<PAGE>

                       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, 2001

                        XM SATELLITE RADIO HOLDINGS INC.
                        --------------------------------
             (Exact name of registrant as specified in its charter)

                     Commission file number      000-27441

                      DELAWARE                       54-1878819
            (State or other jurisdiction of          (I.R.S. Employer
             incorporation or organization)          Identification No.)

                            1500 ECKINGTON PLACE NE,
                            WASHINGTON, DC 20002-2194
                            -------------------------
                    (Address of principal executive offices)
                                   (Zip code)

                                  202-380-4000
                                  ------------
              (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:
                      Class A Common Stock, par value $.01
                 per share 8.25% Series B Convertible Redeemable
                    Preferred Stock, par value $.01 per share
                               (Title of Classes)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes    X          No
---------------------------

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

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 15, 2002, is $786,676,660.

                             XM SATELLITE RADIO INC.
                             -----------------------
             (Exact name of registrant as specified in its charter)

                 Commission file number               333-39178

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

                            1500 ECKINGTON PLACE NE,
                            WASHINGTON, DC 20002-2194
                            -------------------------
                    (Address of principal executive offices)
                                   (Zip code)

                                  202-380-4000
                                  ------------
              (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
                                 Not Applicable

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes      X        No
---------------------------

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

The aggregate market value of common stock held by non-affiliates of the
registrant as of March 15, 2002 is $0.

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

(Class)                                       (Outstanding as of March 15, 2002)
                        XM SATELLITE RADIO HOLDINGS INC.
                        --------------------------------

CLASS A COMMON STOCK, $0.01 PAR VALUE                          75,290,724 SHARES

                             XM SATELLITE RADIO INC.
                             -----------------------

COMMON STOCK, $0.10 PAR VALUE                                125 SHARES
                                                  (all of which are issued to XM
                                                  Satellite Radio Holdings Inc.)



                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the Annual Meeting of
Stockholders of XM Satellite Radio Holdings Inc. to be held on May 23, 2002, to
be filed within 120 days after the end of XM Satellite Radio Holdings Inc.'s
fiscal year, are incorporated by reference into Part III, Items 10-13 of this
Form 10-K.

<PAGE>


                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                         Page
                                                                                                         ----
<S>                                                                                                      <C>
PART I
              Item 1.  Business .......................................................................     1
              Item 2.  Property .......................................................................    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 .....................................................................    23
              Item 7A. Quantitative and Qualitative Disclosures about Market Risk .....................    33
              Item 8.  Financial Statements and Supplementary Data ....................................    34
              Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial
                       Disclosure .....................................................................    34
PART III
              Item 10. Directors and Executive Officers of the Registrant .............................    35
              Item 11. Executive Compensation .........................................................    35
              Item 12. Security Ownership of Certain Beneficial Owners and Management .................    35
              Item 13. Certain Relationships and Related Transactions .................................    35

PART IV
              Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on
                       Form 8-K .......................................................................    36
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ............................................................   F-1
</TABLE>

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

<PAGE>


                                EXPLANATORY NOTE

     This annual report is filed jointly by XM Satellite Radio Holdings Inc.
("Holdings") and XM Satellite Radio Inc. ("XM"). XM is a wholly-owned subsidiary
of Holdings. Unless the context requires otherwise, the terms "we," "our" and
"us" refer to Holdings and its subsidiaries. This report on Form 10-K contains
separate financial statements for each of Holdings and XM. The management's
discussion and analysis section has been combined, focusing on the financial
condition and results of operations of Holdings but including an explanation of
any significant differences between the companies.

<PAGE>


                                     PART I

ITEM 1. BUSINESS

Overview

     We seek to become a premier nationwide provider of audio entertainment and
information programming for reception by vehicle, home and portable radios.
Through our two high-power satellites "Rock" and "Roll," our XM Radio service
offers 100 channels of music, news, talk, sports and children's programming
developed by us or third parties for a monthly subscription price of $9.99. We
believe XM Radio appeals to consumers because of our clear sound quality from
digital signal radios, extensive variety of programming and nationwide coverage.
We will build a subscriber base for XM Radio through multiple distribution
channels, including an exclusive distribution arrangement with General Motors,
other automotive manufacturers, car audio dealers and national electronics
retailers. We launched commercial service in Dallas/Ft. Worth and San Diego on
September 25, 2001. We continued our rollout through the southeastern and
southwestern U.S. during October and we became the first nationwide satellite
radio service on November 12, 2001.

     We transmit the XM Radio signal throughout the continental United States
from "Rock" and "Roll." We have a network of terrestrial repeaters, which are
ground-based electronics equipment that receive and re-transmit the satellite
signals to augment our satellite signal coverage. Mass production of chipsets
and XM radios has commenced to meet expected demand. XM radios are now available
under the Sony, Pioneer and Alpine brand names at national consumer electronics
retailers, such as Circuit City, Best Buy, participating Radio Shack dealers and
franchisees, Sears and others.

     We offer our consumers a unique listening experience by providing 100
channels of programming, coast-to-coast coverage and clear sound with our
digital signals. Our 100 channels include diverse programming tailored to appeal
to a large audience, including urban and rural listeners of virtually all ages,
and to specific groups that our research has shown are most likely to subscribe
to our service. We have original music and talk channels created by XM
Originals, our in-house programming unit, and channels created by well-known
providers of brand name programming, including MTV, VH1, ESPN Radio, Radio
Disney, CNN, CNBC, USA Today, Fox News, BET, E!, Radio One, Clear Channel, and
Hispanic Broadcasting Corporation. We have a team of programming professionals
with a successful record of introducing new radio formats and building local and
national listenership.

     In addition to our subscription fee, we generate revenues from sales of
limited advertising time on a number of channels. 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. Through
affinity and niche programming, we offer advertisers an effective way to
aggregate geographically disparate groups of listeners in their targeted
demographic markets.

     Market data show strong demand for radio service. Over 75% of the entire
United States population age 12 and older listens to the radio daily, and over
95% listens to the radio weekly. However, many radio listeners have access to
only a limited number of radio stations and listening formats offered by
traditional AM/FM radio. We expect XM Radio to be attractive to underserved
radio listeners who want expanded radio choices. Market studies conducted for us
project that as many as 49 million people may subscribe to satellite radio by
2012. We believe, based on our own recent surveys and work with focus groups,
that there is a significant market for XM Radio.

     We have raised $1.5 billion of equity and debt net proceeds to date from
investors and strategic partners; we are funded into the fourth quarter of 2002;
our strategic and financial investors include General Motors, Hughes Electronics
Corporation, Clear Channel Communications, DIRECTV, Telcom Ventures, Columbia
Capital, Madison Dearborn Partners, American Honda and AEA Investors. We hold
one of only two licenses issued by the Federal Communications Commission to
provide satellite digital audio radio service in the United States.

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

                                        1

<PAGE>

limited to mass appeal formats. We believe our national subscription service
complements traditional local radio. Moreover, the success of subscription
entertainment services in other media such as cable television and satellite
television further indicate potential for significant consumer demand for
satellite radio services.

   Radio Listening

     On average, adults listen to the radio 3.1 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, 2000-2001).

   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 $9.99 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 2000 climbed to $19 billion, an increase of 12% over 1999. Although
radio advertising has fallen with the economic downturn since September 11,
2001, there have been recent indications of renewed growth of radio advertising.

   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.

     Limited Number of Radio Stations. The number of radio stations available to
many consumers in their local market is limited in comparison to the 100
channels we offer on a nationwide basis. In 2000, there were only 49 AM/FM radio
stations as listed by Arbitron broadcasting in New York City, the largest radio
market in the United States, many of which are of the same five formats. 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, Winter 2001 Ratings
Report, Duncan's American Radio, 2001).

     We estimate that our coast-to-coast service reaches over 108 million
listeners age 12 and over who are beyond the range of the largest 50 markets as
measured by Arbitron. Of these listeners, 45 million live beyond the largest 286
markets (2001 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 48% of all commercial radio
stations use one of only three general programming formats--country,
news/talk/sports, and adult contemporary (Veronis, Suhler & Associates
Communications Industry Forecast 2001). 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 2000 (2000 Consumer
Profile).

                                       2

<PAGE>

   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. There are more than
13.7 million digital cable subscribers and 18.5 million satellite television
subscribers as of 2001. As of December 2001, 69% of TV households subscribe to
basic cable television, and 17.5% of TV households subscribe to satellite
television (National Cable Television Association website and skyreport.com
website).

   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 a $9.99 monthly subscription fee and a radio price point of $150-$399
depending upon the type of car or home unit chosen. The study also anticipates
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.

   Initial Demand for XM Radio Service

     Initial consumer response to our service has been positive. During the
initial 60-day period following our national launch, we exceeded 30,000
subscribers, which represents a faster adoption rate than for any other consumer
audio product introduced over the past 20 years, such as CD players and DVD
players. Furthermore, based on a random telephone survey of a limited number of
our initial subscribers, the vast majority rated our overall service and sound
quality "excellent," and nearly all indicated that XM was a "good" or
"excellent" value. We have also found a broad initial appeal of our service
across age groups, with people in their twenties, thirties, forties and fifties
each representing comparable percentages of XM subscribers.

The XM Radio Service

     We have designed 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 make our service appealing to customers and
position us to become the leading provider of the next generation of radio.

   We Are Differentiating 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 100 channels in each radio market allows
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
More convenience                        Virtually seamless signal coverage      Local area coverage
<S>                                     <C>                                     <C>
</TABLE>

                                       3

<PAGE>

<TABLE>
--------------------------------------------------------------------------------------------------------------
<S>                                   <C>                                     <C>
                                      in the United States
More Choice                           100 channels with an extensive          Limited formats in many markets
                                      variety of programming
Improved audio quality                Digital quality sound                   Analog AM/FM quality sound
Fewer commercials                     Average 6 minutes per hour; over        Average 13-17 minutes per hour
                                      30 music channels commercial-free
More information about music          Text display with title/name of         No visual display
                                      song/artist

--------------------------------------------------------------------------------------------------------------
</TABLE>

     We are further differentiating XM Radio from traditional AM/FM radio in the
following ways.

     Provide music formats unavailable in many markets. XM Radio offers many
music formats that are popular but currently unavailable in many markets. More
than 48% of all commercial radio stations in markets measured by Arbitron use
one of only three programming formats: country; adult contemporary; or
news/talk/sports. Even major markets do not always offer a full complement of
formats. We offer many types of music with significant popularity, as measured
by recorded music sales and concert revenues, that are unavailable in many
traditional AM/FM radio markets. Such music includes classical recordings and
popular blues and rap music that have retail appeal but are not commonly played
on traditional AM/FM radio. We have channels devoted to popular musical styles
that are not currently heard in many small and medium sized markets, such as
heavy metal, modern electronic dance, disco and blues.

     Superserve popular music formats. We offer more specific programming
choices than traditional AM/FM radio generally offers for even the most popular
listening formats. For example, on traditional AM/FM radio oldies music is often
generalized on a single format. We segment this category by offering several
dedicated, era-specific formats. We also offer seven channels dedicated to urban
formats and five 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 specific formats,
we strive to provide more variety to attract listeners dissatisfied with
repetitive and/or limited playlist selection offered by traditional radio. For
instance, instead of a single oldies station, we have channels devoted to the
music of each decade from the 1940's to the 1990's. In the rock genre, we have a
channel dedicated to "deep tracks" not currently heard on rock radio stations.

     Deliver a wide range of ethnic and informational programming. We 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 are 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 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 has had on the television industry.

     Respond quickly when major music and cultural events occur. XM Radio
programmers strive to respond quickly to changing musical tastes, seasonal music
and emerging popular cultural events, such as Britney Spears, Elton John/Billy
Joel and U2 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. By having specific
channels dedicated to classic country, the 1940s and gospel, for example, we
provide superior sound quality to formats that are traditionally found only on
AM stations.

                                       4

<PAGE>

     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. 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 and have
arrangements to include the programs of popular trucking radio personalities
(for example, Bill Mack, Dale "the Truckin' Bozo" Sommers and Dave Nemo) on
"Open Road," our channel dedicated to truckers. We have also arranged to have XM
radios installed in trucks manufactured by leading trucking companies.

     Availability of commercial-free and limited-advertising channels. We
believe that a significant portion of the listening market will 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 target
this audience with over 30 commercial-free music channels covering popular music
formats. In addition, our limited-advertising channels carry less than half the
advertising spots of typical AM/FM stations.

     Use cross-promotion capability to market XM Radio. We 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.

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:

Programming

     We offer 101 channels, including 71 music channels, 29 news, talk and
information channels, and one preview channel. 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.

                                       5

<PAGE>

     The following is a list of channels included in our current service
offering.

