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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington D.C. 20549

                               ----------------

                                   FORM 10-K

                 Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                  For the fiscal year ended: December 31, 1999

                        Commission File Number: 0-27441

                               ----------------

                        XM Satellite Radio Holdings Inc.

             (Exact name of registrant as specified in its charter)

                Delaware                               54-1878819


    (State or other jurisdiction of       (I.R.S. Employer Identification No.)
     incorporation or organization)

         1250 23rd Street, N.W.                        20037-1100
             Washington, DC


                                                       (Zip Code)
    (Address of principal executive
                offices)

                                 (202) 969-7100
              (Registrant's telephone number, including area code)

                               ----------------

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

                                 Not Applicable

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

                                 Title of Class

                 Class A Common Stock, par value $.01 per share
8.25% Series B Convertible Redeemable Preferred Stock, par value $.01 per share

                               ----------------

   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 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. [_]

   The aggregate market value of common stock held by non-affiliates of the
registrant, based upon the closing price of the registrant's Class A common
stock as of March 10, 2000 is $42.50.

   As of March 10, 2000, there were 32,156,738 shares of the registrant's Class
A common stock and 16,557,262 shares of the registrant's Class B common stock
outstanding.

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                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
 <C>      <C>       <S>                                                    <C>
 PART I
          Item 1.   Business............................................     1
          Item 2.   Properties..........................................    19
          Item 3.   Legal Proceedings...................................    19
          Item 4.   Submission of Matters to a Vote of Security
                    Holders.............................................    19
 PART II
          *Item 5.  Market for Registrant's Common Equity and Related
                    Stockholders Matters................................    20
          *Item 6.  Selected Consolidated Financial Data................    21
          *Item 7.  Management's Discussion and Analysis of Financial
                    Condition and Results of Operations.................    22
          *Item 7A. Quantitative and Qualitative Disclosures about
                    Market Risk.........................................    28
                    Consolidated Financial Statements and Supplementary
          Item 8.   Data................................................    29
          *Item 9.  Changes in and Disagreements with Accountants on
                    Accounting and Financial Disclosure.................    29
 PART III
          Item 10.  Directors and Executive Officers of the Registrant..    30
          Item 11.  Executive Compensation..............................    30
          Item 12.  Security Ownership of Certain Beneficial Owners and
                    Management..........................................    30
          Item 13.  Certain Relationships and Related Transactions......    30
 PART IV
          Item 14.  Exhibits, Consolidated Financial Statement
                    Schedules, and Reports on Form 8-K..................    31
 SIGNATURES..............................................................   35
 SCHEDULE I--VALUATION AND QUALIFYING ACCOUNTS...........................  S-1
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..............................  F-1
</TABLE>


                                       i
<PAGE>

   Except for any historical information, the matters we discuss in this Form
10-K concerning our company 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 its 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.

                                     PART I

ITEM 1. BUSINESS

   Unless the context otherwise requires, the terms "we," "our" and "us" refer
to XM Satellite Radio Holdings, Inc. and its subsidiaries, including XM
Satellite Radio Inc. XM Satellite Radio Inc. was incorporated in Delaware in
1992. XM Satellite Radio Holdings Inc. was incorporated in Delaware and became
a holding company for XM Satellite Radio Inc. in early 1997.

Overview

   We seek to become a premier nationwide provider of audio entertainment and
information programming. We will transmit our XM Radio service by satellites to
vehicle, home and portable radios. We own one of two FCC licenses to provide a
satellite digital radio service in the United States. We will offer a wide
variety of music, news, talk, sports and other specialty programming on up to
100 distinct channels. We believe that customers will be attracted to our
service because of its wide variety of formats, digital quality sound and
coast-to-coast coverage.

   We are constructing our satellite system and have contracts with third party
programmers, vendors and other partners. Key milestones achieved include the
following:

  .  $865.0 million of equity proceeds raised to date, net of expenses,
     interest reserve and repayment of debt, including an initial public
     offering; an offering of subordinated convertible notes to several
     strategic and financial investors, including General Motors, Clear Channel
     Communications, DIRECTV, Telcom Ventures, Columbia Capital and Madison
     Dearborn Partners, which converted into equity at the time of our initial
     public offering; concurrent follow-on offerings of Class A common stock
     and Series B convertible redeemable preferred stock; and the private
     placement of units consisting of senior secured notes and warrants to
     purchase shares of Class A common stock;

  .  Contract with Hughes for construction and in-orbit delivery of two high-
     powered satellites and long lead items for a ground spare;

  .  Contracts with LCC International for design of our international repeater
     network and Hughes for the design and manufacture of the terrestrial
     repeaters;

  .  Long-term agreement with the OnStar division of General Motors covering
     the installation and exclusive marketing and distribution of XM Radio
     service in General Motors vehicles;

  .  Contracts with Delphi-Delco Electronics, Sony, Motorola, Pioneer, Alpine,
     Mitsubishi, Audiovox, Clarion and SHARP to manufacture and distribute XM
     radios;

  .  Agreement with STMicroelectronics, a leading digital audio chipset
     manufacturer, for the design and production of chipsets for XM radios;

  .  Agreement with Lucent Digital Radio to provide coding technology for our
     audio signals;

  .  Agreements with leading specialty programmers, for many of which we will
     be the exclusive satellite radio platform, covering at least 24 channels,
     including AsiaOne, Black Entertainment Television (BET), BBC World
     Service, Bloomberg News Radio, Clear Channel, CNN en Espanol, CNNfn, CNN

                                       1
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     Sports Illustrated, C-SPAN, DIRECTV, Hispanic Broadcasting Corporation
     (formerly Heftel), NASCAR, One-on-One Sports, Radio One, Salem
     Communications, Sporting News, Weather Channel and USA Today;

  .  Engaged Premiere Radio Networks to be our advertising sales
     representative;

  .  Entered into marketing arrangements with SFX Entertainment and NASCAR;

  .  Letter of intent with Freightliner Corporation to install XM radios in
     Freightliner trucks; and

  .  Agreement with Sirius Radio to develop a unified standard for satellite
     radios, which will facilitate the ability of consumers to purchase an
     interoperable radio capable of receiving both our and Sirius Radio's
     service.

Market Opportunity

   We believe that there is a significant market for our satellite radio
service. Market studies show strong demand for radio service, as evidenced by
radio listening trends, data relating to sales and distribution of radios and
the general growth in radio advertising. In addition, we note that in many
markets audio programming choices are limited to mass appeal formats. We
believe our national subscription service will complement traditional local
radio. Moreover, the success of subscription entertainment services in other
media such as cable television and market research further indicate potential
for significant consumer demand for satellite radio services.

Radio Listening

   On average, adults listen to the radio 3.2 hours a day, with the amount of
radio listening fairly evenly distributed across gender and age groups. The
percentage of people listening to radio is also high. Market data show that
over 75% of the entire United States population age 12 and older listen to the
radio daily, and over 95% listen on a weekly basis (Radio Marketing Guide and
Factbook for Advertisers, Radio Advertising Bureau, Fall 1999 to Spring 2000).

   In addition, more people listen to radio than to other comparable audio
entertainment formats. The popularity of radio versus these other formats
appears particularly strong in the car, where we will be targeting our service
initially. An estimated 69% of consumers chose radio as their most listened to
format in the car as compared to 15% for cassettes and 9% for CDs (Radio
Listening Habits, CEMA 1999).

 Radio Sales and Distribution

   A large number of radios are sold in the United States on an annual basis.
In 1999, radio manufacturers sold over 29 million car radios, including 17
million original equipment automobile radios and 11 million aftermarket
automobile radios, as well as 1.2 million aftermarket automobile CD changers.
Original equipment radios are installed in new cars; aftermarket radios are
installed in the automobile after purchase. Based on these statistics, each
additional one million subscribers would represent less than 3.5% of the new
original equipment manufacturer and aftermarket car radios brought to market
annually and would generate incremental subscription revenues, at $9.95 per
month, of approximately $120 million.

 Radio Advertising

   The continued popularity of radio is also reflected in the growth of radio
advertising. The Radio Advertising Bureau estimates that radio advertising
revenue in 1999 climbed to $17.7 billion, an increase of 15% over 1998.
Veronis, Suhler & Associates projects a compound annual increase of 9.7%
through 2003. This growth rate exceeds the projected increase in advertising
spending for television, newspapers, magazines, yellow pages and outdoor
advertising (Communications Industry Forecast, 1999).

 Current Limitations on Programming Choice

   Many consumers have access to a limited number of stations and programming
formats offered by traditional AM/FM radio. Our service is expected to be
attractive to underserved radio listeners who want expanded radio choices.

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<PAGE>

   Limited Number of Radio Stations. The number of radio stations available to
many consumers in their local market is limited in comparison to the up to 100
channels we expect to offer on a nationwide basis. In 1998, there were only 47
AM/FM radio stations as listed by Arbitron broadcasting in New York City, the
largest radio market in the United States. In fact, many metropolitan areas
outside the largest 50 markets, such as Jacksonville, FL, Louisville, KY, and
Oklahoma City, OK, have 30 or fewer AM/FM radio stations as listed by Arbitron
(American Radio, Spring 1999 Ratings Report, Duncan's American Radio, 1999).

   We estimate that our coast-to-coast service will reach over 98 million
listeners age 12 and over who are beyond the range of the largest 50 markets as
measured by Arbitron. Of these listeners, 36 million live beyond the largest
276 markets (Census data and Fall 1999 Market Rankings, The Arbitron Company).
In addition, there are 22 million people age 12 and above who receive five or
fewer stations (The Satellite Report 1999, C. E. Unterberg, Towbin).

   Limited Programming Formats. We believe that there is significant demand for
a satellite radio service that expands the current programming choices
available to these potential listeners. Over 52% of all commercial radio
stations use one of only three general programming formats--country, adult
contemporary and news/talk/sports (Veronis, Schuler & Associates Communications
Industry Forecast 1999). Over 71% of all commercial radio stations use one of
only five general formats--the same three, plus oldies and religion. The small
number of available programming choices means that artists representing niche
music formats likely receive little or no airtime in many markets. Radio
stations prefer featuring artists they believe appeal to the broadest market.
However, according to the Recording Industry Association of America, recorded
music sales of niche music formats such as classical, jazz, movie and Broadway
soundtracks, new age, children's programming and others comprised up to 21% of
total recorded music sales in 1998 (1998 Consumer Profile).

 Demand for Subscription Services and Products

   Penetration data relating to cable, satellite television, and premium movie
channels suggest that consumers are willing to pay for services that
dramatically expand programming choice or enhance quality. As of 1999, over 67%
of TV households subscribe to basic cable television at an average monthly cost
of $29, and over 11% of TV households subscribe to satellite television at an
average monthly cost of $51 (National Cable Television Association website and
DBSdish.com website). Also in 1999, according to Paul Kagan Associates,
subscribers to cable and satellite services purchased more than 75 million
premium channel units, such as HBO, Showtime, and Cinemax, for which they paid
an extra monthly charge on top of the basic monthly fee.

 Demand for Satellite Radio Services

   Several studies have been conducted demonstrating the demand for satellite
radio service.

   In June 1999, we commissioned Strategic Marketing And Research Techniques,
(SMART), a leading market research company and Dr. Frank M. Bass, a leading
authority on the diffusion of new products and inventor of the Bass curve, to
estimate the demand for satellite radio based on survey data and historical
information. SMART surveyed 1,800 people ages 16 and over. The study concluded
that as many as 49 million people may subscribe to satellite radio by 2012,
assuming $9.95 as a monthly subscription fee and a radio price point of $150-
$399, depending upon the type of car or home unit chosen. The study also
anticipated that satellite radio will grow even faster than DBS.

   In December 1998, we commissioned SMART to conduct a study based on one-on-
one interviews with over 1,000 licensed drivers ages 16 to 64 in ten
geographically dispersed markets. The study concluded that approximately 50% of
aftermarket radio purchases would be for AM/FM/satellite radio units with a
single-disc CD player. This assumed a radio price point of $399, a $75
installation fee and a $10 monthly subscription fee for the service. The same
study also found that consumers are more likely to buy satellite radio units
that offer at least 80 channels.

   In November 1998, we commissioned Yankelovich Partners to gauge consumer
interest in satellite radio. This involved surveying 1,000 people via telephone
and correlating the results with the Yankelovich MONITOR

                                       3
<PAGE>

study, which is the longest standing tracking study of consumer values and
attitudes in the United States. The study indicated that 18% of people age 16
and older were "definitely" or "probably" willing to pay $9.99 per month to
receive satellite radio and an additional $150 for a satellite radio when
buying a new car.

The XM Radio Service

   We are designing the XM Radio service to address the tastes of each of our
targeted market segments through a combination of niche and broad appeal
programming. We believe that our distinctive approach to programming, combined
with digital quality sound and virtually seamless signal coverage throughout
the continental United States, will position us to become the leading provider
of the next generation in radio.

 We Will Differentiate XM Radio from Traditional AM/FM Radio

   Local radio stations, even those which are part of national networks, focus
on maximizing listener share within local markets. This limits the types of
programming they can profitably provide to mass appeal formats. In contrast,
our nationwide reach and ability to provide up to 100 channels in each radio
market will allow us to aggregate listeners from markets across the country,
expanding the types of programming we can provide. The following chart
indicates differences between XM Radio and traditional AM/FM radio.

<TABLE>
<CAPTION>
                                      XM Radio                Traditional AM/FM Radio
  <S>                       <C>                           <C>
  Convenience: go anywhere  Virtually seamless signal     Local area coverage
   capability               coverage in the United
                            States
  Choice: wide              Up to 100 channels with a     Limited formats in many markets
   variety/number of        wide variety of programming
   stations
  Improved audio quality    Digital quality sound         Analog AM/FM quality sound
  Fewer commercials         Average 6-7 minutes per       Average 13-17 minutes per hour
                            hour; some channels
                            commercial free
  More information about    Text display with title/name  No visual display
   music                    of song/artist
</TABLE>


   We plan to further differentiate XM Radio from traditional AM/FM radio in
the following ways.

   Provide music formats unavailable in many markets. XM Radio will offer many
music formats that are popular but currently unavailable in many markets. More
than 52% of all commercial radio stations in markets measured by Arbitron use
one of only three programming formats: country; adult contemporary; or
news/talk/sports. There are 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 could include classical
recordings or popular blues and rap music that have retail appeal but are not
commonly played on traditional AM/FM radio. This music also includes special
recordings such as the Irish dance soundtrack "Riverdance" and the "Three
Tenors" concerts which generate millions of CD sales, yet are not typically
played on today's AM/FM stations. Additionally, heavy metal and dance are two
of the more popular musical styles not currently broadcast in many small and
medium sized markets. Even major markets do not always offer a full complement
of formats.

   Superserve popular music formats. We will be able to 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 will be able to segment this
category by offering several dedicated, era-specific formats. We also plan to
offer up to six dedicated channels with urban formats and four distinct country
music formats.

   Use more extensive playlists. Traditional AM/FM radio stations frequently
use limited playlists that focus on artists and specific music that target the
largest audience. With our large channel capacity and focus on

                                       4
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specific formats, we have the ability to provide more variety to attract
listeners dissatisfied with repetitive and/or limited playlist selection
offered by traditional radio.

   Deliver a wide range of ethnic and informational programming. We will
provide a variety of formats that target specific ethnic and special interest
groups who are rarely served by traditional AM/FM radio. We believe by using
our national platform to aggregate geographically disparate groups through
affinity programming, we will provide advertisers a valuable way to market
products and services to these groups by advertising on our affinity channels.

   Develop promotional opportunities with record companies, recording artists
and radio personalities. Because of our nationwide coverage and resulting
economies of scale, we will be able to deliver a variety of national promotions
and events that would not be cost effective or efficient on a market-by-market
basis through traditional AM/FM radio distribution. Also, we will seek to hire
and develop high profile talk and disc jockey talent capable of becoming the
next generation of national radio stars with an influence on radio similar to
the impact that the new breed of cable TV talk hosts have had on the television
industry.

   Respond quickly when major music and cultural events occur. XM Radio
programmers will respond quickly to changing musical tastes, seasonal music and
emerging popular cultural events, such as Bruce Springsteen and Ricky Martin
tours, by providing listeners with extensive coverage utilizing our large
channel capacity.

   Take advantage of digital's higher quality signal. There are several music
formats that have strong demand but have been relegated to AM stations with
weaker signals due to lack of available FM frequencies. Such AM formats include
traditional country music, big band/nostalgia and gospel formats that we will
be able to deliver with superior sound quality.

   Focus on special demands of mobile listeners. A significant percentage of
radio listeners, such as truckers, routinely travel through two or more radio
markets on a frequent basis. According to the U.S. Department of
Transportation, there were over three million truckers in the United States in
1997. We believe these listeners will be attracted to a radio service with
national coast-to-coast coverage. We are seeking to specifically identify and
target the listening demands of this audience.

   Availability of commercial-free and limited-advertising channels. We believe
that a significant portion of the listening market would pay to subscribe to a
radio service that provided commercial-free channels and channels with reduced
advertising, as demonstrated by the appeal of limited periods of non-stop music
used by some traditional AM/FM stations. Therefore, we plan to target this
audience with a number of commercial-free music channels covering popular music
formats. In addition, we expect that our limited-advertising channels will
carry less than half the advertising spots of typical AM/FM stations.

   Use cross-promotion capability to market XM Radio. We will dedicate a
percentage of our advertising inventory across our channels to promote specific
programming and brand loyalty. AM/FM radio stations traditionally promote on a
single channel basis to build awareness.

                                       5
<PAGE>

 Representative XM Radio Channel List

   The following table is a list of representative channels we may offer.
Channels in italics represent contractual commitments with content providers.

                      Representative Channels of XM Radio

 ROCK MUSIC                  INFORMATION              HISPANIC
 Classic Rock                All News (USA Today)     Tejano (Hispanic
 Classic Hard Rock           All News (Bloomberg)      Broadcasting Corp.)
 New Hard Rock               Public Affairs (C-SPAN)  Caribbean (Hispanic
 New Alternative             Financial News (CNNfn)    Broadcasting Corp.)
 Classic Alternative         News/Information (BBC    Regional Mexican
 Soft Rock                    World Service)           (Hispanic Broadcasting
 ECLECTIC MUSIC              Home & Garden             Corp.)
 Contemporary Christian      Love/Relationship Line   Rock en Espanol
 (Salem)                     Farm/Rural                (Hispanic Broadcasting
 Traditional Christian       Health/Fitness            Corp.)
 (Salem)                     Comedy                   Hispanic Ballads
 Blues                       Audio Books               (Hispanic Broadcasting
 Traditional Jazz            Consumer Classified       Corp.)
 Reggae/Island               Soap Operas              Hispanic News (CNN en
 World Music                 For Truckers Only         Espanol)
 American Folk               Movie Soundtrack Channel OLDIES MUSIC
 Pop Classical               Relationship Classified  40's Oldies
 Traditional Classical       (-18)                    50's Oldies
 Modern Jazz                 Relationship Classified  60's Oldies
 Progressive/Fusion          (19-30)                  70's Oldies
 POP MUSIC                   Relationship Classified  80's Oldies
 Top 20 Contemporary Hits    (31-50)                  90's Oldies
 Disco/Dance                 Relationship Classified  Love Songs
 Broadway Show Tunes         (51+)                    TALK
 Modern Adult                Lifestyles               African American Talk
 Contemporary                Celebrity Gossip          (BET/Radio One)
 Classic Vocalists           Entertainment News       Asian/Indian Talk
 All Request Contemporary    Game Show/Contest        (AsiaOne)
 Hits                        URBAN MUSIC              Christian/Family Talk
 SPORTS                      Hip Hop/Rap (BET/Radio   (Salem)
 Sports Headlines            One)                     Mandarin Talk (AsiaOne)
 (CNN/Sports)                Urban Dance Mix (Radio   Conservative Talk
 Sports Talk (One-On-One     One)                     Liberal Talk
 Sports, Sporting News)      Classic Soul (BET/Radio  Senior Citizen Talk
 Sportsman Channel           One)                     Rock Talk
 Automotive (NASCAR)         Gospel (BET/Radio One)   Hispanic Talk
 COUNTRY MUSIC               Adult Urban (BET/Radio   Teen Talk
 Mainstream Country          One)                     CHILDREN'S MUSIC
 Classic Country             Top 20 Urban             Pre-School
 Bluegrass/Traditional       ENVIRONMENTAL MUSIC      Grade School/pre-teen
 Country                     Soft Jazz                SPECIAL/EVENTS
 All Request Country         New Age                  Reserved Channels
                             Electronic
                             Environmental (Earth
                             Sounds)
                             Beautiful Instrumentals


Key Elements of Our Business

   We have developed a business strategy to become a premier nationwide
provider of audio entertainment and information programming in the vehicle,
home and portable markets. Our strategy includes the following elements.


