | 245,080  |  
|Book expenses capitalized and amortized for tax purposes |  |              | 86,908   |   |      |   | 89,039   |      |  |   | 101,650  |  
|Deferred revenue                                         |  |              | 14,397   |   |      |   | 5,452    |      |  |   | 948      |  
|Property, equipment and property under construction      |  |              | 74,023   |   |      |   | 7,733    |      |  |   |         |  
|Deferred interest expense                                |  |              | 17,362   |   |      |   |         |      |  |   |         |  
|Loan financing costs                                     |  |              | 67,978   |   |      |   |         |      |  |   |         |  
|Other deferred tax assets                                |  |              | 20,169   |   |      |   | 3,299    |      |  |   | 1,470    |  
|                                                         |  |              |          |   |      |   |          |      |  |   |          |  
|Gross total deferred tax assetsnoncurrent               |  |              | 781,262  |   |      |   | 532,073  |      |  |   | 349,148  |  
|Valuation allowance for deferred tax assetsnoncurrent   |  |              | (762,083 | ) |      |   | (504,744 | )    |  |   | (320,327 | )
|                                                         |  |              |          |   |      |   |          |      |  |   |          |  
|Net deferred assetsnoncurrent                           |  |              | 19,179   |   |      |   | 27,329   |      |  |   | 28,821   |  
|                                                         |  |              |          |   |      |   |          |      |  |   |          |  
|Net deferred assets                                      |  |              | 20,465   |   |      |   | 28,241   |      |  |   | 29,149   |  
|                                                         |  |              |          |   |      |   |          |      |  |   |          |  
|Deferred tax liabilities:                                |  |              |          |   |      |   |          |      |  |   |          |  
|Property, equipment and property under construction      |  |              |         |   |      |   |         |      |  |   | (568     | )
|DARS license                                             |  |              | (27,317  | ) |      |   | (24,996  | )    |  |   | (24,705  | )
|Intangible assets                                        |  |              | (2,757   | ) |      |   | (3,245   | )    |  |   | (3,876   | )
|Debt instruments                                         |  |              | (17,708  | ) |      |   |         |      |  |   |         |  
|Other deferred tax liabilities                           |  |              |         |   |      |   |         |      |  |   |         |  
|                                                         |  |              |          |   |      |   |          |      |  |   |          |  
|Net deferred tax liabilities                             |  |              | (47,782  | ) |      |   | (28,241  | )    |  |   | (29,149  | )
|                                                         |  |              |          |   |      |   |          |      |  |   |          |  
|Deferred income tax, net                                 |  | $            | (27,317  | ) |      | $ |         |      |  | $ |         |  
|                                                         |  |              |          |   |      |   |          |      |  |   |          |  



At December 31, 2004,
the Company had accumulated net operating losses of $1,299.8 million for Federal income tax purposes that are available to offset future regular taxable income. These operating loss carryforwards expire between the years 2012 and 2024. Utilization
of these net operating losses are subject to Internal Revenue Code Section 382 for loss limitations because there have been



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##### Table of Contents

##### Index to Financial Statements

significant changes in the stock ownership of the Company. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.



(15) Supplemental Cash Flows Disclosures



The Company paid $27.5 million, $71.0 million and $51.2 million for
interest, of which $16.2 million, $0.8 million and $0 was capitalized during 2004, 2003 and 2002, respectively. Additionally, the Company incurred the following non-cash financing and investing activities (in thousands):



|                                                     |  |              |         |      |   |         |  |   |      
|---------------------------------------------------- |  | ------------ | ------- | ---- | - | ------- |  | - | -----
|                                                     |  | December 31,
|                                                     |  | 2004         |         | 2003 |   | 2002   
|Accrued system construction costs                    |  | $            | 15,000  |      | $ | 6,892   |  | $ | 5,123
|Issuance of notes for prepaid expenses               |  |              |        |      |   | 89,042  |  |   |     
|Issuance of warrants for deferred financing fees     |  |              |        |      |   | 27,439  |  |   |     
|Transfer of ground spare satellite bus to Holdings   |  |              |        |      |   |        |  |   |     
|Issuance of notes for accrued expenses               |  |              | 129     |      |   | 55,493  |  |   |     
|Proceeds of note issuance held at Holdings           |  |              |        |      |   | 95,693  |  |   |     
|Discount on debt securities                          |  |              | 33,622  |      |   | 101,707 |  |   |     
|Conversion of debt to Holdings Class A common stock |  |              | 130,995 |      |   | 91,519  |  |   |     
|Systems under construction placed into service       |  |              |        |      |   |        |  |   | 2,147
|Use of deposit/escrow for capital lease agreement    |  |              |        |      |   | 1,174   |  |   |     
|Property acquired through capital leases             |  |              | 6,412   |      |   | 1,894   |  |   | 2,139
|Assumption of liabilities by Holdings                |  |              |        |      |   | 17,081  |  |   |     
|Write off of deferred financing costs to equity      |  |              | 514     |      |   |        |  |   |     



(16) Commitments and Contingencies



(a) DARS Licenses



The Companys DARS license is valid for eight years upon successful
launch and orbital insertion of the satellites and can be extended by the FCC. The DARS license requires that the Company comply with a construction and launch schedule specified by the FCC for each of the two authorized satellites, which has
occurred. The FCC has the authority to revoke the authorizations and in connection with such revocation could exercise its authority to rescind the Companys license. The Company believes that the exercise of such authority to rescind the
license is unlikely. If necessary, the Company could seek FCC authority to launch additional satellites for use in its system, which management believes would likely be approved. In February 2004, the Company applied to the FCC for authority to
launch and operate XM-3 and XM-4 and to collocate XM Roll with XM Rock at the 115 West Longitude orbital location. The FCC granted this application in January 2005. Additionally, the FCC has not yet issued final rules permitting the Company to
deploy its terrestrial repeaters to fill gaps in satellite coverage. The Company is operating its repeaters on a non-interference basis pursuant to a grant of special temporary authority from the FCC. This grant originally expired March 18, 2002.
However, on March 11, 2002, the Company applied for an extension of this special temporary authority and the Company can continue to operate its terrestrial repeaters pursuant to the special temporary authority pending a final determination on this
extension request. This authority is currently being challenged by operators of terrestrial wireless systems who have asserted that the Companys repeaters may cause interference. The Company believes it is not likely that an FCC order would
materially impact the terrestrial repeater system design currently in operation.



One of the losing bidders for the DARS licenses filed an Application for Review by the full FCC of the Licensing Order that granted the Company its DARS license. The Application for Review alleged that a former
investor had effectively taken control of the Company without FCC approval. The FCC denied the Application for Review and the losing bidder appealed to the United States Court of Appeals for the District of Columbia Circuit. On February 21, 2003,
the Court of Appeals rejected the losing bidders claims and upheld the FCCs decision to grant the Company its license.



The Company has entered into a Memorandum of Agreement contemplating the establishment of a joint venture entity that would be authorized to provide the
XM service in Canada. This entity has begun the process of seeking authority from the Canadian government to provide satellite radio service in Canada. XM anticipates that the joint venture, once established, would be independently financed.



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##### Index to Financial Statements

(b) Technology Licenses



Effective January 1, 1998, the Company entered into a technology licensing agreement with Motient and WorldSpace Management
Corporation (WorldSpace MC) by which as compensation for certain licensed technology then under development to be used in the XM Radio System, the Company pays certain amounts to WorldSpace MC. The actual amounts to be incurred under
this agreement are dependent upon further development of the technology, which is at the Companys option. The agreement includes provisions for sharing certain costs related to the further development of technology and for royalty payments
from the Company to WorldSpace MC. At December 31, 2004 and 2003, respectively, the Company had recorded an accrual of $4.0 million and $5.2 million payable to Worldspace for royalty payments.



(c) Satellite Contract



Satellite Insurance SettlementsThe Company had secured launch
and in-orbit insurance policies with a large group of insurers (both U.S. and foreign) providing coverage for losses relating to each of its satellites (XM Rock and XM Roll) where such losses arise from an occurrence within the first 5 years after
launch (both satellites were launched during the 1st half of 2001).



Under these policies, the aggregate sum insured in the event of constructive total loss of both satellites equaled up to $400 million ($200 million per satellite), and lesser amounts would be payable in the event of a partial loss. In the
event of constructive total loss, the amount of recovery would be reduced by any salvage value, which could include a percentage of the revenues from the Companys continuing use of the satellites.



In September 2001, the Company notified its insurers of a progressive solar
array power degradation problem with both satellites (this solar array output power degradation issue is common to the first six Boeing 702 class satellites in orbitXM Rock and XM Roll were the fifth and sixth Boeing 702s launched). In
February 2003, the Company filed Proofs of Loss with its insurers claiming that the pattern of degradation on both satellites met the standard for constructive total loss under the terms of the insurance policies even though the Company would be
able to operate the satellites and provide quality service to its subscribers for some continuing period of time.



In July 2004, the Company reached agreement with insurers covering 80% of the aggregate sum insured at a settlement rate equal to 44.5% of the
proportionate amount covered by each of these insurers, representing a total recovery of approximately $142 million from these insurers. This settlement resolves any issues about the amount of loss sustained, includes a waiver by the settling
insurance companies of any reductions based on salvage value, terminates any further risk to the settling insurers under the policies and ends any other rights the settling insurers might have with regard to XM Rock and XM Roll or revenues generated
by the Companys continuing use of those satellites. The Company has collected all amounts due under the settlement. The portion of the insurance proceeds related to claim payments was recorded as a reduction to the carrying values of XM Rock
and XM Roll.



In August 2004, the Company filed for arbitration
to collect the remaining 20% of the sum insured utilizing the third-party dispute resolution procedures under the policy. Any amounts received from this arbitration proceeding will be recorded as a reduction to the carrying values of XM Rock and
Roll.



Satellite ContractXM Rock and XM Roll. As
of December 31, 2004, Holdings and the Company had paid approximately $613.5 million, including financing charges and interest under the satellite contract related to XM Rock, or XM-2, XM Roll, or XM-1, XM-3 and XM-4. The Company originally entered
into its satellite contract in March 1998 with Boeing Satellite Systems International, Inc., or BSS, and has subsequently amended the contract, including in July 2003 and December 2003. Under the satellite contract, BSS has delivered two satellites
in-orbit, XM Rock and XM Roll, supplied ground equipment and software used in the XM Radio system and provided certain launch and operations support services.



Satellite Contract and Other CostsXM-3. Construction of the Companys ground spare satellite, XM-3, is completed, including certain
modifications to correct the solar array degradation issues experienced by Rock and Roll, as well as other changes agreed with BSS discussed below. The payload of XM-3 is owned by the Company, and the bus of XM-3 is owned by Holdings. As of December
31, 2004, with respect to XM-3, the Company has deferred $15 million at an interest rate of 8% through January 4, 2007. In May 2004, the Company repaid in full a $35 million loan (plus accrued interest) outstanding from Boeing Capital. In February
2005 the Company launched its XM-3 satellite.



In addition to
the modifications to address the solar array degradation issues, BSS made certain alterations to optimize XM-3 for the specific orbital slot into which it will be placed. The aggregate remaining cost, excluding the above $15 million deferral, of the
launch, optimization for the specific orbital slot, appropriate software and certain pre and post-launch services of approximately $135 million was paid during the first half of 2004. Further, BSS has the right to earn performance incentive payments
of up to $25.9 million, excluding interest, based on the in-orbit performance of XM-3 over its design life of fifteen years.



Satellite InsuranceXM-3. The Company acquired launch and in-orbit insurance in January 2005 in connection with the launch of XM-3.



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##### Index to Financial Statements

Satellite Contract and Other CostsXM-4. The Company has committed in its satellite contract,
as amended in July 2003, and by a separate August 2003 contract with Sea Launch Company, LLC, or Sea Launch, to acquire from BSS a fourth satellite, XM-4, which should be available for shipment to the launch services provider by the end of 2005, and
from Sea Launch the associated launch services for the satellite. Holdings will own XM-4. The fixed prices for XM-4 and the associated launch services total $186.5 million, excluding in-orbit performance incentives and financing charges on certain
amounts deferred prior to launch. As of December 31, 2004, satellite construction costs aggregating approximately $106.1 million were incurred, of which $6 million was paid, and $100.1 million are deferred. Interest accrued monthly at a rate of
10.75% per annum through December 2004 and is payable thereafter on a current basis, pursuant to the December 2003 amendment, which extended the deferral into early 2006 (unless the satellite is launched earlier). Most of the remaining portion of
the fixed costs for XM-4 and the associated launch services are payable during construction with the last payment due one month following launch.



After launch of XM-4, BSS has the right to earn performance incentive payments of up to $12 million, plus interest, over the first twelve years of
in-orbit life, up to $7.5 million for performance above specification during the first fifteen years of in-orbit life, and up to $10 million for continued high performance across the five year period beyond the fifteen year design life. If XM-3
operates satisfactorily, the Company may elect, under the above contracts, to defer launch of XM-4 and, as a result, approximately $50 million in payments related to launch services could be postponed until the 2007 timeframe.