<TABLE>
<CAPTION>
          Channel Name                Channel Description
<S>       <C>                         <C>
Preview   XM Preview                  XM Preview

Decades   The 40s                     Forties/Swing
          The 50s                     Fifties
          The 60s                     Sixties
          The 70s                     Seventies
          The 80s                     Eighties
          The 90s                     Nineties

Country   America                     Classic Country
          WSIX                        Nashville Country
          X Country                   Progressive Country
          Hank's Place                Traditional Country
          Bluegrass Junction          Bluegrass/Folk
          Highway 15                  Nonstop Country

Hits      20 on 20                    Top 20 Hits
          KISS                        LA Rock
          MIX                         Pop Mix
          The Heart                   Love Songs
          Lite                        Soft Rock
          MTV Radio                   Rock/Pop
          VH1 Radio                   Rock/Pop
          Cinemagic                   Movie Soundtracks
          On Broadway                 Showtunes
          U-Pop                       Euro Chart Hits
          Special X                   Special Topics
          The Torch                   Christian Rock
          The Fish                    Christian Pop
          On the Rocks                Cocktail Mix
          Ethel                       Alternative Hits

Rock      Deep Tracks                 Deep Album Rock
          Boneyard                    Hard Rock
          XM Liquid Metal             Heavy Rock
          XMU                         New Rock
          Fred                        Classic Alternative
          XM Cafe                     Modern/Soft alt.
          Top Tracks                  Classic Rock Hits
          The Loft                    Acoustic/Folk
          XM Music Lab                Progressive/Fusion
          Unsigned!                   Emerging Acts

Urban     Soul Street                Classic Soul
          The Flow                   Urban Top 40
          BET Uptown                 Uptown Urban
          Spirit                     Gospel
          The Groove                 Old School R&B
          The Rhyme                  Classic Rap
          RAW                        Uncut Hip Hop

Jazz      Real Jazz                  Traditional Jazz
& Blues   Watercolors                Contemporary Jazz

          Beyond Jazz                Modern Jazz
          Frank's Place              Great Vocals/Stds.
          Bluesville                 Blues
          Luna                       Latin Jazz

Dance     The Move                   Modern Electronic
          BPM                        Latest Hot Music
          Club 82                    Urban Mixes
          Chrome                     Disco

Latin     Aguila                     Spanish Top 40
          Caricia                    Spanish Pop Hits
          Vibra                      Rock in Spanish
          Tejano                     Tejano
          Caliente                   Caribbean

World     World Zone                 World Music
          The Joint                  Reggae
          Ngoma                      Music from Africa
          Audio Visions              New Age
          Radio Taj                  Hindi - Indian
          C-Wave                     Chinese Programming

Classical XM Classics                Traditional Classical
          Fine Tuning                Pop Classical
          Vox!                       Opera
          XM Pops                    Classical Hits

Kids      Radio Disney               Children
          XM Kids                    Children

News      XM News                    Top Story News
          USA Today                  News
          Fox News                   News
          CNN Headline News          News
          The Weather Channel        24 Hr. Weather Network
          CNBC                       Business News
          CNN fn                     Financial News
          Bloomberg                  News and Business
          CNET Radio                 Tech News
          BBC World Service          World Affairs
          C-SPAN Radio               US Gov't/Public Affairs
          CNN en Espanol             News in Spanish

Sports    ESPN Radio                 Talk/Play-by-Play
          CNN/Sports Illustrated     Sports News
          Fox Sports Radio           Sports News Talk
          The Sporting News          Sports Talk
          NASCAR Radio               Automotive/Racing

Comedy    XM Comedy                  Comedy
          Laugh USA                  Family Comedy
          Extreme XM                 Comedy

Variety   Discovery Radio            Health/General Science
          E! Entertainment Radio     Entertainment News
          ABC News & Talk            News and Talk
          Ask!                       Experts Talk
          Buzz XM                    Hot Talk Stars
          BabbleOn                   Young and Sassy Talk
          Open Road                  Trucker's Channel
          The Power                  African American Topics
          FamilyTalk                 Christian Talk
</TABLE>

    Summary

          1         Preview
         71         Music
         29         Talk

        101         TOTAL

                                       6





<PAGE>

     XM Originals. Through a programming unit in XM Radio called "XM Originals,"
we have created 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 include artists with strong music sales and concert revenue who do not
get significant airplay on traditional AM/FM radio stations. We are branding
individual channels to create a specific station personality and image using
compelling on-air talent and other techniques to attract listeners in our target
market segments, including shows from Quincy Jones, Wynton Marsalis and others.
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 complement our original programming
with a variety of unique and diverse content provided to us by brand name
programming providers. We have contracts representing at least 38 channels with
well-known specialty and niche programmers that provide brand name content for
XM Radio. These companies include:

     -- Bloomberg News Radio                -- Hispanic Broadcasting Corporation
     -- USA Today                           -- Clear Channel Communications
     -- CNNfn                               -- Radio One
     -- CNN en Espanol                      -- Salem Communications
     -- C-SPAN Radio                        -- The Sporting News
     -- Black Entertainment Television      -- BBC World Service
     -- MTV Networks                        -- NASCAR
     -- Weather Channel                     -- Associated Press
     -- Radio Disney                        -- BBC Concerts
     -- ESPN Radio                          -- Fox Sports Radio
     -- CNBC
     -- Fox News
     -- CNET
     -- Sesame Workshop
     -- Discovery Radio
     -- Country Music Hall of Fame

     Availability of Commercial-Free and Limited-Advertising Channels. We
provide a number of commercial-free music channels covering popular music
formats. In addition, our limited-advertising channels 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
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. We are concentrating 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, adults 16-34 years old 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 provide programming and will implement 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.

Marketing

     Our marketing strategy is designed to build awareness and demand among
potential subscribers in our target markets and the advertising community.

                                       7

<PAGE>

   Extensive Advertising and Media Campaign Supporting Commercial Launch

     In September 2001, we launched commercial service in the Dallas/Fort Worth
and San Diego metropolitan markets supported by a launch advertising and retail
marketing campaign. We continued our rollout through the southeastern and
southwestern U.S. during October and our service became nationwide in November
2001. We began our full national media campaign in November to support our
nationwide launch of commercial services. The timing of our full nationwide
launch in November enabled us to capitalize on the Christmas selling season,
which is the highest selling period of the year for car stereo equipment. We
will continue to support our distribution channels by building awareness of XM
Radio through national and local advertising.

   Subscriber Development and Expansion

     We promote XM Radio as the leader in the new satellite radio category,
offering appealing features compared to traditional radio. TBWA/Chiat Day (Los
Angeles), our advertising agency of record, produced our first series of
advertising spots. Our commercial launch was supported by a comprehensive
advertising program including television, radio, print, outdoor and direct
marketing. Promotional activities that we have employed or are currently
considering include television, radio and print advertising and distributing
sample programming and marketing materials at retail outlets, concert venues,
NASCAR events and on the Internet to generate consumer interest. For instance,
we have an agreement with Clear Channel Entertainment (formerly SFX) to be the
exclusive satellite radio advertiser at live concerts and sporting events
presented by, and live entertainment venues managed by, Clear Channel
Entertainment.

     XM Radio promotes subscriber acquisition activities with both original
equipment and aftermarket radio manufacturers. This may include

..    promotional campaigns directed towards automobile manufacturers and
     dealers;

..    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.

Distribution

     We work closely with radio and automotive manufacturers and retail
distributors to promote rapid market penetration. We market our satellite radio
service through several distribution channels including national electronics
retailers, car audio dealers, mass retailers and automotive manufacturers.

     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 4.9 million automobiles in 2001, which represented more than 28% 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. General Motors made XM radios available as an option in Cadillac
Sevilles and Devilles in the fall of 2001, and announced that it will expand to
over 20 additional models during 2002.

     Other Automobile and Truck Manufacturers. We are currently in discussions
with other car manufacturers regarding additional distribution agreements. 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.

                                       8

<PAGE>

     In addition, we have relationships with Freightliner Corporation and
Pana-Pacific and XM radios are available in Freightliner and Peterbilt trucks
and Winnebago RVs.

     Distribution through Radio Manufacturers. We have contracts with
Delphi-Delco, Motorola, Pioneer, Alpine, Mitsubishi Electric, Clarion,
Blaupunkt, Fujitsu Ten, Hyundai Autonet, Bontec, Visteon, Panasonic and Sanyo
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. 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 Electric Automotive America, together with its parent corporation,
Mitsubishi Electric 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. Pioneer Electronics Corporation,
Alpine Electronics and Sony, which each manufacture XM Radios for the car audio
aftermarket, together sold over 43% of aftermarket car radios sold in the United
States in 2001 (NPD Intelect, 2001). We also have a contract with SHARP to
manufacture and distribute XM radios for home and portable use. To facilitate
attractive pricing for retail radio and automobile consumers, we have financial
arrangements with certain radio manufacturers that include our subsidizing of
certain radio component parts. We are pursuing additional agreements for the
manufacture and distribution of XM radios.

     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.

     Retail Electronics Distributors. XM radios and the XM Radio service are
marketed and distributed through major consumer electronics retail channels,
including Circuit City, Best Buy, participating Radio Shack dealers and
franchisees, Sears and others. We developed in-store merchandising materials and
trained the sales forces of several major retailers.

     Rural Market Distribution. We 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.

     Future Interoperability 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 manufactures 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.

Advertising

     As with other subscription-based entertainment media such as cable
television, we generate revenue by charging a monthly subscription fee and
selling limited advertising time. We 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.

     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 have
advertising sales offices in five major media markets to sell directly to
advertising agencies and media buying groups and have engaged Premiere Radio
Networks, an affiliate of Clear

                                       9

<PAGE>

Channel Communications, to be our advertising sales representative. We will also
work with ratings agencies in our advertising-supported business. Arbitron,
which produces radio listenership reports, has agreed to work with us to develop
other ratings methodologies for satellite radio.

     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. Among the advertisers and agencies
we have sold advertising packages to are AT&T, Procter & Gamble, Allstate,
Sears, Goodyear, Bayer, Radio Shack and J. Walter Thompson.

The XM Radio System

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

   Space Segment

     Satellite Construction. Boeing Satellite Systems, formerly Hughes Space and
Communications, has built, launched and delivered in-orbit two BSS 702
high-power satellites ("Rock" and "Roll") for the XM Radio system. The
satellites were launched on March 18, 2001 and May 8, 2001, respectively, and
are transmitting the XM signal. Boeing is also building one ground spare
satellite, to be available in the event of a failure of any satellite or to
accommodate our satellite system growth. Boeing also provides us with operations
support services, equipment and software.

     The BSS 702 is the highest powered commercial communications satellite
currently available. Both of our satellites contain communications payloads
provided by Alcatel. 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.

     In September 2001, Boeing advised us of a progressive degradation problem
with the solar array output power of 702 class satellites, including both XM
Rock and XM Roll. At the present time, the output power of our solar arrays and
the broadcast signal strength are above minimum acceptable levels and are
expected to remain that way at least through 2005, permitting full operation of
the XM system (based on patterns projected by Boeing) through that time. We have
advised our insurance carriers of this situation. Since the issue is common to
702 class satellites, the manufacturer is watching closely the progression of
the problem, including data from a satellite in orbit approximately 18 months
longer than XM Rock and XM Roll. With this 18-month advance visibility of
performance levels, our insurance arrangements, one spare satellite already
purchased (which is being modified to address the solar array anomaly) and
availability of additional satellites, we believe that we will be able to launch
additional satellites prior to the time the solar array problem might cause the
broadcast signal strength to fall below acceptable levels. Our management will
continue to monitor this situation carefully.

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

     The transmission coverage areas, or footprints, of our satellites encompass
the 48 contiguous states and nearby coastal waters. We have tailored these
footprints to provide nearly uniform availability over the United States and to
minimize transmission spillage across the United States borders into Canada and
Mexico. 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.

                                       10

<PAGE>

     Our satellites transmit audio programming within a 12.5 MHz range of S-Band
radio frequencies that has been allocated by the FCC for our exclusive use.
Megahertz is a unit of measurement of frequency. This 12.5 MHz bandwidth is
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 is carried
on two satellite signals, and the remaining two satellite signals and the
terrestrial repeater signals repeat the audio programming to enhance overall
signal reception. The transmission of higher quality sound requires the use of
more kilobits per second than the transmission of lesser quality sound. We are
using our allocated bandwidth in such a way as to provide 100 channels of
programming, with our music channels having a higher bandwidth allocation so as
to provide high-quality digital sound.

     Insurance. We bear the risk of loss for each of the satellites, and we have
obtained insurance to cover that risk. We have launch and in-orbit insurance
policies from global space insurance underwriters. These policies indemnify us
for a total, constructive total or partial loss of either of the satellites that
occurs during a period ending five years after launch. Coverage exceeds all
hardware, insurance and launch service costs related to the in-orbit replacement
of a lost satellite. However, our insurance will not protect us from the adverse
effect on our business operations due to the loss of a satellite. Our policies
contain standard commercial satellite insurance provisions, including standard
coverage exclusions. We do not expect a final determination regarding insurance
recovery for the solar array anomaly relating to XM Rock and XM Roll while the
impact of the situation is being assessed.

   Ground Segment

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

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

     Terrestrial Repeaters. Our terrestrial repeater system supplements the
coverage of our satellites. In some areas, satellite signals may be subject to
blockages from tall buildings and other obstructions. Due to the satellites'
longitudinal separation, in most circumstances where reception is obscured from
one satellite, XM Radio 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 have installed and may continue to install terrestrial repeaters to
facilitate signal reception. Terrestrial repeaters are ground-based electronics
equipment installed on rooftops or existing tower structures, where they receive
the satellite signals, amplify them and retransmit them at a significantly
higher signal strength than is possible directly from the satellites.

     LCC International, a wireless service site planner, designed our
terrestrial repeater network. Hughes Electronics Corporation manufactured the
terrestrial repeaters. We have installed terrestrial repeaters in approximately
60 markets. In light of the coverage provided by our high-power satellites
"Rock" and "Roll," we have installed fewer repeaters than originally planned,
and have a significant number of repeaters available for future installation as
replacements or to improve signal reception based on performance. Our repeater
network in the largest urban markets includes in excess of 100 repeaters, while
for smaller cities with fewer tall buildings we have as few as one to three
repeaters. Our placement of terrestrial repeaters was guided by a 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.

     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 that
cannot receive the repeater signal, users will need to use a small externally
mounted antenna that will receive the signal from one of the two satellites.

                                       11

<PAGE>

     XM Radios. We transmit XM Radio throughout the continental United States to
vehicle, portable, home and plug and play radios. Our radios are capable of
receiving both XM Radio and traditional AM/FM stations. Six manufacturers,
including Pioneer, Alpine and Sony, introduced 24 different models of XM-ready
radios at the January 2001 Consumer Electronics Show (CES) in Las Vegas, Nevada.
XM radios are available under the Sony, Pioneer and Alpine brand names at
national consumer electronics retailers, such as Circuit City, Best Buy,
participating Radio Shack dealers and franchisees, Sears and others. The Sony
plug and play device is designed to augment the existing radio in the car which
provides AM/FM stations.

     ST Microelectronics is manufacturing the chipsets used to decode the XM
Radio signal. Delphi-Delco Electronics, Sony, Pioneer and Alpine, among others,
are manufacturing XM Radios to meet consumer and automotive demand.

     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. 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. The
parties have agreed to seek arbitration with respect to certain existing
technology. 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 patent
litigation against XM Radio was resolved.

     We anticipate that it will take several years to develop radios capable of
receiving both services. Currently, consumers are able to purchase radios
capable of receiving only one 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 face competition for both listeners and advertising dollars. In addition
to pre-recorded music purchased or playing in cars, homes and using portable
players, we compete most directly with the following providers of radio or other
audio services:

   Sirius Satellite Radio

     Our direct competitor in satellite radio service is Sirius Radio, the only
other FCC licensee for satellite radio service in the United States. Since
October 1997, Sirius Radio's common stock has traded on the Nasdaq National
Market. Sirius Satellite Radio began commercial operations in February 2002 in
the four initial markets of Phoenix, Houston, Denver and Jackson, Mississippi.
Sirius offers its service for a monthly charge of $12.95, featuring 100
channels.

   Traditional AM/FM Radio

     Our competition also includes 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. Radio stations
compete for listeners

                                       12

<PAGE>

and advertising revenues directly with other radio stations within their markets
on the basis of a variety of factors, including

..    program content;

..    on-air talent;

..    transmitter power;

..    source frequency;

..    audience characteristics;

..    local program acceptance; and

..    the number and characteristics of other radio stations in the market.

     Currently, traditional AM/FM radio stations broadcast by means of analog
signals, not digital transmission. We believe, however, that in the future
traditional AM/FM radio broadcasters may be able to transmit digitally into the
bandwidth occupied by current AM/FM stations.