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 Programming

   We believe that the quality and diversity of our programming will be a key
driver of consumer interest in our service. To that end, we have developed a
unique programming strategy that offers consumers

  .  Original music and information channels created by XM Originals, our in-
     house programming unit;

  .  Channels created by well-known providers of brand name programming; and

  .  The availability of commercial-free and advertiser-supported channels.

   XM Originals. Through a programming unit in XM Radio called "XM Originals",
we will create a significant number of original channel formats with content
focusing on popular music such as oldies, rock and country, and on new and
innovative formats, including jazz, blues, reggae and pop classical. These
formats will include artists with strong music sales and concert revenue who do
not get significant airplay on traditional AM/FM radio stations. We also intend
to brand individual channels creating a specific station personality and image
using compelling on-air talent and other techniques to attract listeners in our
target market segments. We have hired a team of programming professionals with
a proven track record of introducing new radio formats and building local and
national listenership.

   Brand Name Programming Partners. We intend to complement our original
programming with a variety of unique and diverse content provided to us by
brand name programming providers. We have signed contracts representing at
least 24 channels with numerous well-known specialty and niche programmers that
will provide brand name content for XM Radio. These companies include:

<TABLE>
<CAPTION>
   Media                    Radio
   -----                    -----
   <S>                      <C>
   -- Bloomberg News Radio  -- Hispanic Broadcasting Corporation (formerly Heftel)
   -- USA Today             -- Clear Channel Communications
   -- CNNfn                 -- Radio One
   -- CNN en Espanol        -- Salem Communications
   -- CNN Sports
    Illustrated             -- AsiaOne
   -- C-SPAN Radio          -- One-On-One Sports
   -- Black Entertainment
    Television              -- BBC World Service
   -- DIRECTV               -- NASCAR
   -- Weather Channel
   -- Sporting News
</TABLE>

   Availability of Commercial-Free and Limited-Advertising Channels. We will
provide a number of commercial-free music channels covering popular music
formats. In addition, our limited-advertising channels will carry less than
half the advertising of a typical AM/FM radio station. We expect the diversity
of our programming line-up will appeal to a large audience, including urban and
rural listeners of all ages, ethnicities, economic groups and specialty
interests. We expect to tailor our programming and marketing to appeal to
specific groups within those audiences that research has shown are most likely
to subscribe to our satellite radio service. Initially, we plan to concentrate
our programming efforts on listeners who are most receptive to innovative
entertainment services, so-called early adopters, and new car buyers. According
to our research, 16-34 years old adults will compose a high percentage of our
early adopters; we will therefore focus a significant portion of our
programming and marketing efforts to appeal to them. In addition, we will
develop programming and marketing specifically to appeal to other market
segments such as baby boomers who are 35-53 years old, seniors who are 54 years
old and older, African-Americans, Asian-Americans and Hispanics.

   Future Content Arrangements. Under our agreement with Sirius Radio, all new
arrangements with providers of programming or content, including celebrity
talent, must be non-exclusive and may not reward any provider for not providing
content to the other party.

                                       7
<PAGE>

Marketing and Distribution

   Our marketing strategy will be designed to build awareness and demand among
potential subscribers in our target markets and the advertising community. In
addition, we expect to work closely with radio and automotive manufacturers and
retail distributors to promote rapid market penetration.

 Establish Broad Distribution Channels for XM Radios

   We plan to market our satellite radio service through several distribution
channels including national electronics retailers, car audio dealers, mass
retailers and automotive manufacturers. In addition, we will support our
distribution channels by building awareness of XM Radio with a substantial
introductory launch campaign, including national and local advertising.

   Exclusive Distribution Agreement with General Motors. We have an agreement
with the OnStar division of General Motors whereby, for a 12-year period,
General Motors will exclusively distribute and market the XM Radio service and
install XM radios in General Motors vehicles beginning in 2001. General Motors
sold over 4.9 million automobiles in 1999, which represented more than 29% of
the United States automobile market. Under the agreement, we have substantial
payment obligations to General Motors, including among others, certain
guaranteed, annual, fixed payment obligations. While we have discussed with
General Motors certain installation projections, General Motors is not required
to meet any minimum targets for installing XM radios in General Motors
vehicles. In addition, certain of the payments to be made by us under this
agreement will not be directly related to the number of XM radios installed in
General Motors vehicles. Our contract with General Motors is described in more
detail under the caption "Certain Relationships and Related Transactions--
Distribution Agreement with General Motors and OnStar." We are currently in
discussions with other car manufacturers regarding additional distribution
agreements.

   Distribution through Radio Manufacturers. We have signed contracts with
Delphi-Delco, Motorola, Pioneer, Alpine, Mitsubishi, Audiovox and Clarion for
the development, manufacture and distribution of XM radios for use in cars and
a contract with Sony Electronics to design, manufacture and market XM radios
for the portable, home, aftermarket and original equipment manufacture car
stereo markets. One of these manufacturers, Delco Electronics Corporation, a
subsidiary of Delphi Automotive Systems, is the leading original equipment
manufacturer of radios for the automobile industry, producing more than 33% of
car radios manufactured for installation in new automobiles in the United
States in 1997. Delphi-Delco is also the leading manufacturer of car radios
sold in General Motors vehicles and has signed a contract to build our radios
for General Motors. Sony is the leader in sales of portable CD players by a
large margin and one of the top three sellers of shelf systems. Sony has agreed
to assist with marketing XM Radios and has agreed to incentive arrangements
that condition its compensation on use of XM Radios manufactured by Sony or
containing Sony hardware. Motorola is a leading supplier of integrated
electronics systems to automobile manufacturers. Mitsubishi Electronic
Automotive America, together with its parent corporation Mitsubishi Electronic
Corp., is the largest Japanese manufacturer of factory- installed car radios in
the United States. Clarion is a leader in the car audio and mobile electronics
industry. Two of our other manufacturers, Pioneer Electronics Corporation and
Alpine Electronics, together sold over 31% of aftermarket car radios sold in
the United States in 1999. We have also signed a contract with SHARP to
manufacture and distribute XM radios for home and portable use. We are pursuing
additional agreements for the manufacture and distribution of XM radios,
subject to contract limitations on the number of manufacturer distributors
during the early years of service. We also plan to meet with automobile dealers
to educate them about XM Radio and develop sales and promotional campaigns to
promote XM radios to new car buyers.

   These leading radio manufacturers have strong retail and dealer distribution
networks in the United States. We expect to have access to the distribution
channels and direct sales relationships of these distributors, including
national electronics retailers, car audio dealers and mass retailers.

   We do not intend to manufacture or hold inventory of XM radios. Radio
distribution likely would be handled by fulfillment centers, which hold
inventory for the radio manufacturers and ship products directly to listeners
at the manufacturers' request.

                                       8
<PAGE>

   Rural Market Distribution/Alternative Distribution. We intend to market our
satellite radio service in rural counties, using distribution channels similar
to satellite television, to penetrate rural households not served by
traditional electronic retailers. In addition, we plan to pursue alternative
distribution opportunities such as catalog/direct marketing, the Internet and
marketing through affinity groups.

   Future Distribution Arrangements. We have signed an agreement with Sirius
Radio to develop a unified standard for satellite radios to facilitate the
ability of consumers to purchase one radio capable of receiving both our and
Sirius Radio's services. Both companies expect to work with their automobile
and radio manufacturing partners to integrate the new standard. Future
agreements with automakers and radio manufacturers will specify the unified
satellite radio standard. Furthermore, future agreements with retail and
automotive distribution partners and content providers will be on a non-
exclusive basis and may not reward any distribution partner for not
distributing the satellite radio system of the other party.

   In addition, we have signed a letter of intent with Freightliner Corporation
to install XM radios in Freightliner trucks.

 Maximize Revenue Through Dual Sources

   As with other subscription-based entertainment media such as cable
television, we expect to generate revenue by charging a monthly subscription
fee and selling limited advertising time. We will earn all of the revenue from
advertising on our own programming and a portion of the revenues from
advertising on third party programming. XM Radio offers a new national radio
platform for advertisers that solves many of the problems associated with
buying radio advertising nationally on a spot or syndicated basis. We believe
the attractiveness of one-stop national radio advertising buys will provide a
significant source of income as our subscriber base grows.

 Subscriber Development and Expansion

   We expect to promote XM Radio as a national brand name with an exciting
image. Several months prior to service commencement, we will launch an
advertising campaign in several United States markets to test and generate
early feedback on the product offerings and stimulate early demand. Promotional
activities currently under consideration include distributing sample
programming at retail outlets, concert venues and on the Internet to generate
initial interest. For instance, we have entered into an agreement with SFX
Entertainment to be the exclusive satellite radio advertiser at live concerts
and sporting events presented by, and live entertainment venues managed by,
SFX.

   Although XM Radio will be available nationwide upon commencement of
operations, we will initially concentrate promotional activities in several key
markets and rapidly expand to other large markets. This phased roll-out
strategy, similar to that employed by consumer electronics manufacturers and
special services such as DIRECTV and Web TV, will enable us to refine our
launch implementation throughout the roll-out period. The advertising will
consist of both branding and promotion efforts for XM Radio, as well as
separate campaigns to promote and brand individual channels. Initially, we will
focus marketing efforts on the various channels targeting young adults, who we
believe are more likely to drive early penetration. We also expect to benefit
from free local media coverage as XM Radio is first offered in each new market.

   XM Radio will promote subscriber acquisition activities with both original
equipment and aftermarket radio manufacturers. This might include

  .  promotional campaigns directed towards automobile manufacturers and
     dealers;

  .  promotional campaigns for free months of service with purchase of an XM
     radio or free installations for aftermarket car radios;

  .  incentive programs for retailer sales forces;

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

  .  jointly funded local advertising campaigns with retailers.

                                       9
<PAGE>

 Advertiser Development and Acquisition

   Our ability to aggregate various local niche market segments into national
audiences will be attractive to national advertisers and agencies. We have held
extensive meetings with media directors, planners and buyers at advertising and
media buying agencies to develop advertiser awareness of the benefits of
satellite radio. We expect to have advertising sales offices in seven major
media markets to sell directly to advertising agencies and media buying groups
and have engaged Premiere Radio Networks to be our advertising sales
representative. We will also work with ratings agencies in our advertising-
supported business. Statistical Research, Inc., which produces Radar reports,
has agreed to work with us to develop other ratings methodologies for satellite
radio.

   During our early years of service, we do not expect to have a listener base
sufficient to attract substantial national advertising dollars on individual
channels at competitive rates. Thus, we plan initially to attract national
advertisers and agencies with the following kinds of incentives.

   Charter Advertising Agreements. We have contracts with several advertisers,
advertising agencies and media buying companies offering charter advertising
packages at reduced rates for a limited time. Each charter advertiser will
purchase a minimum amount of advertising from us during the period that the
reduced rates are in effect. We intend to sign additional contracts on similar
terms.

   Foreign Language Advertising. We and our programmers plan to offer foreign
language advertising on specific foreign language-based channels. Several major
national advertisers have expressed strong interest in the ability to advertise
to these hard-to-reach customer segments.

 The XM Radio System

   We are designing our system to provide 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 will be 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 design uses a
network consisting of an uplink facility, two high-power satellites and, where
necessary, ground-based repeaters to provide digital audio service to XM
radios.

 Space Segment

   Satellite Construction. Under our satellite contract with Hughes, Hughes is
building and will launch two HS 702 high-power satellites for the XM Radio
system. Hughes has also agreed to provide, at our option, one ground spare
satellite, to be available in the event of a failed launch of any satellite or
to accommodate our satellite system growth.

   We believe that the HS 702 model will provide higher quality performance
than other satellite options. The first HS 702 satellite was successfully
launched in the fourth quarter of 1999 and a total of three HS 702 satellites
are currently scheduled for launch before the launch of our satellites.

   Hughes has also contracted to provide us with launch and operations support
services, equipment and software. Under our contract, Hughes must deliver the
first satellite no later than December 31, 2000 and the second satellite no
later than April 11, 2001.

   Hughes has engaged Alcatel to provide the communications payload electronics
for our satellites. The communications payload electronics are designed to make
best use of technologies that have already been developed or used in previous
satellite programs. The design includes significant redundancy and protective
measures to prevent loss of service.

   Satellite Transmission. We anticipate that our two satellites will be
deployed at 85 West Longitude and 115 West Longitude. After reaching their
designated orbital location, the satellites will receive audio signals from our
programming center and retransmit the signals across the continental United
States. The satellites will be 30(degrees) apart in longitude in order to
enhance the probability of clear line-of-sight communication between the
satellites and XM mobile radios.


                                       10
<PAGE>

   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. However, because coverage does extend to the Gulf of Mexico, the
California coast and the Atlantic coast, we also expect to be able to provide
XM Radio to the cruise ships, cargo vessels and leisure boats which frequent
these waters.

   Our satellites will transmit audio programming within a 12.5 MHz range of S-
Band radio frequencies that have been allocated by the FCC for our exclusive
use. Megahertz is a unit of measurement of frequency. This 12.5 MHz bandwidth
will be subdivided to carry the transmission of six signals, two signals to be
transmitted from each of our two satellites and two signals to be transmitted
by the terrestrial repeater network. The audio programming for XM Radio will be
carried on two satellite signals, and the remaining two satellite signals and
the terrestrial repeater signals will 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.
In order to provide high-quality digital sound, we expect that music channels
will require approximately 56 to 64 kilobits per second depending on the type
of compression technology used, whereas talk channels will require
significantly less band width. We expect to use our allocated bandwidth in such
a way as to provide up to 100 channels of programming, with our music channels
having a high bandwidth allocation so as to provide high-quality digital sound.

   Launch Services. Hughes has signed an agreement with Sea Launch Limited
Partnership, a joint venture in which Boeing Commercial Space Company has a
controlling 40% interest, to provide the launch services for our satellites.
The launch vehicle uses a new rocket called the Zenit-3SL, which is based on a
flight-proven two-stage rocket called the Zenit-2, plus a stage which is the
flight-proven upper stage of a Russian-developed rocket called the Proton
rocket. The Zenit-2 vehicle has been successfully launched 30 times in 35
attempts, for an 86% success rate. The upper stage has successfully flown in
186 flights on various rockets with five failures, for a 97% success rate.

   Sea Launch has developed a new launch system to launch rockets from an
ocean-based platform. Sea Launch will perform all rocket and satellite
processing at the Sea Launch home port in Long Beach, California. Sea Launch
will move the platform to its launch position in the South Pacific Ocean near
the equator, where the satellites can be launched more efficiently by avoiding
the requirement to conduct an orbital plane change. In March 1999, Sea Launch
successfully launched a rocket carrying an inert payload into geo-stationary
orbit. Sea Launch also successfully launched its first commerical satellite,
DIRECTV 1-R, in October 1999. As of December 31, 1999, Sea Launch had contracts
for an additional 18 launches. In March 2000 a satellite launch by Sea Launch
experienced an anomaly that resulted in the loss of the communications
satellite payload. An investigation is currently underway by Boeing and its Sea
Launch partners to determine the cause of the failure. We understand that Sea
Launch will resume launches after the anomaly has been investigated and
rectified. While there can be no assurances, given the anticipated Sea Launch
turn around window between launches, as well as our placement on the launch
manifest, with two others ahead of us, we do not expect any significant delay
with our launch schedule.

   Insurance. We bear the risk of loss for each of the satellites from the time
of launch, subject to exceptions set forth in our agreement with Hughes, and we
intend to obtain insurance to cover that risk. We intend to purchase launch and
in-orbit insurance policies from global space insurance underwriters. The
insurance premiums for both satellites are expected to cost us approximately
$50 million. We cannot predict the status of the insurance market near the time
of launch, which is the customary time for purchasing satellite insurance. We
expect that the policies we obtain will indemnify us for a total, constructive
total or partial loss of either of the satellites that occurs from the time of
launch through each satellite's expected lifetime. We intend to obtain coverage
which will exceed all hardware, insurance and launch service costs related to
the in-orbit replacement of a lost satellite. However, any insurance we may
obtain will not protect us from the adverse effect on our business operations
due to the loss of a satellite. We expect that these policies will contain
standard commercial satellite insurance provisions, including standard coverage
exclusions.

                                       11
<PAGE>

 Ground Segment

   Satellite Control.  Each of our satellites will be monitored by a telemetry,
tracking and control station, and both satellites will be controlled by a
satellite control station. Each of the stations will have a backup station. We
have a contract with an experienced satellite operator to perform the
telemetry, tracking and control functions.

   Programming and Business Center. Programming from both our studios and
external sources will be sent to our programming center, which will package and
retransmit signals to our satellites through the uplink station. Financial
services and certain administrative support will be carried on at our business
center. Communications traffic between the various XM Radio facilities will be
controlled by the network monitoring center. The network monitoring center will
monitor satellite signals and the terrestrial repeater network to ensure that
the XM Radio system is operating properly. We plan to design and install fault
detection systems to detect various system failures before they cause
significant damage.

   Terrestrial Repeaters. We intend to install a terrestrial repeater system to
supplement the coverage of our satellites. Terrestrial repeaters are ground-
based electronics equipment which receive and re-transmit the satellite
signals. We have signed a contract with LCC International, a wireless service
site planner, for the design and deployment of our terrestrial repeater
network. LCC International has completed initial site planning for 70 markets.
The contract with LCC International is described in more detail under the
caption "Certain Relationships and Related Transactions--Engineering Contract
with LCC International." We have entered into a contract with Hughes
Electronics Corporation for the design, development and manufacture of the
terrestrial repeaters. The contract is described in greater detail under the
caption "Certain Relationships and Related Party Transactions-Contracts with
Hughes."

   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 will still be 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 will
install terrestrial repeaters to facilitate signal reception. We will install
terrestrial repeaters on rooftops and existing tower structures where they will
receive the satellite signals, amplify them and retransmit them at a
significantly higher signal strength than is possible directly from the
satellites. Before we may install many of our planned terrestrial repeaters, we
must obtain roof rights in suitable locations and on acceptable terms. We do
not expect this to present a serious problem to our construction of a
terrestrial repeater network.

   The high power levels and proprietary signal design of the terrestrial
signals may allow XM radios to receive signals when a terrestrial repeater is
not in view, including within buildings and other structures which can be
penetrated by the terrestrial repeater signal. In some indoor locations which
cannot receive the repeater signal, users will need to use small externally
mounted antennas that will receive the signal from one of the two satellites.