Options to Procure Fifth Satellite and Associated Launch Services. The
Company has also obtained fixed price options to acquire a fifth satellite from BSS, under the July 2003 amendment, on pricing and performance incentive terms similar to those applicable to XM-4 and associated launch services from Sea Launch under
the August 2003 contract.



Satellite ContractWarrant
to BSS. Pursuant to the Companys satellite contract, it issued a warrant to BSS in July 2003 to purchase 500,000 shares of its Class A common stock at $13.524 per share. The fair value of these warrants was determined to be $5.8 million
using a Black-Scholes based methodology and is included in the System Under Construction balance as of December 31, 2004.



Replacement Satellite Deployment Plan. In February 2005 the Company launched its XM-3 satellite, to be placed into one orbital slot. The Company
will then move XM Roll to be collocated with XM Rock in the other orbital slot. In 2007, the Company plans to launch its new satellite (XM-4) to replace the collocated XM Rock and XM Roll. With this plan and advanced visibility, even in the event
there is a problem putting XM-3 into operation, the Company believes it will be able to launch additional satellites prior to the time the solar array output power degradation issue might cause the Companys broadcast signal strength to fall
below minimum acceptable levels.



(d) Terrestrial
Repeater System Contracts



As of December 31, 2004,
the Company had incurred aggregate costs of approximately $268.0 million for its terrestrial repeater system. These costs covered the capital costs of the design, development and installation of a system of terrestrial repeaters to cover
approximately 60 cities and metropolitan areas. In August 1999, the Company signed a contract with LCCI calling for engineering and site preparation. As of December 31, 2004, the Company had paid $128.4 million under this contract. There are no
further payments due under the LCCI contract. The Company also entered into a contract effective October 22, 1999 with Hughes for the design, development and manufacture of the terrestrial repeaters; there are no further payments due under this
contract except those related to ongoing out-of-warranty repairs. The Company has paid $114.4 million under this contract as of December 31, 2004 and has an additional liability recorded of $53,000 at December 31, 2004.



(e) Accrued Network Optimization Expenses



As a result of the planned reduction of the number of terrestrial repeater
sites (see note 7), the Company recognized a charge of $47,000 in 2004, $4.8 million in 2003 and $4.0 million in 2002. The charges represent costs associated with terminating leases on terrestrial repeater sites no longer required. At December 31,
2004 and 2003, the Company had recorded a lease termination accrual of $2.1 million and $4.1 million, respectively, that represent an estimate of the costs to terminate the remaining leases based on managements judgment, advice of lease
consultants, and early negotiations with landlords. At December 31, 2004, 57 leases remained to be terminated. The liability also includes the estimated costs to deconstruct the existing sites, which are based upon quotes from contractors. This
amount could vary significantly from the actual amount incurred.



(f) GM Distribution Agreement



The
Company has a long-term distribution agreement with OnStar, a subsidiary of General Motors. During the term of the agreement, which expires 12 years from the commencement date of the Companys commercial operations, GM has agreed to distribute
the service to the exclusion of other S-band satellite digital radio services.The Company will also have a non-exclusive right to arrange for the installation of XM radios included in OnStar systems in non-GM vehicles that are sold for use
in the United States. The agreement was amended in June 2002 and January 2003 to clarify certain terms in the agreement, including extending the dates when certain initial payments are due to GM and confirming the date of the Companys
commencement of commercial operations, and to provide that the Company may make certain payments to GM in the form of indebtedness or shares of the Companys Class A common stock. The Companys total cash payment obligations were not
increased. The Company has significant



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##### Table of Contents

##### Index to Financial Statements

annual, fixed payment obligations to GM. As a result of the June 2002 amendment, the Company commenced recognizing these
fixed payment obligations for the period ending through November 2005, which approximate $63.6 million, on a straight-line basis. However, due to the January 2003 amendment to the Distribution Agreement and GMs roll out plans which
demonstrated a likelihood of GM exceeding minimum installation targets, in 2003 the Company began prospectively recognizing these fixed payments due under the Distribution Agreement, which approximate $397.3 million, on a straight-line basis through
September 2013, the remaining term of the agreement. The Company issued a 10% Senior Secured Convertible Note due 2009 with an aggregate principal amount of $89.0 million, to OnStar in lieu of making these fixed payments to OnStar for amounts
otherwise due in 2003 through 2006. The fixed payments due to be paid in years 2007, 2008 and 2009 are $80.7 million, $106.7 million and $132.9 million, respectively. As described in Note 3, in February 2004, the Company completed the redemption of
the note through repayment of a portion with cash and GMs conversion of a portion of the principal amount into the Companys Class A common stock. The Company has recorded $22.3 million of current prepaid expense to related party and
$22.3 million of non-current prepaid expense to related party in connection with the guaranteed fixed payments in the consolidated balance sheet at December 31, 2004.



In order to encourage the broad installation of XM radios in GM vehicles, the Company has agreed to subsidize a portion of
the cost of XM radios, and to make incentive payments to GM when the owners of GM vehicles with installed XM radios become subscribers to the Companys service. The Company must also share with GM a percentage of the subscription revenue
attributable to GM vehicles with installed XM radios, which percentage increases until there are more than 8 million GM vehicles with installed XM radios (at which point the percentage remains constant). During the second quarter of 2004, a
clarification was agreed to by XM and Onstar relating to the implementation of certain aspects of revenue sharing contained within the distribution agreement. Accordingly, the revenue share expense is recognized as the related subscription revenue
is earned. The Company recorded $3.6 million of current prepaid expense to related party and $8.9 million of non-current prepaid expense to related party in connection with this revenue sharing arrangement in the consolidated balance sheet at
December 31, 2004. As part of the agreement, OnStar provides certain call-center related services directly to XM subscribers who are also OnStar customers and the Company must reimburse OnStar for these XM-related call center services. The agreement
is subject to renegotiation at any time based upon the installation of radios that are compatible with a common receiver platform or capable of receiving Sirius Satellite Radios service. The agreement is subject to renegotiation if as of
November 2005, and at two-year intervals thereafter, GM does not achieve and maintain specified installation levels of GM vehicles capable of receiving the Companys service. The specified installation level of 1,240,000 units by November 2005
was achieved in 2004. The specified installation levels in future years will increase by the lesser of 600,000 units per year or amounts proportionate to target market shares in the satellite digital radio service market. There can be no assurances
as to the outcome of any such renegotiations. General Motors exclusivity obligations will discontinue if, by November 2005 and at two-year intervals thereafter, the Company fails to achieve and maintain specified minimum market share levels in
the satellite digital radio service market. As of December 31, 2004, 2003 and 2002 the Company incurred total costs of $159.4 million, $108.3 million and $30.1 million, respectively, under the distribution agreement.



(g) Joint Development Agreement



Under the terms of a joint development agreement with Sirius Radio, the
other holder of an FCC satellite radio license, each party is obligated to fund one half of the development cost for a common receiver platform for satellite radios. During the years ended December 31, 2004, 2003 and 2002, the Company incurred costs
of $0.9 million, $0.6 million and $0, respectively, in relation to this agreement. The costs related to the joint development agreement are being expensed as incurred in research and development. The Company is currently unable to determine the
expenditures necessary to complete this process, but they may be significant.



Pursuant to the joint development agreement, in November of 2003, XM and Sirius formed a limited liability company for the purpose of developing a common receiver platform for satellite radios.



(h) Sales, Marketing and Distribution Agreements



The Company has entered into various joint sales, marketing and distribution
agreements. Under the terms of these agreements, the Company is obligated to provide incentives, subsidies and commissions to other entities that may include fixed payments, per-unit radio and subscriber amounts and revenue sharing arrangements. The
amount of the operational, promotional, subscriber acquisition, joint development, and manufacturing costs related to these agreements cannot be estimated, but future costs are expected to be substantial. During the years ended December 31, 2004,
2003, and 2002, the Company incurred expenses of $94.5 million, $56.3 million, and $55.7 million respectively, in relation to these agreements, excluding the GM distribution agreement. The amount of these costs will vary in future years, but is
expected to increase in the next year as the number of subscribers and revenue increase.



(i) Programming Agreements



The Company has entered into various programming agreements. Under the terms of these agreements, the Company is obligated to provide payments to other entities that may include fixed payments, advertising commitments
and revenue sharing arrangements. During the years ended December 31, 2004, 2003, and 2002, the Company incurred expenses of $26.5 million, $19.6 million and $20.3 million, respectively, in relation to these agreements. The amount of these costs
will vary in future years, but is expected to increase in the next year as the number of subscribers and advertising revenue increase. The amount of the costs related to these agreements cannot be estimated, but future costs are expected to be
substantial.





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##### Index to Financial Statements

In October 2004, the Company announced a multi-year agreement with Major League Baseball to broadcast MLB
games live nationwide and to become the Official Satellite Radio provider of Major League Baseball. The Company will pay up to $50 million for 2005 and $60 million per year thereafter through 2012, with $120 million to be deposited into escrow in
2005. MLB has the option to extend the agreement for the 2013, 2014 and 2015 seasons at the same $60 million annual compensation rate. The Company paid $10 million to MLB in October 2004. The Company will also make incentive payments to MLB for XM
subscribers obtained through MLB and baseball club verifiable promotional programs. No stock or warrants were included in this agreement.



(j) Royalty Agreements



The Company has entered into fixed and variable revenue share payment agreements with performance rights organizations that expire as late as 2006. During
the years ended December 31, 2004, 2003 and 2002, the Company incurred expenses of $13.7 million, $9.5 million and $9.5 million, respectively, in relation to these agreements.



(k) Warrants



Sony Warrant



In February 2000, the Company issued a warrant to Sony exercisable for shares of the Companys Class A common stock. The warrant would have vested,
if at all, at the time that the Company reached its one-millionth customer and the number of shares underlying the warrant would have been determined by the percentage of XM Radios that had a Sony brand name as of the vesting date. If Sony had
achieved its maximum performance target, the warrant would have been exercisable for 2% of the total number of shares of the Companys Class A common stock on a fully-diluted basis. The exercise price of the Sony warrant would have equaled 105%
of fair market value of the Class A common stock on the vesting date, determined based upon the 20-day trailing average. When the measurement date was reached, Sony had not achieved the minimum performance target, and therefore, none of the warrants
were vested. The Company reversed the non-cash compensation expense that had been recorded related to these warrants in the third quarter of 2003. For the years ended December 31, 2004, 2003 and 2002, the Company recognized $0, $(339,000) and
$208,000, respectively, in non-cash compensation expense.



CNBC Warrant



In May 2001, the Company granted
a warrant to purchase 90,000 shares of Class A common stock consisting of three 30,000 share tranches to purchase shares at $26.50 per share, which expire in 11, 12, and 13 years, respectively. The warrants began to vest on September 25, 2001 when
the Company reached its commercial launch and became vested on September 1, 2002, 2003, and 2004, respectively. For the years ended December 31, 2004, 2003 and 2002, the Company recognized $191,000, $942,000 and $(156,000), respectively, in non-cash
compensation expense related to these warrants.



(m) Leases



The Company has noncancelable operating leases for
office space and terrestrial repeater sites and noncancelable capital leases for equipment that expire over the next ten years. The Company leases its corporate headquarters from Holdings. Of the $108.3 million to be paid in the future for operating
leases, $71.2 million will be paid to Holdings. The future minimum lease payments and rentals under noncancelable leases as of December 31, 2004 are (in thousands):



|                                            |  |                       |        |   |                         |   |        
|------------------------------------------- |  | --------------------- | ------ | - | ----------------------- | - | -------
|                                            |  | Capital LeasePayments |        |   | Operating LeasePayments
|Year ending December 31:                    |  |                       |        |   |                         |   |        
|2005                                        |  | $                     | 3,717  |   |                         | $ | 20,686 
|2006                                        |  |                       | 2,708  |   |                         |   | 11,079 
|2007                                        |  |                       | 225    |   |                         |   | 8,813  
|2008                                        |  |                       |       |   |                         |   | 6,985  
|2009                                        |  |                       |       |   |                         |   | 6,894  
|Thereafter                                  |  |                       |       |   |                         |   | 53,811 
|                                            |  |                       |        |   |                         |   |        
|Total                                       |  | $                     | 6,650  |   |                         | $ | 108,268
|Less amount representing interest           |  |                       | (463   | ) |                         |   |        
|                                            |  |                       |        |   |                         |   |        
|Present value of net minimum lease payments |  |                       | 6,187  |   |                         |   |        
|Less current maturities                     |  |                       | (3,378 | ) |                         |   |        
|                                            |  |                       |        |   |                         |   |        
|Long-term obligations                       |  | $                     | 2,809  |   |                         |   |        
|                                            |  |                       |        |   |                         |   |        



Rent expense for 2004,
2003 and 2002 was $22.1 million, $26.8 million, and $24.2 million, respectively.