   Internet Radio

     A growing number of Internet radio broadcasts provide listeners with radio
programming from around the country and the world. 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 or compact disk players. Availability of music in
the public MP3 audio standard has been growing in recent years with sound files
available on the websites of online music retailers, artists and record labels
and through numerous file sharing software programs. These MP3 files, many of
which are posted or available in violation of existing copyrights, can be played
instantly, burned to a compact disk or stored in various portable players
available to consumers. 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. The Copyright Arbitration Panel recently announced royalty fees for
internet radio. 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 or cable audio systems. These services are targeted
to fixed locations, mostly in-home. The radio service offered by direct
broadcast satellite and cable audio is often included as part of a package of
digital services with video service, and video customers therefore generally do
not pay an additional monthly charge for the audio service.

Regulatory Matters

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

     As the 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

                                       13

<PAGE>

Communications Act and related federal law. Non-compliance by us with FCC rules
and regulations could result in fines, additional license conditions, license
revocation or other detrimental FCC actions. Any of these FCC actions may harm
our business. There is no guarantee that the rules and regulations of the FCC
will continue to support our business plan.

     One of the two losing bidders in the satellite radio license auction filed
a petition to deny our application for an FCC license, but the petition was
denied. The losing bidder has asked the FCC to review this decision. The losing
bidder has also asked a federal court of appeals to mandate that the FCC review
this decision. On November 30, 2001, the FCC denied the losing bidder's
application for review and upheld the FCC's previous decision denying its
petition to deny. The losing bidder has appealed the decision to the United
States Court of Appeals for the District of Columbia Circuit. 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 us. 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 appeal.
In December 2000, the FCC approved a transfer of control of our FCC license from
Motient Corporation to a diffuse group of owners, none of whom will have a
controlling interest in us. The FCC has conditioned this approval on the outcome
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 satellite radio
service.

     Our license, which is held by a subsidiary wholly owned by XM, has a term
of eight years from commencement of XM's 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   Completed Summer 2001
October 2003      Begin full operation of the XM Radio system          Completed September 2001
</TABLE>

     We have certified to the FCC that we have met all of our milestones.

     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 several years to develop
the technologies necessary for radios that will be capable of receiving both our
service and Sirius Radio's service. Together with Sirius Radio, we have informed
the FCC of the progress that has been made to date in meeting the
interoperability requirement. We may need to obtain an extension of time or
modification of the interoperability 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, Wireless Communications Service (WCS) licensees, Multipoint
Distribution Service (MDS) licensees, and Instructional Television Fixed Service
(ITFS) licensees have asked the FCC to:

                                       14

<PAGE>

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

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

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

..    require individual licensing of each terrestrial repeater; and

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

     Our plans to deploy terrestrial repeaters in our system may be impacted,
possibly materially, by whatever rules the FCC issues in this regard. We have
made a proposal to the FCC to set a 40 kW EIRP limit or, alternatively, a limit
of 18 kW EIRP calculated by averaging power over 360 degrees, on the power of
terrestrial repeaters. We have also proposed to coordinate with WCS licensees in
certain cases prior to operating terrestrial repeaters above 2 kW EIRP. The
coordination may include our providing of filters in certain instances to limit
the interference WCS licensees claim will result from our operation of repeaters
operating above 2 kW EIRP.

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

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

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

     We 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. The FCC has granted us a license for this earth station which expires
in March 2011. The other services operating in this band 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-

                                       15

<PAGE>

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 February 2002, the FCC initiated a
rulemaking proceeding regarding rules for future licensees in the 2385-2390 MHz
band, which will be able to provide both fixed and mobile services. We have
proposed that the FCC apply the same out-of-band emissions limits on these
licensees that are applied to Wireless Communication Services licensees. In
addition, in April 1998, the FCC proposed to establish rules for radio frequency
("RF") lighting devices that operate in an adjacent radio frequency band. We
opposed the proposal on the grounds that the proliferation of this new kind of
lighting and its proposed emission limits, particularly if used for street
lighting, may interfere with XM Radio. Jointly with Sirius Radio, we have
proposed to the FCC an emission limit for these RF lighting devices that we
believe will protect DARS receivers from interference. In addition, we have
proposed that the FCC require existing RF lighting devices that exceed our
proposed limit to cease operations. A manufacturer of RF lights has conducted
tests which it claims demonstrate that RF lights do not cause interference to
our receivers. While our proposal is pending, these RF lighting devices may
continue to be produced and used, which could adversely affect our signal
quality. The FCC may not adopt our proposal, a decision which could adversely
affect our signal quality. In addition, in May 2000, the FCC proposed to amend
its rules to allow for the operation of devices incorporating ultra-wideband
(UWB) technology on an unlicensed basis. The FCC has proposed to impose less
stringent emissions limits for UWB devices operating above 2 GHz, where XM
operates, than for such devices operating below 2 GHz. We have opposed this
proposal on the basis that the operation of these devices may interfere with XM
Radio. In February 2002, the FCC decided to allow for the operation of these
devices, but has not yet released its decision to the public. It is our
understanding that the FCC has restricted intentional emissions from most UWB
devices to above 3 GHz, outside of XM Radio's licensed frequency band. In
addition, we understand that the FCC has adopted more stringent out-of-band
emissions limits for certain UWB devices to protect our system than the FCC had
originally proposed, but that the emissions limits adopted are less stringent
than XM Radio proposed. In addition, the FCC has stated that it intends to
review these standards for UWB devices and may allow for the operation of
additional types of UWB devices in the future. Interference from other devices
that operate on an unlicensed basis may also adversely affect our signal. In May
2001, the FCC issued a notice of proposed rulemaking seeking to facilitate the
development of new unlicensed wireless devices operating in a frequency band
adjacent to XM Radio. XM Radio has opposed this proposal on the basis that the
operation of these devices pursuant to the FCC's current emissions limits may
interfere with XM Radio's operations. In addition, in October 2001, the FCC
initiated a rulemaking proceeding reviewing its rules for unlicensed devices. XM
Radio has proposed in this proceeding that the FCC adopt out-of-band emissions
limits for certain unlicensed devices sufficient to protect our system. XM Radio
has proposed that the FCC apply these emissions limits to products sold 18
months after a final rule is published. Some manufacturers of unlicensed devices
have opposed these limits on the grounds that they are too stringent and that it
will be costly for them to meet these limits.

     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.

Intellectual Property

   System Technology

     We have contracted with several technology companies to implement portions
of the XM Radio system. These technology companies include Boeing Satellite
Systems and Alcatel (satellites); Delphi-Delco, Sony, Pioneer, Alpine, Audiovox
and Clarion, among others, (car and home radios); ST Microelectronics
(chipsets); Fraunhofer Institute (various technologies) LCC International
(design of repeater network); and Hughes Electronics (design and manufacture of
terrestrial repeaters). We will not acquire any intellectual property rights in
the satellites. We have joint ownership of or a license to use the technology
developed by the radio and chipset manufacturers. We also license various other
technologies used in our system. We own the design of our system, including
aspects of the technology used in communicating from the satellites, the design
of the repeater network and certain aspects of the design of, and features that
may be used in, our radios.

                                       16

<PAGE>

     Our system design, our repeater system design and the specifications we
supplied to our radio and chipset manufacturers incorporate or may in the future
incorporate some intellectual property licensed to us on a non-exclusive basis
by WorldSpace 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 $5.4 million to WorldSpace Management under this agreement through December
31, 2001. We will not be required to pay royalties to WorldSpace Management for
licensed technology that we do not use in our system.

     We anticipate the Fraunhofer Institute will continue to provide various
development services for us in connection with the design of our system. Motient
Corporation has granted us a royalty-free license with respect to certain ground
segment communications technology and antenna technology.

     Motient 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 Motient 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 Motient 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.

     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. In our
discussions we have yet to agree on the validity, value, use, importance and
available alternatives of our respective technologies. If we fail to reach
agreement, the fees or credits may be determined through binding arbitration.
The companies have agreed to seek arbitration to resolve this issue with respect
to certain existing technology. We cannot predict at this time the amount of
license fees, if any, payable by or to XM or Sirius Radio or the size of 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 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

                                       17

<PAGE>

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 (with whom we recently reached agreement), 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 4% of their revenues to these performing
rights societies. We expect to establish license fees through negotiation or
through a rate court proceeding in the U.S. District Court for the Southern
District of New York but such royalty arrangements may be more costly than
anticipated.

     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 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 XM 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 December 31, 2001, we had 448 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. PROPERTY

     In August 2001, we purchased our approximately 150,000 square feet of
executive offices, studio and production facilities located at 1500 Eckington
Place, N.E., Washington, D.C. 20002. We have also entered into license or lease
agreements with regard to our terrestrial repeater system throughout the United
States.

                                       18

<PAGE>

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 2001.

                                       19

<PAGE>

                                     PART II

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

                           PRICE RANGE OF COMMON STOCK

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

     1999:                                              High        Low
                                                      --------    -------
     Fourth Quarter (beginning October 5, 1999) ....   $44.750    $11.625

     2000:
     First Quarter .................................   $50.000    $27.000
     Second Quarter ................................   $39.250    $18.125
     Third Quarter .................................   $46.938    $30.125
     Fourth Quarter ................................   $43.750    $12.063

     2001:
     First Quarter .................................   $21.063     $9.000
     Second Quarter ................................   $17.500     $3.870
     Third Quarter .................................   $17.200     $4.020
     Fourth Quarter ................................   $20.680     $4.300

     2002:
     First Quarter (through March 15, 2002) ........   $19.200    $10.700

     On March 15, 2002, the last reported sale price of Holdings' Class A common
stock on the Nasdaq National Market was $15.04. As of March 15, 2002, there were
473 holders of record of Holdings' Class A common stock.

                                 DIVIDEND POLICY

     Holdings has not declared or paid any dividends on its common stock since
its date of inception. Currently, Holdings' 8.25% Series B Convertible
Redeemable preferred stock restricts Holdings from paying dividends on its
common stock unless full cumulative dividends have been paid or set aside for
payment on all shares of the Series B preferred stock. The terms of Holdings'
8.25% Series C Convertible Redeemable preferred stock contain similar
restrictions. In accordance with its terms, Holdings has paid dividends on the
Series B preferred stock in common stock. The Series C preferred stock provides
for cumulative dividends payable in cash. As no dividends have been declared on
the Series C preferred stock, the value of the cumulative dividends has
increased the liquidation preference. The indenture governing XM's senior
secured notes restricts XM from paying dividends to Holdings which, in turn,
will significantly limit the ability of Holdings to pay dividends. Holdings does
not intend to pay cash dividends on its common stock in the foreseeable future.
Holdings anticipates that it will retain any earnings for use in its operations
and the expansion of its business.

                     RECENT SALES OF UNREGISTERED SECURITIES

     None.

                                       20

<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

XM Satellite Radio Holdings Inc. and Subsidiaries

     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
five-year period ended December 31, 2001 and the consolidated balance sheets
data as of December 31, 1997, 1998, 1999, 2000 and 2001 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 are dependent upon additional debt or equity financing
and that this factor raises 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. With the
commencement of operations during the fourth quarter of 2001, we have recognized
revenue and emerged from the development stage.

<TABLE>
<CAPTION>
                                                                                      Years Ended December 31,
                                                                            ------------------------------------------
                                                                  1997          1998          1999           2000          2001
                                                               ----------    ----------    -----------    ----------   -----------
                                                                      (In thousands, except subscriber and share amounts)
<S>                                                            <C>           <C>           <C>            <C>          <C>
Consolidated Statements of Operations Data:
Subscriber revenue ........................................    $       --    $       --    $        --    $        --   $       246
Ad sales revenue ..........................................            --            --             --             --           294
   Less: Agency commissions ...............................            --            --             --             --           (43)
Other revenue .............................................            --            --             --             --            36
                                                               ----------    ----------    -----------    -----------   -----------
     Total revenue. .......................................    $       --    $       --    $        --    $        --   $       533
                                                               ==========    ==========    ===========    ===========   ===========
Operating expenses:
   Broadcasting operations:
     Content/programming ..................................            --          (664)        (1,014)        (6,878)      (27,924)
     System operations ....................................            --        (1,145)        (2,877)       (23,227)      (67,571)
     Customer care and billing operations .................            --            --             --           (856)       (6,034)
   Sales and marketing ....................................            --        (1,523)        (3,352)       (16,078)      (99,789)
   General and administrative .............................        (1,110)       (5,327)       (14,496)       (16,624)      (24,595)
   Research and development. ..............................            --        (7,477)        (7,440)       (12,701)      (14,255)
   Depreciation and amortization ..........................            --           (57)        (1,512)        (3,115)      (41,971)
                                                               ----------    ----------     ----------    -----------   -----------
     Total operating expenses .............................        (1,110)      (16,193)       (30,691)       (79,479)     (282,139)
                                                               ----------    ----------     ----------    -----------   ----------
Operating loss ............................................        (1,110)      (16,193)       (30,691)       (79,479)     (281,606)
                                                               ----------    ----------     ----------    -----------   -----------

Interest income (expense), net ............................          (549)           26         (6,205)        27,606        (2,933)
Other income (expense), net ...............................            --            --             --             --           160
                                                               ----------    ----------     ----------    -----------   -----------
Net loss ..................................................        (1,659)      (16,167)       (36,896)       (51,873)     (284,379)
                                                               ----------    ----------     ----------    -----------   -----------
Series B preferred stock dividend requirement .............            --            --             --         (5,935)       (3,766)
Series C preferred stock dividend requirement .............            --            --             --         (9,277)      (19,387)
Series B preferred stock incentivized conversion charge ...            --            --             --        (11,211)           --
Series C preferred stock beneficial conversion charge .....            --            --             --       (123,042)           --
                                                               ----------    ----------     ----------    -----------   -----------
Net loss applicable to common stockholders ................    $   (1,659)   $  (16,167)   $   (36,896)   $  (201,338)  $  (307,532)
                                                               ==========    ==========    ===========    ===========   ===========
Net loss per share--basic and diluted .....................    $    (0.26)   $    (2.42)   $     (2.40)   $     (4.15)  $     (5.13)
                                                               ==========    ==========    ===========    ===========   ===========
Weighted average shares used in computing net loss per
   share--basic and diluted ...............................     6,368,166     6,689,250     15,344,102     48,508,042    59,920,196
Other Data:
   EBITDA(1) ..............................................    $   (1,110)   $  (16,136)   $   (29,181)   $   (76,110)  $  (239,184)
   XM Subscriptions (end of period)(2) ....................            --            --             --             --        27,733
</TABLE>

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                             -----------------------------------
                                                                  1997          1998          1999           2000          2001
                                                               ----------    ----------    -----------    ----------   -----------
                                                                                        (In thousands)
<S>                                                            <C>           <C>           <C>            <C>          <C>
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term investments .........    $        1    $      310    $   120,170    $  224,903    $   210,852
Restricted investments ....................................            --            --             --       161,166         72,759
System under construction .................................        91,932       169,029        362,358       815,016         55,056
Property and equipment, net ...............................            --         1,146          2,551        50,052      1,066,191
Total assets ..............................................        91,933       170,485        515,189     1,293,218      1,456,203
Total long-term debt, net of current portion ..............        82,504       140,332            212       262,665        411,520
Total liabilities .........................................        82,949       177,668         30,172       337,266        529,552
Stockholders' equity (deficit) ............................         8,984        (7,183)       485,017       955,952        926,651
</TABLE>

(1)  EBITDA means earnings (loss) before interest income and expense, other
     income, taxes, depreciation (including amounts related to research and
     development) and amortization. We have included EBITDA data because it is a
     commonly used measure. EBITDA is not a measure of financial performance
     under generally accepted accounting principles and should not be considered
     an alternative to net income (loss) as a measure of performance or to cash
     flows as a measure of liquidity.
(2)  We consider subscribers to be those who are receiving and have agreed to
     pay for our service, either by credit card or by invoice, including those
     that are currently in promotional periods.