   We have contracted to purchase 1,550 terrestrial repeaters and may install
as many as 1,700 terrestrial repeaters to cover urban areas in approximately 70
markets. We expect that this system will be operational by the second quarter
of 2001. We estimate that the largest urban markets may require in excess of
100 repeaters, while smaller cities with fewer tall buildings may require as
few as one to three repeaters. We also intend to use additional small repeaters
in areas such as tunnels, where reception would otherwise be severely
restricted. Our placement of terrestrial repeaters will be guided by a newly
developed radio frequency analysis technique which, employing technology
similar to that used in certain cellular telephone systems, analyzes the
satellite footprint to discover areas likely to have impaired reception of XM
Radio.

   We expect to benefit from the expertise gained by American Mobile with its
ARDIS terrestrial two-way data network consisting of approximately 1,700 base
stations sites serving cities throughout the United States. We may use a
portion of these sites in our system.

   XM Radios. We will transmit XM Radio throughout the continental United
States to vehicle, portable, home and plug and play radios. Our radios will be
capable of receiving both XM Radio and traditional AM/FM stations. We believe
prototypes will be available and limited production will begin by December
2000, and radios will be commercially available by commencement of commercial
operation.

                                       12
<PAGE>

   We have signed a contract with STMicroelectronics to design and produce
chips which will decode the XM Radio signal. Additionally, some of the design
elements in the chipsets currently being made for the WorldSpace International
system, which operates in a different frequency band, will be integrated into
our chipsets. Lucent Digital Radio has agreed to provide coding technology for
our audio signals.

   Delphi-Delco, Motorola, Pioneer, Alpine, Mitsubishi, Audiovox and Clarion
have signed contracts with us to develop, manufacture and distribute XM radios
which can be used in the car and we have signed a contract with Sony
Electronics to design, manufacture and market XM radios for the portable, home,
aftermarket and original equipment manufacture car stereo markets. We have also
signed a contract with SHARP to manufacture XM radios for home and portable
use.

   Unified Standard for Satellite Radio. On February 16, 2000, we signed an
agreement with Sirius Radio to develop a unified standard for satellite radios
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
unified standard will be jointly developed, funded and owned by the two
companies. In addition, we will work together with Sirius Radio to proliferate
the new standard by creating a service mark for satellite radio. This unified
standard is intended to meet FCC rules that require interoperability with both
licensed satellite radio systems.

   As part of the agreement, each company has licensed to the other its
intellectual property relating to its system; the value of this license will be
considered part of each company's contribution toward the joint development. In
addition, each company has agreed to license its non-core technology, including
non-essential features of its system, to the other at commercially reasonable
rates. In connection with this agreement, the pending patent litigation against
XM Radio has been resolved.

   We anticipate that it will take several years to develop radios capable of
receiving both services. At the commercial launch of our service, we anticipate
that our consumers will be able to purchase radios only capable of receiving
our service.

   Both companies expect to work with their automobile and radio manufacturing
partners to integrate the new standard. Future agreements with automakers and
radio manufacturers will specify the unified satellite radio standard.
Furthermore, future agreements with retail and automotive distribution partners
and content providers will be on a non-exclusive basis.

   We and Sirius Radio have also agreed to negotiate in good faith to provide
service to each other's subscribers in the event of a catastrophic failure of
the XM Radio system or the Sirius Radio system.

Competition

   We expect to face competition for both listeners and advertising dollars.

 Sirius Satellite Radio

   Our direct competitor in satellite radio service is likely to be Sirius
Satellite Radio, the only other FCC licensee for satellite radio service in the
United States. Since October 1997, Sirius Satellite Radio's common stock has
traded on the Nasdaq National Market. Sirius Satellite Radio plans to deploy
three satellites in a North American elliptical orbit and a network of
terrestrial repeaters. Sirius Satellite Radio has announced in recent SEC
filings that it has arrangements for the construction, implementation and
distribution of its service and that it expects to begin receiving revenue from
operations in early 2001, which is slightly ahead of our planned commencement
of commercial operations in the second quarter of 2001.

 Traditional AM/FM Radio

   Our competition will also include traditional AM/FM radio. Unlike XM Radio,
traditional AM/FM radio already has a well established market for its services
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 traffic and weather reports,
which XM Radio initially will be unable to offer as effectively as local radio,
or at all. The AM/FM radio broadcasting industry is highly competitive.

                                       13
<PAGE>

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;

  .  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 may be able to transmit digitally into the
bandwidth occupied by current AM/FM stations.

 Internet Radio

   There are a growing number of Internet radio broadcasts which provide
listeners with radio programming from around the country and the world.
Internet radio can be heard through a personal computer equipped with a modem,
sound card and speakers. One of the largest Internet radio providers,
Broadcast.com Inc., currently provides a large number of stations on the
Internet and has recently completed an initial public offering of stock,
indicating growth in the industry. Announcements have been made about plans by
one or more companies to deliver Internet radio to cars or portable radios
using satellites. Although we believe that the current sound quality of
Internet radio is below standard and may vary depending on factors such as
network traffic, which can distort or interrupt the broadcast, we expect that
improvements from higher bandwidths, faster modems and wider programming
selection may make Internet radio a more significant competitor in the future.

   There are a number of Internet-based audio formats in existence or in
development which could 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. In addition, prominent members of the music
and computer industry have supported an initiative known as the Secure Digital
Music Initiative to become a standard for fee-based electronic distribution of
copyrighted sound recordings. 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.

 Direct Broadcast Satellite and Cable Audio

   A number of companies provide specialized audio service through either
direct broadcast satellite and 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 generally an add-on service to the
higher priced video service.

Regulatory Matters

   XM Radio and Sirius Radio received licenses from the FCC in October 1997 to
construct and operate satellite radio service. The FCC has allocated 25 MHz for
the new service in a range of radio frequencies known as the S-Band.

   As an owner of one of two FCC licenses to operate a commercial satellite
radio service in the United States, we will continue to be subject to
regulatory oversight by the FCC. Our development, implementation and eventual
operation of our system will be subject to significant regulation by the FCC
under authority granted under the Communications Act and related to 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.

                                       14
<PAGE>

   One of the two losing bidders in the satellite radio license auction filed
an application for review of the order granting our FCC license, but the
challenge was denied. The losing bidder is seeking review by the FCC. The
losing bidder has argued that WorldSpace had effectively taken control of us
without FCC approval and that WorldSpace has circumvented the FCC's application
cut-off procedures. WorldSpace is no longer a stockholder in our company. We
have opposed this appeal and have denied the allegations contained in the
challenge. The FCC's order granting our license remains in effect during the
pendency of the application for review. Although we believe that the award of
the license to us will continue to be upheld, we cannot predict the ultimate
outcome of this challenge. If this challenge is successful, the FCC could take
a range of actions, any of which could harm our ability to proceed with our
planned satellite radio service.

   Our license, which is held by a subsidiary wholly owned by us, has a term of
eight years from commencement of our operations and may be renewed. The FCC
requires the satellite radio licensees, including us, to adhere to certain
milestones in the development of their systems, including a requirement that
the licensees begin full operation by October 2003.

   Our FCC license requires us to meet the following milestones:

<TABLE>
<CAPTION>
Deadline                          Milestone                                 Status
--------                          ---------                                 ------
<S>           <C>                                                <C>
October 1998  Complete contracting for first satellite           Completed March 1998
October 1999  Complete contracting for second satellite          Completed March 1998
October 2001  Begin in-orbit operation of at least one satellite Expected Fourth Quarter 2000
October 2003  Begin full operation of the XM Radio system        Expected Second Quarter 2001
</TABLE>


   While we have already fulfilled the first two milestones, we may not meet
the remaining two milestones, in part because we depend on third parties to
build and launch our satellites. If we fail to meet these milestones, the FCC
could take a range of actions, any of which may harm our business.

   For business and technical reasons, we have decided to modify certain
aspects of the satellite radio system described in our May 1997 amended
application to the FCC. Specifically, we intend to

  .  increase the satellites' transmission power;

  .  eliminate coverage of Alaska and Hawaii; and

  .  change the total number of signals carried by the satellites and
     terrestrial repeaters.

   We will subdivide our 12.5 MHz of allocated bandwidth to carry six signals
instead of five as previously stated in our FCC application. Two signals will
be transmitted by each of the two satellites, and two signals will be
transmitted by our terrestrial repeaters. We have filed an application
requesting that the FCC allow us to modify the XM Radio system to incorporate
these changes. In response to our application, one commenter expressed concern
that a grant of XM Radio's request to operate its satellites at higher power
could have an adverse effect on international frequency coordination with the
government of Mexico. We discuss the coordination of the XM Radio system with
systems operating in the same frequency bands in adjacent countries below in
this section. While the FCC regularly approves modifications to commercial
licenses, it may not approve our request.

   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.

   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 plans
to use a different transmission technology than we plan to use. Because of
uncertainty regarding the design of Sirius Radio's systems, we may face
difficulties initially in meeting this interoperability requirement. We have
signed an agreement with Sirius Radio to develop a unified standard for
satellite radios, but we anticipate that it will take

                                       15
<PAGE>

several years to develop the technologies necessary for radios that will be
capable of receiving both our service and Sirius Radio's service. Accordingly,
we may not be able to meet the FCC's interoperability requirements by the time
we launch our commercial operations and may need to obtain an extension of time
or modification of this requirement from the FCC. Furthermore, complying with
the interoperability requirement could make the radios more difficult and
costly to manufacture.

   The FCC is currently conducting a rulemaking proceeding to establish rules
for terrestrial repeater transmitters, which we plan to deploy 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, have asked the FCC to

  .  delay consideration of terrestrial repeater rules until our company and
     Sirius Radio provide additional information regarding planned
     terrestrial repeaters;

  .  require individual licensing of each terrestrial repeater;

  .  limit the number of repeaters that may be deployed; 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 plans to deploy terrestrial repeaters in our system may be impacted,
possibly materially, by whatever rules the FCC issues in this regard.

   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 will need 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 resolved
the issue with Canada and has begun discussions with the Mexican government.
However, the negotiations with Mexico could be complicated by that country's
interest in developing a similar digital satellite radio service that might
operate on the same frequencies as XM Radio will use in the United States.
Although we are optimistic that the FCC will coordinate satellite radio
frequency use with Mexico without compromising our ability to operate as
planned, it may not be able to do so, which could materially affect XM Radio.

   We will operate the communication uplinks between our own earth station and
our satellites in a band of radio frequencies that are used for several other
services. These services are known under FCC rules as fixed services, broadcast
auxiliary services, electronic news gathering services, and mobile satellite
services for uplink station networks. Although we are optimistic that we will
succeed in coordinating domestic uplink station networks, we may not be able to
coordinate use of this spectrum in a timely manner, or at all.

   We also need to protect our system from out-of-band emissions from licensees
operating in adjacent frequency bands. Wireless Communication Service licensees
operating in frequency bands adjacent to the satellite radio's S-Band
allocation must comply with certain out-of-band emission limits imposed by the
FCC to protect satellite radio systems. These limits, however, are less
stringent than those we proposed. In addition, in April 1998, the FCC proposed
to amend its rules to allow for new radio frequency lighting devices that would
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
emission limits, particularly if used for street lighting, may interfere with
XM Radio. However, the FCC may not rule in our favor, a decision which could
adversely affect our signal quality.

                                       16
<PAGE>

   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.

   Sea Launch, Alcatel and other vendors are subject to United States export
regulations. Our vendors will need approval from the State Department under
technology export statutes and regulations for the launch of our satellites.
Although these are not new requirements, the export of technology has received
considerable attention in response to concerns about the export of technology
to China by the United States defense contractors. The negative publicity may
lead the United States Congress to alter the relevant laws or regulations, or
may change the State Department's policy in enforcing the regulations. Any
change in applicable law or policy may result in delay of our satellite launch.

Intellectual Property

 System Technology

   We have contracted with several technology companies to implement portions
of the XM Radio system. These technology companies include Hughes and Alcatel
(satellites); Delphi-Delco, Sony, Motorola, Pioneer, Alpine, Mitsubishi,
Audiovox, Clarion and SHARP (car and home radios); STMicroelectronics
(chipsets); Lucent Digital Radio (audio coding technology); Fraunhofer
Institute (various technologies) and LCC International (design of repeater
network). We will not acquire any intellectual property rights in the
satellites. We will have joint ownership of or a license to use the technology
developed by the radio and chipset manufacturers. We will own the design of our
system, including aspects of the technology used in communicating from the
satellites and the design of the repeater network.

   Our system design, our repeater system design and the specifications we
supplied to our radio and chipset manufacturers incorporates or may in the
future incorporate some intellectual property licensed to us on a non-exclusive
basis by WorldSpace Management. WorldSpace Management 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. Under our agreement with WorldSpace
Management we must pay one time, annual or percentage royalty fees or reimburse
WorldSpace Management for various costs for various elements of the licensed
technology that we decide to use in the XM Radio system. We have incurred costs
of $6.7 million to WorldSpace Management under this agreement through December
31, 1999. We will not be required to pay royalties to WorldSpace Management for
licensed technology that we do not use in our system. We anticipate that the
Fraunhofer Institute will continue to provide various development services for
us in connection with the design of our system.

   American Mobile has granted us a royalty-free license with respect to
certain ground segment communications technology and antenna technology.

   American Mobile and WorldSpace Management have also granted us royalty-free,
non-exclusive and irrevocable licenses to use and sublicense all improvements
to their technology. The technology licenses from American Mobile and
WorldSpace Management renew automatically on an annual basis unless terminated
for a breach which has not been or cannot be remedied.

   We believe that the intellectual property rights we have licensed under our
technology license were independently developed or duly licensed by American
Mobile or WorldSpace International, as the case may be. We cannot assure you,
however, that third parties will not bring suit against us for patent or other
infringement of intellectual property rights.

                                       17
<PAGE>

   We have signed an agreement with Sirius Radio to develop a unified standard
for satellite radios 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 unified standard 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 unified standard and to its
system; the value of this license will be considered part of its contribution
toward the joint project. In addition, each company has agreed to license its
non-core technology, including non-essential features of its system, to the
other at commercially reasonable rates. Each party will be entitled to license
fees or a credit towards its obligation to fund one half of the development
cost of the technologies used to develop a unified standard for satellite
radios. The amount of the fees or credit will be based upon the validity,
value, use, importance and available alternatives of the technology each
contributes and will be determined over time by agreement of the parties or by
arbitration. We cannot predict at this time the amount of license fees, if any,
payable by or to XM or Sirius Radio of the size or the credits to XM and
Sirius Radio from the use of their technology. This may require additional
capital, which could be significant.

 Prior Litigation with Sirius Radio; Technology License

   On January 12, 1999, Sirius Radio, the other holder of an FCC satellite
radio license, commenced an action against us in the United States District
Court for the Southern District of New York, alleging that we were infringing
or would infringe three patents assigned to Sirius Radio. In its complaint,
Sirius Radio sought money damages to the extent we manufactured, used or sold
any product or method claimed in their patents and injunctive relief. This suit
was resolved in February 2000 in accordance with the terms of a joint
development agreement between us and Sirius Radio in which both companies
agreed to develop a unified standard for satellite radios and license our
respective intellectual property, including the patents that were the subject
of the suit, for use in this joint development. If this agreement is terminated
before the value of the licenses has been determined due to our failure to
perform a material covenant or obligation, then this suit could be refiled.

   If this litigation were recommenced, we believe based on the planned design
of our system, our knowledge of the differences between our system and the
claims of the Sirius Radio patents and on advice we have previously received
from our patent counsel, that a court would find that we have not and will not
infringe any Sirius Radio patents. However, the litigation could harm us, even
if we were successful. It would divert our management's attention and might
make it more difficult for us to raise financing or enter into other agreements
with third parties. In addition, even if we prevailed, the Sirius Radio
litigation might prevent us from moving forward with the development of the XM
Radio system in a timely manner. The Sirius Radio patents involved in the
litigation relate to certain aspects of signal and reception methodologies that
may be employed by a satellite radio system. If this suit were refiled and we
lost all or part of this litigation, we could become liable to Sirius Radio for
money damages and subject to an injunction preventing us from using certain
technology in the XM Radio system. Any such injunction could force us to
engineer technology which would not be subject to the injunction, license or
develop alternative technology, or seek a license from, and pay royalties to,
Sirius Radio. If any of these strategies becomes necessary, it could be costly
and time-consuming and would likely delay any implementation of our system. If
we could not accomplish any strategy, or could not do so in a timely manner at
an acceptable cost, our business would be harmed.

 Copyrights to Programming

   We must negotiate and enter into music programming royalty arrangements with
performing rights societies such as the American Society of Composers, Authors
and Publishers, Broadcast Music, Inc., and SESAC, Inc. These organizations
collect royalties and distribute them to songwriters and music publishers and
negotiate fees with copyright users based on a percentage of revenues. Radio
broadcasters currently pay a combined total of approximately 3-4% of their
revenues to these performing rights societies. We expect to negotiate or
establish by arbitration royalty arrangements with these organizations, but
such royalty arrangements may be more costly than anticipated or unavailable.
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 owners of the sound

                                       18
<PAGE>

recordings. The Recording Industry Association of America will negotiate
licenses and collect royalties on behalf of copyright owners for this
performance right in sound recordings. Cable audio services currently pay a
royalty rate of 6.5% of gross subscriber revenue. This rate was set by the
Librarian of Congress, which has statutory authority to decide rates through
arbitration, and was affirmed on May 21, 1999 by the United States Court of
Appeals for the District of Columbia. Although we believe we can distinguish XM
Radio sufficiently from the cable audio services in order to negotiate a lower
statutory rate, we may not be able to do so.

 The XMTM Trademark

   We believe that XM Radio will be seen as the complement to AM and FM radio.
We have an application pending in the United States Patent and Trademark Office
for the registration of the trademark "XM" in
connection with the transmission services offered by our company and expect
that our brand name and logo will be prominently displayed on the surface of XM
radios together with the radio manufacturer's brand name. This will identify
the equipment as being XM Radio- compatible and build awareness of XM Radio. We
intend to maintain our trademark and the anticipated 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.

Personnel

   As of January 31, 2000, we had 67 employees. In addition, we rely upon a
number of consultants and other advisors. 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 is represented by a labor
union, and we believe that our relationship with our employees is good.

ITEM 2. PROPERTIES

   Our executive offices are located at 1250 23rd Street, N.W., Suite 57,
Washington, D.C. 20037-1100, and are leased pursuant to a lease agreement that
will expire on October 31, 2000. We have entered into a ten year lease of
approximately 120,000 square feet of additional space in Washington, D.C. to be
used as our headquarters office, as well as for our studio and production
facilities.

ITEM 3. LEGAL PROCEEDINGS

   Except for the FCC proceeding described under the caption "Business--
Regulatory Matters," we are not a party to any material litigation or other
proceedings.

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 1999.

                                       19
<PAGE>

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
                          PRICE RANGE OF COMMON STOCK

   Our Class A common stock has been quoted on the Nasdaq National Market under
the symbol "XMSR" since our initial public offering on October 5, 1999. The
following table presents, for the period indicated, the high and low sales
prices per share of our Class A common stock as reported on the Nasdaq National
Market.

<TABLE>
<CAPTION>
                                                                  High    Low
                                                                 ------ -------
<S>                                                              <C>    <C>
1999:
 Fourth Quarter (beginning October 5, 1999)..................... $44.75 $11.625
</TABLE>

   On March 10, 2000, the last reported bid price for our Class A common stock
on the Nasdaq National Market was $42.50. As of March 10, 2000, there were 76
holders of record of our Class A common stock.