F-33



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##### Index to Financial Statements

As discussed in Note 16(e), in December 2001, the Company determined that the planned number of
terrestrial repeater sites could be reduced due to the relative signal strength provided by the Companys satellites. In 2001, the Company recognized a charge of $26.3 million with respect to the terrestrial repeater sites no longer required.
This charge included a lease termination accrual of $8.6 million for 646 terrestrial site leases, which reduced the future minimum lease payments. In 2004, 2003 and 2002, the Company recognized charges of $47,000, $4.8 million and $4.0 million,
respectively, for additional costs associated with terminating leases on sites no longer required.



(m) Service Providers



The Company has entered into an agreement with a service provider for customer care functions to subscribers of its service. Employees of the service
provider have access to the Companys customer care systems to establish customer accounts, activate radios, update program and account information and respond to general inquires from subscribers. The Company pays its service provider an
hourly rate for each customer care representative supporting its subscribers. During the years ended December 31, 2004, 2003, and 2002, the Company incurred $21.5 million, $14.2 million and $8.7 million, respectively, in relation to services
provided for customer care functions. The Company changed service providers during 2003.



(17) Condensed Consolidating Financial Information



The Company has certain series of debt securities outstanding that are guaranteed by Holdings and by the Companys subsidiary, XM Equipment Leasing LLC, which owns certain terrestrial repeaters. Accordingly, the
Company provides the following condensed consolidating financial information.



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##### Table of Contents

##### Index to Financial Statements

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES



CONDENSED CONSOLIDATING BALANCE SHEET



AS OF DECEMBER 31, 2004

(IN THOUSANDS)



|                                                                                                        |  |                        |            |   |                       |   |        |                                  |  |              |         |  |                                    |            |   |                                |   |            |                                       |  |              |            |   |                                             |   |        |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | - | --------------------- | - | ------ | -------------------------------- |  | ------------ | ------- |  | ---------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ------------------------------------- |  | ------------ | ---------- | - | ------------------------------------------- | - | ------ |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                        |  | XM SatelliteRadio Inc. |            |   | XMEquipmentLeasingLLC |   |        | XMSR Non- guarantor Subsidiaries |  | Eliminations |         |  | ConsolidatedXM SatelliteRadio Inc. |            |   | XM SatelliteRadioHoldings Inc. |   |            | XMHoldings Non- guarantorSubsidiaries |  | Eliminations |            |   | Consolidated XM SatelliteRadioHoldings Inc. |  
|Current assets:                                                                                         |  |                        |            |   |                       |   |        |                                  |  |              |         |  |                                    |            |   |                                |   |            |                                       |  |              |            |   |                                             |   |        |  |   |            |   |  |   |            |  
|Cash and cash equivalents                                                                               |  | $                      | 202,474    |   |                       | $ | 47     |                                  |  | $            |        |  | $                                  |           |   |                                | $ | 202,521    |                                       |  | $            | 506,250    |   |                                             | $ | 9,096  |  | $ |           |   |  | $ | 717,867    |  
|Accounts receivable, net                                                                                |  |                        | 20,138     |   |                       |   |       |                                  |  |              | 44      |  |                                    |           |   |                                |   | 20,182     |                                       |  |              |           |   |                                             |   |       |  |   |           |   |  |   | 20,182     |  
|Due from subsidiaries/ affiliates                                                                       |  |                        | 4,188      |   |                       |   | 36,677 |                                  |  |              | 561,248 |  |                                    | (600,701   | ) |                                |   | 1,412      |                                       |  |              |           |   |                                             |   | 436    |  |   | (1,848     | ) |  |   |           |  
|Due from related parties                                                                                |  |                        | 5,367      |   |                       |   |       |                                  |  |              |        |  |                                    |           |   |                                |   | 5,367      |                                       |  |              |           |   |                                             |   |       |  |   |           |   |  |   | 5,367      |  
|Prepaid and other current assets                                                                        |  |                        | 59,781     |   |                       |   | 186    |                                  |  |              |        |  |                                    |           |   |                                |   | 59,967     |                                       |  |              | 1,734      |   |                                             |   | 332    |  |   | (1,286     | ) |  |   | 60,747     |  
|                                                                                                        |  |                        |            |   |                       |   |        |                                  |  |              |         |  |                                    |            |   |                                |   |            |                                       |  |              |            |   |                                             |   |        |  |   |            |   |  |   |            |  
|Total current assets                                                                                    |  | $                      | 291,948    |   |                       | $ | 36,910 |                                  |  | $            | 561,292 |  | $                                  | (600,701   | ) |                                | $ | 289,449    |                                       |  | $            | 507,984    |   |                                             | $ | 9,864  |  | $ | (3,134     | ) |  | $ | 804,163    |  
|Restricted investments, net of current portion                                                          |  |                        | 372        |   |                       |   |       |                                  |  |              |        |  |                                    |           |   |                                |   | 372        |                                       |  |              |           |   |                                             |   | 4,120  |  |   |           |   |  |   | 4,492      |  
|System under construction                                                                               |  |                        | 153,595    |   |                       |   |       |                                  |  |              |        |  |                                    |           |   |                                |   | 153,595    |                                       |  |              | 175,760    |   |                                             |   |       |  |   |           |   |  |   | 329,355    |  
|Property and equipment, net                                                                             |  |                        | 379,612    |   |                       |   | 56,557 |                                  |  |              |        |  |                                    |           |   |                                |   | 436,169    |                                       |  |              |           |   |                                             |   | 30,263 |  |   | (5,099     | ) |  |   | 461,333    |  
|Investment in subsidiary/affiliates                                                                     |  |                        | 743,231    |   |                       |   |       |                                  |  |              |        |  |                                    | (743,231   | ) |                                |   |           |                                       |  |              | 84,575     |   |                                             |   |       |  |   | (84,575    | ) |  |   |           |  
|DARS license & intangibles, net                                                                         |  |                        | 7,164      |   |                       |   |       |                                  |  |              | 141,227 |  |                                    |           |   |                                |   | 148,391    |                                       |  |              |           |   |                                             |   |       |  |   |           |   |  |   | 148,391    |  
|Related party prepaid expenses                                                                          |  |                        | 25,901     |   |                       |   |       |                                  |  |              |        |  |                                    |           |   |                                |   | 25,901     |                                       |  |              |           |   |                                             |   |       |  |   |           |   |  |   | 25,901     |  
|Deferred financing costs, prepaid and other assets, net of accumulated amortization and current portion |  |                        | 38,439     |   |                       |   |       |                                  |  |              |        |  |                                    |           |   |                                |   | 38,439     |                                       |  |              | 7,355      |   |                                             |   | 3,521  |  |   | (1,315     | ) |  |   | 48,000     |  
|                                                                                                        |  |                        |            |   |                       |   |        |                                  |  |              |         |  |                                    |            |   |                                |   |            |                                       |  |              |            |   |                                             |   |        |  |   |            |   |  |   |            |  
|Total assets                                                                                            |  | $                      | 1,640,262  |   |                       | $ | 93,467 |                                  |  | $            | 702,519 |  | $                                  | (1,343,932 | ) |                                | $ | 1,092,316  |                                       |  | $            | 775,674    |   |                                             | $ | 47,768 |  | $ | (94,123    | ) |  | $ | 1,821,635  |  
|                                                                                                        |  |                        |            |   |                       |   |        |                                  |  |              |         |  |                                    |            |   |                                |   |            |                                       |  |              |            |   |                                             |   |        |  |   |            |   |  |   |            |  
|Current liabilities:                                                                                    |  |                        |            |   |                       |   |        |                                  |  |              |         |  |                                    |            |   |                                |   |            |                                       |  |              |            |   |                                             |   |        |  |   |            |   |  |   |            |  
|Current portion of long-term debt                                                                       |  | $                      | 6,148      |   |                       | $ |       |                                  |  | $            |        |  | $                                  |           |   |                                | $ | 6,148      |                                       |  | $            |           |   |                                             | $ | 408    |  | $ |           |   |  | $ | 6,556      |  
|Accounts payable                                                                                        |  |                        | 59,155     |   |                       |   |       |                                  |  |              |        |  |                                    |           |   |                                |   | 59,155     |                                       |  |              | 731        |   |                                             |   | 100    |  |   |           |   |  |   | 59,986     |  
|Accrued expenses                                                                                        |  |                        | 86,041     |   |                       |   | 155    |                                  |  |              |        |  |                                    |           |   |                                |   | 86,196     |                                       |  |              | 22         |   |                                             |   | 182    |  |   | (441       | ) |  |   | 85,959     |  
|Accrued XM-4 liability                                                                                  |  |                        |           |   |                       |   |       |                                  |  |              |        |  |                                    |           |   |                                |   |           |                                       |  |              | 100,100    |   |                                             |   |       |  |   |           |   |  |   | 100,100    |  
|Accrued network optimization expenses                                                                   |  |                        | 2,148      |   |                       |   |       |                                  |  |              |        |  |                                    |           |   |                                |   | 2,148      |                                       |  |              |           |   |                                             |   |       |  |   |           |   |  |   | 2,148      |  
|Due to subsidiaries/affiliates                                                                          |  |                        | 575,418    |   |                       |   | 1,385  |                                  |  |              | 23,878  |  |                                    | (600,681   | ) |                                |   |           |                                       |  |              | 1,628      |   |                                             |   | 358    |  |   | (1,986     | ) |  |   |           |  
|Due to related parties                                                                                  |  |                        | 27,610     |   |                       |   |       |                                  |  |              |        |  |                                    |           |   |                                |   | 27,610     |                                       |  |              |           |   |                                             |   |       |  |   |           |   |  |   | 27,610     |  
|Accrued interest                                                                                        |  |                        | 5,552      |   |                       |   |       |                                  |  |              |        |  |                                    |           |   |                                |   | 5,552      |                                       |  |              | 8,427      |   |                                             |   | 167    |  |   |           |   |  |   | 14,146     |  
|Deferred revenue                                                                                        |  |                        | 114,951    |   |                       |   |       |                                  |  |              |        |  |                                    |           |   |                                |   | 114,951    |                                       |  |              |           |   |                                             |   |       |  |   |           |   |  |   | 114,951    |  
|                                                                                                        |  |                        |            |   |                       |   |        |                                  |  |              |         |  |                                    |            |   |                                |   |            |                                       |  |              |            |   |                                             |   |        |  |   |            |   |  |   |            |  
|Total current liabilities                                                                               |  | $                      | 877,023    |   |                       | $ | 1,540  |                                  |  | $            | 23,878  |  | $                                  | (600,681   | ) |                                | $ | 301,760    |                                       |  | $            | 110,908    |   |                                             | $ | 1,215  |  | $ | (2,427     | ) |  | $ | 411,456    |  
|Long term debt, net of current portion                                                                  |  |                        | 615,943    |   |                       |   |       |                                  |  |              |        |  |                                    |           |   |                                |   | 615,943    |                                       |  |              | 300,000    |   |                                             |   | 32,798 |  |   |           |   |  |   | 948,741    |  
|Due to related parties, net of current portion                                                          |  |                        | 38,911     |   |                       |   |       |                                  |  |              |        |  |                                    |           |   |                                |   | 38,911     |                                       |  |              |           |   |                                             |   |       |  |   |           |   |  |   | 38,911     |  
|Deferred revenue, net of current portion                                                                |  |                        | 37,396     |   |                       |   |       |                                  |  |              |        |  |                                    |           |   |                                |   | 37,396     |                                       |  |              |           |   |                                             |   |       |  |   |           |   |  |   | 37,396     |  
|Other non-current liabilities                                                                           |  |                        | 27,407     |   |                       |   |       |                                  |  |              | 27,317  |  |                                    |           |   |                                |   | 54,724     |                                       |  |              | 28,603     |   |                                             |   |       |  |   | (34,359    | ) |  |   | 48,968     |  
|                                                                                                        |  |                        |            |   |                       |   |        |                                  |  |              |         |  |                                    |            |   |                                |   |            |                                       |  |              |            |   |                                             |   |        |  |   |            |   |  |   |            |  
|Total liabilities                                                                                       |  | $                      | 1,596,680  |   |                       | $ | 1,540  |                                  |  | $            | 51,195  |  | $                                  | (600,681   | ) |                                | $ | 1,048,734  |                                       |  | $            | 439,511    |   |                                             | $ | 34,013 |  | $ | (36,786    | ) |  | $ | 1,485,472  |  
|Stockholders equity:                                                                                   |  |                        |            |   |                       |   |        |                                  |  |              |         |  |                                    |            |   |                                |   |            |                                       |  |              |            |   |                                             |   |        |  |   |            |   |  |   |            |  
|Capital stock                                                                                           |  |                        |           |   |                       |   |       |                                  |  |              |        |  |                                    |           |   |                                |   |           |                                       |  |              | 2,142      |   |                                             |   |       |  |   |           |   |  |   | 2,142      |  
|Paid in capital                                                                                         |  |                        | 2,158,402  |   |                       |   | 97,018 |                                  |  |              | 433,036 |  |                                    | (530,054   | ) |                                |   | 2,158,402  |                                       |  |              | 2,446,910  |   |                                             |   | 2,289  |  |   | (2,160,691 | ) |  |   | 2,446,910  |  
|Retained earnings                                                                                       |  |                        | (2,114,820 | ) |                       |   | (5,091 | )                                |  |              | 218,288 |  |                                    | (213,197   | ) |                                |   | (2,114,820 | )                                     |  |              | (2,112,889 | ) |                                             |   | 11,466 |  |   | 2,103,354  |   |  |   | (2,112,889 | )
|                                                                                                        |  |                        |            |   |                       |   |        |                                  |  |              |         |  |                                    |            |   |                                |   |            |                                       |  |              |            |   |                                             |   |        |  |   |            |   |  |   |            |  
|                                                                                                        |  | $                      | 43,582     |   |                       | $ | 91,927 |                                  |  | $            | 651,324 |  | $                                  | (743,251   | ) |                                | $ | 43,582     |                                       |  | $            | 336,163    |   |                                             | $ | 13,755 |  | $ | (57,337    | ) |  | $ | 336,163    |  
|                                                                                                        |  |                        |            |   |                       |   |        |                                  |  |              |         |  |                                    |            |   |                                |   |            |                                       |  |              |            |   |                                             |   |        |  |   |            |   |  |   |            |  
|Total liabilities and stockholders equity                                                              |  | $                      | 1,640,262  |   |                       | $ | 93,467 |                                  |  | $            | 702,519 |  | $                                  | (1,343,932 | ) |                                | $ | 1,092,316  |                                       |  | $            | 775,674    |   |                                             | $ | 47,768 |  | $ | (94,123    | ) |  | $ | 1,821,635  |  
|                                                                                                        |  |                        |            |   |                       |   |        |                                  |  |              |         |  |                                    |            |   |                                |   |            |                                       |  |              |            |   |                                             |   |        |  |   |            |   |  |   |            |  