                                       21

<PAGE>

XM Satellite Radio Inc. and Subsidiaries

     In considering the following selected consolidated financial data, you
should also read XM's consolidated financial statements and notes and the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The consolidated statements of operations data for
the five-year period ended December 31, 2001 and the consolidated balance sheets
data as of December 31, 1997, 1998, 1999, 2000 and 2001 are derived from XM's
consolidated financial statements. These statements have been audited by KPMG
LLP, independent certified public accountants. KPMG's report contains a
paragraph stating that XM is dependent upon additional debt or equity financing
and that this factor raises substantial doubt about XM's 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>
                                                                            Years Ended December 31,
                                                                       ----------------------------------
                                                                 1997      1998       1999        2000      2001
                                                               -------  ---------   --------    -------  ---------
                                                                 (In thousands, except share data)
<S>                                                            <C>     <C>          <C>         <C>      <C>
Consolidated Statements of Operations Data:
Subscriber revenue ........................................    $    --   $     --   $     --    $    --  $     246
Ad sales revenue ..........................................         --         --         --         --        294
   Less: Agency commissions ...............................         --         --         --         --        (43)
Other revenue .............................................         --         --         --         --         36
                                                               -------   --------   --------    -------  ---------
     Total Revenue. .......................................    $    --   $     --   $     --    $    --  $     533
                                                               =======   ========   ========    =======  =========
Operating expenses:
   Broadcasting operations:
     Content/programming ..................................         --       (664)    (1,014)    (6,878)   (27,924)
     System operations ....................................         --     (1,145)    (2,877)   (23,227)   (67,571)
     Customer care and billing operations .................         --         --         --       (856)    (6,034)
   Sales and marketing ....................................         --     (1,523)    (3,352)   (16,078)   (99,789)
   General and administrative .............................     (1,110)    (5,327)   (14,475)   (16,272)   (25,782)
   Research and development. ..............................         --     (7,477)    (7,440)   (12,701)   (14,255)
   Depreciation and amortization ..........................         --        (57)    (1,512)    (3,115)   (41,491)
                                                               -------   --------   --------     ------  ---------
     Total operating expenses .............................     (1,110)   (16,193)   (30,670)   (79,127)  (282,846)
                                                               -------   --------   --------     ------  ---------
Operating loss ............................................     (1,110)   (16,193)   (30,670)   (79,127)  (282,313)
                                                               -------   --------   --------     ------  ---------
Interest income (expense), net ............................        (85)        26        490     27,200     (1,055)
Other income (expense), net ...............................         --         --         --         --       (607)
                                                               -------   --------   --------  -- ------  ---------
Net loss ..................................................    $(1,195)  $(16,167)  $(30,180) $ (51,927) $(283,975)
                                                               =======   ========   ========  =========  =========
Other Data:
   EBITDA(1) ..............................................    $(1,110) $ (16,136)  $(29,160) $ (75,758) $(240,371)
   XM Subscriptions (end of period)(2) ....................         --         --         --         --     27,733
</TABLE>

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                          --------------------------
                                                               1997        1998       1999        2000        2001
                                                              -------    --------  ---------   ----------  ----------
                                                                                (In thousands)
<S>                                                           <C>        <C>       <C>         <C>         <C>
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term investments...........  $      1   $    310  $ 119,102   $  203,191  $   72,664
Restricted investments .....................................        --         --         --      161,166      70,734
System under construction ..................................    90,031    155,334    333,500      786,159      18,597
Property and equipment, net ................................        --      1,146      2,551       50,052   1,031,810
Total assets ...............................................    90,032    156,397    485,134    1,242,517   1,241,362
Total long-term debt, net of current portion ...............        --         87        212      262,665     268,934
Total liabilities ..........................................        --     28,941     30,030      337,107     385,908
Stockholder's equity .......................................    90,032    127,456    455,104      905,410     855,454
</TABLE>

(1)  EBITDA means earnings (loss) before interest income and expense, other
     income, taxes, depreciation (including amounts related to research and
     development) and amortization. We have included EBITDA data because it is a
     commonly used measure. EBITDA is not a measure of financial performance
     under generally accepted accounting principles and should not be considered
     an alternative to net income (loss) as a measure of performance or to cash
     flows as a measure of liquidity.

(2)  We consider subscribers to be those who are receiving and have agreed to
     pay for our service, either by credit card or by invoice, including those
     that are currently in promotional periods.


                                       22

<PAGE>

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

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

Introduction

     This annual report on Form 10-K is filed jointly by XM Satellite Radio
Holdings Inc. and XM Satellite Radio Inc. XM is a wholly-owned subsidiary of
Holdings. Accordingly, the management's discussion and analysis section of this
report focuses on the financial condition and results of operations of Holdings
but contains an explanation of any significant differences, if applicable,
between the two companies.

Overview

     XM Satellite Radio Inc. was incorporated in Delaware in 1992 as a
wholly-owned subsidiary of Motient Corporation. XM Satellite Radio Holdings Inc.
became a holding company for XM Satellite Radio Inc. in early 1997.

     We emerged from the development stage in the fourth quarter of 2001
following the commercial launch of our service on a nationwide basis on November
12, 2001. We commenced commercial service of XM Radio in San Diego and
Dallas/Ft. Worth on September 25, 2001, expanded across the southern half of the
United States in mid-October and launched nationwide on November 12, 2001. As of
December 31, 2001, we had 27,733 subscribers. Accordingly, we revised the
presentation of our Statements of Operations to reflect those of a commercial
enterprise. Prior to that point, we were a development stage company with no
significant revenue-generating operations.

     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 (which we refer to as the DARS license).
Prior to our commercial launch, our principal activities included:

..    designing and developing the XM Radio system, including launching our
     satellites, "Rock" and "Roll," to complete our space constellation,
     completing our state-of-the-art broadcast studio facilities, completing our
     ground segment, implementing our terrestrial network build-out, and
     validating XM radios on the XM radio system;

..    executing contracts with specialty programmers, retail distributors, radio
     manufacturers and car manufacturers;

..    receiving temporary FCC authority to operate our national repeater network;
     and

..    securing financing for working capital and capital expenditures.

     To finance the establishment and commercialization of our system and fund
the substantial losses incurred to date, we have raised net proceeds of $1.5
billion through December 31, 2001 from issuances of equity and debt to investors
and strategic partners, as further described under the heading "Liquidity and
Capital Resources -- Funds Raised to Date."

     Although our system is substantially completed, we expect to incur
significant operating losses for the next few years as we seek to increase the
number of subscribers and develop a stream of cash flow sufficient to cover
operating costs. We also have significant outstanding contracts and commercial
commitments that need to be paid over the next several years, including payments
for work previously performed in constructing our system and to fund marketing
and distribution costs and repayment of long-term debt, as further described
below under the heading "Liquidity and Capital Resources--Contractual
Obligations and Commercial Commitments." Our ability to

                                       23

<PAGE>

become profitable ultimately depends upon our substantially increasing the
number of our subscribers as well as a number of other factors, as identified
below under the heading "Liquidity and Capital Resources--Funds Required in 2002
and Beyond."

Results of Operations

   Year Ended December 31, 2001 Compared With Year Ended December 31, 2000

   XM Satellite Radio Holdings Inc. and Subsidiaries

     Revenue. Our revenue consists primarily of customers' subscription fees and
advertising revenue. Revenue from subscribers consists of our monthly $9.99
subscription fee, which is recognized as the service is provided, and a
non-refundable activation fee, which is recognized on a pro-rata basis over an
estimated term for the subscriber relationship (which estimate we expect to be
further refined over the next few years as additional historical data becomes
available). Our subscriber arrangements are cancelable, without penalty.
Payments received from customers receiving our service under promotional offers
are not included as revenue until the promotional period has elapsed, as these
customers are not obligated to continue receiving our service beyond the
promotional period. Advertising revenue consists of sales of spot announcements
to national advertisers that are recognized in the period in which the spot
announcement is broadcast. Agency commissions are presented as a reduction to
revenue in the Consolidated Statement of Operations, which is consistent with
industry practice.

     We recognized revenue of $533,000 from the date of launch through December
31, 2001. Total revenue included $246,000 in subscriber revenue and $295,000 in
advertising revenue less sales commissions of $43,000. We expect revenue to
increase during 2002 as we add subscribers and attract additional advertisers.

     Broadcasting Operations. Broadcasting operations expense was $101.5 million
in 2001, compared with $31.0 million in 2000, an increase of $70.5 million or
227%. Broadcasting operations expense consists of content/programming expense,
system operations and customer care and billing operations.

         Content/Programming - Content/programming expense was $27.9 million in
         2001, compared with $6.9 million in 2000, an increase of $21.0 million
         or 304%. This increase was the result of the cost of content and
         headcount, third party programming fees, and estimates of royalties
         owed to performing rights organizations. We expect content/programming
         expense to increase during 2002 as we operate the XM Radio system for a
         full year and as revenue increases.

         System Operations - System operations expense was $67.6 million in
         2001, compared with $23.2 million in 2000, an increase of $44.4 million
         or 191%. This increase primarily resulted from the operation of our
         satellites and terrestrial repeater network and a charge of $26.3
         million related to terrestrial repeater sites no longer required. We
         expect this expense to increase during 2002, exclusive of the $26.3
         million charge, as our system operations continue to stabilize and we
         operate the system over the course of a full year.

         Customer Care and Billing Operations - Customer care and billing
         operations expense was $6.0 million, compared with $856,000 in 2000, an
         increase of $5.1 million or 567%. This increase resulted from our
         commencement of commercial operations. Included in 2001 expense are
         $4.9 million of set-up and pre-operating costs. We expect customer care
         and billing operations expense to increase during 2002, exclusive of
         the $4.9 million in set-up and pre-operating costs, as we add
         subscribers.

     Sales and Marketing. Sales and marketing expense was $99.8 million in 2001,
compared with $16.1 million in 2000, an increase of $83.7 million or 520%. Sales
and marketing expense increased as a result of our commencement of commercial
operations and includes expenses related to our distribution partners,
subscriber acquisition costs, personnel, advertising creation and media costs
and significant pre-operations costs. We expect sales and marketing expense to
increase during 2002 as we add subscribers.

     General and Administrative. General and administrative expense was $24.6
million in 2001, compared with $16.6 million in 2000, an increase of $8.0
million or 48%. The increase reflects additional headcount, facilities and

                                       24

<PAGE>

the commencement of commercial operations. We anticipate general and
administrative expense to remain relatively stable during 2002.

     Research and Development. Research and development expense was $14.3
million (including depreciation of $0.5 million) in 2001, compared with $12.7
million (including depreciation of $0.3 million) in 2000, an increase of $1.6
million or 13%. The increase in research and development expense primarily
resulted from increased activity relating to our system technology development,
including chipset design and uplink technology, in 2001. We expect research and
development expense to increase during 2002 as we work toward developing our
second generation chipset technology.

     Depreciation and Amortization. Depreciation and amortization expense was
$42.0 million in 2001, compared with $3.1 million in 2000, an increase of $38.9
million or 1,255%. The increase in depreciation and amortization expense
primarily resulted from our taking delivery of major components of our system
during 2001, including our two satellites and terrestrial repeater network. We
expect depreciation and amortization expense to increase during 2002 to reflect
a full year's depreciation of our satellites and other components of our system.
However, we will cease to amortize goodwill, our DARS license, and other
intangibles in accordance with new accounting standards, as further described
under the heading "Recent Accounting Pronouncements."

     Interest Income. Interest income was $15.2 million in 2001, compared with
$27.6 million in 2000, a decrease of $12.4 million or 45%. The decrease was the
result of lower average balances of cash and cash equivalents in 2001 as well as
lower yields on our investments due to market conditions.

     Interest Expense. We incurred interest costs of $63.3 million, including a
$6.5 million charge due to the incentivized conversion of Holdings' 7.75%
convertible notes, and $39.1 million in 2001 and 2000, respectively. We
capitalized interest costs of $45.2 million and $39.1 million associated with
our DARS license and the XM Radio system and expensed $18.1 million and $0 in
2001 and 2000, respectively, as the interest capitalization threshold was
exceeded.

     Net Loss. Net loss for 2001 was $284.4 million, compared with $51.9 million
in 2000, an increase of $232.5 million or 448%. The increase primarily reflects
increases in broadcasting operations expense, sales and marketing expense,
depreciation and amortization expense and general and administrative expense in
connection with our commencement of commercial operations.

   XM Satellite Radio Inc. and Subsidiaries

     The results of operations for XM and its subsidiaries were substantially
the same as the results for Holdings and its subsidiaries discussed above except
that in 2001, XM incurred additional rent expense of $1.3 million, $0.5 million
less depreciation and amortization expense, $1.1 million less interest income,
$3.0 million less interest expense and $0.8 million less other income. The rent,
depreciation and other income differences are principally related to XM's rental
of its corporate headquarters from Holdings due to Holdings' ownership of the
building since August 2001. The interest income and expense differences were
principally related to the components of cash and debt held at each company.

   Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

   XM Satellite Radio Holdings Inc. and Subsidiaries

     Revenue. We had no revenue during 2000 and 1999 because we had not yet
commenced commercial operations.

     Broadcasting Operations. Broadcasting operations expense was $31.0 million
in 2000, compared with $3.9 million in 1999, an increase of $27.1 million or
695%. This increase reflects preparation for commercial operations, including
increased expense for headcount, facilities and services.

                                       25

<PAGE>

     Sales and Marketing. Sales and marketing expense was $16.1 million in 2000,
compared with $3.4 million in 1999, an increase of $12.7 million or 374%. This
increase reflects preparation for commercial operations, including increased
expense for headcount, facilities and services.

     General and Administrative. General and administrative expense was $16.6
million in 2000, compared with $14.5 million in 1999, an increase of $2.1
million or 14%. The increase reflects increased expense for headcount,
facilities and services.

     Research and Development. Research and development expense was $12.7
million (including depreciation of $0.3 million) in 2000, compared with $7.4
million in 1999, an increase of $5.3 million or 72%. The increase in research
and development expense primarily resulted from increased activity relating to
our system technology development, including chipset design and uplink
technology, in 2000.