                                DIVIDEND POLICY

   We have not declared or paid any dividends since our date of inception. We
do not intend to pay cash dividends on our common stock in the foreseeable
future. We anticipate we will retain any earnings for use in our operations and
the expansion of our business. We are obligated to pay dividends on our Series
B convertible redeemable preferred stock, which we may pay in cash or in shares
of our Class A common stock, at our option.

                    RECENT SALES OF UNREGISTERED SECURITIES

   None.

                                       20
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA


   In considering the following selected consolidated financial data, you
should also read our 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 three-year period ended December 31, 1999, and for the period from December
15, 1992 (date of inception) to December 31, 1999, and the consolidated balance
sheets data as of December 31, 1997, 1998 and 1999 are derived from our
consolidated financial statements. These statements have been audited by KPMG
LLP, independent certified public accountants. KPMG's report contains a
paragraph stating that we have not begun operations and are dependent upon
additional debt or equity financing, and that these factors raise substantial
doubt about our ability to continue as a going concern. The selected
consolidated financial data do not include any adjustments that might result
from the outcome of that uncertainty.


<TABLE>
<CAPTION>
                                                                  December 15,
                                                                  1992 (Date of
                                  Years Ended December 31,         Inception)
                               --------------------------------  to December 31,
                                 1997       1998        1999        1999 (1)
                               ---------  ---------  ----------  ---------------
                                (In thousands, except share
                                           data)
<S>                            <C>        <C>        <C>         <C>
Consolidated Statements of
 Operations Data:
Revenue......................  $      --  $      --  $       --     $    --
                               ---------  ---------  ----------     --------
Operating expenses:
 Research and development....         --      6,941       4,274       11,215
 Professional fees...........      1,090      5,242       9,969       16,301
 General and administrative..         20      4,010      16,448       20,478
                               ---------  ---------  ----------     --------
 Total operating expenses....      1,110     16,193      30,691       47,994
                               ---------  ---------  ----------     --------
Operating loss...............     (1,110)   (16,193)    (30,691)     (47,994)
Other expense--interest
 income (expense), net.......       (549)        26      (6,205)      (6,728)
                               ---------  ---------  ----------     --------
Net loss.....................  $  (1,659) $ (16,167) $  (36,896)    $(54,722)
                               =========  =========  ==========     ========
Net loss per share--basic and
 diluted.....................     $(0.26)    $(2.42)     $(2.40)
                               =========  =========  ==========
Weighted average shares used
 in computing net loss per
 share--basic and diluted....  6,368,166  6,689,250  15,344,102
</TABLE>

<TABLE>
<CAPTION>
                                              December 31,
                                        --------------------------
                                         1997     1998      1999
                                        ------- --------  --------
                                             (In thousands)
<S>                                     <C>     <C>       <C>      <C> <C> <C>
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term
 investments........................... $     1 $    310  $120,170
System under construction..............  91,932  169,029   362,358
Total assets...........................  91,933  170,485   515,189
Total debt.............................  82,504  140,332       212
Total liabilities......................  82,949  177,668    30,172
Stockholders' equity (deficit).........   8,984   (7,183)  485,017
</TABLE>
--------
(1) Business activity for the period from December 15, 1992, which was our date
    of inception, through December 31, 1996 was insignificant.

                                       21
<PAGE>

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


   The following discussion and analysis provides information which 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.

Introduction

   XM Satellite Radio Inc. was incorporated in Delaware in 1992 as a wholly-
owned subsidiary of American Mobile. XM Satellite Radio Holdings Inc. became a
holding company for XM Satellite Radio Inc. in connection with a strategic
investment by a former shareholder in early 1997. In July 1999, following our
repayment of $75.0 million in debt owed to the former shareholder, it conveyed
all of its interest in us to a trust. American Mobile then acquired all of that
interest from the trust, making American Mobile our only stockholder at that
time. Also, in July, we issued $250.0 million of Series A subordinated
convertible notes. In October 1999, we completed an initial public offering and
exercised an overallotment option for a cumulative total of 10,241,000 shares
of Class A common stock, yielding net proceeds of $114.1 million. Concurrent
with the closing of our initial public offering, the $250.0 million of Series A
subordinated convertible notes, together with associated accrued interest of
$6.8 million, converted into 10,786,504 shares of Series A convertible
preferred stock and 16,179,755 shares of Class A common stock. Additionally,
the $21.4 million and $81.7 million of convertible notes issued to American
Mobile, together with associated accrued interest of $3.8 million, converted
into 11,182,926 shares of Class B common stock. In the first quarter of 2000,
we completed a follow-on offering of 4,370,000 shares of Class A common stock,
yielding net proceeds of $132.2 million, a concurrent offering of 2,000,000
shares of our Series B convertible redeemable preferred stock, which yielded
net proceeds of $96.3 million, and a private placement of 325,000 units, each
consisting of $1,000 principal amount of 14% senior secured notes due 2010 and
one warrant to purchase 8.024815 shares of Class A common stock at $49.50 per
share that provided net proceeds of $191.0 million excluding $123.0 million for
an interest reserve.

   We are in the development stage. Since our inception in December 1992, we
have devoted our efforts to establishing and commercializing the XM Radio
system. Our activities were fairly limited until 1997, when we pursued and
obtained regulatory approval from the FCC to provide satellite radio service.
Our principal activities to date have included

  .  designing and developing the XM Radio system;

  .  negotiating contracts with satellite and launch vehicle operators,
     specialty programmers, radio manufacturers and car manufacturers;

  .  developing technical standards and specifications;

  .  conducting market research; and

  .  securing financing for working capital and capital expenditures.

   We have incurred substantial losses to date and expect to continue to incur
significant losses for the foreseeable future as we continue to design, develop
and deploy the XM Radio system and for some period following our commencement
of commercial operations.

   We intend to capitalize all costs related to our satellite contract and our
FCC license, including all applicable interest. These capitalized costs will be
depreciated over the estimated useful lives of the satellites and ground
control stations. Depreciation of our satellites will commence upon in-orbit
delivery. Depreciation of our satellite control facilities and terrestrial
repeaters and the amortization of our FCC license will commence upon commercial
operations.

   After we begin commercial operations, which we are targeting for the second
quarter of 2001, we anticipate that our revenues will consist primarily of
customers' subscription fees and advertising revenues.


                                       22
<PAGE>

Results of Operations

 Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

   Research and Development. Research and development expenses decreased to
$4.3 million in 1999, compared with $6.9 million in 1998. The decrease in
research and development expenses resulted from the completion of the
development of some of our system technology during 1998.

   Professional Fees. Professional fees increased to approximately $10.0
million in 1999, compared with $5.2 million in 1998. The increase primarily
reflects additional legal, regulatory and marketing expenses.

   General and Administrative. General and administrative expenses increased to
$16.4 million in 1999, compared with $4.0 million in 1998. The increase
primarily reflects increased headcount and facility expenses to begin program
management and operations. We also commenced the amortization of our goodwill
and intangibles resulting from American Mobile's acquisition of a former
investor's interest in us during 1999. We have granted certain key executives
stock options and incurred a non-cash compensation charge of approximately $4.1
million in the fourth quarter of 1999 primarily for performance-based stock
options. We will continue to incur quarterly non-cash compensation charges over
the vesting period depending on the market value of our Class A common stock.

   Interest Income. Interest income increased to $2.9 million in 1999, compared
with 1998, which was insignificant. The increase was the result of higher
average balances of cash and short-term investments during 1999 due to the
proceeds from the issuance of Series A convertible notes in the third quarter
of 1999 exceeding the amounts of expenditures for satellite and launch vehicle
construction, other capital expenditures and operating expenses.

   Interest Expense. As of December 31, 1999 and 1998, we owed $0 and $140.2
million, respectively, including accrued interest, under various debt
agreements which we entered into for the purpose of financing the XM Radio
system. Our capitalized interest costs were $15.3 million and $11.8 million
associated with our FCC license and the XM Radio system during 1999 and 1998,
respectively. We expensed interest costs of $9.1 million and $0 during 1999 and
1998, respectively. We incurred a one-time $5.5 million charge to interest due
to the beneficial conversion feature of the new American Mobile note. We also
exceeded our interest capitalization threshold by $3.6 million.

   Net Loss. The net loss for 1999 and 1998 was $36.9 million and $16.2
million, respectively. The increase in net losses for 1999, compared with 1998,
primarily reflects an increase in net interest expense as discussed above and
additional general and administration expenses, primarily due to increased
headcount and facility expenses, in preparation for commercial operations and
the commencement of amortization of goodwill and intangibles.

 Year Ended December 31, 1998 Compared with Year Ended December 31, 1997

   Research and Development. Research and development expenses amounted to
approximately $6.9 million for the year ended December 31, 1998. Research and
development expenses for the year ended December 31, 1997 were insignificant.
The increase in research and development expenses resulted from the development
of some of our system technology during 1998.

   Professional Fees. Professional fees increased to approximately $5.2 million
for the year ended December 31, 1998, compared with $1.1 million for the year
ended December 31, 1997. The increase primarily reflects legal, regulatory and
marketing expenses.

   General and Administrative. General and administrative expenses increased to
$4.0 million for the year ended December 31, 1998, compared with $20,000 for
the year ended December 31, 1997. The increase primarily reflects increased
headcount and facility expenses to begin program management and operations.

   Interest Expense. As of December 31, 1998 and 1997, we owed $140.2 million
and $82.5 million, respectively, including accrued interest, under various debt
agreements which we entered into for the purpose of

                                       23
<PAGE>

financing the XM Radio system. We capitalized interest costs of $11.8 million
and $1.9 million associated with our FCC license and the XM Radio system during
the year ended December 31, 1998 and 1997, respectively. We expensed interest
costs of $0.5 million during the year ended December 31, 1997.

   Net Loss. The net loss for the years ended December 31, 1998 and 1997 was
$16.2 million and $1.7 million, respectively, primarily reflecting research and
development activities, professional fees and general and administrative
expenses.

Liquidity and Capital Resources

   At December 31, 1999, we had a total of cash, cash equivalents and short-
term investments of $120.2 million and working capital of $94.7 million,
compared with cash and cash equivalents of $0.3 million and working capital of
$(130.3) million at December 31, 1998. The increases in the respective balances
are due primarily to the proceeds from the issuance of Series A subordinated
convertible notes in July 1999 (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Funds Required for XM Radio
Through Commencement of Commercial Operations--Sources of Funds") exceeding
capital expenditures and operating expenses for 1999, which was off-set by a
$75 million payment to retire loans payable, and the conversion of current
loans payable to a former shareholder into the non-current American Mobile new
convertible note. In October 1999, we successfully completed an initial public
offering, which raised $114.1 million in net proceeds, and converted the Series
A subordinated convertible notes into Series A convertible preferred stock and
Class A common stock.

 Funds Required for XM Radio Through Commencement of Commercial Operations

   We estimate that we will require approximately $1.1 billion to develop and
implement the XM Radio system from our inception through the commencement of
commercial operations, which we are targeting for the second quarter of 2001.
We will have raised an aggregate of $865.0 million since our inception net of
expenses, interest reserve and repayment of debt. We will require substantial
additional funding, approximately $235.0 million, to finish building the XM
Radio system, to provide working capital and fund operating losses until we
commence commercial operations. The funds raised to date are expected to be
sufficient in the absence of additional financing to cover our funding needs
into the third quarter of 2000.

   We currently expect to satisfy our funding requirements by selling debt or
equity securities and by obtaining loans or other credit lines from banks or
other financial institutions. In addition, we plan to raise funds through
vendor financing arrangements associated with our terrestrial repeater project.
If we are successful in raising additional financing, we anticipate that a
significant portion of future financing will consist of debt. We are actively
considering possible financings, and because of our substantial capital needs
we may consummate one or more financings at any time. Often, high yield debt
securities are issued as part of units with warrants to purchase common stock.
If warrants were issued in any debt placement by us, the amount of common stock
that may be purchased and the price at which stock would be purchased under the
warrants would depend upon market conditions at that time.

   American Mobile is our controlling stockholder. American Mobile has certain
rights regarding the election of persons to serve on our board of directors and
as of the date of this report, holds 61.0% of the voting power of Holdings, or
50.5% giving effect to the conversion of all of Holdings' outstanding common
stock equivalents. American Mobile cannot relinquish its position as our
controlling shareholder without obtaining the prior approval of the FCC.
Accordingly, prior to our obtaining FCC approval of the transfer of control
from American Mobile, we will only be able to issue a limited amount of voting
securities or securities convertible into voting securities unless certain of
our stockholders holding nonvoting convertible securities agree not to convert
them into voting securities or we take other steps to permit voting securities
on a basis consistent with FCC rules. Certain holders of our nonvoting
securities have agreed not to convert their securities if it would cause
American Mobile not to hold a majority of our voting stock or a lesser
percentage approved by the FCC, until we obtain approval by the FCC of a change
in control. In return, Holdings has agreed not to issue new voting securities,
other than the units issued on March 15, 2000 and other than up to 2,000,000
shares of Class A common stock (except upon conversion or exercise of existing
securities or under our employee stock plans), if it would make these holders
unable to convert any of their non-voting securities. We intend to seek
appropriate FCC approvals in the near future. We may not be able to obtain FCC

                                       24
<PAGE>

approval or it may take a long period of time to obtain such approval and
there may be conditions imposed in connection with such approval which may be
unfavorable to us. The inability to raise capital opportunistically, or at
all, could adversely affect our business plan.

   We may not be able to raise any funds or obtain loans on favorable terms or
at all. Our ability to obtain the required 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 agreements with our investors
or lenders. If we fail to obtain any necessary financing on a timely basis, a
number of adverse effects could occur. Our satellite construction and launch
and other events necessary to our business could be materially delayed or
their costs could materially increase. We could default on our commitments to
our satellite construction or launch contractors, creditors or others, leading
to termination of construction or inability to launch our satellites. Finally,
we may not be able to launch our satellite radio service as planned and may
have to discontinue operations or seek a purchaser for our business or assets.

   Our expected sources and uses of funds through commencement of commercial
operations are as follows:

                      Inception Through Commercial Launch
                                 (in millions)

Sources of Funds
<TABLE>
<S>                                                                    <C>
  Total funds raised to date.......................................... $  865.0
  Future capital requirements.........................................    235.0
                                                                       --------
    Total sources..................................................... $1,100.0
                                                                       ========

Uses of Funds
  Satellites and launch............................................... $  472.6
  Launch insurance....................................................     50.0
  Terrestrial repeater system.........................................    263.3
  Ground segment......................................................     65.9
                                                                       --------
    Total system......................................................    851.8
  FCC license.........................................................     90.0
  Operating expenses and working capital requirements.................    158.2
                                                                       --------
    Total uses........................................................ $1,100.0
                                                                       ========
</TABLE>

   The sources and uses chart for inception through commercial launch assumes
that we will commence full commercial operations in the second quarter of 2001
and does not include net interest income or expense of any future offerings or
other financings. We anticipate that we will need substantial further funding
after commencement of operations to cover our cash requirements before we
generate positive cash flow from operations. Many factors, including our
ability to generate significant revenues, could affect this estimate. See
"Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

   Total funds raised to date in the chart above include proceeds of

  .  $9.2 million in equity contributions and an additional $157.8 million in
     equity from converted debt instruments funded by American Mobile and by
     a former investor who sold its investment to American Mobile.

  .  $238.7 million in net proceeds from convertible notes which were
     converted to Class A common stock and Series A convertible preferred
     stock on October 8, 1999 as a result of our initial public offering. $75
     million of these proceeds were used to repay outstanding debt.

  .  $114.1 million in net proceeds from our initial public offering.

  .  $132.2 million in net proceeds from a Class A common stock offering in
     the first quarter of 2000.

                                      25
<PAGE>

  .  $96.3 million in net proceeds from a Series B convertible preferred
     stock offering in the first quarter of 2000.

  .  $191.0 million in net proceeds from a private placement on March 15,
     2000, of 325,000 units, each unit consisting of $1,000 principal amount
     of 14% senior secured notes due 2010 and one warrant to purchase
     8.024815 shares of Class A common stock at $49.50 per share, excluding
     $123.0 million for an interest reserve.

  .  $0.4 million in proceeds from the sale of stock under the employee stock
     purchase plan and the exercise of stock options.

   The use of funds for satellites and launch in the chart above includes
$472.6 million for satellites, launch and long-lead items, including certain
financing costs associated with the satellites, and for an option to complete
the ground spare satellite under our satellite contract with Hughes. As of
December 31, 1999, $183.9 million has been paid under the satellite contract.

   The anticipated $65.9 million in costs for ground segment are intended to
cover the satellite control facilities, programming production studios and
various other equipment and facilities. As of December 31, 1999, we had
incurred 7.6 million in costs in deploying the ground segment.

   Other operating expenses and working capital requirements in the chart above
include cumulative historical operating losses through December 31, 1999 of
$54.7 million.

   Sources of Funds. To date, we have raised approximately $865.0 million of
equity proceeds, net of expenses, interest reserve and repayment of debt. These
funds have been used to acquire our FCC license, make required payments under
our satellite contract with Hughes, and for working capital and operating
expenses. Of the $865.0 million raised to date, approximately $167.0 million,
excluding the Class A common stock acquired as part of our initial public
offering, has been raised through the issuance of equity to, and receipt of
loans from, our current stockholder, American Mobile, and a former stockholder.
Of this amount, approximately $90.7 million and $46.0 million was raised in
1997 and 1998, respectively, and $30.3 million was raised in January 1999.

   In July 1999, we issued $250.0 million of Series A subordinated convertible
notes to six strategic and financial investors--General Motors, $50.0 million;
Clear Channel Communications, $75.0 million; DIRECTV, $50.0 million; and
Columbia Capital, Telcom Ventures, L.L.C. and Madison Dearborn Partners, $75.0
million in the aggregate. Using part of the proceeds from the issuance of the
Series A subordinated convertible notes, we paid a former stockholder $75.0
million in July 1999 to redeem an outstanding loan. We incurred fees and
expenses totalling $11.3 million in connection with these transactions.

   In October 1999, we raised $114.1 million from the issuance of 10.2 million
shares of Class A common stock at a price of $12 per share less $8.8 million in
underwriting discounts and commissions and estimated expenses. The Series A
convertible notes, together with related accrued interest, automatically
converted into 16,179,755 shares of our Class A common stock and 10,786,504
shares of our Series A preferred stock. Also, the American Mobile notes,
together with related accrued interest, automatically converted into 11,182,926
shares of our Class B common stock. As a result of these transactions,
substantially all of our indebtedness converted into equity.

   In the first quarter of 2000, we completed a follow-on offering of 4,370,000
shares of Class A common stock, yielding net proceeds of $132.2 million. At the
same time, we completed an offering of 2,000,000 shares of our Series B
convertible redeemable preferred stock, which yielded net proceeds of $96.3
million. We also completed a private placement on March 15, 2000 of 325,000
units, each unit consisting of $1,000 principal amount of 14% senior secured
notes due 2010 and one warrant to purchase 8.024815 shares of Class A common
stock at $49.50 per share that provided net proceeds of $191.0 million,
excluding $123.0 million for an interest reserve.

   Uses of Funds. Of the approximately $1.1 billion of funds to be used through
commencement of commercial operations, an estimated $569.4 million are expected
to be incurred under contracts presently in place and for our FCC license,
which has already been paid for in full. Total capital expenditures from our
inception to December 31, 1999, totaled $295.5 million.