(certain totals may not
add due to the effects of rounding)



F-35



---

##### Table of Contents

##### Index to Financial Statements

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES



CONDENSED CONSOLIDATING BALANCE SHEET



AS OF DECEMBER 31, 2003

(IN THOUSANDS)



|                                                                                                        |  |                        |            |   |                       |   |        |                                 |  |              |         |  |                                    |            |   |                                |   |            |                                     |  |   |              |   |  |                                           |        |   |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | - | --------------------- | - | ------ | ------------------------------- |  | ------------ | ------- |  | ---------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ----------------------------------- |  | - | ------------ | - |  | ----------------------------------------- | ------ | - |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                        |  | XM SatelliteRadio Inc. |            |   | XMEquipmentLeasingLLC |   |        | XMSR Non- guarantorSubsidiaries |  | Eliminations |         |  | ConsolidatedXM SatelliteRadio Inc. |            |   | XM SatelliteRadioHoldings Inc. |   |            | XMHoldingsNon-guarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedXM SatelliteRadioHoldingsInc. |       
|Current assets:                                                                                         |  |                        |            |   |                       |   |        |                                 |  |              |         |  |                                    |            |   |                                |   |            |                                     |  |   |              |   |  |                                           |        |   |  |   |            |   |  |   |            |  
|Cash and cash equivalents                                                                               |  | $                      | 90,234     |   |                       | $ |       |                                 |  | $            |        |  | $                                  | (15        | ) |                                | $ | 90,219     |                                     |  | $ | 326,349      |   |  | $                                         | 1,739  |   |  | $ |           |   |  | $ | 418,307    |  
|Restricted investments                                                                                  |  |                        | 116        |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   | 116        |                                     |  |   |             |   |  |                                           |       |   |  |   |           |   |  |   | 116        |  
|Accounts receivable, net                                                                                |  |                        | 13,080     |   |                       |   |       |                                 |  |              | 80      |  |                                    |           |   |                                |   | 13,160     |                                     |  |   |             |   |  |                                           |       |   |  |   |           |   |  |   | 13,160     |  
|Due from subsidiaries / affiliates                                                                      |  |                        | 102,150    |   |                       |   | 25,239 |                                 |  |              | 465,701 |  |                                    | (497,397   | ) |                                |   | 95,693     |                                     |  |   | 428          |   |  |                                           | 4,230  |   |  |   | (100,351   | ) |  |   |           |  
|Due from related parties                                                                                |  |                        | 5,176      |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   | 5,176      |                                     |  |   |             |   |  |                                           |       |   |  |   |           |   |  |   | 5,176      |  
|Prepaid and other current assets                                                                        |  |                        | 39,820     |   |                       |   |       |                                 |  |              | 658     |  |                                    |           |   |                                |   | 40,478     |                                     |  |   | 1,190        |   |  |                                           | 135    |   |  |   |           |   |  |   | 41,803     |  
|                                                                                                        |  |                        |            |   |                       |   |        |                                 |  |              |         |  |                                    |            |   |                                |   |            |                                     |  |   |              |   |  |                                           |        |   |  |   |            |   |  |   |            |  
|Total current assets                                                                                    |  | $                      | 250,576    |   |                       | $ | 25,239 |                                 |  | $            | 466,439 |  | $                                  | (497,412   | ) |                                | $ | 244,842    |                                     |  | $ | 327,967      |   |  | $                                         | 6,104  |   |  | $ | (100,351   | ) |  | $ | 478,562    |  
|Restricted investments, net of current portion                                                          |  |                        | 375        |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   | 375        |                                     |  |   |             |   |  |                                           | 3,660  |   |  |   |           |   |  |   | 4,035      |  
|System under construction                                                                               |  |                        | 22,058     |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   | 22,058     |                                     |  |   | 70,519       |   |  |                                           |       |   |  |   |           |   |  |   | 92,577     |  
|Property and equipment, net                                                                             |  |                        | 612,428    |   |                       |   | 70,569 |                                 |  |              |        |  |                                    |           |   |                                |   | 682,997    |                                     |  |   |             |   |  |                                           | 31,603 |   |  |   | (5,099     | ) |  |   | 709,501    |  
|Investment in subsidiary/affiliates                                                                     |  |                        | 679,447    |   |                       |   |       |                                 |  |              |        |  |                                    | (679,447   | ) |                                |   |           |                                     |  |   | 238,820      |   |  |                                           |       |   |  |   | (238,820   | ) |  |   |           |  
|DARS license & intangibles, net                                                                         |  |                        | 8,429      |   |                       |   |       |                                 |  |              | 141,200 |  |                                    |           |   |                                |   | 149,629    |                                     |  |   |             |   |  |                                           |       |   |  |   |           |   |  |   | 149,629    |  
|Related party prepaid expenses                                                                          |  |                        | 44,521     |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   | 44,521     |                                     |  |   |             |   |  |                                           |        |   |  |   |            |   |  |   | 44,521     |  
|Deferred financing costs, prepaid and other assets, net of accumulated amortization and current portion |  |                        | 45,274     |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   | 45,274     |                                     |  |   | 957          |   |  |                                           | 1,756  |   |  |   | (30        | ) |  |   | 47,957     |  
|                                                                                                        |  |                        |            |   |                       |   |        |                                 |  |              |         |  |                                    |            |   |                                |   |            |                                     |  |   |              |   |  |                                           |        |   |  |   |            |   |  |   |            |  
|Total assets                                                                                            |  | $                      | 1,663,108  |   |                       | $ | 95,808 |                                 |  | $            | 607,639 |  | $                                  | (1,176,859 | ) |                                | $ | 1,189,696  |                                     |  | $ | 638,263      |   |  | $                                         | 43,123 |   |  | $ | (344,300   | ) |  | $ | 1,526,782  |  
|                                                                                                        |  |                        |            |   |                       |   |        |                                 |  |              |         |  |                                    |            |   |                                |   |            |                                     |  |   |              |   |  |                                           |        |   |  |   |            |   |  |   |            |  
|Current liabilities:                                                                                    |  |                        |            |   |                       |   |        |                                 |  |              |         |  |                                    |            |   |                                |   |            |                                     |  |   |              |   |  |                                           |        |   |  |   |            |   |  |   |            |  
|Current portion of long-term debt                                                                       |  | $                      | 3,249      |   |                       | $ |       |                                 |  | $            |        |  | $                                  |           |   |                                | $ | 3,249      |                                     |  | $ | 35,000       |   |  | $                                         | 437    |   |  | $ |           |   |  | $ | 38,686     |  
|Accounts payable                                                                                        |  |                        | 513,350    |   |                       | $ | 940    |                                 |  |              | 22,871  |  |                                    | (497,377   | ) |                                |   | 39,784     |                                     |  |   | 200          |   |  |                                           | 449    |   |  |   | (4,660     | ) |  |   | 35,773     |  
|Accrued expenses                                                                                        |  |                        | 57,358     |   |                       |   | 169    |                                 |  |              |        |  |                                    | (15        | ) |                                |   | 57,512     |                                     |  |   | 16           |   |  |                                           | 207    |   |  |   | (441       | ) |  |   | 57,293     |  
|Accrued network optimization expenses                                                                   |  |                        | 4,136      |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   | 4,136      |                                     |  |   |             |   |  |                                           |       |   |  |   |           |   |  |   | 4,136      |  
|Due to related parties                                                                                  |  |                        | 2,103      |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   | 2,103      |                                     |  |   |             |   |  |                                           |       |   |  |   |           |   |  |   | 2,103      |  
|Accrued interest                                                                                        |  |                        | 3,070      |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   | 3,070      |                                     |  |   | 2,157        |   |  |                                           | 200    |   |  |   |           |   |  |   | 5,427      |  
|Deferred revenue                                                                                        |  |                        | 39,722     |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   | 39,722     |                                     |  |   |             |   |  |                                           |       |   |  |   |           |   |  |   | 39,722     |  
|                                                                                                        |  |                        |            |   |                       |   |        |                                 |  |              |         |  |                                    |            |   |                                |   |            |                                     |  |   |              |   |  |                                           |        |   |  |   |            |   |  |   |            |  
|Total current liabilities                                                                               |  | $                      | 622,988    |   |                       | $ | 1,109  |                                 |  | $            | 22,871  |  | $                                  | (497,392   | ) |                                | $ | 149,576    |                                     |  | $ | 37,373       |   |  | $                                         | 1,293  |   |  | $ | (5,101     | ) |  | $ | 183,140    |  
|Related party long term debt, net of current portion                                                    |  |                        | 141,891    |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   | 141,891    |                                     |  |   |             |   |  |                                           |       |   |  |   |           |   |  |   | 141,891    |  
|Long term debt, net of current portion                                                                  |  |                        | 527,944    |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   | 527,944    |                                     |  |   | 45,703       |   |  |                                           | 27,716 |   |  |   |           |   |  |   | 601,363    |  
|Due to related parties, net of current portion                                                          |  |                        | 23,921     |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   | 23,921     |                                     |  |   |             |   |  |                                           |       |   |  |   |           |   |  |   | 23,921     |  
|Deferred revenue, net of current portion                                                                |  |                        | 14,162     |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   | 14,162     |                                     |  |   |             |   |  |                                           |       |   |  |   |           |   |  |   | 14,162     |  
|Other non-current liabilities                                                                           |  |                        | 13,120     |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   | 13,120     |                                     |  |   | 22,300       |   |  |                                           | (1,315 | ) |  |   | (4,688     | ) |  |   | 29,417     |  
|                                                                                                        |  |                        |            |   |                       |   |        |                                 |  |              |         |  |                                    |            |   |                                |   |            |                                     |  |   |              |   |  |                                           |        |   |  |   |            |   |  |   |            |  
|Total liabilities                                                                                       |  | $                      | 1,344,026  |   |                       | $ | 1,109  |                                 |  | $            | 22,871  |  | $                                  | (497,392   | ) |                                | $ | 870,614    |                                     |  | $ | 105,376      |   |  | $                                         | 27,694 |   |  | $ | (9,789     | ) |  | $ | 993,894    |  
|Stockholders equity:                                                                                   |  |                        |            |   |                       |   |        |                                 |  |              |         |  |                                    |            |   |                                |   |            |                                     |  |   |              |   |  |                                           |        |   |  |   |            |   |  |   |            |  
|Capital stock                                                                                           |  |                        |           |   |                       |   |       |                                 |  |              |        |  |                                    |           |   |                                |   |           |                                     |  |   | 1,721        |   |  |                                           |       |   |  |   |           |   |  |   | 1,721      |  
|Paid in capital                                                                                         |  |                        | 1,783,869  |   |                       |   | 97,018 |                                 |  |              | 433,036 |  |                                    | (530,054   | ) |                                |   | 1,783,869  |                                     |  |   | 2,001,687    |   |  |                                           | 8,354  |   |  |   | (1,792,223 | ) |  |   | 2,001,688  |  
|Retained earnings                                                                                       |  |                        | (1,464,787 | ) |                       |   | (2,319 | )                               |  |              | 151,732 |  |                                    | (149,413   | ) |                                |   | (1,464,787 | )                                   |  |   | (1,470,521   | ) |  |                                           | 7,075  |   |  |   | 1,457,712  |   |  |   | (1,470,521 | )
|                                                                                                        |  |                        |            |   |                       |   |        |                                 |  |              |         |  |                                    |            |   |                                |   |            |                                     |  |   |              |   |  |                                           |        |   |  |   |            |   |  |   |            |  
|                                                                                                        |  | $                      | 319,082    |   |                       | $ | 94,699 |                                 |  | $            | 584,768 |  | $                                  | (679,467   | ) |                                | $ | 319,082    |                                     |  | $ | 532,887      |   |  | $                                         | 15,429 |   |  | $ | (334,511   | ) |  | $ | 532,888    |  
|                                                                                                        |  |                        |            |   |                       |   |        |                                 |  |              |         |  |                                    |            |   |                                |   |            |                                     |  |   |              |   |  |                                           |        |   |  |   |            |   |  |   |            |  
|Total liabilities and stockholders equity                                                              |  | $                      | 1,663,108  |   |                       | $ | 95,808 |                                 |  | $            | 607,639 |  | $                                  | (1,176,859 | ) |                                | $ | 1,189,696  |                                     |  | $ | 638,263      |   |  | $                                         | 43,123 |   |  | $ | (344,300   | ) |  | $ | 1,526,782  |  
|                                                                                                        |  |                        |            |   |                       |   |        |                                 |  |              |         |  |                                    |            |   |                                |   |            |                                     |  |   |              |   |  |                                           |        |   |  |   |            |   |  |   |            |  