     Depreciation and Amortization. Depreciation and amortization expense was
$3.1 million, compared with approximately $1.5 million in 1999, an increase of
$1.6 million or 107%. During 2000, we commenced the amortization of our goodwill
and intangibles.

     Interest Income. Interest income was $27.6 million in 2000, compared with
$2.9 million in 1999, an increase of $24.7 million or 852%. The increase was the
result of higher average balances of cash and cash equivalents in 2000 due to
the proceeds from the private placement of 14% senior secured notes and
warrants, the public offerings of Class A common stock and Series B convertible
redeemable preferred stock and the private placement of Series C convertible
redeemable preferred stock, all in the first nine months of 2000, which exceeded
expenditures for satellite and launch vehicle construction, other capital
expenditures and operating expenses.

     Interest Expense. We incurred interest costs of $39.1 million and $24.4
million in 2000 and 1999, respectively. We capitalized interest costs of $39.1
million and $15.3 million associated with our DARS license and the XM Radio
system and expensed $0 and $9.1 million in 2000 and 1999, respectively. The
increase in interest costs was the result of the incurrence of new debt during
the first quarter of 2000, which exceeded the reduction in interest due to the
conversion of all debt into equity in the fourth quarter of 1999. Further, the
interest capitalization threshold was exceeded in 1999.

     Net Loss. Net loss for 2000 was $51.9 million, compared with $36.9 million
for 1999, an increase of $15.0 million or 41%. The increase in net loss reflects
increases in research and development and additional general and administrative
expense, primarily due to increased expense for headcount, facilities and
services in preparation for commercial operations and the amortization of
goodwill and intangibles.

   XM Satellite Radio Inc. and Subsidiaries

     The results of operations for XM and its subsidiaries were substantially
the same as the results for Holdings and its subsidiaries discussed above except
that in 1999, XM recognized $2.4 million less interest income due to the timing
of capital contributions from Holdings and substantially less interest expense
as Holdings' $5.5 million charge to interest for the beneficial conversion
feature of the new Motient note and Holdings' exceeding its capitalization
threshold by $3.6 million were not allocated to XM.

Liquidity and Capital Resources

     At December 31, 2001, we had a total of cash, cash equivalents and
short-term investments of $210.9 million, which excludes $72.8 million of
restricted investments, and working capital of $157.0 million, compared with
cash, cash equivalents and short-term investments of $224.9 million, which
excludes $161.2 million of restricted investments, and working capital of $212.1
million at December 31, 2000. The decreases in the respective balances are due
primarily to the increasing capital expenditures and operating expenses for the
year ended December 31, 2001, which were partially offset by funds raised from
financing activities in the amount of $382.0 million.

     For the year ended December 31, 2001 we had an operating loss of $281.6
million compared to $79.5 million for the year ended December 31, 2000. At
December 31, 2001, we had total assets of approximately $1.5 billion

                                       26

<PAGE>

and total liabilities of $529.6 million, compared with total assets of $1.3
billion and total liabilities of $337.3 million at December 31, 2000. At
December 31, 2001, we had $411.5 million of long-term debt outstanding (net of
current portion), compared with $262.7 million at December 31, 2000.

   Non-Cash Stock-Based Expense

     We incurred non-cash compensation charges of approximately $4.9 million and
$2.7 million in 2001 and 2000, respectively. These charges relate to stock
options granted to employees and non-employees and warrants granted to Sony and
CNBC. Additional compensation charges may result depending upon the market value
of our Class A common stock at each balance sheet date.

   Funds Raised to Date

     Since inception, we have raised an aggregate of $1.5 billion net of
expenses, interest reserve and repayment of debt. These funds are expected to be
sufficient, in the absence of additional financing, to cover funding needs into
the fourth quarter of 2002 based on our current business plan and as further
described under the heading "Funds Required in 2002 and Beyond." These funds
have been used to acquire our DARS license, make required payments for our
system, including the satellites, terrestrial repeater system, and ground
networks, and for working capital and operating expenses.

     Sources of Funds. Prior to our initial public offering, we raised
approximately $167.0 million through the issuance of equity to, and receipt of
loans from, Motient Corporation and a former stockholder from 1997 through
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. In October
1999, we completed our initial public offering, which yielded net proceeds of
$114.1 million. In January 2000, we completed a follow-on offering of our Class
A common stock, which yielded net proceeds of $132.1 million, and an offering of
our Series B convertible redeemable preferred stock, which yielded net proceeds
of $96.5 million. In March 2000, we completed a private placement of units
consisting of $1,000 principal amount of XM's 14% senior secured notes due 2010
and a warrant to purchase 8.024815 shares of our Class A common stock at $49.50
per share, which yielded net proceeds of $191.5 million excluding $123.0 million
for an interest reserve. In August 2000, we completed a private placement of our
Series C convertible redeemable preferred stock, which yielded net proceeds of
$226.8 million.

     During the fiscal year ended December 31, 2001:

     .    We completed a follow-on offering of 7,500,000 shares of Class A
          common stock, which yielded net proceeds of $72.0 million, and a
          concurrent offering of 7.75% convertible subordinated notes due 2006,
          convertible into shares of our Class A common stock at $12.23 per
          share, which yielded net proceeds of $120.7 million;

     .    We closed a $66.0 million financing package with subsidiaries of The
          Boeing Company, which includes a $35.0 million loan and deferral of
          $31.0 million of obligations to Boeing, our satellite manufacturer;

     .    We entered into a loan and security agreement with a lender that
          provided $29.0 million to purchase our corporate headquarters and
          incurred $0.5 million in financing costs;

     .    We completed a follow-on offering of 11,500,000 shares of our Class A
          common stock, yielding net proceeds of $126.5 million;

     .    These issuances caused the conversion price of the Series C preferred
          stock to be adjusted to $22.17 and the exercise price of the warrants
          sold in March 2000 to be adjusted to $45.27 and number of warrant
          shares to be increased to 8.776003 per warrant.

                                       27

<PAGE>

     Uses of Funds. Of the approximately $1.5 billion of funds raised to date,
as of December 31, 2001, we have paid $1.0 billion in capital expenditures,
including approximately $90.0 million for our DARS license which has been paid
for in full, and incurred $409.6 million in operating expenses.

     Satellite Contract. Under our satellite contract, Boeing Satellite Systems
International, Inc. has delivered two satellites in orbit and is to complete
construction of a ground spare satellite. Boeing Satellite has also provided
ground equipment and software used in the XM Radio system and certain launch and
operations support services. The contract also provides for in-orbit incentives
to be earned depending on the performance of the in-orbit satellites over their
useful lives. Such payments could total up to an additional $70.2 million over
the useful lives of the satellites. We have deferred $31.0 million of payments
under this contract to December 2006 at an interest rate of 8 percent. As of
December 31, 2001, we had paid approximately $470.4 million under our satellite
contract and have recognized an additional $741,000 in accrued milestone
payments.

     Launch Insurance. As of December 31, 2001, we had launched both of our
satellites and paid $44.1 million with respect to launch insurance, which has
been capitalized to in-service satellites.

     Terrestrial Repeater System. As of December 31, 2001, we incurred aggregate
costs of approximately $243.5 million for a terrestrial repeater system. These
costs covered the capital cost of the design, development and installation of a
system of terrestrial repeaters to cover approximately 60 cities and
metropolitan areas. In August 1999, we signed a contract with LCC International,
Inc., a related party, for engineering and site preparation. As of December 31,
2001, we had paid $109.9 million under this contract and accrued an additional
$15.4 million. We have also engaged other companies to perform site preparation
services. We also 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, 2001, we had paid $95.8 million
under this contract and accrued an additional $7.7 million.

     Ground Segment. As of December 31, 2001, we incurred aggregate ground
segment costs of approximately $110.9 million. These costs were related to the
satellite control facilities, programming production studios and various other
equipment and facilities.

     DARS 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. There are no further payments required
relating to the license.

     Purchase of Building. In August 2001, we acquired our corporate
headquarters building for $34.0 million.

     Operating Expenses. From inception through December 31, 2001, we have
incurred total operating expenses of $409.6 million.

     Joint Development Agreement Funding Requirements. We may require additional
funds to pay license fees or make contributions toward 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. In our discussions we have yet to agree on the
validity, value, use, importance and available alternatives of our respective
technologies. If we fail to reach agreement, the fees or credits may be
determined through binding arbitration. We cannot predict at this time the
amount of license fees or contribution payable by us or Sirius Radio or the size
of the credits to us and Sirius Radio from the use of the other's technology.
This may require significant additional capital.

   Funds Required in 2002 and Beyond

     Although we commenced nationwide commercial operations in November 2001, 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 estimate that our existing resources would be sufficient in the absence of
additional financing to cover our estimated funding needs into the fourth
quarter of 2002. We estimate that we will need an additional $40

                                       28

<PAGE>

million to $65 million through the end of 2002, and we will require additional
funding thereafter. These estimates may change, and we may need additional
financing in excess of these estimates. Funds will be needed to cover
broadcasting operations, sales and marketing, general corporate purposes and
further development of the XM Radio system. Sales and marketing 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 the total amount of these operational,
promotional, subscriber acquisition, joint development and manufacturing costs
and expenses, however, since they vary depending upon different criteria, but
they are expected to be substantial. In addition, our ability to generate
revenues and ultimately to become profitable will depend upon several factors,
including whether we can attract and retain enough subscribers and advertisers;
whether our system continues to operate at an acceptable level; whether we
compete successfully; and whether the FCC grants us all additional necessary
authorizations in a timely manner.

     We currently expect to satisfy our continuing funding requirements by
selling debt or equity securities and by obtaining loans or other credit lines
from banks or other financial institutions. If we are successful in raising
additional financing, we anticipate that a significant portion of the 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.

     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. We could default on our commitments to
creditors or others and may have to discontinue operations or seek a purchaser
for our business or assets.

     Our need for additional funds may also be affected by future developments.
In September 2001, we were advised by Boeing Satellite of a progressive
degradation problem with the solar array output power of 702 class satellites,
including XM "Rock" and XM "Roll." At the present time, the output power of the
solar arrays and the broadcast signal strength are above minimum acceptable
levels and are expected to remain that way at least through 2005, permitting
full operation of the XM System (based on patterns projected by Boeing
Satellite). We have advised our insurance carriers of the situation and believe
that should we experience a total or partial loss, we would have adequate
insurance coverage, although there is no assurance that would be the case. Since
the issue is common to 702 class satellites, the manufacturer is closely
watching the progression of the problem, including data from a satellite in
orbit approximately 18 months longer than XM "Rock" and XM "Roll." With this
18-month advance visibility of performance levels, insurance arrangements in
place, a spare satellite under construction that is being modified to address
the solar array anomaly and availability of additional satellites, we believe
that we will be able to launch additional satellites prior to the time the solar
power problem might cause the broadcast signal strength to fall below acceptable
levels. Our management will continue to monitor this situation carefully over
the next few years.

   Contractual Obligations and Commercial Commitments

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

     Marketing and Distribution Arrangements. We have entered into various joint
     ---------------------------------------
sales, marketing and distribution agreements. Under the terms of these
agreements, we are obligated to provide incentives, subsidies and commissions to
other entities that may include fixed payments, per-unit radio and subscriber
amounts and revenue sharing arrangements. We have subsidized the manufacture of
certain component parts of XM radios in order to provide attractive pricing to
our customers. The subsidies are charged to expense when the radios are
manufactured or shipped from the factory. Consequently, the expense is most
often recognized in advance of when revenue, if any, is realized. The amount of
these operational, promotional, subscriber acquisition, joint development, and
manufacturing costs related to these agreements cannot be estimated, but are
expected to be substantial future costs. During the years ended December 31,
1999, 2000 and 2001 we incurred expenses of $0, $0 and $19.5 million,
respectively, in relation to these agreements. The amount of these costs will
vary in future years, but is expected to increase in the next year as the number
of subscribers and revenue increase.

                                       29

<PAGE>

     Programming Agreements. We have also entered into various programming
     ----------------------
agreements. Under the terms of these agreements, we are obligated to provide
payments and commissions to other entities that may include fixed payments,
advertising commitments and revenue sharing arrangements. The amount of these
costs related to these agreements cannot be estimated, but are expected to be
substantial future costs. During the years ended December 31, 1999, 2000, 2001,
we incurred expenses of $0, $0 and $7.2 million, respectively, in relation to
these agreements. The amount of these costs will vary in future years, but is
expected to increase in the next year as the number of subscribers and revenue
increase.

     General Motors Distribution Agreement. We have significant payment
     -------------------------------------
obligations under our distribution agreement with General Motors. We will pay an
aggregate of approximately $35 million through 2004. 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. There
can be no assurances as to the outcome of any such renegotiations. General
Motors' exclusivity obligations will discontinue if, four years after we
commence commercial operations and at two-year intervals thereafter, we fail to
achieve and maintain specified minimum market share levels in the satellite
digital radio service market. Prior to 2001, we had not incurred any costs under
the contract and in 2001 we incurred $1.3 million.

     Long-term debt. In March 2000, XM issued $325.0 million aggregate principal
     --------------
amount of 14% senior secured notes due 2010. In connection with this financing,
an interest reserve of $123.0 million was established to cover the first six
interest payments, of which three have been made. Principal on the senior
secured notes is payable at maturity, while interest is payable semi-annually.
In March 2001, we issued $125.0 million aggregate principal amount of 7.75%
convertible subordinated notes due 2006. In July and August 2001, holders of
convertible subordinated notes exchanged $45.9 million of notes for 4,194,272
shares of our Class A common stock. Principal on the convertible subordinated
notes is payable at maturity, while interest is payable semi-annually. In August
2001, we borrowed $29.0 million to finance the purchase of our headquarters
facility. This loan is for a term of five years and bears interest at a rate
based on the London Interbank Offer Rate plus an indicated spread. We make
monthly payments of principal and interest on this loan. In December 2001, we
borrowed $35.0 million from a subsidiary of The Boeing Company. This loan is for
a term of five years and bears interest at a rate based on the London Interbank
Offer Rate plus an indicated spread. Principal is payable at maturity, while
interest is payable quarterly.

     Lease obligations. We have noncancelable operating leases for office space
     -----------------
and terrestrial repeater sites and noncancelable capital leases for equipment
that expire over the next ten years. As discussed below, in December 2001, we
determined that the planned number of terrestrial repeater sites could be
reduced due to the relative signal strength provided by our satellites. We
recognized a charge of $26.3 million with respect to terrestrial repeater sites
no longer required. This charge includes a lease termination accrual of $8.6
million for 646 terrestrial repeater site leases, which would reduce the future
minimum lease payments.