                                       26
<PAGE>

   Satellite Contract. Under our satellite contract, Hughes will deliver two
satellites in orbit and if we exercise our option, complete construction of a
ground spare satellite. Hughes will also provide ground equipment and software
to be used in the XM Radio system and certain launch and operations support
services. We expect that by commencement of commercial operations in the second
quarter of 2001, we will have had to pay an aggregate amount of approximately
$472.6 million for these items and for Hughes to complete the optional ground
spare satellite. This amount does not include incentive payments, which will
depend in part on projected satellite performance at the acceptance date. Such
payments could total up to an additional $68.7 million over the useful lives of
the satellites. As of December 31, 1999, we had paid approximately $183.9
million under our satellite contract and recognized an additional $15.5 million
in accrued milestone payments which were paid subsequently.

   Launch Insurance. Based on current industry estimates, we expect that launch
insurance for both satellites will cost an aggregate of approximately $50.0
million. As of December 31, 1999, we had not incurred any costs with respect to
launch insurance.

   Terrestrial Repeater System. Based on the current design of the XM Radio
system and preliminary bids, we estimate that through our expected commencement
of operations in the second quarter of 2001 we will incur aggregate costs of
approximately $263.3 million for a terrestrial repeater system. We expect these
costs to cover the capital cost of the design, development and installation of
a system of terrestrial repeaters to cover approximately 70 cities and
metropolitan areas. As of December 31, 1999, we had incurred costs with respect
to the terrestrial repeater buildout of $10.1 million which we paid. In August
1999, we signed a contract calling for payments of approximately $115.0 million
for engineering and site preparation. We entered into a contract effective
October 22, 1999, with Hughes Electronics Corporation for the design,
development and manufacture of the terrestrial repeaters. Payments under this
contract are expected to be approximately $128.0 million. As of December 31,
1999, we have paid $3.5 million under this contract.

   Ground Segment. Based on the design of the XM Radio system, available
research, preliminary bids and actual contract costs, we expect to incur
aggregate ground segment costs through the expected commencement of operations
in the second quarter of 2001 of approximately $65.9 million. We expect these
costs will cover the satellite control facilities, programming production
studios and various other equipment and facilities. As of December 31, 1999, we
had incurred $5.6 million in costs with respect to the ground segment.

   FCC License. In October 1997, we received one of two satellite radio
licenses issued by the FCC. We have paid approximately $90.0 million for this
license, including the initial bid right. No additional payments have been made
relating to the license.

   Operating Expenses and Working Capital Requirements. In addition to the
above capital needs, we will require funds for working capital, operating
expenses and royalty payments currently estimated to be approximately $158.2
million through our targeted commercial launch in the second quarter of 2001.
From our inception through December 31, 1999, we have incurred total expenses
of $36.9 million. Total cash used in operating activities was $18.8 million.
The difference between the loss incurred to date and cash used in operations is
principally due to a $5.5 million beneficial conversion charge, $12.5 million
in amounts due to related parties and $3.6 million in accrued interest.

   Joint Development Agreement Funding Requirements. In addition to the above
capital needs, we may require funds to pay license fees or make contributions
towards the development of the technologies used to develop a unified standard
for satellite radios under our joint development agreement with Sirius Radio.
Each party is obligated to fund one half of the development cost for such
technologies. Each party will be entitled to license fees or a credit towards
its one half of the cost based upon the validity, value, use, importance and
available alternatives of the technology it contributes. The amounts of these
fees or credits will be determined over time by agreement of the parties or by
arbitration. We cannot predict at this time the amount of license fees or
contribution payable by XM or Sirius Radio or the size of the credits to XM and
Sirius Radio from the use of their technology. This may require significant
additional capital.

                                       27
<PAGE>

 Funds Required for XM Radio Following Commencement of Commercial Operations

   Even after commencement of commercial operations, we expect to need
significant additional funds to cover our cash requirements before we generate
sufficient cash flow from operations to cover our expenses. We cannot
accurately estimate the amount of additional funds needed, since it will depend
on business decisions to be made in the future and revenues received from
operations, but we expect the amount to be substantial. Funds will be needed to
cover operating expenses, marketing and promotional expenses including an
extensive marketing campaign in connection with the launch of our service,
distribution expenses, programming costs and any further development of the XM
Radio system that we may undertake after operations commence. Marketing and
distribution expenses are expected to include joint advertising and joint
development with and manufacturing subsidies of certain costs of some of our
manufacturers and distribution partners. We cannot estimate accurately the
total amount of these operational, promotional, subscriber acquisition, joint
development and manufacturing costs and expenses, but they are expected to be
substantial.

   We will have significant payment obligations after commencement of
operations under our distribution agreement with General Motors. We will pay an
aggregate of approximately $35 million in the first four years following
commencement of commercial service. After that, through 2009, we will have
additional fixed annual payments ranging from less than $35 million to
approximately $130 million, aggregating approximately $400 million. In order to
encourage the broad installation of XM radios, we have agreed to subsidize a
portion of the cost of XM radios and to make incentive payments to General
Motors when the owners of General Motors vehicles with installed XM radios
become subscribers for the XM Radio service. We must also share with General
Motors a percentage of the subscription revenue attributable to General Motors
vehicles with installed XM radios. This percentage increases until there are
more than eight million General Motors vehicles with installed XM radios. This
agreement is subject to renegotiation if General Motors does not achieve and
maintain specified installation levels, starting with 1.24 million units after
four years and thereafter increasing by the lesser of 600,000 units per year
and amounts proportionate to our share of the satellite digital radio market.

   We currently expect to satisfy our funding requirements for the period
following commencement of commercial operations in substantially the same
manner as our requirements prior to commencement of commercial operations.

Year 2000 Readiness

   Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Many such systems will
need to accept four-digit entries in order to distinguish 20th century dates
from 21st century dates. As a result, by the end of 1999, computer systems and
software used by many companies have been upgraded to comply with these Year
2000 requirements. Otherwise these systems may cause miscalculations that will
interfere with business activities or simply fail to work. When we use the
terms "Year 2000 Ready" or "Year 2000 Readiness," we mean that customers will
not experience any material difference in performance and functionality of our
networks as a result of the date being prior to, during or after the Year 2000.

   We began to assess our Year 2000 Readiness in mid-1998. We have completed
the identification, necessary modification and testing of all our current
systems, which we believe are Year 2000 compliant. This required no significant
expense. Because we are a development stage company and do not expect to
commence commercial operations until the second quarter of 2001, as of the date
of this report, we have not experienced and do not expect any significant
operational or financial problems for our company as a result of Year 2000
issues. Our existing technology development contracts require Year 2000
Readiness, and we require Year 2000 Readiness in all new contracts that we
enter.

   In addition to our internal review process, we have had communications with
certain significant third parties with which we do business to

  .  evaluate their Year 2000 Readiness and state of compliance; and

                                       28
<PAGE>

  .  determine the extent to which our systems may be affected if they fail
     to remediate their own Year 2000 issues.

   To date, we have not identified any system which demonstrates symptoms of
not being Year 2000 Ready or for which a suitable alternative cannot be
implemented.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   As of December 31, 1999, we do not have any derivative financial instruments
and do not intend to use derivatives. We invest our cash in short-term
commercial paper and investment-grade corporate and government obligations and
money market funds. All of our indebtedness was automatically converted into
equity upon completion of our initial public offering. As a result, we believe
that our exposure to interest rate risk is not material to our results of
operations.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The consolidated financial statements of XM Satellite Radio Holdings Inc.,
including our consolidated balance sheets as of December 31, 1998 and 1999, and
consolidated statements of operations, consolidated statements of cash flows,
and consolidated statements of stockholders' equity (deficit) for the three-
year period ended December 31, 1999, and for the period from December 15, 1992
(date of inception) to December 31, 1999 and notes to the consolidated
financial statements, together with a report thereon of KPMG LLP, dated
February 16, 2000, except for Note 14 which is as of March 15, 2000, are
attached hereto as pages F-1 through F-25.

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

   None

                                       29
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The information is incorporated herein by reference to our definitive 2000
Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

   The information is incorporated herein by reference to our definitive 2000
Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The information is incorporated herein by reference to our definitive 2000
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The information is incorporated herein by reference to our definitive 2000
Proxy Statement.


                                       30
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K

(a)(1)The following Consolidated Financial Statements of and report of
independent public accountants are included in Item 8 of this Form 10-K:

    Report of Independent Auditors.

    Consolidated Balance Sheets as of December 31, 1998 and 1999.

    Consolidated Statements of Operations for the years ended December 31,
 1997, 1998 and 1999, and for the period from December 15, 1992 (date of
 inception) to December 31, 1999.

    Consolidated Statements of Stockholders' Equity (Deficit) for the years
 ended December 31, 1997, 1998 and 1999, and for the period from December 15,
 1992 (date of inception) to December 31, 1999.

    Consolidated Statements of Cash Flows for the years ended December 31,
 1997, 1998 and 1999, and for the period from December 15, 1992 (date of
 inception) to December 31, 1999.

    Notes to Consolidated Financial Statements.

(a)(2)The following consolidated financial statement schedule is filed as part
of this report and is attached hereto as page S-1:

    Schedule I--Valuation and Qualifying Accounts.

All other schedules for which provision is made in the applicable accounting
regulations of the Commission either have been included in the Consolidated
Financial Statements of XM Satellite Radio Holdings 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

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
  3.1+   Restated Certificate of Incorporation of XM Satellite Radio Holdings
          Inc.
  3.2+   Restated Bylaws of XM Satellite Radio Holdings Inc.
  4.1+   Form of Certificate for our Class A common stock (incorporated by
          reference to Exhibit 3 to the XM Satellite Radio Holdings Inc.
          Registration Statement on Form 8-A, filed with the SEC on
          September 23, 1999).
  4.2++  Form of Certificate for our 8.25% Series B Convertible Redeemable
          Preferred Stock.
  4.3    Certificate of Designation Establishing the Voting Powers,
          Designations, Preferences, Limitations, Restrictions and Relative
          Rights of 8.25% Series B Convertible Redeemable Preferred Stock
          due 2012.
 10.1+   Shareholders' Agreement, dated as of July 7, 1999, by and among XM
          Satellite Radio Holdings Inc., American Mobile Satellite Corporation,
          Baron Asset Fund, Clear Channel Investments, Inc., Columbia XM Radio
          Partners, LLC, DIRECTV Enterprises, Inc., General Motors Corporation,
          Madison Dearborn Capital Partners III, L.P., Special Advisors Fund I,
          LLC, Madison Dearborn Special Equity III, L.P., and Telcom-XM
          Investors, L.L.C.
 10.2+   Registration Rights Agreement, dated July 7, 1999, by and among XM
          Satellite Radio Holdings Inc., American Mobile Satellite Corporation,
          the Baron Asset Fund series of Baron Asset Fund, and the holders of
          Series A subordinated convertible notes of XM Satellite Radio
          Holdings Inc.
</TABLE>

                                       31
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
 10.3+   Note Purchase Agreement, dated June 7, 1999, by and between XM
          Satellite Radio Holdings Inc., XM Satellite Radio Inc., Clear Channel
          Communications, Inc., DIRECTV Enterprises, Inc., General Motors
          Corporation, Telcom-XM Investors, L.L.C., Columbia XM Radio Partners,
          LLC, Madison Dearborn Capital Partners III, L.P., Madison Dearborn
          Special Equity III, L.P., and Special Advisors Fund I, LLC (including
          form of Series A subordinated convertible note of XM Satellite Radio
          Holdings Inc. attached as Exhibit A thereto).
 10.4+*  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.
 10.5+*  Technical Services Agreement between XM Satellite Radio Holdings Inc.
          and American Mobile Satellite Corporation, dated as of January 1,
          1998, as amended by Amendment No. 1 to Technical Services Agreement,
          dated June 7, 1998.
 10.6+*  Satellite Purchase Contract for In-Orbit Delivery, by and between XM
          Satellite Radio Inc. and Hughes Space and Communications
          International Inc., dated July 21, 1999.
 10.7+*  Amended and Restated Agreement by and between XM Satellite Radio, Inc
          and STMicroelectronics Srl, dated September 27, 1999.
 10.8+*  Distribution Agreement, dated June 7, 1999, between OnStar, a division
          of General Motors Corporation, and XM Satellite Radio Inc.
 10.9+*  Operational Assistance Agreement, dated as of June 7, 1999, between XM
          Satellite Radio Inc. and DIRECTV, INC.
 10.10+* Operational Assistance Agreement, dated as of June 7, 1999, between XM
          Satellite Radio Inc. and Clear Channel Communication, Inc.
 10.11+* Operational Assistance Agreement, dated as of June 7, 1999, between XM
          Satellite Radio Inc. and TCM, LLC.
 10.12+  Agreement, dated as of July 16, 1999 between XM Satellite Radio
          Holdings Inc. and Gary Parsons.
 10.13+  Employment Agreement, dated as of June 1, 1998, between XM Satellite
          Radio Holdings Inc. and Hugh Panero.
 10.14+  Letter Agreement with Lee Abrams dated May 22, 1998.
 10.15+  Letter Agreement with Stelios Patsiokas dated September 14, 1998
 10.16+  Letter Agreement with Heinz Stubblefield dated May 22, 1998.
 10.17+  Form of Indemnification Agreement between XM Satellite Radio Holdings
          Inc. and each of its directors and executive officers.
 10.18+  1998 Shares Award Plan (incorporated by reference to the Registrant's
          Registration Statement on Form S-8, File No. 333-92049).
 10.19+  Form of Employee Non-Qualified Stock Option Agreement.
 10.20+  Firm Fixed Price Contract #001 between XM Satellite Radio Inc. and the
          Fraunhofer Gesellschaft zur Foderung Der angewandten Forschung e.V.,
          dated July 16, 1999.
 10.21+* Contract for Engineering and Construction of Terrestrial Repeater
          Network System by and between XM Satellite Radio Inc. and LCC
          International, Inc., dated August 18, 1999.
 10.22   Employee Stock Purchase Plan (Incorporated by reference to the
          Registrant's Registration Statement on Form S-8, File No. 333-92049).
 10.23+  Non-Qualified Stock Option Agreement between Gary Parsons and XM
          Satellite Radio Holdings Inc., dated July 16, 1999.
</TABLE>

                                       32
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                Description
 -------                              -----------
 <C>     <S>
 10.24+  Non-Qualified Stock Option Agreement between Hugh Panero and XM
          Satellite Radio Holdings Inc., dated July 1, 1998, as amended.
 10.25+  Form of Director Non-Qualified Stock Option Agreement.
 10.26+  Lease between Consortium One Eckington, L.L.C. and XM Satellite Radio
          Inc., dated September 29, 1999
 10.27++ Letter Agreement with Stephen Cook dated January 12, 1999
 10.28** Contract for the Design, Development and Purchase of Terrestrial
          Repeater Equipment by and between XM Satellite Radio Inc. and Hughes
          Electronics Corporation, dated February 14, 2000.
 21.1++  Subsidiaries of XM Satellite Radio Holdings Inc.
 23.1    Consent of KPMG LLP.
 27.1    Financial Data Schedule.
</TABLE>
--------
+  Incorporated by reference to the Registrant's Registration Statement on Form
   S-1, File No. 333-83619.
++ Incorporated by reference to the Registrant's Registration Statement on Form
   S-1, File No. 333-93529.
*  Pursuant to the Commission's Order Granting Confidential Treatment under
   Rule 406 of the Securities Act of 1933, certain confidential portions of
   this Exhibit were omitted by means of redacting a portion of the text.
** Certain portions of this Exhibit were omitted by means of redacting a
   portion of the text. This Exhibit has been filed separately with the
   Secretary of the Commission with such text pursuant to our Application
   Requesting Confidential Treatment under Rule 246-2 under the Securities
   Exchange Act of 1934.

(b)Reports on Form 8-K.

   On February 25, 2000, the Company filed a Current Report on Form 8-K that
   contained audited, consolidated financial statements substantially the
   same as those contained herein. The Company also filed certain other
   information with respect to its business and financial condition that the
   Company deemed of importance to its stockholders.

(c)Exhibits.

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

(d)Consolidated Financial Statement Schedule.

   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
   Holdings Inc. or notes thereto.

                                       33
<PAGE>

                                   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 in the District of
Columbia, on the 16th day of March, 2000.

                                          XM Satellite Radio Holdings Inc.

                                          By: /s/ Hugh Panero
                                             ----------------------------------
                                             Name: Hugh Panero
                                             Title: President and Chief
                                             Executive Officer


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

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
           /s/ Hugh Panero             President Chief Executive    March 16, 2000
______________________________________  Officer, and Director
             Hugh Panero                (Principal Executive
                                        Officer)

        /s/ Heinz Stubblefield         Senior Vice President and    March 16, 2000
______________________________________  Chief Financial Officer
          Heinz Stubblefield            (Principal Financial and
                                        Accounting Officer)

         /s/ Gary M. Parsons           Chairman of the Board of     March 16, 2000
______________________________________  Directors
           Gary M. Parsons

        /s/ Nathaniel A. Davis         Director                     March 16, 2000
______________________________________
          Nathaniel A. Davis

         /s/ Thomas J. Donohue         Director                     March 16, 2000
______________________________________
          Thomas J. Donohue

         /s/ Randall T. Mays           Director                     March 16, 2000
______________________________________
           Randall T. Mays

          /s/ Randy S. Segal           Director                     March 16, 2000
______________________________________
            Randy S. Segal

        /s/ Ronald L. Zarrella         Director                     March 16, 2000
______________________________________
          Ronald L. Zarrella
</TABLE>

                                       34
<PAGE>

   Independent Auditors' Report on Consolidated Financial Statement Schedule

The Board of Directors
XM Satellite Radio Holdings Inc. and Subsidiaries:

   Under date of February 16, 2000, except for Note 14 which is as of March 15,
2000, we reported on the consolidated balance sheets of XM Satellite Radio
Holdings Inc. and Subsidiaries (a development stage company) as of December 31,
1998 and 1999, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1999 and for the period from December 15,
1992 (date of inception) to December 31, 1999, which are included in this
Annual Report on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule. This consolidated financial statement schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion on this consolidated financial statement schedule based on
our audits.

   In our opinion, such 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.

   The audit report on the consolidated financial statements of XM Satellite
Radio Holdings Inc. and Subsidiaries referred to above contains an explanatory
paragraph that states that the Company has not commenced operations and is
dependent upon additional debt or equity financing, which raises substantial
doubt about its ability to continue as a going concern. The consolidated
financial statement schedule included in the registration statement does not
include any adjustments that might result from the outcome of this uncertainty.