(certain totals may not
add due to the effects of rounding)



F-36



---

##### Table of Contents

##### Index to Financial Statements

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES



CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS



FOR THE YEAR ENDED DECEMBER 31, 2004

(IN THOUSANDS)



|                                      |  |                        |          |   |                       |   |        |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|------------------------------------- |  | ---------------------- | -------- | - | --------------------- | - | ------ | -------------------------------- |  | - | ------------ | - |  | ---------------------------------- | ------- | - | ---------------------------- | - | -------- | ------------------------------------- |  | - | ------------ | - |  | ------------------------------------------ | ----- | - |  | - | ------- | - |  | - | -------- | -
|                                      |  | XM SatelliteRadio Inc. |          |   | XMEquipmentLeasingLLC |   |        | XMSR Non- guarantor Subsidiaries |  |   | Eliminations |   |  | ConsolidatedXM SatelliteRadio Inc. |         |   | XMSatelliteRadioHoldingsInc. |   |          | XMHoldings Non- guarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated XM SatelliteRadioHoldingsInc. |      
|Revenue                               |  | $                      | 244,443  |   |                       | $ | 10,513 |                                  |  | $ | 35,448       |   |  | $                                  | (45,961 | ) |                              | $ | 244,443  |                                       |  | $ |             |   |  | $                                          | 8,189 |   |  | $ | (8,189  | ) |  | $ | 244,443  |  
|Operating expenses:                   |  |                        |          |   |                       |   |        |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|Cost of revenue                       |  | $                      | 204,787  |   |                       | $ | 31     |                                  |  | $ |             |   |  | $                                  | 444     |   |                              | $ | 205,262  |                                       |  | $ |             |   |  | $                                          | 2,075 |   |  | $ | (5,402  | ) |  | $ | 201,935  |  
|Research & development                |  |                        | 23,513   |   |                       |   |       |                                  |  |   |             |   |  |                                    |        |   |                              |   | 23,513   |                                       |  |   |             |   |  |                                            |      |   |  |   |        |   |  |   | 23,513   |  
|General & administrative              |  |                        | 28,366   |   |                       |   |       |                                  |  |   |             |   |  |                                    |        |   |                              |   | 28,366   |                                       |  |   | 497          |   |  |                                            | 120   |   |  |   | (428    | ) |  |   | 28,555   |  
|Marketing                             |  |                        | 304,316  |   |                       |   |       |                                  |  |   |             |   |  |                                    |        |   |                              |   | 304,316  |                                       |  |   |             |   |  |                                            |      |   |  |   |        |   |  |   | 304,316  |  
|Depreciation & amortization           |  |                        | 131,902  |   |                       |   | 13,873 |                                  |  |   |             |   |  |                                    |        |   |                              |   | 145,775  |                                       |  |   |             |   |  |                                            | 1,390 |   |  |   |        |   |  |   | 147,165  |  
|                                      |  |                        |          |   |                       |   |        |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|Total operating expenses              |  | $                      | 692,884  |   |                       | $ | 13,904 |                                  |  | $ |             |   |  | $                                  | 444     |   |                              | $ | 707,232  |                                       |  | $ | 497          |   |  | $                                          | 3,585 |   |  | $ | (5,830  | ) |  | $ | 705,484  |  
|                                      |  |                        |          |   |                       |   |        |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|Operating income (loss)               |  | $                      | (448,441 | ) |                       | $ | (3,391 | )                                |  | $ | 35,448       |   |  | $                                  | (46,405 | ) |                              | $ | (462,789 | )                                     |  | $ | (497         | ) |  | $                                          | 4,604 |   |  | $ | (2,359  | ) |  | $ | (461,041 | )
|Other income (expense):               |  |                        |          |   |                       |   |        |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|Interest income                       |  | $                      | 1,592    |   |                       | $ | 571    |                                  |  | $ | 58,995       |   |  | $                                  | (59,566 | ) |                              | $ | 1,592    |                                       |  | $ | 4,543        |   |  | $                                          | 104   |   |  | $ |        |   |  | $ | 6,239    |  
|Interest expense                      |  |                        | (143,909 | ) |                       |   |       |                                  |  |   | (571         | ) |  |                                    | 59,566  |   |                              |   | (84,914  | )                                     |  |   | (556         | ) |  |                                            | (318  | ) |  |   | 31      |   |  |   | (85,757  | )
|Loss from deleveraging transactions   |  |                        | (76,621  | ) |                       |   |       |                                  |  |   |             |   |  |                                    |        |   |                              |   | (76,621  | )                                     |  |   |             |   |  |                                            |      |   |  |   |        |   |  |   | (76,621  | )
|Other income (expense)                |  |                        | 17,346   |   |                       |   | 48     |                                  |  |   |             |   |  |                                    | (17,378 | ) |                              |   | 16       |                                       |  |   | (645,858     | ) |  |                                            |      |   |  |   | 647,971 |   |  |   | 2,129    |  
|                                      |  |                        |          |   |                       |   |        |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|Net income (loss) before income taxes |  |                        | (650,033 | ) |                       |   | (2,772 | )                                |  |   | 93,872       |   |  |                                    | (63,783 | ) |                              |   | (622,716 | )                                     |  |   | (642,368     | ) |  |                                            | 4,390 |   |  |   | 645,643 |   |  |   | (615,051 | )
|Provision for deferred income taxes   |  |                        |         |   |                       |   |       |                                  |  |   | (27,317      | ) |  |                                    |        |   |                              |   | (27,317  | )                                     |  |   |             |   |  |                                            |      |   |  |   |        |   |  |   | (27,317  | )
|                                      |  |                        |          |   |                       |   |        |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|Net income (loss)                     |  | $                      | (650,033 | ) |                       | $ | (2,772 | )                                |  | $ | 66,555       |   |  | $                                  | (63,783 | ) |                              | $ | (650,033 | )                                     |  | $ | (642,368     | ) |  | $                                          | 4,390 |   |  | $ | 645,643 |   |  | $ | (642,368 | )
|                                      |  |                        |          |   |                       |   |        |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  



(certain totals may not
add due to the effects of rounding)



F-37



---

##### Table of Contents

##### Index to Financial Statements

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES



CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS



FOR THE YEAR ENDED DECEMBER 31, 2003

(IN THOUSANDS)



|                                    |  |                        |          |   |                       |   |        |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                       |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  
|----------------------------------- |  | ---------------------- | -------- | - | --------------------- | - | ------ | -------------------------------- |  | - | ------------ | - |  | ---------------------------------- | ------- | - | ---------------------------- | - | -------- | ------------------------------------- |  | - | ------------ | - |  | ------------------------------------------ | ------ | - |  | - | ------- | - |  | - | -------- | -
|                                    |  | XM SatelliteRadio Inc. |          |   | XMEquipmentLeasingLLC |   |        | XMSR Non- guarantor Subsidiaries |  |   | Eliminations |   |  | ConsolidatedXM SatelliteRadio Inc. |         |   | XMSatelliteRadioHoldingsInc. |   |          | XMHoldings Non- guarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated XM SatelliteRadioHoldingsInc. |       
|Revenue                             |  | $                      | 91,359   |   |                       | $ | 10,442 |                                  |  | $ | 12,846       |   |  | $                                  | (22,866 | ) |                              | $ | 91,781   |                                       |  | $ |             |   |  | $                                          | 7,305  |   |  | $ | (7,305  | ) |  | $ | 91,781   |  
|Operating expenses:                 |  |                        |          |   |                       |   |        |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                       |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  
|Cost of revenue                     |  | $                      | 149,581  |   |                       | $ | 40     |                                  |  | $ | 688          |   |  | $                                  | 464     |   |                              | $ | 150,773  |                                       |  | $ |             |   |  | $                                          | 1,865  |   |  | $ | (4,686  | ) |  | $ | 147,952  |  
|Research & development              |  |                        | 12,285   |   |                       |   |       |                                  |  |   |             |   |  |                                    |        |   |                              |   | 12,285   |                                       |  |   |             |   |  |                                            |       |   |  |   |        |   |  |   | 12,285   |  
|General & administrative            |  |                        | 27,822   |   |                       |   |       |                                  |  |   |             |   |  |                                    |        |   |                              |   | 27,822   |                                       |  |   |             |   |  |                                            | 136    |   |  |   | (540    | ) |  |   | 27,418   |  
|Marketing                           |  |                        | 200,264  |   |                       |   |       |                                  |  |   | 3            |   |  |                                    |        |   |                              |   | 200,267  |                                       |  |   |             |   |  |                                            |       |   |  |   |        |   |  |   | 200,267  |  
|Depreciation & amortization         |  |                        | 142,856  |   |                       |   | 14,071 |                                  |  |   |             |   |  |                                    |        |   |                              |   | 156,927  |                                       |  |   |             |   |  |                                            | 1,390  |   |  |   |        |   |  |   | 158,317  |  
|                                    |  |                        |          |   |                       |   |        |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                       |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  
|Total operating expenses            |  | $                      | 532,808  |   |                       | $ | 14,111 |                                  |  | $ | 691          |   |  | $                                  | 464     |   |                              | $ | 548,074  |                                       |  | $ |             |   |  | $                                          | 3,391  |   |  | $ | (5,226  | ) |  | $ | 546,239  |  
|                                    |  |                        |          |   |                       |   |        |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                       |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  
|Operating income (loss)             |  | $                      | (441,449 | ) |                       | $ | (3,669 | )                                |  | $ | 12,155       |   |  | $                                  | (23,330 | ) |                              | $ | (456,293 | )                                     |  | $ |             |   |  | $                                          | 3,914  |   |  | $ | (2,079  | ) |  | $ | (454,458 | )
|Other income (expense)              |  |                        |          |   |                       |   |        |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                       |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  
|Interest income                     |  | $                      | 794      |   |                       | $ | 411    |                                  |  | $ | 58,593       |   |  | $                                  | (59,004 | ) |                              | $ | 794      |                                       |  | $ | 2,150        |   |  | $                                          | 122    |   |  | $ |        |   |  | $ | 3,066    |  
|Interest expense                    |  |                        | (162,843 | ) |                       |   |       |                                  |  |   | (411         | ) |  |                                    | 59,004  |   |                              |   | (104,250 | )                                     |  |   | (4,423       | ) |  |                                            | (1,676 | ) |  |   |        |   |  |   | (110,349 | )
|Loss from deleveraging transactions |  |                        | (29,731  | ) |                       |   |       |                                  |  |   |             |   |  |                                    |        |   |                              |   | (29,731  | )                                     |  |   | 4,982        |   |  |                                            |       |   |  |   |        |   |  |   | (24,749  | )
|Other income (expense)              |  |                        | 43,470   |   |                       |   | 29     |                                  |  |   | (13          | ) |  |                                    | (43,765 | ) |                              |   | (279     | )                                     |  |   | (587,244     | ) |  |                                            | 49     |   |  |   | 589,429 |   |  |   | 1,955    |  
|                                    |  |                        |          |   |                       |   |        |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                       |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  
|Net income (loss)                   |  | $                      | (589,759 | ) |                       | $ | (3,229 | )                                |  | $ | 70,324       |   |  | $                                  | (67,095 | ) |                              | $ | (589,759 | )                                     |  | $ | (584,535     | ) |  | $                                          | 2,409  |   |  | $ | 587,350 |   |  | $ | (584,535 | )
|                                    |  |                        |          |   |                       |   |        |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                       |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  