<TABLE>
<CAPTION>
                                                               Payments Due By Period
                                                               ----------------------
                                                                   (in thousands)

         Contractual Obligations               2002   2003 and 2004         2005   2006 and Beyond        Total
         -----------------------               ----   -------------         ----   ---------------        -----
<S>                                       <C>         <C>              <C>         <C>              <C>
GM Distribution Agreement ..............  $   3,000     $    29,400    $  33,500        $  372,400   $  438,300
Long-term debt .........................        380             874          492           466,220      467,966
Capital Lease Obligations ..............      1,530           4,487          141                --        6,158
Operating Lease Obligations ............     20,471          42,389       17,351            16,126       96,337
                                          ---------     -----------    ---------        ----------   ----------
     Total .............................  $  25,381     $    77,150    $  51,484        $  854,746   $1,008,761
                                          =========     ===========    =========        ==========   ==========
</TABLE>

                                       30


<PAGE>

     The above amounts do not include interest, which in some cases is variable
in amount.

     The long-term debt payments due in 2006 and beyond include the maturity of
our $79.1 million of 7.75% convertible subordinated notes, our $29.0 million
loan to finance the purchase of our headquarters facility and our $35.0 million
borrowing from Boeing, all of which come due in 2006, and the maturity of XM's
$325.0 million of 14% senior secured notes, which come due in 2010.

Related Party Transactions

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

     We are a party to a long-term distribution agreement with the OnStar
division of General Motors that provides for the installation of XM radios in
General Motors vehicles, as more fully described above under the heading
"Liquidity and Capital Resources--Contractual Obligations and Commercial
Commitments." In connection with the development of our terrestrial repeater
network, we are a party to a contract with Hughes Electronics Corporation and a
contract with LCC International, as further described under the heading
"Liquidity and Capital Resources--Funds Raised to Date." DIRECTV has provided
consulting services in connection with the development of our customer care
center and billing operations. We have agreements with Clear Channel
Communications, DIRECTV, Telcom Ventures and American Honda to make available
use of our bandwidth. We have a sponsorship agreement with Clear Channel
Entertainment to advertise our service at Clear Channel Entertainment concerts
and venues. Premiere Radio Networks, a subsidiary of Clear Channel
Communications, is our advertising sales representative. Motient Corporation has
provided technical and administrative support for our operations. General Motors
is one of our largest shareholders and Chester A. Huber, Jr., the president of
OnStar, is a member of our board of directors. Hughes Electronics is our largest
shareholder and is a subsidiary of General Motors. Jack Shaw, a member of our
board of directors, is Chief Executive Officer of Hughes Electronics
Corporation. Dr. Rajendra Singh, a member of our board of directors and a member
of the board of directors of LCC International, controls the largest shareholder
of LCC International. DIRECTV, a subsidiary of Hughes Electronics, is a holder
of our Series C preferred stock. Randall Mays, a member of our board of
directors, is executive vice president and chief financial officer of Clear
Channel Communications. Our chairman, Gary Parsons, is also the chairman of
Motient, a significant early investor and formerly our controlling stockholder.

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

<TABLE>
<CAPTION>
                                          Year      GM    Hughes       DIRECTV      LCC    Clear Channel     Motient
                                          ----      --    ------       -------      ---    -------------     -------
<S>                                       <C>    <C>      <C>          <C>       <C>       <C>               <C>
Terrestrial repeater network ............ 1999      --     3,500            --    6,578               --          --
     engineering and manufacturing        2000      --    11,858            --   58,731               --          --
                                          2001      --    88,116            --   59,958               --          --

Terrestrial repeater site leases ........ 1999      --        --            --       --               --          --
                                          2000      --        --            --       --                5          --
                                          2001      --        --            --       --               36          --

Customer care and billing ............... 1999      --        --            --       --               --          --
     operations                           2000      --        --         1,008       --               --          --
                                          2001      --        --           623       --               --          --

Sales and marketing ..................... 1999      --        --            --       --               --          --
                                          2000      --        --            --       --            3,175          --
                                          2001   1,264        --            --       --            4,351          --

General and administrative .............. 1999      --        --            --       --               --         224
</TABLE>

                                       31

<PAGE>

<TABLE>
<S>                 <C>       <C>       <C>     <C>      <C>     <C>     <C>
                    2000      --        --      --       --       3      252
                    2001      --        --      --       --      --      193
</TABLE>

Critical Accounting Policies

     The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require that we make estimates and assumptions. Our significant accounting
policies are described in Note 1 to our consolidated financial statements. In
accordance with recent Securities and Exchange Commission guidance, we have
identified the following policies as possibly involving a higher degree of
judgment and complexity.

..    Revenue Recognition - Revenue from subscribers consists of our monthly
     subscription fee, which is recognized as the service is provided, and a
     non-refundable activation fee, which is recognized on a pro-rata basis over
     an estimated term of the subscriber relationship, which was based upon
     market studies and management's judgment. We expect to refine this estimate
     as more data becomes available. Payments from customers receiving our
     service under promotional offers are not recognized as revenue until the
     promotional period has elapsed, as described above under the heading
     "Results of Operations."

..    Useful Life of Satellites - The expected life of our satellites was
     extended from 15 years, the initial design life, to 17.5 years based upon
     updated technical estimates we received from our satellite provider
     following our satellite launches. We are currently evaluating the possible
     effect of a progressive degradation problem with the solar array output
     power of our satellites, as described above under the heading "Liquidity
     and Capital Resources--Funds Required in 2002 and Beyond." We currently do
     not have sufficient information regarding the anomaly to make specific
     conclusions with regard to the performance of our satellites. We continue
     to monitor the situation and may need to adjust the life of our satellites
     based upon future information.

..    Accrued Network Optimization Expenses - As a result of the planned
     reduction of the number of terrestrial repeater sites, we recognized a
     charge of $26.3 million in 2001. This expense includes $17.7 million of
     site specific capitalized costs that were written off and a lease
     termination accrual of $8.6 million for 646 terrestrial repeater site
     leases. The contractual lease payments for the sites are $35.1 million. The
     accrual represents an estimate of the costs to terminate existing leases
     based on management's judgment, advice of lease consultants, and early
     negotiations with landlords. The accrual also includes the estimated costs
     to deconstruct the existing sites, which are based upon quotes from
     contractors. This accrual could vary significantly from the actual amount
     incurred, which will be primarily based on our ability to negotiate lease
     termination settlements.

Recent Accounting Pronouncements

     On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141 ("SFAS 141"), Business Combinations, and Statement No. 142
("SFAS 142"), Goodwill and Other Intangible Assets. SFAS 141 addresses the
accounting for acquisitions of businesses and is effective for acquisitions
occurring on or after July 1, 2001. SFAS 142 addresses the method of identifying
and measuring goodwill and other intangible assets acquired in a business
combination, eliminates further amortization of goodwill and other intangibles
with indefinite lives, and requires periodic evaluations of impairment of
goodwill and other intangible balances. SFAS 142 became effective on January 1,
2002. We are currently assessing the impacts of the adoption of these standards
and believe that SFAS 141 will not have an impact on our current operations, but
that SFAS 142 will have a material effect on operations in 2002. As of the date
of adoption of SFAS No. 142, we expect to have unamortized goodwill in the
amount of $11.5 million and unamortized identifiable intangible assets in the
amount of $155.2 million, all of which will be subject to the transition
provisions of SFAS No. 142. Amortization expense related to goodwill and
identifiable intangible assets was $1.2 million, $1.4 million and $3.6 million
for the years ended December 31, 1999, 2000, and 2001, respectively.

     In August 2001, the FASB issued Statement No. 144, ("SFAS 144"), Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, and the accounting and reporting provisions
of APB

                                       32

<PAGE>

Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and 25 Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business (as previously defined in that Opinion). This Statement also amends
ARB No. 51, Consolidated Financial Statements, to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years, with
early application encouraged. We are currently assessing the impact of the
adoption of this standard and do not believe that SFAS 144 will have a material
effect on operations in 2002.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As of December 31, 2001, we do not have any derivative financial
instruments and do not intend to use derivatives. We do not hold or issue any
free-standing derivatives. We invest our cash in short-term commercial paper,
investment-grade corporate and government obligations and money market funds.
Our long-term debt includes fixed interest rates and the fair market value of
the debt is sensitive to changes in interest rates. We run the risk that market
rates will decline and the required payments will exceed those based on current
market rates. Under our current policies, we do not use interest rate derivative
instruments to manage our exposure to interest rate fluctuations. The mortgage
on our corporate headquarters has a variable interest rate that may not exceed a
ceiling rate of 14% or a floor rate of 8%. A change of one percentage point in
the interest rate applicable to this $29.0 million of variable rate debt at
December 31, 2001 would result in a fluctuation of approximately $0.3 million in
our annual interest expense. Additionally, we believe that our exposure to
interest rate risk is not material to our results of operations.

                                       33

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements of XM Satellite Radio Holdings Inc.,
including consolidated balance sheets as of December 31, 2000 and 2001, and
consolidated statements of operations, consolidated statements of stockholders'
equity (deficit) and consolidated statements of cash flows for the three-year
period ended December 31, 2001 and notes to the consolidated financial
statements, together with a report thereon of KPMG LLP, dated January 23, 2002,
are attached hereto as pages F-1 through F-30.

     The consolidated financial statements of XM Satellite Radio Inc., including
consolidated balance sheets as of December 31, 2000 and 2001, and consolidated
statements of operations, consolidated statements of stockholder's equity and
consolidated statements of cash flows for the three-year period ended December
31, 2001 and notes to the consolidated financial statements, together with a
report thereon of KPMG LLP, dated January 23, 2002, are attached hereto as pages
F-31 through F-55.

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

     None.

                                       34

<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

     The information is incorporated herein by reference to Holdings' definitive
2002 Proxy Statement. Holdings and XM have the same directors and executive
officers.

ITEM 11. EXECUTIVE COMPENSATION

     The information is incorporated herein by reference to Holdings' definitive
2002 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information is incorporated herein by reference to Holdings' definitive
2002 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information is incorporated herein by reference to Holdings' definitive
2002 Proxy Statement.

                                       35

<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 for XM Satellite Radio Holdings Inc. are included
in Item 8 of this Form 10-K:

Report of Independent Auditors.

Consolidated Balance Sheets as of December 31, 2000 and 2001.

Consolidated Statements of Operations for the years ended December 31, 1999,
2000 and 2001.

Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1999, 2000 and 2001.

Consolidated Statements of Cash Flows for the years ended December 31, 1999,
2000 and 2001, and for the period from December 15, 1992.

Notes to Consolidated Financial Statements.

Schedule I--Valuation and Qualifying Accounts.

     The following Consolidated Financial Statements of and report of
independent public accountants for XM Satellite Radio Inc. are included in Item
8 of this Form 10-K:

Report of Independent Auditors.

Consolidated Balance Sheets as of December 31, 2000 and 2001.

Consolidated Statements of Operations for the years ended December 31, 1999,
2000 and 2001.

Consolidated Statements of Stockholder's Equity for the years ended December 31,
1999, 2000 and 2001.

Consolidated Statements of Cash Flows for the years ended December 31, 1999,
2000 and 2001.

Notes to Consolidated Financial Statements.

Schedule I--Valuation and Qualifying Accounts.

(a)(2) The following consolidated financial statement schedules are filed as
part of this report and attached hereto as page F-30 and F-56:

Schedule I--Valuation and Qualifying Accounts for Holdings.

Schedule I--Valuation and Qualifying Accounts for XM.

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

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

                                       36

<PAGE>

                                  Exhibit Index

Exhibit No.                          Description
-----------                          -----------
3.1.    Restated Certificate of Incorporation of XM Satellite Radio Holdings
        Inc.

3.2.    Restated Bylaws of XM Satellite Radio Holdings Inc.

3.3     Restated Certificate of Incorporation of XM Satellite Radio Inc.
        (incorporated by reference to XM's Registration Statement on Form S-4,
        File No. 333-39178).

3.4     Amended and Restated Bylaws of XM Satellite Radio Inc. (incorporated by
        reference to XM's Registration Statement on Form S-4, File No.
        333-39178).

4.1     Form of Certificate for Holdings' Class A common stock (incorporated by
        reference to Exhibit 3 to Holdings' Registration Statement on Form 8-A,
        filed with the SEC on September 23, 1999).

4.2     Form of Certificate for Holdings' 8.25% Series B Convertible Redeemable
        Preferred Stock (incorporated by reference to Holdings' Registration
        Statement on Form S-1, File No. 333-93529).

4.3     Certificate of Designation Establishing the Voting Powers, Designations,
        Preferences, Limitations, Restrictions and Relative Rights of 8.25%
        Series B Convertible Redeemable Preferred Stock due 2012 (incorporated
        by reference to Holdings' Annual Report on Form 10-K for the fiscal year
        ended December 31, 1999, filed with the SEC on March 16, 2000).

4.4     Warrant to purchase shares of Holdings' Class A common stock, dated
        February 9, 2000, issued to Sony Electronics, Inc. (incorporated by
        reference to Holdings' quarterly report on Form 10-Q for the quarter
        ended March 31, 2000, filed with the SEC on May 12, 2000).

4.5     Warrant Agreement, dated March 15, 2000, between XM Satellite Radio
        Holdings Inc. as Issuer and United States Trust Company of New York as
        Warrant Agent (incorporated by reference to Holdings' Registration
        Statement on Form S-1, File No. 333-39176).

4.6     Warrant Registration Rights Agreement, dated March 15, 2000, between XM
        Satellite Radio Holdings Inc. and Bear, Stearns & Co., Inc., Donaldson,
        Lufkin and Jenrette Securities Corporation, Salomon Smith Barney Inc.
        and Lehman Brothers Inc. (incorporated by reference to Holdings'
        Registration Statement on Form S-1, File No. 333-39176).

4.7     Form of Warrant (incorporated by reference to Holdings' Registration
        Statement on Form S-1, File No. 333-39176).

4.8     Certificate of Designation Establishing the Powers, Preferences, Rights,
        Qualifications, Limitations and Restrictions of the 8.25% Series C
        Convertible Redeemable Preferred Stock due 2012 (incorporated by
        reference to Holdings' Registration Statement on Form S-1, File No.
        333-39176).

4.9     Form of Certificate for Holdings' 8.25% Series C Convertible Redeemable
        Preferred Stock (incorporated by reference to the Registrant's
        Registration Statement on Form S-1, File No. 333-39176).

4.10    Indenture, dated as of March 15, 2000, between XM Satellite Radio Inc.
        and United States Trust Company of New York (incorporated by reference
        to XM's Registration Statement on Form S-4, File No. 333-39178).

4.11    Registration Rights Agreement, dated March 15, 2000, between XM
        Satellite Radio Inc. and Bear, Stearns & Co. Inc., Donaldson, Lufkin and
        Jenrette Securities Corporation, Salomon Smith Barney Inc. and Lehman
        Brothers Inc. (incorporated by reference to XM's Registration Statement
        on Form S-4, File No. 333-39178).