                                             /s/ KPMG LLP
McLean, VA
February 16, 2000, except
for Note 14, which is
as of March 15, 2000


                                      S-1
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                  Additions (Deductions)
                         --------- ----------------------------------------------------
                                   Charged to    Charged to     Write-Offs/
                          Balance  Costs and  Other Accounts --  Payments/    Balance
      Description        January 1  Expenses      Describe         Other    December 31
      -----------        --------- ---------- ----------------- ----------- -----------
<S>                      <C>       <C>        <C>               <C>         <C>
Year Ended December 31,
 1997
 Deferred Tax Assets--
 Valuation allowance...   $  --         746          --             --           746
Year Ended December 31,
 1998
 Deferred Tax Assets--
 Valuation allowance...   $  746      7,232          --             --         7,978
Year Ended December 31,
 1999
 Deferred Tax Assets--
 Valuation allowance...   $7,978     (3,159)         --             --         4,819
</TABLE>

                                      S-2
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                                          <C>
Independent Auditors' Report................................................ F-2

Consolidated Balance Sheets................................................. F-3

Consolidated Statements of Operations....................................... F-4

Consolidated Statements of Stockholders' Equity (Deficit)................... F-5

Consolidated Statements of Cash Flows....................................... F-6

Notes to Consolidated Financial Statements.................................. F-8
</TABLE>

                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
XM Satellite Radio Holdings Inc. and Subsidiaries:

   We have audited the accompanying consolidated balance sheets of XM Satellite
Radio Holdings Inc. and subsidiaries (a development stage company) as of
December 31, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the
years in the three-year period ended December 31, 1999, and for the period from
December 15, 1992 (date of inception) to December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of XM
Satellite Radio Holdings Inc. and subsidiaries (a development stage company) as
of December 31, 1998 and 1999, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1999 and for the period from December 15, 1992 (date of inception) to December
31, 1999, in conformity with generally accepted accounting principles.

   The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
note 11 to the consolidated financial statements, the Company has not commenced
operations and is dependent upon additional debt or equity financing, which
raises substantial doubt about its ability to continue as a going concern.
Management's plan in regard to these matters is also described in note 11. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.


                                                      /s/ KPMG LLP

McLean, VA
February 16, 2000, except
for Note 14, which is
as of March 15, 2000

                                      F-2
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

                          CONSOLIDATED BALANCE SHEETS
                           December 31, 1998 and 1999

<TABLE>
<CAPTION>
                                                             1998       1999
                                                          ---------- ----------
                                                          (in thousands, except
                                                               share data)
<S>                                                       <C>        <C>
                         ASSETS
Current assets:
  Cash and cash equivalents.............................. $      310 $   50,698
  Short-term investments.................................         --     69,472
  Prepaid and other current assets.......................        172      1,077
                                                          ---------- ----------
    Total current assets.................................        482    121,247
Other assets:
  System under construction..............................    169,029    362,358
  Property and equipment, net of accumulated depreciation
   and amortization of $57 and $347......................        449      2,551
  Goodwill and intangibles, net of accumulated
   amortization of $0 and $1,220.........................         --     25,380
  Other assets...........................................        525      3,653
                                                          ---------- ----------
    Total assets......................................... $  170,485 $  515,189
                                                          ---------- ----------
</TABLE>

<TABLE>
<S>                                                         <C>       <C>
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable......................................... $ 23,125  $ 23,338
  Accrued expenses.........................................      444     1,514
  Due to related parties...................................   13,767        62
  Accrued interest on loans payable........................    1,907        --
  Loans payable due to related parties.....................   91,546        --
  Royalty payable..........................................       --     1,646
  Term loan................................................       34        --
                                                            --------  --------
    Total current liabilities..............................  130,823    26,560
Term loan, net of current portion..........................       53        --
Subordinated convertible notes payable due to related
 party.....................................................   45,583        --
Accrued interest on subordinated convertible notes payable
 due to related party......................................    1,209        --
Royalty payable, net of current portion....................       --     3,400
Capital lease, net of current portion......................       --       212
                                                            --------  --------
    Total liabilities......................................  177,668    30,172
                                                            --------  --------
Stockholders' equity (deficit):
  Preferred stock, par value $0.01; 60,000,000 shares
   authorized, 15,000,000 shares designated Series A, no
   shares and 10,786,504 issued and outstanding at December
   31, 1998 and 1999.......................................       --       108
  Class A common stock, par value $0.01; 180,000,000 shares
   authorized, no and 26,465,333 shares issued and
   outstanding at December 31, 1998 and 1999...............       --       265
  Class B common stock, par value $0.01; 30,000,000 shares
   authorized, 125 (6,689,250 post split) and 17,872,176
   shares issued and outstanding at........................       --       179
  December 31, 1998 and 1999
   Class C common stock, par value $0.01; 30,000,000 shares
    authorized, no shares issued and outstanding at
    December 31, 1998 and 1999.............................       --        --
  Additional paid-in capital...............................   10,643   539,187
  Deficit accumulated during development stage.............  (17,826)  (54,722)
                                                            --------  --------
    Total stockholders' equity (deficit)...................   (7,183)  485,017
                                                            --------  --------
Commitments and contingencies (notes 11 and 12)
    Total liabilities and stockholders' equity (deficit)... $170,485  $515,189
                                                            ========  ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

                     CONSOLIDATED STATEMENTS OF OPERATIONS
     Years ended December 31, 1997, 1998 and 1999, and for the period from
           December 15, 1992 (date of inception) to December 31, 1999

<TABLE>
<CAPTION>
                                                             December 15, 1992
                                                            (date of inception)
                           1997       1998        1999      to December 31, 1999
                         ---------  ---------  -----------  --------------------
                                  (in thousands, except share data)
<S>                      <C>        <C>        <C>          <C>
Revenue................. $     --   $     --   $       --         $    --
                         ---------  ---------  -----------        --------
Operating expenses:
  Research and
   development..........       --       6,941        4,274          11,215
  Professional fees.....     1,090      5,242        9,969          16,301
  General and
   administrative.......        20      4,010       16,448          20,478
                         ---------  ---------  -----------        --------
    Total operating
     expenses...........     1,110     16,193       30,691          47,994
                         ---------  ---------  -----------        --------
    Operating loss......    (1,110)   (16,193)     (30,691)        (47,994)
Other income (expense):
  Interest income.......       --          26        2,916           2,942
  Interest expense......      (549)       --        (9,121)         (9,670)
                         ---------  ---------  -----------        --------
    Net loss............ $  (1,659) $ (16,167) $   (36,896)       $(54,722)
                         =========  =========  ===========        ========
Net loss per share:
  Basic and diluted..... $   (0.26) $   (2.42) $     (2.40)
                         =========  =========  ===========
Weighted average shares
 used in computing net
 loss per share-basic
 and diluted............ 6,368,166  6,689,250  $15,344,102
                         =========  =========  ===========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
     Years ended December 31, 1997, 1998 and 1999, and for the period from
          December 15, 1992 (date of inception) to December 31, 1999

<TABLE>
<CAPTION>
                                                                                                   Deficit
                      Series A           Class A           Class B         Class C               Accumulated
                   Preferred Stock    Common Stock      Common Stock    Common Stock  Additional   During         Total
                  ----------------- ----------------- ----------------- -------------  Paid-in   Development  Stockholders'
                    Shares   Amount   Shares   Amount   Shares   Amount Shares Amount  Capital      Stage    Equity (Deficit)
                  ---------- ------ ---------- ------ ---------- ------ ------ ------ ---------- ----------- ----------------
                                                       (in thousands, except share data)
<S>               <C>        <C>    <C>        <C>    <C>        <C>    <C>    <C>    <C>        <C>         <C>
Issuance of
common stock
(December 15,
1992)...........          --  $ --          --  $ --         100  $ --    --    $--    $     --   $     --       $     --
                  ----------  ----  ----------  ----  ----------  ----   ---    ---    --------   --------       --------
Balance at
December 31,
1992............          --    --          --    --         100    --    --     --          --         --             --
Net loss........          --    --          --    --          --    --    --     --          --         --             --
                  ----------  ----  ----------  ----  ----------  ----   ---    ---    --------   --------       --------
Balance at
December 31,
1993............          --    --          --    --         100    --    --     --          --         --             --
Net loss........          --    --          --    --          --    --    --     --          --         --             --
                  ----------  ----  ----------  ----  ----------  ----   ---    ---    --------   --------       --------
Balance at
December 31,
1994............          --    --          --    --         100    --    --     --          --         --             --
Net loss........          --    --          --    --          --    --    --     --          --         --             --
                  ----------  ----  ----------  ----  ----------  ----   ---    ---    --------   --------       --------
Balance at
December 31,
1995............          --    --          --    --         100    --    --     --          --         --             --
Net loss........          --    --          --    --          --    --    --     --          --         --             --
                  ----------  ----  ----------  ----  ----------  ----   ---    ---    --------   --------       --------
Balance at
December 31,
1996............          --    --          --    --         100    --    --     --          --         --             --
Contributions to
paid-in
capital.........          --    --          --    --          --    --    --     --         143         --            143
Issuance of
common stock and
capital
contributions...          --    --          --    --          25    --    --     --       9,000         --          9,000
Issuance of
options.........          --    --          --    --          --    --    --     --       1,500         --          1,500
Net loss........          --    --          --    --          --    --    --     --          --     (1,659)        (1,659)
                  ----------  ----  ----------  ----  ----------  ----   ---    ---    --------   --------       --------
Balance at
December 31,
1997............          --    --          --    --         125    --    --     --      10,643     (1,659)         8,984
Net loss........          --    --          --    --          --    --    --     --          --    (16,167)       (16,167)
                  ----------  ----  ----------  ----  ----------  ----   ---    ---    --------   --------       --------
Balance at
December 31,
1998............          --    --          --    --         125    --    --     --      10,643    (17,826)        (7,183)
53,514-for-one
stock split.....          --    --          --    --   6,689,125    67    --     --         (67)        --             --
Initial public
offering........          --    --  10,241,000   102          --    --    --     --     114,032         --        114,134
Conversion of
Series A
convertible
debt............  10,786,504   108  16,179,755   162          --    --    --     --     246,079         --        246,349
Conversion of
subordinated
convertible
notes payable to
related party...          --    --          --    --  11,182,926   112    --     --     106,843         --        106,955
Issuance of
shares to key
executive.......          --    --      14,716    --          --    --    --     --         140         --            140
Issuance of
shares through
exercise of
stock options...          --    --       1,071    --          --    --    --     --          10         --             10
Issuance of
shares through
the employee
stock purchase
plan............          --    --      28,791     1          --    --    --     --         293         --            294
Increase in FCC
license,
goodwill and
intangibles from
WorldSpace
Transaction.....          --    --          --    --          --    --    --     --      51,624         --         51,624
Charge for
beneficial
conversion
feature of note
issued to
Parent..........          --    --          --    --          --    --    --     --       5,520         --          5,520
Non-cash stock
compensation....          --    --          --    --          --    --    --     --       4,070         --          4,070
Net loss........          --    --          --    --          --    --    --     --          --    (36,896)       (36,896)
                  ----------  ----  ----------  ----  ----------  ----   ---    ---    --------   --------       --------
Balance at
December 31,
1999............  10,786,504  $108  26,465,333  $265  17,872,176  $179    --    $--    $539,187   $(54,722)      $485,017
                  ==========  ====  ==========  ====  ==========  ====   ===    ===    ========   ========       ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
     Years ended December 31, 1997, 1998 and 1999, and for the period from
           December 15, 1992 (date of inception) to December 31, 1999

<TABLE>
<CAPTION>
                                                              December 15, 1992
                                                                  (date of
                                                                inception) to
                                 1997      1998      1999     December 31, 1999
                               --------  --------  ---------  -----------------
                                              (in thousands)
<S>                            <C>       <C>       <C>        <C>
Cash flows from operating
 activities:
 Net loss..................... $ (1,659) $(16,167) $ (36,896)     $ (54,722)
 Adjustments to reconcile net
  loss to net cash used in
  operating activities:
  Depreciation and
   amortization...............       33        57      1,987          2,077
  Non-cash stock
   compensation...............       --        --      4,210          4,210
  Non-cash charge for
   beneficial conversion
   feature of note issued to
   Parent.....................       --        --      5,520          5,520
  Changes in operating assets
   and liabilities:
   Increase in prepaid and
    other current assets......       --      (212)      (905)        (1,117)
   Decrease in other assets...       --        --         43             43
   Increase in accounts
    payable and accrued
    expenses..................       --     1,701      7,519          9,220
   Increase (decrease) in
    amounts due to related
    parties...................      445    13,322     (1,316)        12,451
   Increase (decrease) in
    accrued interest..........      517        (2)     3,053          3,568
                               --------  --------  ---------      ---------
    Net cash used in operating
     activities...............     (664)   (1,301)   (16,785)       (18,750)
                               --------  --------  ---------      ---------
Cash flows from investing
 activities:
 Purchase of property and
  equipment...................       --      (506)    (2,008)        (2,514)
 Additions to system under
  construction................  (90,031)  (43,406)  (159,510)      (292,947)
 Purchase of short-term
  investments.................       --        --    (69,472)       (69,472)
 Other investing activities...       --        --     (3,422)        (3,422)
                               --------  --------  ---------      ---------
    Net cash used in investing
     activities...............  (90,031)  (43,912)  (234,412)      (368,355)
                               --------  --------  ---------      ---------
Cash flows from financing
 activities:
 Proceeds from sale of common
  stock and capital
  contribution................    9,143        --    114,428        123,571
 Proceeds from issuance of
  loan payable to related
  party.......................   80,053       337         --         80,390
 Proceeds from issuance of
  options.....................    1,500        --         --          1,500
 Proceeds from issuance of
  subordinated convertible
  notes to related parties....       --    45,583     22,966         68,549
 Proceeds from issuance of
  convertible notes...........       --        --    250,000        250,000
 Repayment of loan payable....       --        --    (75,000)       (75,000)
 Payments for deferred
  financing costs.............       --      (393)   (10,725)       (11,118)
 Other investing activities...       --        (5)       (84)           (89)
                               --------  --------  ---------      ---------
    Net cash provided by
     financing activities.....   90,696    45,522    301,585        437,803
                               --------  --------  ---------      ---------
Net increase in cash and cash
 equivalents..................        1       309     50,388         50,698
Cash and cash equivalents at
 beginning of period..........       --         1        310             --
                               --------  --------  ---------      ---------
Cash and cash equivalents at
 end of period................ $      1  $    310  $  50,698      $  50,698
                               ========  ========  =========      =========
</TABLE>

                                                                     (Continued)

                                      F-6
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

               CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
     Years ended December 31, 1997, 1998 and 1999, and for the period from
           December 15, 1992 (date of inception) to December 31, 1999

<TABLE>
<CAPTION>
                                                              December 15, 1992
                                                                  (date of
                                                                inception) to
                                       1997   1998     1999   December 31, 1999
                                      ------ ------- -------- -----------------
                                                   (in thousands)
<S>                                   <C>    <C>     <C>      <C>
Supplemental cash flow disclosure:
 Increase in FCC license, goodwill
  and intangibles from WorldSpace
  Transaction........................ $   -- $    -- $ 51,624     $ 51,624
 Liabilities exchanged for new
  convertible note to Parent.........     --      --   81,676       81,676
 Non-cash interest capitalized.......  1,901  11,824   15,162       28,887
 Interest converted into principal
  note balance.......................    501   9,157    4,601       14,259
 Accrued expenses transferred to loan
  balance............................     --      --    7,405        7,405
 Accrued system milestone payments...     --  21,867   15,500       15,500
 Property acquired through capital
  leases.............................     --      --      470          470
 Conversion of debt to equity........     --      --  353,315      353,315
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the period from December 15, 1992 (date of inception) to December 31, 1999

(1) Summary of Significant Accounting Policies and Practices

 (a) Nature of Business

   XM Satellite Radio Inc. ("XMSR"), formerly American Mobile Radio
Corporation, was incorporated on December 15, 1992 in the State of Delaware as
a wholly owned subsidiary of American Mobile Satellite Corporation ("AMSC" or
"Parent") for the purpose of procuring a digital audio radio service ("DARS")
license. Business activity for the period from December 15, 1992 through
December 31, 1996 was insignificant. Pursuant to various financing agreements
entered into in 1997 between AMSC, XMSR and WorldSpace, Inc. ("WSI"), WSI
acquired a 20 percent interest in XMSR.

   On May 16, 1997, AMSC and WSI formed XM Satellite Radio Holdings Inc. (the
"Company"), formerly AMRC Holdings Inc., as a holding company for XMSR in
connection with the construction, launch and operation of a domestic
communications satellite system for the provision of DARS. AMSC and WSI
exchanged their respective interests in XMSR for equivalent interests in the
Company, which had no assets, liabilities or operations prior to the
transaction.

   On July 7, 1999, AMSC acquired WSI's 20 percent interest in the Company,
which is discussed in note 4.

 (b) Principles of Consolidation and Basis of Presentation

   The consolidated financial statements include the accounts of XM Satellite
Radio Holdings Inc. and its subsidiaries, XM Satellite Radio Inc. and XM Radio
Inc. All significant intercompany transactions and accounts have been
eliminated. The Company's management has devoted substantially all of its time
to the planning and organization of the Company, obtaining its DARS license,
and to the process of addressing regulatory matters, initiating research and
development programs, conducting market research, initiating construction of
the satellite system, securing content providers, and securing adequate debt
and equity capital for anticipated operations and growth. The Company has not
generated any revenues and planned principal operations have not commenced.
Accordingly, the Company's financial statements are presented as those of a
development stage enterprise, as prescribed by Statement of Financial
Accounting Standards ("SFAS") No. 7, Accounting and Reporting by Development
Stage Enterprises.

   As discussed in Note 6, on September 9, 1999, the Company effected a
53,514-for-1 stock split. The effect of the stock split has been reflected as
of December 31, 1999 in the consolidated balance sheet and consolidated
statement of stockholders' equity (deficit); however, the activity in prior
periods was not restated in those statements. All references to the number of
common shares and per share amounts in the consolidated financial statements
and notes thereto have been restated to reflect the effect of the split for
all periods presented.

 (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):

<TABLE>
<CAPTION>
                                                                    December 31,
                                                                    ------------
                                                                    1998  1999
                                                                    ---- -------
      <S>                                                           <C>  <C>
      Cash on deposit.............................................. $ 28 $    66
      Money market funds...........................................  282  10,620
      Commercial paper.............................................  --   40,012
                                                                    ---- -------
                                                                    $310 $50,698
                                                                    ==== =======
</TABLE>

                                      F-8
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999

 (d) Short-term Investments

   The Company holds commercial paper with maturity dates of less than one year
that is stated at amortized cost, which approximates fair value.

 (e) Property and Equipment

   Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization is calculated using the straight-
line method over the following estimated useful lives:

<TABLE>
      <S>                                                        <C>
      Furniture, fixtures and computer equipment................ 3 years
      Machinery and equipment................................... 7 years
      Leasehold improvements.................................... Remaining lease
</TABLE>

 (f) System Under Construction

   The Company is currently developing its satellite system. Costs related to
the project are being capitalized to the extent that they have future benefits.
As of December 31, 1999, all amounts recorded as system under construction
relate to costs incurred in obtaining a Federal Communications Commission
("FCC") license and approval as well as the system development. The FCC license
will be amortized using the straight line method over an estimated useful life
of fifteen years. Amortization of the license will begin on commercial launch.
Depreciation of the Company's satellites will commence upon in-orbit delivery.
Depreciation of the Company's ground stations will commence upon commercial
launch. The satellites and the ground stations will be depreciated over their
estimated useful lives.

   On October 16, 1997, the FCC granted XMSR a license to launch and operate
two geostationary satellites for the purpose of providing DARS in the United
States in the 2332.5-2345 Mhz (space-to-earth) frequency band, subject to
achieving certain technical milestones and international regulatory
requirements. The license is valid for eight years upon successful launch and
orbital insertion of the satellites. The Company's license requires that it
comply with a construction and launch schedule specified by the FCC for each of
the two authorized satellites. 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.

     System under construction consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                                1998     1999
                                                              -------- --------
      <S>                                                     <C>      <C>
      License................................................ $ 90,031 $115,055
      Satellite system.......................................   63,273  204,083
      Terrestrial system.....................................      --     6,578
      Spacecraft control facilities..........................    2,000    2,000
      Broadcast facilities and other.........................      --     5,574
      Capitalized interest...................................   13,725   29,068
                                                              -------- --------
                                                              $169,029 $362,358
                                                              ======== ========
</TABLE>

                                      F-9
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999



   The Company's policy is to review its long-lived assets and certain
identifiable intangibles 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 future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.