(certain totals may not
add due to the effects of rounding)



F-38



---

##### Table of Contents

##### Index to Financial Statements

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES



CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS



FOR THE YEAR ENDED DECEMBER 31, 2002

(IN THOUSANDS)



|                            |  |                       |          |   |                       |   |        |                                |  |   |              |   |  |                                    |         |   |                              |   |          |                                     |  |   |              |   |  |                                           |        |   |  |   |         |   |  |   |          |  
|--------------------------- |  | --------------------- | -------- | - | --------------------- | - | ------ | ------------------------------ |  | - | ------------ | - |  | ---------------------------------- | ------- | - | ---------------------------- | - | -------- | ----------------------------------- |  | - | ------------ | - |  | ----------------------------------------- | ------ | - |  | - | ------- | - |  | - | -------- | -
|                            |  | XMSatelliteRadio Inc. |          |   | XMEquipmentLeasingLLC |   |        | XMSRNon- guarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedXM SatelliteRadio Inc. |         |   | XMSatelliteRadioHoldingsInc. |   |          | XMHoldingsNon-guarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedXM SatelliteRadioHoldingsInc. |       
|Revenue                     |  | $                     | 19,424   |   |                       | $ | 9,802  |                                |  | $ | 3,703        |   |  | $                                  | (12,748 | ) |                              | $ | 20,181   |                                     |  | $ |             |   |  | $                                         | 7,337  |   |  | $ | (7,337  | ) |  | $ | 20,181   |  
|Operating expenses:         |  |                       |          |   |                       |   |        |                                |  |   |              |   |  |                                    |         |   |                              |   |          |                                     |  |   |              |   |  |                                           |        |   |  |   |         |   |  |   |          |  
|Cost of revenue             |  | $                     | 137,460  |   |                       | $ | 151    |                                |  | $ | 1,692        |   |  | $                                  | (12,748 | ) |                              | $ | 126,555  |                                     |  | $ |             |   |  | $                                         | 533    |   |  | $ | (4,632  | ) |  | $ | 122,456  |  
|Research & development      |  |                       | 10,843   |   |                       |   |       |                                |  |   |             |   |  |                                    |        |   |                              |   | 10,843   |                                     |  |   |             |   |  |                                           |       |   |  |   |        |   |  |   | 10,843   |  
|General & administrative    |  |                       | 27,777   |   |                       |   |       |                                |  |   |             |   |  |                                    |        |   |                              |   | 27,777   |                                     |  |   | 106          |   |  |                                           | 2      |   |  |   | (1,437  | ) |  |   | 26,448   |  
|Marketing                   |  |                       | 169,165  |   |                       |   |       |                                |  |   |             |   |  |                                    |        |   |                              |   | 169,165  |                                     |  |   |             |   |  |                                           |       |   |  |   |        |   |  |   | 169,165  |  
|Impairment of goodwill      |  |                       | 11,461   |   |                       |   |       |                                |  |   |             |   |  |                                    |        |   |                              |   | 11,461   |                                     |  |   |             |   |  |                                           |       |   |  |   |        |   |  |   | 11,461   |  
|Depreciation & amortization |  |                       | 104,634  |   |                       |   | 12,568 |                                |  |   |             |   |  |                                    |        |   |                              |   | 117,202  |                                     |  |   |             |   |  |                                           | 1,386  |   |  |   |        |   |  |   | 118,588  |  
|                            |  |                       |          |   |                       |   |        |                                |  |   |              |   |  |                                    |         |   |                              |   |          |                                     |  |   |              |   |  |                                           |        |   |  |   |         |   |  |   |          |  
|Total operating expenses    |  | $                     | 461,340  |   |                       | $ | 12,719 |                                |  | $ | 1,692        |   |  | $                                  | (12,748 | ) |                              | $ | 463,003  |                                     |  | $ | 106          |   |  | $                                         | 1,921  |   |  | $ | (6,069  | ) |  | $ | 458,961  |  
|                            |  |                       |          |   |                       |   |        |                                |  |   |              |   |  |                                    |         |   |                              |   |          |                                     |  |   |              |   |  |                                           |        |   |  |   |         |   |  |   |          |  
|Operating income (loss)     |  | $                     | (441,916 | ) |                       | $ | (2,917 | )                              |  | $ | 2,011        |   |  | $                                  |        |   |                              | $ | (442,822 | )                                   |  | $ | (106         | ) |  | $                                         | 5,416  |   |  | $ | (1,268  | ) |  | $ | (438,780 | )
|Other income (expense)      |  |                       |          |   |                       |   |        |                                |  |   |              |   |  |                                    |         |   |                              |   |          |                                     |  |   |              |   |  |                                           |        |   |  |   |         |   |  |   |          |  
|Interest income             |  | $                     | 2,427    |   |                       | $ | 252    |                                |  | $ | 52,989       |   |  | $                                  | (53,047 | ) |                              | $ | 2,621    |                                     |  | $ | 2,435        |   |  | $                                         | 55     |   |  | $ |        |   |  | $ | 5,111    |  
|Interest expense            |  |                       | (104,642 | ) |                       |   | (217   | )                              |  |   | (225         | ) |  |                                    | 53,047  |   |                              |   | (52,037  | )                                   |  |   | (8,888       | ) |  |                                           | (2,648 | ) |  |   |        |   |  |   | (63,573  | )
|Other income (expense)      |  |                       | 52,548   |   |                       |   | (62    | )                              |  |   | (91          | ) |  |                                    | (51,742 | ) |                              |   | 653      |                                     |  |   | (488,453     | ) |  |                                           | (639   | ) |  |   | 490,669 |   |  |   | 2,230    |  
|                            |  |                       |          |   |                       |   |        |                                |  |   |              |   |  |                                    |         |   |                              |   |          |                                     |  |   |              |   |  |                                           |        |   |  |   |         |   |  |   |          |  
|Net income (loss)           |  | $                     | (491,583 | ) |                       | $ | (2,944 | )                              |  | $ | 54,684       |   |  | $                                  | (51,742 | ) |                              | $ | (491,585 | )                                   |  | $ | (495,012     | ) |  | $                                         | 2,184  |   |  | $ | 489,401 |   |  | $ | (495,012 | )
|                            |  |                       |          |   |                       |   |        |                                |  |   |              |   |  |                                    |         |   |                              |   |          |                                     |  |   |              |   |  |                                           |        |   |  |   |         |   |  |   |          |  



(certain totals may not
add due to the effects of rounding)



F-39



---

##### Table of Contents

##### Index to Financial Statements

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES



CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS



FOR THE YEAR ENDED DECEMBER 31, 2004

(IN THOUSANDS)



|                                                            |  |                      |          |   |                       |   |                                  |  |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |                                            |   |         |   |  |   |   |  |   |          |  
|----------------------------------------------------------- |  | -------------------- | -------- | - | --------------------- | - | -------------------------------- |  | ------------ | - |  | ----------------------------------- | --- | - | ---------------------------- | - | -------- | ------------------------------------- |  | - | ------------ | - | ------------------------------------------ | - | ------- | - |  | - | - |  | - | -------- | -
|                                                            |  | XMSatelliteRadioInc. |          |   | XMEquipmentLeasingLLC |   | XMSR Non- guarantor Subsidiaries |  | Eliminations |   |  | Consolidated XM SatelliteRadio Inc. |     |   | XMSatelliteRadioHoldingsInc. |   |          | XMHoldings Non- guarantorSubsidiaries |  |   | Eliminations |   | Consolidated XM SatelliteRadioHoldingsInc. |  
|Net cash provided by (used in) operating activities         |  | $                    | (106,954 | ) |                       | $ | 47                               |  | $            |  |  | $                                   | 15  |   |                              | $ | (106,892 | )                                     |  | $ | 18,532       |   |                                            | $ | 2,808   |   |  | $ |  |  | $ | (85,552  | )
|                                                            |  |                      |          |   |                       |   |                                  |  |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |                                            |   |         |   |  |   |   |  |   |          |  
|Cash flows from investing activities:                       |  |                      |          |   |                       |   |                                  |  |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |                                            |   |         |   |  |   |   |  |   |          |  
|Purchase of property and equipment                          |  |                      | (25,912  | ) |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   | (25,912  | )                                     |  |   | (22          | ) |                                            |   |        |   |  |   |  |  |   | (25,934  | )
|Additions to system under construction                      |  |                      | (116,537 | ) |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   | (116,537 | )                                     |  |   | (27,441      | ) |                                            |   |        |   |  |   |  |  |   | (143,978 | )
|Net purchase/maturity of restricted investments             |  |                      | 119      |   |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   | 119      |                                       |  |   | (460         | ) |                                            |   |        |   |  |   |  |  |   | (341     | )
|Insurance proceeds from satellite recoveries                |  |                      | 133,924  |   |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   | 133,924  |                                       |  |   |             |   |                                            |   |        |   |  |   |  |  |   | 133,924  |  
|                                                            |  |                      |          |   |                       |   |                                  |  |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |                                            |   |         |   |  |   |   |  |   |          |  
|Net cash used in investing activities                       |  | $                    | (8,406   | ) |                       | $ |                                 |  | $            |  |  | $                                   |    |   |                              | $ | (8,406   | )                                     |  | $ | (27,923      | ) |                                            | $ |        |   |  | $ |  |  | $ | (36,329  | )
|                                                            |  |                      |          |   |                       |   |                                  |  |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |                                            |   |         |   |  |   |   |  |   |          |  
|Cash flows from financing activities:                       |  |                      |          |   |                       |   |                                  |  |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |                                            |   |         |   |  |   |   |  |   |          |  
|Proceeds from issuance of common stock                      |  |                      |         |   |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   |         |                                       |  |   | 236,835      |   |                                            |   |        |   |  |   |  |  |   | 236,835  |  
|Capital contribution from Holdings                          |  |                      | 304,846  |   |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   | 304,846  |                                       |  |   | (304,846     | ) |                                            |   |        |   |  |   |  |  |   |         |  
|Proceeds from issuance of floating rate discount notes      |  |                      | 200,000  |   |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   | 200,000  |                                       |  |   |             |   |                                            |   |        |   |  |   |  |  |   | 200,000  |  
|Proceeds from issuance of 1.75% convertible notes           |  |                      |         |   |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   |         |                                       |  |   | 300,000      |   |                                            |   |        |   |  |   |  |  |   | 300,000  |  
|Proceeds from refinancing of mortgage on corporate facility |  |                      |         |   |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   |         |                                       |  |   |             |   |                                            |   | 33,300  |   |  |   |  |  |   | 33,300   |  
|Repayment of 12% senior secured notes                       |  |                      | (70,000  | ) |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   | (70,000  | )                                     |  |   |             |   |                                            |   |        |   |  |   |  |  |   | (70,000  | )
|Repayment of 14% senior secured notes                       |  |                      | (13,028  | ) |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   | (13,028  | )                                     |  |   |             |   |                                            |   |        |   |  |   |  |  |   | (13,028  | )
|Repayment of related party long-term debt                   |  |                      | (81,194  | ) |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   | (81,194  | )                                     |  |   |             |   |                                            |   |        |   |  |   |  |  |   | (81,194  | )
|Repayment of loan                                           |  |                      |         |   |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   |         |                                       |  |   | (35,000      | ) |                                            |   |        |   |  |   |  |  |   | (35,000  | )
|Payments on related party facility                          |  |                      | (103,034 | ) |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   | (103,034 | )                                     |  |   |             |   |                                            |   |        |   |  |   |  |  |   | (103,034 | )
|Payments on other borrowings                                |  |                      | (5,174   | ) |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   | (5,174   | )                                     |  |   |             |   |                                            |   | (28,247 | ) |  |   |  |  |   | (33,421  | )
|Payments for deferred financing costs                       |  |                      | (4,816   | ) |                       |   |                                 |  |              |  |  |                                     |    |   |                              |   | (4,816   | )                                     |  |   | (7,697       | ) |                                            |   | (504    | ) |  |   |  |  |   | (13,017  | )
|                                                            |  |                      |          |   |                       |   |                                  |  |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |                                            |   |         |   |  |   |   |  |   |          |  
|Net cash provided by financing activities                   |  | $                    | 227,600  |   |                       | $ |                                 |  | $            |  |  | $                                   |    |   |                              | $ | 227,600  |                                       |  | $ | 189,292      |   |                                            | $ | 4,549   |   |  | $ |   |  | $ | 421,441  |  
|                                                            |  |                      |          |   |                       |   |                                  |  |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |                                            |   |         |   |  |   |   |  |   |          |  
|Net increase in cash and cash equivalents                   |  |                      | 112,240  |   |                       |   | 47                               |  |              |  |  |                                     | 15  |   |                              |   | 112,302  |                                       |  |   | 179,901      |   |                                            |   | 7,357   |   |  |   |  |  |   | 299,560  |  
|Cash and cash equivalents at beginning of period            |  |                      | 90,234   |   |                       |   |                                 |  |              |  |  |                                     | (15 | ) |                              |   | 90,219   |                                       |  |   | 326,349      |   |                                            |   | 1,739   |   |  |   |  |  |   | 418,307  |  
|                                                            |  |                      |          |   |                       |   |                                  |  |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |                                            |   |         |   |  |   |   |  |   |          |  
|Cash and cash equivalents at end of period                  |  | $                    | 202,474  |   |                       | $ | 47                               |  | $            |  |  | $                                   |    |   |                              | $ | 202,521  |                                       |  | $ | 506,250      |   |                                            | $ | 9,096   |   |  | $ |  |  | $ | 717,867  |  
|                                                            |  |                      |          |   |                       |   |                                  |  |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |                                            |   |         |   |  |   |   |  |   |          |  