                                       37

<PAGE>

4.12      Form of 14% Senior Secured Note of XM Satellite Radio Inc.
          (incorporated by reference to XM's Registration Statement on Form S-4,
          File No. 333-39178).

4.13      Security Agreement, dated March 15, 2000, between XM Satellite Radio
          Inc. and United States Trust Company of New York (incorporated by
          reference to XM's Registration Statement on Form S-4, File No.
          333-39178).

4.14      Pledge Agreement, dated March 15, 2000, between XM Satellite Radio
          Inc. and United States Trust Company of New York (incorporated by
          reference to XM's Registration Statement on Form S-4, File No.
          333-39178).

4.15      Indenture, dated March 6, 2001, between XM Satellite Radio Holdings
          Inc. and United States Trust Company of New York (incorporated by
          reference to Holdings' annual report on Form 10-K for the year ended
          December 31, 2000, filed with the SEC on March 15, 2001).

4.16      Supplemental Indenture, dated as of November 15, 2001, by and between
          XM Satellite Radio Inc. and The Bank of New York (successor to United
          States Trust Company of New York) (incorporated by reference to
          Holdings' Current Report on Form 8-K, filed with the SEC on December
          6, 2001).

4.17      Form of 7.75% convertible subordinated note (incorporated by reference
          to Holdings' annual report on Form 10-K for the year ended December
          31, 2000, filed with the SEC on March 15, 2001).

4.18      Customer Credit Agreement dated as of December 5, 2001 between
          Holdings and Boeing Capital Services Corporation (incorporated by
          reference to Holdings' Current Report on Form 8-K, filed with the SEC
          on December 6, 2001).

4.19      Security Agreement dated as of December 5, 2001, between Holdings and
          Boeing Capital Services Corporation (incorporated by reference to
          Holdings' Current Report on Form 8-K, filed with the SEC on December
          6, 2001).

10.1      Amended and Restated Shareholders' Agreement, dated as of August 8,
          2000, by and among XM Satellite Radio Holdings Inc., Motient
          Corporation, Baron Asset Fund, Baron iOpportunity Fund, Baron Capital
          Asset Fund, Clear Channel Investments, Inc., Columbia XM Radio
          Partners, LLC, Columbia Capital Equity Partners III (QP), L.P.,
          Columbia XM Satellite Partners III, 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., American Honda Motor Co., Inc. and Telcom-XM Investors,
          L.L.C. (incorporated by reference to Holdings' Registration Statement
          on Form S-1, File No. 333-39176).

10.2      Amended and Restated Registration Rights Agreement, dated as of August
          8, 2000, by and among XM Satellite Radio Holdings Inc., Motient
          Corporation, Baron Asset Fund, Baron iOpportunity Fund, Baron Capital
          Asset Fund, Clear Channel Investments, Inc., Columbia XM Radio
          Partners, LLC, Columbia Capital Equity Partners III (QP), L.P.,
          Columbia XM Satellite Partners III, 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., American Honda Motor Co., Inc. and Telcom-XM Investors,
          L.L.C. (incorporated by reference to Holdings' Registration Statement
          on Form S-1, File No. 333-39176).

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).

                                       38

<PAGE>

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      Intentionally omitted.

10.6      Intentionally omitted.

10.7.*    Amended and Restated Agreement by and between XM Satellite Radio Inc.
          and ST Microelectronics 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     Intentionally omitted.

10.13     Intentionally omitted.

10.14     Intentionally omitted.

10.15     Intentionally omitted.

10.16     Intentionally omitted.

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 Holdings'
          Registration Statement on Form S-8, File No. 333-65020).

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 Holdings'
          Registration Statement on Form S-8, File No. 333-65020).

10.23.    Non-Qualified Stock Option Agreement between Gary Parsons and XM
          Satellite Radio Holdings Inc., dated July 16, 1999.

10.24.    Non-Qualified Stock Option Agreement between Hugh Panero and XM
          Satellite Radio Holdings Inc., dated July 1, 1998, as amended.

                                       39

<PAGE>

10.25.    Form of Director Non-Qualified Stock Option Agreement.

10.26     Intentionally omitted.

10.27     Intentionally omitted.

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 (incorporated by
          reference to Holdings' Annual Report on Form 10-K for the fiscal year
          ended December 31, 1999, filed with the SEC on March 16, 2000).

10.29*    Joint Development Agreement, dated February 16, 2000, between XM
          Satellite Radio Inc. and Sirius Satellite Radio Inc. (incorporated by
          reference to Holdings' quarterly report on Form 10-Q for the quarter
          ended March 31, 2000, filed with the SEC on May 12, 2000).

10.30     XM Satellite Radio Holdings Inc. Talent Option Plan (incorporated by
          reference to Holdings' Registration Statement on Form S-8, File No.
          333-65022).

10.31     Employment Agreement, dated as of June 1, 2001, between XM Satellite
          Radio Holdings Inc. and Hugh Panero (incorporated by reference to
          Holdings' quarterly report on Form 10-Q for the quarter ended June 30,
          2001, filed with the SEC on August 13, 2001).

10.32     Form of Employment Agreement, dated as of July 1, 2001, between XM
          Satellite Radio Holdings Inc. and Gary Parsons (incorporated by
          reference to Holdings' quarterly report on Form 10-Q for the quarter
          ended June 30, 2001, filed with the SEC on August 13, 2001).

10.33     Loan and Security Agreement, dated as of August 24, 2001, by and
          between Fremont Investment & Loan and XM 1500 Eckington LLC
          (incorporated by reference to Holdings' quarterly report on Form 10-Q
          for the quarter ended September 30, 2001, filed with the SEC on
          November 13, 2001).

10.34     Limited Recourse Obligations Guaranty, dated as of August 24, 2001, by
          XM Satellite Radio Holdings Inc. in favor of Fremont Investment & Loan
          (incorporated by reference to Holdings' quarterly report on Form 10-Q
          for the quarter ended September 30, 2001, filed with the SEC on
          November 13, 2001).

10.35     Assignment and Novation Agreement dated as of December 5, 2001,
          between Holdings, XM Satellite Radio Inc. and Boeing Satellite Systems
          International Inc. (incorporated by reference to Holdings' Current
          Report on Form 8-K filed with the SEC on December 6, 2001).

10.36+    Third Amended and Restated Satellite Purchase Contract for In-Orbit
          Delivery dated as of May 15, 2001 between XM Satellite Radio, Inc. and
          Boeing Satellite Systems International Inc. (incorporated by reference
          to Holdings' Current Report on Form 8-K filed with the SEC on December
          6, 2001).

10.37+    Amendment to the Satellite Purchase Contract for In-Orbit Delivery
          dated as of December 5, 2001 between XM Satellite Radio, Inc. and
          Boeing Satellite Systems International Inc. (incorporated by reference
          to Holdings' Current Report on Form 8-K filed with the SEC on December
          6, 2001).

23.1      Consent of KPMG LLP.

----------

..    Incorporated by reference to Holdings' Registration Statement on Form S-1,
     File No. 333-83619.
*    Pursuant to the Commission's Orders Granting Confidential Treatment under
     Rule 406 of the Securities Act of 1933 or Rule 24(b)-2 under the Securities
     Exchange Act of 1934, certain confidential portions of this Exhibit were
     omitted by means of redacting a portion of the text.
+    We have requested confidential treatment from the Commission of certain
     portions of this Exhibit.

(b)       Reports on Form 8-K.

                                       40

<PAGE>

        On December 6, 2001, Holdings filed a Current Report on Form 8-K that
        reported the closing of a $66 million financing package with
        subsidiaries of The Boeing Company.

        On December 6, 2001, Holdings filed a Current Report on Form 8-K that
        contained certain information in connection with its offering of Class A
        common stock.

(c)     Exhibits.

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

(d)     Consolidated Financial Statement Schedules.

        The following consolidated financial statement schedules are filed
        herewith:

        Schedule I--Valuation and Qualifying Accounts for Holdings.
        Schedule I--Valuation and Qualifying Accounts for XM.

        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.

                                       41

<PAGE>


         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

<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-7

Independent Auditors' Report on Consolidated Financial Statement Schedule ......  F-28

Schedule I--Valuation and Qualifying Accounts ..................................  F-29


                    XM SATELLITE RADIO INC. AND SUBSIDIARIES

Independent Auditors' Report ...................................................  F-30

Consolidated Balance Sheets ....................................................  F-31

Consolidated Statements of Operations ..........................................  F-32

Consolidated Statements of Stockholder's Equity ................................  F-33

Consolidated Statements of Cash Flows ..........................................  F-34

Notes to Consolidated Financial Statements .....................................  F-35

Independent Auditors' Report on Consolidated Financial Statement Schedule ......  F-53

Schedule I--Valuation and Qualifying Accounts ..................................  F-54
</TABLE>

                                      F-1

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

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

     We have audited the accompanying consolidated balance sheets of XM
Satellite Radio Holdings Inc. and subsidiaries as of December 31, 2000 and 2001,
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, 2001. 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 auditing standards generally
accepted in the United States of America. 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 as of December 31, 2000 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
2 to the consolidated financial statements, the Company 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 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

                                                  /s/ KPMG LLP


McLean, VA
January 23, 2002

                                      F-2

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2000 AND 2001

<TABLE>
<CAPTION>
                                                                                                              2000         2001
                                                                                                           -----------  -----------
                                                               ASSETS                                        (in thousands, except
                                                                                                                   share data)
<S>                                                                                                        <C>          <C>
Current assets:
     Cash and cash equivalents .........................................................................   $   224,903  $   182,497
     Short-term investments ............................................................................            --       28,355
     Restricted investments ............................................................................        45,585       44,861
     Accounts receivable, net of allowance for doubtful accounts of $0 and $10 .........................            --          478
     Prepaid and other current assets ..................................................................         8,815       15,720
                                                                                                           -----------  -----------
          Total current assets .........................................................................       279,303      271,911
Other assets:
     Restricted investments, net of current portion ....................................................       115,581       27,898
     System under construction .........................................................................       815,016       55,056
     Property and equipment, net of accumulated depreciation and amortization of $2,337 and $43,384 ....        50,052    1,066,191
     Goodwill and intangibles, net of accumulated amortization of $2,599 and $3,974 ....................        24,001       22,626
     Other assets, net of accumulated amortization of $672 and $2,167 ..................................         9,265       12,521
                                                                                                           -----------  -----------
          Total assets .................................................................................   $ 1,293,218  $ 1,456,203
                                                                                                           ===========  ===========

                                                    LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable ..................................................................................   $    31,793  $    36,559
     Accrued expenses ..................................................................................         6,039       26,098
     Accrued network optimization expenses (note 15) ...................................................            --        8,595
     Current portion of long-term debt .................................................................           556        1,910
     Due to related parties ............................................................................        15,429       26,052
     Accrued interest ..................................................................................        13,397       15,664
                                                                                                           -----------  -----------
          Total current liabilities ....................................................................        67,214      114,878
Long-term debt, net of current portion .................................................................       262,665      411,520
Royalty payable, net of current portion ................................................................         2,600        1,800
Other non-current liabilities ..........................................................................         4,787        1,354
                                                                                                           -----------  -----------
          Total liabilities ............................................................................       337,266      529,552
                                                                                                           -----------  -----------
Stockholders' equity:
   Series A convertible preferred stock, par value $0.01 (liquidation preference of $102,688);
     15,000,000 shares authorized, 10,786,504 shares issued and outstanding at December 31, 2000
     and 2001 ..........................................................................................           108          108
   Series B convertible redeemable preferred stock, par value $0.01 (liquidation
     preference of $43,364); 3,000,000 shares authorized, 867,289 shares issued
     and outstanding at December 31, 2000 and 2001 .....................................................             9            9
   Series C convertible redeemable preferred stock, par value $0.01 (liquidation preference of
     $244,277 and $263,664 at December 31, 2000 and 2001, respectively); 250,000 shares authorized,
     235,000 shares issued and outstanding at December 31, 2000 and 2001 ...............................             2            2
   Class A common stock, par value $0.01; 180,000,000 shares authorized, 34,073,994 and
     74,482,168 shares issued and outstanding at December 31, 2000 and 2001, respectively ..............           341          745
   Class B common stock, par value $0.01; 30,000,000 shares authorized, 16,557,262
     and no shares issued and outstanding at December 31, 2000 and 2001, respectively ..................           166           --
   Class C common stock, par value $0.01; 30,000,000 shares authorized, no shares issued and
     outstanding at December 31, 2000 and 2001 .........................................................            --           --
   Additional paid-in capital ..........................................................................     1,061,921    1,316,761
   Accumulated deficit .................................................................................      (106,595)    (390,974)
                                                                                                           -----------  -----------
          Total stockholders' equity ...................................................................       955,952      926,651
                                                                                                           -----------  -----------
Commitments and contingencies (notes 1, 2, 3, 5, 10 and 15)
          Total liabilities and stockholders' equity ...................................................   $ 1,293,218  $ 1,456,203
                                                                                                           ===========  ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-3

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

<TABLE>
<CAPTION>
                                                                          1999           2000            2001
                                                                     -----------     -----------     -----------
                                                                        (in thousands, except share data)
<S>                                                                  <C>             <C>             <C>
Revenue:
     Subscriber revenue ..........................................   $        --     $        --     $       246
     Ad sales revenue ............................................            --              --             294
        Less:  Agency commissions ................................            --              --             (43)
     Other revenue ...............................................            --              --              36
                                                                     -----------     -----------     -----------
          Total revenue ..........................................            --              --             533
                                                                     -----------     -----------     -----------

Operating expenses:
     Broadcasting operations:
        Content/programming ......................................        (1,014)         (6,878)        (27,924)
        System operations ........................................        (2,877)        (23,227)        (67,571)
        Customer care and billing operations .....................            --            (856)         (6,034)
     Sales and marketing .........................................        (3,351)        (16,078)        (99,789)
     General and administrative ..................................       (14,496)        (16,624)        (24,595)
     Research and development ....................................        (7,440)        (12,701)        (14,255)
     Depreciation and amortization ...............................        (1,513)         (3,115)        (41,971)
                                                                     -----------     -----------     -----------
          Total operating expenses ...............................       (30,691)        (79,479)       (282,139)
                                                                     -----------     -----------     -----------
Operating loss ...................................................       (30,691)        (79,479)       (281,606)

Other income (expense):
     Interest income .............................................         2,916          27,606          15,198
     Interest expense ............................................        (9,121)             --         (18,131)
     Other income, net ...........................................            --              --             160
                                                                     -----------     -----------     -----------
             Net loss ............................................       (36,896)        (51,873)       (284,379)
                                                                     -----------     -----------     -----------