 (g)Goodwill and Intangible Assets

   Goodwill and intangible assets, which represents the excess of purchase
price over fair value of net assets acquired, is amortized on a straight-line
basis over the expected periods to be benefited, generally 15 years. The
Company assesses the recoverability of its intangible assets by determining
whether the amortization of the goodwill and intangible assets balance over its
remaining life can be recovered through undiscounted future operating cash
flows. The amount of goodwill and intangible assets impairment, if any, is
measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The assessment of
the recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.

 (h)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,
and complies with the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. 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.

 (i) Research and Development

   Research and development costs are expensed as incurred.

 (j) Net Income (Loss) Per Share

   The Company computes net income (loss) per share in accordance with SFAS No.
128, Earnings Per Share and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss) per
share is computer by dividing the net income (loss) available to common
stockholders (after deducting preferred dividend requirements) for the period
by the weighted average number of common shares outstanding during the period.
Diluted net income (loss) available per share is computed by dividing the net
income (loss) available to common stockholders for the period by the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. The Company has presented historical basic and diluted net
income (loss) per share in accordance with SFAS No. 128. As the Company had a
net loss in each of the periods presented, basic and diluted net income (loss)
per share is the same.

 (k) Income Taxes

   The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and the financial reporting amounts at each year-end, based on
enacted tax laws

                                      F-10
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999

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 tax payable for the period and the change
during the period in deferred tax assets and liabilities.

 (l) Comprehensive Income

   In December 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income (SFAS 130). This statement establishes standards for reporting and
displaying comprehensive income and its components in the financial statements.
This statement is effective for all interim and annual periods with the year
ended December 31, 1998. The Company has evaluated the provisions of SFAS 130
and has determined that there were no transactions that have taken place during
the years ended December 31, 1997, 1998 and 1999 that would be classified as
other comprehensive income.

 (m) Accounting Estimates

   The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of 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 the DARS license, goodwill and intangible
assets, and the valuation allowances against deferred tax assets. Accordingly,
actual amounts could differ from these estimates.

 (n)Reclassifications

   Certain fiscal year 1997 and 1998 amounts have been reclassified to conform
to the fiscal 1999 consolidated financial statement presentation.

 (o)Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The new standard
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. This statement, as amended, is effective for all fiscal
quarters beginning after June 15, 2000. The Company does not expect SFAS No.
133 to have a material affect on its financial position or results of
operations.

(2) Related Party Transactions

   The Company had related party transactions with the following shareholders:

 (a)AMSC

   In 1997, AMSC contributed $143,000 for the Company to establish the original
application for the FCC license. On March 28, 1997, the Company received
$1,500,000 as a capital contribution from AMSC. During 1998 and 1999, AMSC
incurred general and administrative costs and professional fees for the Company
and established an intercompany balance of $458,000 and $62,000, respectively,
(see note 3). Effective January 15, 1999, the Company issued a convertible note
maturing on September 30, 2006 to AMSC for $21,419,000. (See note 4(d)).

                                      F-11
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999

 (b)WSI

   On March 28, 1997, the Company received $1,500,000 as a capital contribution
from WSI. The Company issued WSI 25 (6,689,250 post split) shares of common
stock for this consideration.

   On April 16, 1997, the Company received $15,000,000 from WSI, which
represented $6,000,000 as an additional capital contribution and $9,000,000 as
a six-month bridge loan (see note 4).

   On May 16, 1997, the Company obtained a $1,000,000 working capital loan
facility from WSI. During 1997, the Company drew down $663,000 against the
facility with the remaining $337,000 drawn in 1998 (see note 4).

   On October 16, 1997, the Company received $71,911,000 from WSI, which
represented an additional $13,522,000 under the bridge loan and $58,389,000
under the additional amounts loan (see note 4).

   On April 1, 1998, the Company entered into an agreement with WSI to issue
$54,536,000 in subordinated convertible notes. During 1998 and 1999, the
Company drew down $45,583,000 and $8,953,000, respectively, under the agreement
(see note 4).

   As discussed in note 4(c) all amounts due to WSI under the debt agreements
were acquired by AMSC or repaid on July 9, 1999.

   In July 1998, the Company acquired furniture and equipment from WSI for
$104,000 and established a due to WSI for the balance (see note 3).

   In addition to financing, the Company has relied upon certain related
parties for legal and technical services. Total expenses incurred in
transactions with related parties are as follows (in thousands):

<TABLE>
<CAPTION>
                                                  Year Ended December 31, 1997
                                                  -----------------------------
                                                     WSI      AMSC     Total
                                                  ---------- ------------------
      <S>                                         <C>        <C>     <C>
      Professional fees.......................... $      960 $   130 $    1,090
      General and administrative.................        --       20         20
                                                  ---------- ------- ----------
        Total.................................... $      960 $   150 $    1,110
                                                  ========== ======= ==========
<CAPTION>
                                                  Year Ended December 31, 1998
                                                  -----------------------------
                                                     WSI      AMSC     Total
                                                  ---------- ------------------
      <S>                                         <C>        <C>     <C>
      Research and development................... $    6,624 $   --  $    6,624
      Professional fees..........................      2,529     353      2,882
      General and administrative.................        903      60        963
                                                  ---------- ------- ----------
        Total.................................... $   10,056 $   413 $   10,469
                                                  ========== ======= ==========
<CAPTION>
                                                  Year Ended December 31, 1999
                                                  -----------------------------
                                                     WSI      AMSC     Total
                                                  ---------- ------------------
      <S>                                         <C>        <C>     <C>
      Research and development................... $       50 $   --  $       50
      Professional fees..........................        --      219        219
      General and administrative.................        --        5          5
                                                  ---------- ------- ----------
        Total.................................... $       50 $   224 $      274
                                                  ========== ======= ==========
</TABLE>


                                      F-12
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999

   Additionally, during 1998 and 1999 the Company incurred $925,000 and $0,
respectively, of WSI project management costs that were capitalized to the
satellite system. With the WorldSpace Transaction, which is discussed in note
4, on July 7, 1999, WSI ceased to be a related party; therefore, the expenses
reflected for WSI are representative of the period from January 1, 1999 through
July 7, 1999.

(3) Due to Related Parties

   Due to related parties included the following amounts (in thousands):


<TABLE>
<CAPTION>
                                                                    December 31,
                                                                    ------------
                                                                     1998   1999
                                                                    ------- ----
      <S>                                                           <C>     <C>
      Advances from WSI............................................ $ 7,405 $--
      Due to WSI...................................................   5,904  --
      Due to AMSC..................................................     458   62
                                                                    ------- ----
                                                                    $13,767 $ 62
                                                                    ======= ====
</TABLE>

   Advances represented funding provided by WSI for 30 days. If amounts were
not repaid within this time period, additional subordinated convertible notes
were issued.

(4) Debt

 (a)Loans Payable Due to Related Party

   In March 1997, XMSR entered into a series of agreements (the "Participation
Agreement") with AMSC and WSI in which both companies provided various equity
and debt funding commitments to XMSR for the purpose of financing the
activities of XMSR in connection with the establishment of a DARS satellite
system in the United States. On May 16, 1997, certain portions of the
Participation Agreement were subsequently ratified with substantially the same
terms and conditions under the Bridge Loan, Additional Amounts Loan and Working
Capital Credit Facility (the "Loan Agreement").

   The Company had loans payable of $91,546,000 at December 31, 1998
outstanding with WSI as follows (in thousands):

<TABLE>
<CAPTION>
                                                                         1998
                                                                        -------
      <S>                                                               <C>
      Bridge loan...................................................... $25,556
      Additional amounts loan..........................................  64,875
      Working capital loan.............................................   1,115
                                                                        -------
                                                                        $91,546
                                                                        =======
</TABLE>

   As discussed in note 4(c) all amounts due to WSI under the debt agreements
were acquired by AMSC or repaid on July 7, 1999.

 Bridge Loan

   The Company executed the bridge loan with WSI in two tranches. On April 16,
1997, the Company received proceeds of $8,479,000 for a loan with a face amount
of $9,000,000. On October 16, 1997, the

                                      F-13
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999
Company received proceeds of $12,771,000 for a loan with a face amount of
$13,522,000. The first tranche was a six-month loan at LIBOR plus five percent
per annum, equaling 11.03 percent. The first tranche was rolled over with the
establishment of the second tranche, which is a six-month loan at LIBOR plus
five percent per annum, equaling 9.94 percent at December 31, 1998. Interest of
$3,034,000 had been converted into additional loan balance through December 31,
1998.

  Additional Amounts Loan

   On October 16, 1997, the Company executed the additional amounts loan with
WSI and received proceeds of $58,219,000 for a loan with a face amount of
$58,389,000. This loan is a six-month loan at LIBOR plus five percent per
annum, equaling 9.94 percent at December 31, 1998. Interest of $6,486,000 had
been converted into additional loan balance through December 31, 1998.

  Working Capital Loan

   On May 16, 1997, the Company executed the working capital loan with WSI
whereby the Company would receive proceeds of $920,000 for a loan with a face
amount of $1,000,000. The Company drew down $663,000 and $337,000 against the
line of credit through December 31, 1997 and 1998, respectively. This loan is a
six-month loan at LIBOR plus five percent per annum, with an interest rate of
10.19 percent at December 31, 1998. Interest of $115,000 had been converted
into additional loan balance through December 31, 1998.

 (b)Subordinated Convertible Notes Payable Due to Related Party

   Effective April 1, 1998, the Company entered into a convertible note
agreement maturing on September 30, 2006 with WSI that provided for a maximum
of $54,536,000 through the issuance of subordinated convertible notes. The
notes carried an interest rate of LIBOR plus five percent per annum, which was
10.15 percent as of December 31, 1998. Under the terms of the note agreement,
WSI shall have the right to convert all or a portion of the aggregate principal
amount of the notes into shares of common stock at a conversion price of $16.35
per share. As of December 31, 1998 and July 7, 1999, $45,583,000 and
$54,536,000, respectively, had been drawn through the issuance of subordinated
convertible notes. As discussed in note 4(c), all amounts due to WSI under the
debt agreements were acquired by AMSC or repaid on July 7, 1999.

 (c)Exchange of WSI's Interest in the Company (WorldSpace Transaction)

   On July 7, 1999, AMSC acquired WSI's remaining debt and equity interests in
the Company in exchange for approximately 8.6 million shares of AMSC's common
stock. Additionally, the Company issued an aggregate $250.0 million of Series A
subordinated convertible notes (see note 4(e)) to several new investors and
used $75.0 million of the proceeds it received from the issuance of these notes
to redeem certain outstanding loan obligations owed to WSI. As a result of
these transactions, as of July 7, 1999, AMSC owned all of the issued and
outstanding stock of the Company. Concurrent with AMSC's acquisition of the
remaining interest in the Company, the Company recognized goodwill and
intangibles of $51,624,000, which has been allocated as follows (in thousands):

<TABLE>
      <S>                                                               <C>
      FCC license...................................................... $25,024
      Goodwill.........................................................  13,738
      Programming agreements...........................................   8,000
      Receiver agreements..............................................   4,600
      Other intangibles................................................     262
                                                                        -------
                                                                        $51,624
                                                                        =======
</TABLE>

                                      F-14
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999

 (d)Notes to Related Party

   On January 15, 1999, the Company issued a convertible note maturing on
September 30, 2006 to AMSC for $21,419,000. This note carried an interest rate
of LIBOR plus five percent per annum and was convertible at a price of $16.35
per share. On July 7, 1999 the Company amended the convertible note agreement
with AMSC to change the maturity date to December 31, 2004, modified the
conversion provisions to Class B common stock at a price of $16.35 per share
and the conversion of the accrued interest in Class B common stock at a price
of $9.52 per share.

   Following the WorldSpace Transaction, the Company issued a convertible note
maturing December 31, 2004 to AMSC for $81,676,000 in exchange for the
$54,536,000 subordinated convertible notes payable, $6,889,000 in demand notes,
$20,251,000 in accrued interest and all of WSI's outstanding options to acquire
the Company's common stock. This note bore interest at LIBOR plus five percent
per annum. The note was convertible at AMSC's option at $8.65 per Class B
common share. The Company took a one-time $5,520,000 charge to interest due to
the beneficial conversion feature of the new AMSC note.

   These notes, along with $3,870,000 of accrued interest were converted into
11,182,926 shares of Class B common stock upon the initial public offering.

 (e)Issuance of Series A Subordinated Convertible Notes of the Company to New
 Investors

   At the closing of the WorldSpace Transaction, the Company issued an
aggregate $250.0 million of Series A subordinated convertible notes to six new
investors--General Motors Corporation, $50.0 million; Clear Channel
Investments, Inc., $75.0 million; DIRECTV Enterprises, Inc., $50.0 million; and
Columbia Capital, Telcom Ventures, L.L.C. and Madison Dearborn Partners, $75.0
million. The Series A subordinated convertible notes issued by the Company are
convertible into shares of the Company's Series A convertible preferred stock
(in the case of notes held by General Motors Corporation and DIRECTV) or Class
A common stock (in the case of notes held by the other investors) at the
election of the holders or upon the occurrence of certain events, including an
initial public offering of a prescribed size. The conversion price is $9.52
aggregate principal amount of notes for each share of the Company's stock.
These notes, along with $6,849,000 of accrued interest, were converted into
16,179,755 shares of Class A common stock and 10,786,504 shares of Series A
preferred stock upon the initial public offering.

(5) Fair Value of Financial Instruments

   The carrying amounts of cash and cash equivalents, short-term investments,
receivables, accounts payable, accrued expenses, royalty payable and the term
loan approximate their fair market value because of the relatively short
duration of these instruments as of December 31, 1998 and 1999, in accordance
with SFAS No. 107, Disclosures about Fair Value of Financial Instruments.

   The fair value of the loans and subordinated convertible notes due to
related party at December 31, 1998 could not be estimated as such amounts are
due to the Company's stockholders.

(6) Equity

 (a)Recapitalization

   Concurrent with the WorldSpace Transaction discussed in note 4, the
Company's capital structure was reorganized. The Company's common stock was
converted into the newly authorized Class B common stock,

                                      F-15
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999
which has three votes per share. The Company also has authorized Class A common
stock, which is entitled to one vote per share and non-voting Class C common
stock. The Class B common stock is convertible into Class A common stock on a
one for one basis, as follows: (1) at any time at the discretion of AMSC, (2)
following the Company's initial public offering, at the direction of the
holders of a majority of the then outstanding shares of Class A common stock
(which majority must include at least 20 percent of the public holders of Class
A common stock), and (3) on or after January 1, 2002, at the direction of the
holders of a majority of the then outstanding shares of the Company's Class A
common stock. Such conversion will be effected only upon receipt of FCC
approval of AMSC's transfer of control of the Company to a diffuse group of
shareholders.

   The Company also authorized 60,000,000 shares of preferred stock, of which
15,000,000 shares are designated Series A convertible preferred stock, par
value $0.01 per share. The Series A convertible preferred stock is convertible
into Class A common stock at the option of the holder. The Series A preferred
stock is non-voting and receives dividends, if declared, ratably with the
common stock.

   On September 9, 1999, the board of directors of the Company effected a stock
split providing 53,514 shares of stock for each share owned.

 (b)Initial Public Offering

   On October 8, 1999, the Company completed an initial public offering of
10,000,000 shares of Class A common stock at $12.00 per share. The offering
yielded net proceeds of $111,437,000.

   On October 17, 1999, the underwriters of the Company's initial public
offering exercised the over-allotment option for an additional 241,000 shares
of Class A common stock at $12.00 per share. This exercise yielded net proceeds
of $2,697,000.

                                      F-16
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999

 (c)Stock-Based Compensation

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

 1998 Shares Award Plan

   On June 1, 1998, the Company adopted the 1998 Shares Award Plan (the "Plan")
under which employees, consultants, and non-employee directors may be granted
options to purchase shares of Class A common stock of the Company. The Company
initially authorized 1,337,850 shares of common stock under the Plan, which was
increased to 2,675,700 in July 1999. 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. On July 8, 1999, the Company's board of
directors voted to reduce the exercise price of the options outstanding in the
shares award plan from $16.35 to $9.52 per share, which represented the fair
value of the stock on the date of repricing. Transactions and other information
relating to the Plan for the year ended December 31, 1998 and 1999 are
summarized below:

<TABLE>
<CAPTION>
                                                             Outstanding Options
                                                             -------------------
                                                                       Weighted-
                                                                        Average
                                                             Number of Exercise
                                                              Shares     Price
                                                             --------- ---------
<S>                                                          <C>       <C>
Balance, January 1, 1998....................................       --      --
  Options granted...........................................   787,297  $16.35
  Options canceled or expired...............................       --      --
  Options exercised.........................................       --      --
                                                             ---------  ------
Balance, December 31, 1998..................................   787,297  $16.35
  Options granted........................................... 2,188,988   10.50
  Option repricing..........................................   818,339   16.35
  Options canceled or expired...............................    57,786   13.91
  Options exercised.........................................     1,071    9.52
                                                             ---------  ------
Balance, December 31, 1999.................................. 2,099,089  $10.32
                                                             =========  ======
</TABLE>

   The following table summarizes information about stock options outstanding
at December 31, 1998 and 1999:

<TABLE>
<CAPTION>
                    Options Outstanding          Options Exercisable
            ------------------------------------ --------------------
                                      Weighted-
                                       Average   Weighted             Weighted-
                                      Remaining  Average               Average
              Exercise     Number    Contractual Exercise   Number    Exercise
               Price     Outstanding    Life      Price   Exercisable   Price
            ------------ ----------- ----------- -------- ----------- ---------
<S>         <C>          <C>         <C>         <C>      <C>         <C>
1998.......       $16.35    787,297   9.5 years   $16.35        --     $16.35
1999....... $9.52-$12.00  2,099,089  9.24 years   $10.32    416,294    $ 9.52
</TABLE>

   There were no and 416,294 stock options exercisable at December 31, 1998 and
1999, respectively. There were 575,540 shares available under the plan for
future grants at December 31, 1999. At December 31, 1999, all options have been
issued to employees, officers and directors.

                                      F-17
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999


   The per share weighted-average fair value of employee options granted during
the year ended December 31, 1998 and 1999 was $10.54 and $6.21, respectively,
on the date of grant using the Black-Scholes Option Pricing Model with the
following weighted-average assumptions:

<TABLE>
<CAPTION>
                                                           December 31,
                                                   -----------------------------
                                                        1998           1999
                                                   -------------- --------------
<S>                                                <C>            <C>
Expected dividend yield...........................             0%             0%
Volatility........................................         56.23%         63.92%
Risk-free interest rate range..................... 4.53% to 5.57% 5.47% to 5.97%
Expected life.....................................      7.5 years        5 years
</TABLE>

 Employee Stock Purchase Plan

   In 1999, the Company established an employee stock purchase plan that
provides for the issuance of 300,000 shares of Class A common stock. All
employees whose 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 five percent or
more of the Company's 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 percent 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, 1999, 28,791 shares had been issued by the Company under this plan.