(certain totals may not
add due to the effects of rounding)



F-40



---

##### Table of Contents

##### Index to Financial Statements

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES



CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS



FOR THE YEAR ENDED DECEMBER 31, 2003

(IN THOUSANDS)



|                                                     |  |                      |          |   |                       |   |      |                                  |  |   |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|---------------------------------------------------- |  | -------------------- | -------- | - | --------------------- | - | ---- | -------------------------------- |  | - | ------------ | - |  | ----------------------------------- | --- | - | ---------------------------- | - | -------- | ------------------------------------- |  | - | ------------ | - |  | ------------------------------------------ | ----- | - |  | - | ------- | - |  | - | -------- | -
|                                                     |  | XMSatelliteRadioInc. |          |   | XMEquipmentLeasingLLC |   |      | XMSR Non- guarantor Subsidiaries |  |   | Eliminations |   |  | Consolidated XM SatelliteRadio Inc. |     |   | XMSatelliteRadioHoldingsInc. |   |          | XMHoldings Non- guarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated XM SatelliteRadioHoldingsInc. |      
|Net cash provided by (used in) operating activities  |  | $                    | (220,878 | ) |                       | $ | (159 | )                                |  | $ | (219         | ) |  | $                                   | (15 | ) |                              | $ | (221,271 | )                                     |  | $ | (24,916      | ) |  | $                                          | 1,064 |   |  | $ |        |   |  | $ | (245,123 | )
|                                                     |  |                      |          |   |                       |   |      |                                  |  |   |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|Cash flows from investing activities:                |  |                      |          |   |                       |   |      |                                  |  |   |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|Purchase of property and equipment                   |  |                      | (15,663  | ) |                       |   |     |                                  |  |   |             |   |  |                                     |    |   |                              |   | (15,663  | )                                     |  |   |             |   |  |                                            | (22   | ) |  |   |        |   |  |   | (15,685  | )
|Additions to system under construction               |  |                      | (2,672   | ) |                       |   |     |                                  |  |   |             |   |  |                                     |    |   |                              |   | (2,672   | )                                     |  |   | (1,436       | ) |  |                                            |      |   |  |   |        |   |  |   | (4,108   | )
|Net purchase/maturity of restricted investments      |  |                      | 22,750   |   |                       |   |     |                                  |  |   |             |   |  |                                     |    |   |                              |   | 22,750   |                                       |  |   |             |   |  |                                            |      |   |  |   |        |   |  |   | 22,750   |  
|Other investing                                      |  |                      | 2,272    |   |                       |   |     |                                  |  |   |             |   |  |                                     |    |   |                              |   | 2,272    |                                       |  |   | (1,771       | ) |  |                                            | (605  | ) |  |   | 11,768  |   |  |   | 11,664   |  
|                                                     |  |                      |          |   |                       |   |      |                                  |  |   |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|Net cash provided by (used in) investing activities  |  | $                    | 6,687    |   |                       | $ |     |                                  |  | $ |             |   |  | $                                   |    |   |                              | $ | 6,687    |                                       |  | $ | (3,207       | ) |  | $                                          | (627  | ) |  | $ | 11,768  |   |  | $ | 14,621   |  
|                                                     |  |                      |          |   |                       |   |      |                                  |  |   |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|Cash flows from financing activities:                |  |                      |          |   |                       |   |      |                                  |  |   |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|Proceeds from sale of common stock                   |  |                      | 11,768   |   |                       |   |     |                                  |  |   |             |   |  |                                     |    |   |                              |   | 11,768   |                                       |  |   | 253,102      |   |  |                                            |      |   |  |   | (11,768 | ) |  |   | 253,102  |  
|Proceeds from issuance of 10% Note                   |  |                      | 108,132  |   |                       |   |     |                                  |  |   |             |   |  |                                     |    |   |                              |   | 108,132  |                                       |  |   | 101,868      |   |  |                                            |      |   |  |   |        |   |  |   | 210,000  |  
|Proceeds from issuance of 12% Note                   |  |                      | 185,000  |   |                       |   |     |                                  |  |   |             |   |  |                                     |    |   |                              |   | 185,000  |                                       |  |   |             |   |  |                                            |      |   |  |   |        |   |  |   | 185,000  |  
|Repayment of 7.75% Notes                             |  |                      |         |   |                       |   |     |                                  |  |   |             |   |  |                                     |    |   |                              |   |         |                                       |  |   | (6,723       | ) |  |                                            |      |   |  |   |        |   |  |   | (6,723   | )
|Series B Buyback                                     |  |                      |         |   |                       |   |     |                                  |  |   |             |   |  |                                     |    |   |                              |   |         |                                       |  |   | (10,162      | ) |  |                                            |      |   |  |   |        |   |  |   | (10,162  | )
|Payments on capital lease obligations and mortgage   |  |                      | (2,722   | ) |                       |   |     |                                  |  |   |             |   |  |                                     |    |   |                              |   | (2,722   | )                                     |  |   |             |   |  |                                            | (420  | ) |  |   |        |   |  |   | (3,142   | )
|Payments for deferred financing costs                |  |                      | (4,101   | ) |                       |   |     |                                  |  |   |             |   |  |                                     |    |   |                              |   | (4,101   | )                                     |  |   | (7,983       | ) |  |                                            |      |   |  |   |        |   |  |   | (12,084  | )
|                                                     |  |                      |          |   |                       |   |      |                                  |  |   |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|Net cash provided by (used in) financing activities  |  | $                    | 298,077  |   |                       | $ |     |                                  |  | $ |             |   |  | $                                   |    |   |                              | $ | 298,077  |                                       |  | $ | 330,102      |   |  | $                                          | (420  | ) |  | $ | (11,768 | ) |  | $ | 615,991  |  
|                                                     |  |                      |          |   |                       |   |      |                                  |  |   |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents |  |                      | 83,886   |   |                       |   | (159 | )                                |  |   | (219         | ) |  |                                     | (15 | ) |                              |   | 83,493   |                                       |  |   | 301,979      |   |  |                                            | 17    |   |  |   |        |   |  |   | 385,489  |  
|Cash and cash equivalents at beginning of period     |  |                      | 6,348    |   |                       |   | 159  |                                  |  |   | 219          |   |  |                                     |    |   |                              |   | 6,726    |                                       |  |   | 24,370       |   |  |                                            | 1,722 |   |  |   |        |   |  |   | 32,818   |  
|                                                     |  |                      |          |   |                       |   |      |                                  |  |   |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  
|Cash and cash equivalents at end of period           |  | $                    | 90,234   |   |                       | $ |     |                                  |  | $ |             |   |  | $                                   | (15 | ) |                              | $ | 90,219   |                                       |  | $ | 326,349      |   |  | $                                          | 1,739 |   |  | $ |        |   |  | $ | 418,307  |  
|                                                     |  |                      |          |   |                       |   |      |                                  |  |   |              |   |  |                                     |     |   |                              |   |          |                                       |  |   |              |   |  |                                            |       |   |  |   |         |   |  |   |          |  



(certain totals may not
add due to the effects of rounding)



F-41



---

##### Table of Contents

##### Index to Financial Statements

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES



CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS



FOR THE YEAR ENDED DECEMBER 31, 2002

(IN THOUSANDS)



|                                                     |  |                        |          |   |                       |   |         |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  
|---------------------------------------------------- |  | ---------------------- | -------- | - | --------------------- | - | ------- | -------------------------------- |  | - | ------------ | - |  | ---------------------------------- | ------- | - | ---------------------------- | - | -------- | -------------------------------------- |  | - | ------------ | - |  | ------------------------------------------ | ------ | - |  | - | ------- | - |  | - | -------- | -
|                                                     |  | XM SatelliteRadio Inc. |          |   | XMEquipmentLeasingLLC |   |         | XMSR Non- guarantor Subsidiaries |  |   | Eliminations |   |  | ConsolidatedXM SatelliteRadio Inc. |         |   | XMSatelliteRadioHoldingsInc. |   |          | XM Holdings Non- guarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated XM SatelliteRadioHoldingsInc. |       
|Net cash provided by (used in) operating activities  |  | $                      | (290,121 | ) |                       | $ | 2,646   |                                  |  | $ | (567         | ) |  | $                                  |        |   |                              | $ | (288,042 | )                                      |  | $ | (8,246       | ) |  | $                                          | 1,999  |   |  | $ |        |   |  | $ | (294,289 | )
|                                                     |  |                        |          |   |                       |   |         |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  
|Cash flows from investing activities:                |  |                        |          |   |                       |   |         |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  
|Purchase of property and equipment                   |  |                        | (28,203  | ) |                       |   | (7,419  | )                                |  |   | (2           | ) |  |                                    |        |   |                              |   | (35,624  | )                                      |  |   |             |   |  |                                            | 26     |   |  |   |        |   |  |   | (35,598  | )
|Additions to system under construction               |  |                        | (32,813  | ) |                       |   |        |                                  |  |   |             |   |  |                                    |        |   |                              |   | (32,813  | )                                      |  |   |             |   |  |                                            |       |   |  |   |        |   |  |   | (32,813  | )
|Net purchase/maturity of short-term investments      |  |                        | 3,657    |   |                       |   |        |                                  |  |   | 6,639        |   |  |                                    |        |   |                              |   | 10,296   |                                        |  |   | 8,062        |   |  |                                            |       |   |  |   |        |   |  |   | 18,358   |  
|Net purchase/maturity of restricted investments      |  |                        | 41,117   |   |                       |   | 2,930   |                                  |  |   |             |   |  |                                    |        |   |                              |   | 44,047   |                                        |  |   |             |   |  |                                            | 1,453  |   |  |   |        |   |  |   | 45,500   |  
|Other investing activities                           |  |                        | 70,236   |   |                       |   | (9,567  | )                                |  |   | (77,211      | ) |  |                                    | 16,542  |   |                              |   |         |                                        |  |   | 69,136       |   |  |                                            | 117    |   |  |   | (71,736 | ) |  |   | (2,483   | )
|                                                     |  |                        |          |   |                       |   |         |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  
|Net cash provided by (used in) investing activities  |  | $                      | 53,994   |   |                       | $ | (14,056 | )                                |  | $ | (70,574      | ) |  | $                                  | 16,542  |   |                              | $ | (14,094  | )                                      |  | $ | 77,198       |   |  | $                                          | 1,596  |   |  | $ | (71,736 | ) |  | $ | (7,036   | )
|                                                     |  |                        |          |   |                       |   |         |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  
|Cash flows from financing activities:                |  |                        |          |   |                       |   |         |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  
|Capital contribution                                 |  |                        | 249,150  |   |                       |   | 11,559  |                                  |  |   | 4,983        |   |  |                                    | (16,542 | ) |                              |   | 249,150  |                                        |  |   | (159,074     | ) |  |                                            | (2,738 | ) |  |   | 71,736  |   |  |   | 159,074  |  
|Payments on capital lease obligations and mortgage   |  |                        | (2,440   | ) |                       |   |        |                                  |  |   |             |   |  |                                    |        |   |                              |   | (2,440   | )                                      |  |   | (335         | ) |  |                                            |       |   |  |   |        |   |  |   | (2,775   | )
|Payments for deferred financing costs                |  |                        | (216     | ) |                       |   |        |                                  |  |   |             |   |  |                                    |        |   |                              |   | (216     | )                                      |  |   | (4,437       | ) |  |                                            |       |   |  |   |        |   |  |   | (4,653   | )
|                                                     |  |                        |          |   |                       |   |         |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  
|Net cash provided by (used in) financing activities  |  | $                      | 246,494  |   |                       | $ | 11,559  |                                  |  | $ | 4,983        |   |  | $                                  | (16,542 | ) |                              | $ | 246,494  |                                        |  | $ | (163,846     | ) |  | $                                          | (2,738 | ) |  | $ | 71,736  |   |  | $ | 151,646  |  
|                                                     |  |                        |          |   |                       |   |         |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents |  |                        | 10,367   |   |                       |   | 149     |                                  |  |   | (66,158      | ) |  |                                    |        |   |                              |   | (55,642  | )                                      |  |   | (94,894      | ) |  |                                            | 857    |   |  |   |        |   |  |   | (149,679 | )
|Cash and cash equivalents at beginning of period     |  |                        | (4,019   | ) |                       |   | 10      |                                  |  |   | 66,377       |   |  |                                    |        |   |                              |   | 62,368   |                                        |  |   | 119,264      |   |  |                                            | 865    |   |  |   |        |   |  |   | 182,497  |  
|                                                     |  |                        |          |   |                       |   |         |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  
|Cash and cash equivalents at end of period           |  | $                      | 6,348    |   |                       | $ | 159     |                                  |  | $ | 219          |   |  | $                                  |        |   |                              | $ | 6,726    |                                        |  | $ | 24,370       |   |  | $                                          | 1,722  |   |  | $ |        |   |  | $ | 32,818   |  
|                                                     |  |                        |          |   |                       |   |         |                                  |  |   |              |   |  |                                    |         |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |         |   |  |   |          |  