   The per share weighted-average fair value of purchase rights granted during
the year was $3.30 for the year ended December 31, 1999. The estimates were
calculated at the grant date using the Black-Scholes Option Pricing Model with
the following assumptions at December 31, 1999:

<TABLE>
<S>                                                                   <C>
Expected dividend yield..............................................         0%
Volatility...........................................................     63.92%
Risk-free interest rate range........................................      4.73%
Expected life........................................................ 0.23 years
</TABLE>

   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 in the financial statements other than for performance based
stock options and for options granted with exercise prices below fair value on
the date of grant. During 1999, the Company incurred $4,070,000 in compensation
cost for these options. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS 123, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below (in thousands):

<TABLE>
<CAPTION>
                           Year ended December 31,
                           ------------------------
                              1998         1999
                           -----------  -----------
<S>                        <C>          <C>
Net loss;
  As reported............. $    16,167  $    36,896
  Pro forma...............      17,508       37,706
  As reported--net loss
   per share--basic and
   diluted................       (2.42)       (2.40)
  Pro forma--net loss per
   share--basic and
   diluted................       (2.62)       (2.46)
</TABLE>

                                      F-18
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999


(7) WSI Options

   In 1997, the Company issued WSI three options. Under the first option, WSI
could have purchased 5,202,748 shares of common stock at $4.52 per share to
acquire common stock. The option could have been exercised in whole or in
incremental amounts between April 16, 1998 and October 16, 2002. Under certain
circumstances, AMSC could have required WSI to exercise the option in whole.
The Company allocated $1,250,000 to the option. Under the second option, WSI
could have purchased 6,897,291 shares at $8.91 per share. The option could have
been exercised between October 16, 1997 and October 16, 2003. The Company
allocated $170,000 to the option. Under the third option, WSI could have
purchased 187,893 shares of common stock at $5.32 per share. The option could
have been exercised between October 16, 1997 and October 17, 2002. The Company
allocated $80,000 to the option.

   The options were acquired by AMSC and exchanged for the $81,676,000 note to
AMSC as part of the WorldSpace Transaction (see note 4(d)).

(8) 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 up to 15 percent of their compensation on a pre-tax
basis through contributions to the savings plan. The Company contributed $0.50
in 1998 and 1999 for every dollar the employees contributed up to 6 percent of
compensation, which amounted to $14,000 and $164,000, respectively.

(9) Interest Cost

   The Company capitalizes a portion of interest cost as a component of the
cost of the FCC license and satellite system under construction. The following
is a summary of interest cost incurred during December 31, 1997, 1998 and 1999,
and for the period from December 15, 1992 (date of inception) to December 31,
1998 (in thousands):

<TABLE>
<CAPTION>
                                                          December 15, 1992
                                                        (date of inception) to
                                  1997   1998    1999     December 31, 1999
                                 ------ ------- ------- ----------------------
<S>                              <C>    <C>     <C>     <C>
Interest cost capitalization.... $1,901 $11,824 $15,343        $29,068
Interest cost charged to
 expense........................    549     --    9,120          9,669
                                 ------ ------- -------        -------
  Total interest cost incurred.. $2,450 $11,824 $24,463        $38,737
                                 ====== ======= =======        =======
</TABLE>

   Interest costs incurred prior to the award of the license were expensed in
1997. During 1999, the Company exceeded its capitalization threshold by
$3,600,000 and incurred a charge to interest of $5,520,000 for the beneficial
conversion feature of the new AMSC note.

(10) Income Taxes

   For the period from December 15, 1992 (date of inception) to October 8,
1999, the Company filed consolidated federal and state tax returns with its
majority stockholder AMSC. The Company generated net operating losses and other
deferred tax benefits that were not utilized by AMSC. As no formal tax sharing
agreement has been finalized, the Company was not compensated for the net
operating losses. Had the Company filed on a stand-alone basis for the three-
year period ending December 31, 1999, the Company's tax provision would be as
follows:

                                      F-19
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999


   Taxes on income included in the statements of operations consists of the
following (in thousands):

<TABLE>
<CAPTION>
                                                               December 31,
                                                           --------------------
                                                            1997   1998   1999
                                                           ------ ------ ------
<S>                                                        <C>    <C>    <C>
Current taxes:
  Federal................................................. $  --  $  --  $  --
  State...................................................    --     --     --
                                                           ------ ------ ------
    Total current taxes...................................    --     --     --
                                                           ------ ------ ------
Deferred taxes:
  Federal.................................................    --     --     --
  State...................................................    --     --     --
                                                           ------ ------ ------
    Total deferred taxes..................................    --     --     --
                                                           ------ ------ ------
    Total tax expense (benefit)........................... $  --  $  --  $  --
                                                           ====== ====== ======
</TABLE>

   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):

<TABLE>
<CAPTION>
                                                         December 31,
                                                   ---------------------------
                                                    1997      1998      1999
                                                   -------  --------  --------
<S>                                                <C>      <C>       <C>
Income before taxes on income, as reported in the
 statements of income............................  $(1,659) $(16,167) $(36,896)
                                                   =======  ========  ========
Theoretical tax on the above amount at 35%.......     (581)   (5,658)  (12,914)
State tax, net of federal benefit................     (165)   (1,605)      701
Increase in taxes resulting from permanent
 differences, net................................      --         31     2,120
Adjustments arising from differences in the basis
 of measurement for tax purposes and financial
 reporting purposes and other....................      --        --     13,252
Change in valuation allowance....................      746     7,232    (3,159)
                                                   -------  --------  --------
Taxes on income for the reported year............  $   --   $    --   $    --
                                                   =======  ========  ========

   At December 31, 1997, 1998 and 1999, deferred income tax consists of future
tax assets/(liabilities) attributable to the following (in thousands):

<CAPTION>
                                                         December 31,
                                                   ---------------------------
                                                    1997      1998      1999
                                                   -------  --------  --------
<S>                                                <C>      <C>       <C>
Deferred tax assets:
  Net operating loss/other tax attribute
   carryovers....................................  $    36  $    477  $  2,650
  Start-up costs.................................      710     7,501    17,605
                                                   -------  --------  --------
    Gross total deferred tax assets..............      746     7,978    20,255
Valuation allowance for deferred tax assets......     (746)   (7,978)   (4,819)
                                                   -------  --------  --------
    Net deferred assets..........................      --        --     15,436
                                                   -------  --------  --------
Deferred tax liabilities:
  Fixed assets...................................      --        --        (51)
  FCC license....................................      --        --    (10,160)
  Other intangible assets........................      --        --     (5,225)
                                                   -------  --------  --------
    Net deferred tax liabilities.................      --        --    (15,436)
                                                   -------  --------  --------
    Deferred income tax, net.....................  $   --   $    --   $    --
                                                   =======  ========  ========
</TABLE>

                                      F-20
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999


(11) Accumulated Deficit

   The Company is devoting its efforts to develop, construct and expand a
digital audio radio network. This effort involves substantial risk and future
operating results will be subject to significant business, economic,
regulatory, technical, and competitive uncertainties and contingencies. These
factors individually or in the aggregate could have an adverse effect on the
Company's financial condition and future operating results and create an
uncertainty as to the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.

   In order to commence satellite-based radio broadcasting services, the
Company will require substantial funds to develop and construct the DARS
system, develop and launch radio communications satellites, retire debt
incurred in connection with the acquisition of the DARS license and to sustain
operations until it generates positive cash flow.

   At the Company's current stage of development, economic uncertainties exist
regarding successful acquisition of additional debt and equity financing and
ultimate profitability of the Company's proposed service. The Company is
currently constructing its satellites and will require substantial additional
financing before construction is completed. Failure to obtain the required
long-term financing will prevent the Company from realizing its objective of
providing satellite-delivered radio programming. Management's plan to fund
operations and capital expansion includes the additional sale of debt and
equity securities through public and private sources. There are no assurances,
however, that such financing will be obtained.

(12) Commitments and Contingencies

 (a) FCC License

   The FCC has established certain system development milestones that must be
met for the Company to maintain its license to operate the system. The Company
believes that it is proceeding into the system development as planned and in
accordance with the FCC milestones.

 (b) Application for Review of FCC License

   One of the losing bidders for the DARS licenses filed an Application for
Review by the full FCC of the Licensing Order which granted the Company its FCC
license. The Application for Review alleges that WSI had effectively taken
control of the Company without FCC approval. The FCC or the U.S. Court of
Appeals has the authority to overturn the award of the FCC license should they
rule in favor of the losing bidder. Although the Company believes that its
right to the FCC license will withstand the challenge as WSI is no longer a
stockholder in the Company, no prediction of the outcome of this challenge can
be made with any certainty.

 (c) Technical Services

   Effective January 1, 1998, the Company entered into agreements with AMSC and
WorldSpace Management Corporation ("WorldSpace MC"), an affiliate of WSI, in
which AMSC and WorldSpace MC would provide technical support in areas related
to the development of a DARS system. Payments for services provided under these
agreements are made based on negotiated hourly rates. These agreements may be
terminated by the parties on or after the date of the commencement of
commercial operation following the launch of the Company's first

                                      F-21
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999

satellite. There are no minimum services purchase requirements. The Company
incurred costs of $413,000 and $224,000 under its agreement with AMSC during
1998 and 1999, respectively. The Company incurred costs of $4,357,000 and $0
under its agreement with WorldSpace MC during 1998 and 1999, respectively.

 (d) Technology Licenses

   Effective January 1, 1998, XMSR entered into a technology licensing
agreement with AMSC and WorldSpace MC by which as compensation for certain
licensed technology currently under development to be used in the XM Radio
system, XMSR will pay up to $14,300,000 to WorldSpace MC over a ten-year
period. XMSR incurred costs of $6,624,000 and $50,000, payable to WorldSpace
MC, under the agreement during 1998 and 1999, respectively. Any additional
amounts to be incurred under this agreement are dependent upon further
development of the technology, which is at XMSR's option. No liability exists
to AMSC or WorldSpace MC should such developments prove unsuccessful. The
Company maintains an accrual of $5,046,000, payable to WorldSpace MC, for
quarterly royalty payments to be made. In addition, XMSR agreed to pay 1.2
percent of quarterly net revenues to WorldSpace MC and a royalty of $0.30 per
chipset, payable to WorldSpace MC, for equipment manufactured using certain
source encoding and decoding signals technology.

 (e) Satellite Contract

   During the first half of 1999, the Company and Hughes Space and
Communications, Inc. ("Hughes") amended the satellite contract to construct and
launch the Company's satellites to implement a revised work timetable, payment
schedule to reflect the timing of the receipt of additional funding, and
technical modifications. The Company expects to incur total payment obligations
under this contract of approximately $541,300,000, which includes amounts the
Company expects to pay pursuant to the exercise of the option to build the
ground spare satellite and certain financing costs and in- orbit incentive
payments. As of December 31, 1998 and 1999, the Company had paid $40,481,250
and $183,918,000, respectively, under this contract.

 (f) LCC International Services Contract

   In August 1999, the Company signed a contract with LCC International, Inc.,
a related party, for the engineering for its terrestrial repeater network.
Payments by the Company under this contract are expected to aggregate
approximately $115,000,000 through April 15, 2001. As of December 31, 1999, the
Company has paid $6,578,000 under this contract.

 (g) General Motors Distribution Agreement

   The Company has signed a long-term distribution agreement with the OnStar
division of General Motors providing for the installation of XM radios in
General Motors vehicles. During the term of the agreement, which expires 12
years from the commencement date of the Company's commercial operations,
General Motors 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-General Motors vehicles that are sold for use in the United
States. The Company has significant annual, fixed payment obligations to
General Motors for four years following commencement of commercial service.
These payments approximate $35,000,000 in the aggregate during this period.
Additional annual fixed payment obligations beyond the initial four years of
the contract term range from less than $35,000,000 to approximately
$130,000,000 through 2009, aggregating approximately $400,000,000. In order to
encourage the broad installation of XM radios in General Motors vehicles, the
Company has agreed to subsidize a portion of the cost of XM radios, and to make
incentive payments to General Motors when the owners of General Motors

                                      F-22
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999

vehicles with installed XM radios become subscribers for the Company's service.
The Company must also share with General Motors a percentage of the
subscription revenue attributable to General Motors vehicles with installed XM
radios, which percentage increases until there are more than 8 million General
Motors vehicles with installed XM radios. The Company will also make available
to General Motors bandwidth on the Company's systems. The agreement is subject
to renegotiations at any time based upon the installation of radios that are
compatible with a unified standard or capable of receiving Sirius Satellite
Radio's (formerly known as CD Radio) service. The agreement is subject to
renegotiations if, four years after the commencement of XM Radio's commercial
operations and at two-year intervals thereafter GM does not achieve and
maintain specified installation levels of General Motors vehicles capable of
receiving the Company's service, starting with 1,240,000 units after four
years, and thereafter increasing by the lesser of 600,000 units per year and
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,
four years after the Company commences commercial operations 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.

 (h) Terrestrial Repeater Contract

   In February 2000, the Company entered into a contract with Hughes
Electronics Corporation, a related party, for the design, development and
purchase of terrestrial repeater equipment. The total contract value is
$128,000,000 and the Company incurred and paid $3,500,000 under a letter
agreement in anticipation of this contract through December 31, 1999.

 (i) Joint Development Agreement

   On February 16, 2000, the Company signed an agreement with Sirius Satellite
Radio ("Sirius Radio"), a competitor of the Company, to develop a unified
standard for satellite radios to facilitate the ability of consumers to
purchase one radio capable of receiving both the Company's and Sirius Radio's
services. The technology relating to the unified standard 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
its system; the value of this license will be considered part of its
contribution toward the joint development. In addition, each company has agreed
to license its non-core technology, including non-essential features of its
system, to the other at commercially reasonable rates.

 (j) 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 will vest at the time
that we attain our millionth customer, and the number of shares underlying the
warrant will be determined by the percentage of XM Radios that have a Sony
brand name as of the vesting date. If Sony achieves its maximum performance
target, it will receive 2% of the total number of shares of the Company's Class
A common stock on a fully-diluted basis upon exercise of the warrant. The
exercise price of the Sony warrant will equal 105% of fair market value of the
Class A common stock on the vesting date, determined based upon the 20-day
trailing average.

                                      F-23
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999


 (k) Leases

   The Company has three noncancelable operating leases for office space and
two noncancelable capital leases for equipment that expire over the next ten
years. The future minimum lease payments under noncancelable leases as of
December 31, 1999 are (in thousands):

<TABLE>
<CAPTION>
                                                               Operating Capital
                                                                leases   leases
                                                               --------- -------
   <S>                                                         <C>       <C>
   Year ending December 31:
   2000.......................................................  $   755   $172
   2001.......................................................    2,113    172
   2002.......................................................    2,180     86
   2003.......................................................    2,248    --
   2004.......................................................    2,281    --
   Thereafter.................................................   14,354    --
                                                                -------   ----
     Total....................................................  $23,931   $430
                                                                =======
   Less amount representing interest..........................             (52)
                                                                          ----
     Present value of net minimum lease payments..............             378
   Less current maturities....................................            (139)
                                                                          ----
     Long-term obligations....................................            $239
                                                                          ====
</TABLE>

   Rent expense for 1997, 1998 and 1999 was $0, $231,000 and $649,000,
respectively.

   In January 2000, the Company established a $3,400,000 letter of credit as a
security deposit for one of its leases for office space.

 (l) Prior Litigation

   On January 12, 1999, Sirius Radio, the other holder of an FCC satellite
radio license, commenced an action against the Company in the United States
District Court for the Southern District of New York, alleging that the Company
was infringing or would infringe three patents assigned to Sirius Radio. In its
complaint, Sirius Radio sought money damages to the extent the Company
manufactured, used or sold any product or method claimed in their patents and
injunctive relief. On February 16, 2000, this suit was resolved in accordance
with the terms of a joint development agreement between the Company and Sirius
Radio and both companies agreed to cross-license their respective property (see
note 12(i)). However, if this agreement is terminated before the value of the
license has been determined due to the Company's failure to perform a material
covenant or obligation, then this suit could be refiled.

(13) Secondary Offering and Sale of Series B Convertible Redeemable Preferred
     Stock

   On January 31, 2000, the Company closed on a secondary offering of its Class
A common stock and newly designated Series B convertible redeemable preferred
stock. The Company sold 4,000,000 shares of its Class A common stock for $32.00
per share, which yielded net proceeds of approximately $121,000,000. The
Company concurrently sold 2,000,000 shares of its Series B convertible
redeemable preferred stock for $50.00 per share, which yielded net proceeds of
approximately $96,300,000. The Series B convertible redeemable preferred stock

                                      F-24
<PAGE>

               XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                         (A Development Stage Company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 For the period from December 15, 1992 (date of inception) to December 31, 1999

provides for 8.25% cumulative dividends that may be paid in Class A common
stock or cash. The Series B convertible redeemable preferred stock is
convertible into Class A common stock at a conversion price of $40 per share
and is redeemable in Class A common stock on February 3, 2003.

   On February 9, 2000, the underwriters exercised a portion of the over-
allotment option for 370,000 shares of Class A common stock, which yielded net
proceeds of approximately $11,233,000.

(14) Private Units Offering

   On March 15, 2000 the Company closed a private placement of 325,000 units,
each unit consisting of $1,000 principal amount of 14% senior secured notes due
2010 of its subsidiary XM Satellite Radio Inc. and one warrant to purchase
8,024,115 shares of the Company's Class A common stock at a price of $49.50 per
share. The Company realized net proceeds of $191.0 million, excluding $123.0
million used to acquire securities which will be used to pay interest payments
due under the notes for the first three years.

(15)Quarterly Data (Unaudited)

<TABLE>
<CAPTION>
                                                             1997
                                                ----------------------------------
                                                  1st      2nd      3rd      4th
                                                Quarter  Quarter  Quarter  Quarter
                                                -------  -------  -------  -------
                                                 (in thousands, except for per
                                                          share data)
<S>                                             <C>      <C>      <C>      <C>
Revenues....................................... $  --    $  --    $  --    $  --
Operating loss.................................    --        51      185      874
Loss before income taxes.......................    --       270      459      930
Net loss.......................................    --       270      459      930
                                                ------   ------   ------   ------
  Net loss per share--basis and diluted........ $  --    $(0.04)  $(0.07)  $(0.14)
                                                ======   ======   ======   ======
<CAPTION>
                                                             1998
                                                ----------------------------------
                                                  1st      2nd      3rd      4th
                                                Quarter  Quarter  Quarter  Quarter
                                                -------  -------  -------  -------
<S>                                             <C>      <C>      <C>      <C>
Revenues....................................... $  --    $  --    $  --    $  --
Operating loss.................................  3,100    5,032    3,865    4,196
Loss before income taxes.......................  3,100    5,032    3,857    4,178
Net loss.......................................  3,100    5,032    3,857    4,178
                                                ------   ------   ------   ------
  Net loss per share--basis and diluted........ $(0.46)  $(0.75)  $(0.58)  $(0.62)
                                                ======   ======   ======   ======
<CAPTION>
                                                             1999
                                                ----------------------------------
                                                  1st      2nd      3rd      4th
                                                Quarter  Quarter  Quarter  Quarter
                                                -------  -------  -------  -------
<S>                                             <C>      <C>      <C>      <C>
Revenues....................................... $  --    $  --    $  --    $  --
Operating loss.................................  4,421    4,020    9,374   12,876
Loss before income taxes.......................  4,367    3,999   17,402   11,128
Net loss.......................................  4,367    3,999   17,402   11,128
                                                ------   ------   ------   ------
  Net loss per share--basis and diluted........ $(0.65)  $(0.60)  $(2.60)  $(0.27)
                                                ======   ======   ======   ======
</TABLE>

   The sum of quarterly per share net losses do not necessarily agree to the
net loss per share for the year due to the timing of stock issuances.

                                      F-25