(certain totals may not
add due to the effects of rounding)



F-42



---

##### Table of Contents

##### Index to Financial Statements

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES



CONDENSED CONSOLIDATING STATEMENTS OF STOCKHOLDERS EQUITY



FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(IN THOUSANDS)



|                                 |  |                        |          |   |                       |   |        |                                  |  |              |         |  |                                    |          |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |          |   |  |   |          |  
|-------------------------------- |  | ---------------------- | -------- | - | --------------------- | - | ------ | -------------------------------- |  | ------------ | ------- |  | ---------------------------------- | -------- | - | ---------------------------- | - | -------- | -------------------------------------- |  | - | ------------ | - |  | ------------------------------------------ | ------ | - |  | - | -------- | - |  | - | -------- | -
|                                 |  | XM SatelliteRadio Inc. |          |   | XMEquipmentLeasingLLC |   |        | XMSR Non- guarantor Subsidiaries |  | Eliminations |         |  | ConsolidatedXM SatelliteRadio Inc. |          |   | XMSatelliteRadioHoldingsInc. |   |          | XM Holdings Non- guarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated XM SatelliteRadioHoldingsInc. |       
|Balance at January 1, 2002       |  | $                      | 855,454  |   |                       | $ | 88,517 |                                  |  | $            | 454,776 |  | $                                  | (543,293 | ) |                              | $ | 855,454  |                                        |  | $ | 926,651      |   |  | $                                          | 10,761 |   |  | $ | (866,215 | ) |  | $ | 926,651  |  
|Capital stock issuances          |  |                        |         |   |                       |   |       |                                  |  |              |        |  |                                    |         |   |                              |   |         |                                        |  |   | 159,165      |   |  |                                            | (1     | ) |  |   | 1        |   |  |   | 159,165  |  
|Contributions to paid-in capital |  |                        | 249,150  |   |                       |   | 12,355 |                                  |  |              | 4,983   |  |                                    | (17,338  | ) |                              |   | 249,150  |                                        |  |   |             |   |  |                                            |       |   |  |   | (249,150 | ) |  |   |         |  
|Non-cash stock compensation      |  |                        | 1,507    |   |                       |   |       |                                  |  |              |        |  |                                    |         |   |                              |   | 1,507    |                                        |  |   | 1,507        |   |  |                                            |       |   |  |   | (1,507   | ) |  |   | 1,507    |  
|Net Income (Loss)                |  |                        | (491,585 | ) |                       |   | (2,944 | )                                |  |              | 54,686  |  |                                    | (51,742  | ) |                              |   | (491,585 | )                                      |  |   | (495,012     | ) |  |                                            | 2,184  |   |  |   | 489,401  |   |  |   | (495,012 | )
|                                 |  |                        |          |   |                       |   |        |                                  |  |              |         |  |                                    |          |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2002     |  | $                      | 614,526  |   |                       | $ | 97,928 |                                  |  | $            | 514,445 |  | $                                  | (612,373 | ) |                              | $ | 614,526  |                                        |  | $ | 592,311      |   |  | $                                          | 12,944 |   |  | $ | (627,470 | ) |  | $ | 592,311  |  
|Capital stock issuances          |  |                        |         |   |                       |   |       |                                  |  |              |        |  |                                    |         |   |                              |   |         |                                        |  |   | 463,393      |   |  |                                            |       |   |  |   |         |   |  |   | 463,393  |  
|Contributions to paid-in capital |  |                        | 291,312  |   |                       |   |       |                                  |  |              |        |  |                                    |         |   |                              |   | 291,312  |                                        |  |   |             |   |  |                                            | 76     |   |  |   | (291,388 | ) |  |   |         |  
|Discount on note                 |  |                        |         |   |                       |   |       |                                  |  |              |        |  |                                    |         |   |                              |   |         |                                        |  |   | 68,879       |   |  |                                            |       |   |  |   |         |   |  |   | 68,879   |  
|Conversion of preferred stock    |  |                        |         |   |                       |   |       |                                  |  |              |        |  |                                    |         |   |                              |   |         |                                        |  |   | (10,163      | ) |  |                                            |       |   |  |   |         |   |  |   | (10,163  | )
|Non-cash stock compensation      |  |                        | 3,003    |   |                       |   |       |                                  |  |              |        |  |                                    |         |   |                              |   | 3,003    |                                        |  |   | 3,003        |   |  |                                            |       |   |  |   | (3,003   | ) |  |   | 3,003    |  
|Net Income (Loss)                |  |                        | (589,759 | ) |                       |   | (3,229 | )                                |  |              | 70,324  |  |                                    | (67,095  | ) |                              |   | (589,759 | )                                      |  |   | (584,535     | ) |  |                                            | 2,409  |   |  |   | 587,349  |   |  |   | (584,535 | )
|                                 |  |                        |          |   |                       |   |        |                                  |  |              |         |  |                                    |          |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2003     |  | $                      | 319,082  |   |                       | $ | 94,699 |                                  |  | $            | 584,769 |  | $                                  | (679,468 | ) |                              | $ | 319,082  |                                        |  | $ | 532,888      |   |  | $                                          | 15,429 |   |  | $ | (334,511 | ) |  | $ | 532,888  |  
|                                 |  |                        |          |   |                       |   |        |                                  |  |              |         |  |                                    |          |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |          |   |  |   |          |  
|Capital stock issuances          |  |                        |         |   |                       |   |       |                                  |  |              |        |  |                                    |         |   |                              |   |         |                                        |  |   | 443,623      |   |  |                                            |       |   |  |   |         |   |  |   | 443,623  |  
|Contributions to paid-in capital |  |                        | 372,513  |   |                       |   |       |                                  |  |              |        |  |                                    |         |   |                              |   | 372,513  |                                        |  |   |             |   |  |                                            | (6,064 | ) |  |   | (366,449 | ) |  |   |         |  
|Non-cash stock compensation      |  |                        | 2,020    |   |                       |   |       |                                  |  |              |        |  |                                    |         |   |                              |   | 2,020    |                                        |  |   | 2,020        |   |  |                                            |       |   |  |   | (2,020   | ) |  |   | 2,020    |  
|Net Income (Loss)                |  |                        | (650,033 | ) |                       |   | (2,772 | )                                |  |              | 66,555  |  |                                    | (63,783  | ) |                              |   | (650,033 | )                                      |  |   | (642,368     | ) |  |                                            | 4,390  |   |  |   | 645,643  |   |  |   | (642,368 | )
|                                 |  |                        |          |   |                       |   |        |                                  |  |              |         |  |                                    |          |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2004     |  | $                      | 43,582   |   |                       | $ | 91,927 |                                  |  | $            | 651,324 |  | $                                  | (743,251 | ) |                              | $ | 43,582   |                                        |  | $ | 336,163      |   |  | $                                          | 13,755 |   |  | $ | (57,337  | ) |  | $ | 336,163  |  
|                                 |  |                        |          |   |                       |   |        |                                  |  |              |         |  |                                    |          |   |                              |   |          |                                        |  |   |              |   |  |                                            |        |   |  |   |          |   |  |   |          |  



(certain totals may not
add due to the effects of rounding)



(18) Quarterly Data (Unaudited, in
thousands)



|               |  |             |          |   |             |   |          |             |  |   |             |   |  |   |          |  
|-------------- |  | ----------- | -------- | - | ----------- | - | -------- | ----------- |  | - | ----------- | - |  | - | -------- | -
|               |  | 2004        |         
|               |  | 1st Quarter |          |   | 2nd Quarter |   |          | 3rd Quarter |  |   | 4th Quarter |  
|Revenues       |  | $           | 42,965   |   |             | $ | 52,982   |             |  | $ | 65,358      |   |  | $ | 83,139   |  
|Operating loss |  |             | (117,959 | ) |             |   | (113,603 | )           |  |   | (101,109    | ) |  |   | (130,120 | )
|Net Loss       |  |             | (171,431 | ) |             |   | (167,824 | )           |  |   | (119,959    | ) |  |   | (190,820 | )
|               | 
|               |  | 2003        |         
|               |  | 1st Quarter |          |   | 2nd Quarter |   |          | 3rd Quarter |  |   | 4th Quarter |  
|Revenues       |  | $           | 13,052   |   |             | $ | 18,321   |             |  | $ | 26,913      |   |  | $ | 33,495   |  
|Operating loss |  |             | (107,382 | ) |             |   | (117,987 | )           |  |   | (100,772    | ) |  |   | (130,152 | )
|Net Loss       |  |             | (130,996 | ) |             |   | (161,735 | )           |  |   | (134,246    | ) |  |   | (162,782 | )
|               | 
|               |  | 2002        |         
|               |  | 1st Quarter |          |   | 2nd Quarter |   |          | 3rd Quarter |  |   | 4th Quarter |  
|Revenues       |  | $           | 1,785    |   |             | $ | 3,839    |             |  | $ | 5,552       |   |  | $ | 9,005    |  
|Operating loss |  |             | (101,294 | ) |             |   | (104,986 | )           |  |   | (96,559     | ) |  |   | (139,983 | )
|Net Loss       |  |             | (111,633 | ) |             |   | (116,654 | )           |  |   | (109,033    | ) |  |   | (154,265 | )



The operating loss
during the 4thquarter of 2002 of $140.0 million includes an impairment charge of $11.5 million as fully described
in Note 5. In addition, the operating loss includes a charge of $8.0 million as a result of completion of negotiation for performance rights royalties, which includes the period from commencement of commercial operations.



F-43



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##### Table of Contents

##### Index to Financial Statements

Schedule IValuation And Qualifying Accounts

(in thousands)



|                                        |  |                   |         |                            |         |                         |        |                            |         |   |                     |   |        
|--------------------------------------- |  | ----------------- | ------- | -------------------------- | ------- | ----------------------- | ------ | -------------------------- | ------- | - | ------------------- | - | -------
|Description                             |  | Balance January 1 |         | Chargedto CostsandExpenses |         | Chargedto OtherAccounts |        | Write-Offs/Payments/ Other |         |   | Balance December 31
|Year Ended December 31, 2002            |  |                   |         |                            |         |                         |        |                            |         |   |                     |   |        
|Allowance for doubtful accounts         |  | $                 | 10      |                            | 493     |                         |       |                            | (262    | ) |                     | $ | 241    
|Deferred Tax AssetsValuation Allowance |  | $                 | 132,036 |                            | 191,933 |                         |       |                            |        |   |                     | $ | 323,969
|Accrued network optimization expenses   |  | $                 | 8,595   |                            | 4,013   |                         |       |                            | (10,407 | ) |                     | $ | 2,201  
|                                        |  |                   |         |                            |        
|Year Ended December 31, 2003            |  |                   |         |                            |         |                         |        |                            |         |   |                     |   |        
|Allowance for doubtful accounts         |  | $                 | 241     |                            | 2,077   |                         |       |                            | (1,522  | ) |                     | $ | 796    
|Deferred Tax AssetsValuation Allowance |  | $                 | 323,969 |                            | 197,621 |                         |       |                            |        |   |                     | $ | 521,590
|Accrued network optimization expenses   |  | $                 | 2,201   |                            | 4,842   |                         |       |                            | (2,907  | ) |                     | $ | 4,136  
|                                        |  |                   |         |                            |        
|Year Ended December 31, 2004            |  |                   |         |                            |         |                         |        |                            |         |   |                     |   |        
|Allowance for doubtful accounts         |  | $                 | 796     |                            | 3,218   |                         |       |                            | (2,463  | ) |                     | $ | 1,551  
|Deferred Tax AssetsValuation Allowance |  | $                 | 521,590 |                            | 230,781 |                         | 55,645 |                            |        |   |                     | $ | 808,016
|Accrued network optimization expenses   |  | $                 | 4,136   |                            | 47      |                         |       |                            | (2,035  | ) |                     | $ | 2,148  



F-44