8.25% Series B preferred stock dividend requirement ..............            --          (5,935)         (3,766)
8.25% Series C preferred stock dividend requirement ..............            --          (9,277)        (19,387)
Series B preferred stock deemed dividend .........................            --         (11,211)             --
Series C preferred stock beneficial conversion feature ...........            --        (123,042)             --
                                                                     -----------     -----------     -----------
             Net loss attributable to common stockholders ........   $   (36,896)    $  (201,338)    $  (307,532)
                                                                     ===========     ===========     ===========
Net loss per share:
     Basic and diluted ...........................................   $     (2.40)    $     (4.15)    $     (5.13)
                                                                     ===========     ===========     ===========
Weighted average shares used in computing net
   loss per share-basic and diluted ..............................    15,344,102      48,508,042      59,920,196
                                                                     ===========     ===========     ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-4

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                  YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

<TABLE>
<CAPTION>
                                                                            Series B           Series C
                                                        Series A           Convertible       Convertible
                                                       Convertible         Redeemable         Redeemable             Class A
                                                    Preferred Stock     Preferred Stock       Preferred            Common Stock
                                                    ----------------    ----------------      ----------           -------------

                                                  Shares      Amount    Shares     Amount    Shares    Amount     Shares     Amount
                                                  ------      ------    ------     ------    ------    ------     ------     ------
<S>                                           <C>            <C>        <C>        <C>      <C>        <C>       <C>         <C>
                                                                                                   (in thousands, except share data)
Balance at January 1, 1999 ................           --     $   --          --    $   --         --   $    --           --  $   --
53,514-for-one stock split ................           --         --          --        --         --        --           --      --
Initial public offering ...................           --         --          --        --         --        --   10,241,000     102
Conversion of Series A convertible
  debt ....................................   10,786,504        108          --        --         --        --   16,179,755     162
Conversion of subordinated
  convertible notes payable to
  related party ...........................           --         --          --        --         --        --           --      --
Increase in DARS license, goodwill
  and intangibles .........................           --         --          --        --         --        --           --      --
Charge for beneficial conversion
  feature of note issued to Parent ........           --         --          --        --         --        --           --      --
Issuance of shares to employees
  through stock option and
  purchase plans ..........................           --         --          --        --         --        --       29,862       1
Non-cash stock compensation ...............           --         --          --        --         --        --       14,716      --
Net loss ..................................           --         --          --        --         --        --           --      --
                                              ----------     ------- ----------    ------    -------   -------   ----------  ------
Balance at December 31, 1999 ..............   10,786,504     $   108         --    $   --         --   $    --   26,465,333  $  265
Secondary public offering .................           --          --         --        --         --        --    4,370,000      44
Sale of Series B convertible
  redeemable preferred stock ..............           --          --  2,000,000        20         --        --           --      --
Sale of Series C convertible
  redeemable preferred stock ..............           --          --         --        --    235,000         2           --      --
Incentivized conversion of Series B
  convertible redeemable preferred
  stock ...................................           --          -- (1,132,711)      (11)        --        --    1,700,016      17
Sale of warrants to purchase Class A
  common stock ............................           --          --         --        --         --        --           --      --
Conversion of Class B common stock ........           --          --         --        --         --        --    1,314,914      13
Series B convertible redeemable
  preferred stock dividends ...............           --          --         --        --         --        --      145,166       1
Issuance of shares to employees
  through stock option and
  purchase plans ..........................           --          --         --        --         --        --       73,565       1
Non-cash stock compensation ...............           --          --         --        --         --        --        5,000      --
Net loss ..................................           --          --         --        --         --        --           --      --
                                              ----------     ------- ----------    ------    -------   -------   ----------  ------
Balance at December 31, 2000 ..............   10,786,504     $   108    867,289    $    9    235,000   $     2   34,073,994     341
Conversion of Class B common stock ........           --          --         --        --         --        --   16,557,262     166
Incentivized conversion of
  convertible subordinated notes to
  Class A common stock ....................           --          --         --        --         --        --    4,194,272      42
Secondary public offerings ................           --          --         --        --         --        --   19,000,000     190
Series B convertible redeemable
  preferred stock dividends ...............           --          --         --        --         --        --      466,180       5
Issuance of shares to employees
  through stock option and
  purchase plans ..........................           --          --         --        --         --        --      190,460       1
Non-cash stock compensation ...............           --          --         --        --         --        --           --      --
Net loss ..................................           --          --         --        --         --        --           --      --
                                              ----------     ------- ----------    ------    -------   -------   ----------  ------
Balance at December 31, 2001 ..............   10,786,504     $   108    867,289    $    9    235,000   $     2   74,482,168  $  745
                                              ----------     ======= ==========    ======    =======   =======   ==========  ======

<CAPTION>
                                                                                                                        Total
                                                                                          Additional                   Stockholders'
                                                       Class B              Class C          Paid-in      Accumulated     Equity
                                                    Common Stock          Common Stock      Capital        Deficit       Deficit
                                                    -------------         ------------      -------        --------      -------

                                                  Shares    Amount      Shares    Amount
                                                  ------    ------      ------    ------
<S>                                          <C>             <C>      <C>       <C>       <C>             <C>          <C>
Balance at January 1, 1999 ................          125     $    --      --    $   --    $    10,643     $   (17,826)      (7,183)
53,514-for-one stock split ................    6,689,125          67      --        --            (67)             --           --
Initial public offering ...................           --          --      --        --        114,032              --      114,134
Conversion of Series A convertible
  debt ....................................           --          --      --        --        246,079              --      246,349
Conversion of subordinated
  convertible notes payable to
  related party ...........................   11,182,926         112      --        --        106,843              --      106,955
Increase in DARS license, goodwill
  and intangibles .........................           --          --      --        --         51,624              --       51,624
Charge for beneficial conversion
  feature of note issued to Parent ........           --          --      --        --          5,520              --        5,520
Issuance of shares to employees
  through stock option and
  purchase plans ..........................           --          --      --        --            303              --          304
Non-cash stock compensation ...............           --          --      --        --          4,210              --        4,210
Net loss ..................................           --          --      --        --             --         (36,896)     (36,896)
                                             -----------     -------  ------    ------    -----------     -----------    ---------
Balance at December 31, 1999 ..............   17,872,176     $   179      --    $   --    $   539,187     $   (54,722)   $ 485,017
Secondary public offering .................           --          --      --        --        132,026              --    $ 132,070
Sale of Series B convertible
  redeemable preferred stock ..............           --          --      --        --         96,452              --       96,472
Sale of Series C convertible
  redeemable preferred stock ..............           --          --      --        --        226,820              --      226,822
Incentivized conversion of Series B
  convertible redeemable preferred
  stock ...................................           --          --      --        --             (6)             --           --
Sale of warrants to purchase Class A
  common stock ............................           --          --      --        --         63,536              --       63,536
Conversion of Class B common stock ........   (1,314,914)        (13)     --        --             --              --           --
Series B convertible redeemable
  preferred stock dividends ...............           --          --      --        --             (1)             --           --
Issuance of shares to employees
  through stock option and
  purchase plans ..........................           --          --      --        --          1,164              --        1,165
Non-cash stock compensation ...............           --          --      --        --          2,743              --        2,743
Net loss ..................................           --          --      --        --             --         (51,873)     (51,873)
                                             -----------     -------  ------    ------    -----------     -----------    ---------
Balance at December 31, 2000 ..............   16,557,262     $   166      --    $   --    $ 1,061,921     $  (106,585)   $ 955,952
Conversion of Class B common stock ........  (16,557,262)       (166)     --        --             --              --           --
Incentivized conversion of
  convertible subordinated
  notes to Class A common stock ...........           --          --      --        --         50,950              --       50,992
Secondary public offerings ................           --          --      --        --        197,896              --      198,086
Series B convertible redeemable
  preferred stock dividends ...............           --          --      --        --             (5)             --           --
Issuance of shares to employees
  through stock option and
  purchase plans ..........................           --          --      --        --          1,132              --        1,133
Non-cash stock compensation ...............           --          --      --        --          4,867              --        4,867
Net loss ..................................           --          --      --        --             --        (284,379)    (284,379)
                                             -----------     -------  ------    ------    -----------     -----------    ---------
Balance at December 31, 2001 ..............  $        --     $    --      --    $   --    $ 1,316,761     $  (390,974)   $ 926,651
                                             ===========     =======  ======    ======    ===========     ===========    =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-5

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

<TABLE>
<CAPTION>
                                                                                         1999         2000         2001
                                                                                      ---------     ---------    --------
                                                                                                 (in thousands)
<S>                                                                                   <C>        <C>             <C>
Cash flows from operating activities:
  Net loss ........................................................................   $ (36,896)    $ (51,873)   $(284,379)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Bad debt expense ..............................................................          --            --           10
    Depreciation and amortization .................................................       1,478         3,369       42,422
    Loss on disposal computer equipment ...........................................          --            --          435
    Amortization of deferred financing fees .......................................         509            --           --
    Non-cash stock-based compensation .............................................       4,210         2,743        4,867
    Non-cash charge for beneficial conversion feature of note .....................
      issued to investor ..........................................................       5,520            --           --
    Changes in operating assets and liabilities:
      Increase in accounts receivable .............................................          --            --         (488)
      Increase in prepaid and other current assets ................................        (905)       (7,738)      (6,905)
      Decrease in other assets ....................................................          43            --           --
      Increase in accounts payable and accrued expenses ...........................       7,519        16,026       29,531
      Increase (decrease) in amounts due to related parties .......................      (1,316)           26        2,696
      Increase in accrued interest ................................................       3,053            --        8,763
                                                                                      ---------     ---------    ---------
        Net cash used in operating activities .....................................     (16,785)      (37,447)    (203,048)
                                                                                      ---------     ---------    ---------
Cash flows from investing activities:
  Purchase of property and equipment ..............................................      (2,008)      (41,925)     (58,520)
  Additions to system under construction ..........................................    (159,510)     (424,342)    (142,321)
  Net purchase/maturity of short-term investments .................................     (69,472)       69,472      (28,355)
  Net purchase/maturity of restricted investments .................................          --      (106,338)      40,317
  Other investing activities ......................................................      (3,422)      (56,268)     (32,482)
                                                                                      ---------     ---------    ---------
        Net cash used in investing activities .....................................    (234,412)     (559,401)    (221,361)
                                                                                      ---------     ---------    ---------
Cash flows from financing activities:
  Proceeds from sale of common stock and capital contribution .....................     114,428       133,235      199,219
  Proceeds from issuance of Series B convertible redeemable preferred stock........          --        96,472           --
  Proceeds from issuance of 14% senior secured notes and warrants .................          --       322,889           --
  Proceeds from issuance of Series C convertible redeemable preferred stock........          --       226,822           --
  Proceeds from issuance of subordinated convertible notes to related parties......      22,966            --           --
  Proceeds from issuance of 7.75% convertible subordinated notes ..................          --            --      125,000
  Proceeds from mortgage on corporate facility ....................................          --            --       29,000
  Proceeds from loan payable ......................................................          --            --       35,000
  Proceeds from issuance of convertible notes .....................................     250,000            --           --
  Repayment of loan payable to related party ......................................     (75,000)           --           --
  Payments for deferred financing costs ...........................................     (10,725)       (8,365)      (6,124)
  Other net financing activities ..................................................         (84)           --          (92)
                                                                                      ---------     ---------    ---------
        Net cash provided by financing activities .................................     301,585       771,053      382,003
                                                                                      ---------     ---------    ---------
Net increase (decrease) in cash and cash equivalents ..............................      50,388       174,205      (42,406)
Cash and cash equivalents at beginning of period ..................................         310        50,698      224,903
                                                                                      ---------     ---------    ---------
Cash and cash equivalents at end of period ........................................   $  50,698     $ 224,903    $ 182,497
                                                                                      =========     =========    =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-6

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

(1) Summary of Significant Accounting Policies and Practices

(a) Nature of Business

     XM Satellite Radio Inc. ("XMSR"), was incorporated on December 15, 1992 in
the State of Delaware as a wholly owned subsidiary of Motient Corporation
("Motient"), for the purpose of operating a digital audio radio service ("DARS")
under a license from the Federal Communications Commission ("FCC"). XM Satellite
Radio Holdings Inc. (the "Company") was formed as a holding company for XMSR on
May 16, 1997.

     The Company became the first digital satellite radio service in the United
States of America on September 25, 2001 when it commenced commercial operations
in the lead markets of Dallas, Texas and San Diego, California as part of its
national rollout. On October 18, 2001, the Company continued its national
rollout as it launched service in the southern half of the country and completed
its national rollout on November 12, 2001. In 2001, the Company's satellites,
"Rock" and "Roll", were successfully launched on March 18, 2001 and May 8, 2001,
respectively.

(b) Principles of Consolidation and Basis of Presentation

     The consolidated financial statements include the accounts of XM Satellite
Radio Holdings Inc. and its subsidiaries. All significant intercompany
transactions and accounts have been eliminated. The Company emerged from the
development stage in the fourth quarter of 2001 as its principal operations had
commenced and its national rollout had been completed. Accordingly, the Company
revised the presentation of its Consolidated Statements of Operations to reflect
that of a commercial enterprise.

     As discussed in Note 5, 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 statements of stockholders' equity
(deficit); however, the activity in prior periods was not restated. 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,
                                                     --------------------
                                                       2000        2001
                                                     --------    --------
                <S>                                  <C>         <C>
                Cash on deposit ...................  $     97     ($4,216)
                Overnight investments .............        --     140,250
                Money market funds ................   224,806       2,794
                Commercial paper ..................        --      43,669
                                                     --------    --------
                                                     $224,903    $182,497
                                                     ========    ========
</TABLE>

(d) Short-term Investments

     At December 31, 2001, the Company held commercial paper with maturity dates
of less than one year that were stated at amortized cost, which approximated
fair value.

(e) Restricted Investments

     Restricted investments consist of fixed income securities and are stated at
amortized cost plus accrued interest income. At December 31, 2000 and 2001,
restricted investments represent securities held in escrow to secure the
Company's future performance with regard to certain contracts and obligations,
which include the interest payments required on the Company's 14% senior secured
notes through March 2003, payments under the Hughes Electronics Corporation
("Hughes") terrestrial repeater contract, and certain facility leases and other
secured credits. The interest reserve consists of US Treasury securities and are
classified as held-to-maturity investments. The remaining investments are
principally money market funds and certificates of deposit. The amortized cost,
gross unrealized

                                      F-7

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

holding gains, gross unrealized holding losses and fair value of the restricted
investments at December 31, 2000 and 2001, were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                         Gross      Gross
                                                                      Unrealized Unrealized
                                                           Amortized    Holding    Holding
                                                              Cost       Gains     Losses   Fair Value
                                                              ----       -----     ------   ----------

<S>                                                         <C>        <C>       <C>        <C>
At December 31, 2000:
---------------------
Interest reserve ........................................   $106,338   $  1,060   $     --   $107,398
Contract escrow .........................................     49,692         --         --     49,692
Collateral for letters of credit and other
  secured credit ........................................      5,136         --         --      5,136
                                                            --------   --------   --------   --------
                                                            $161,166   $  1,060   $     --   $162,226
                                                            ========   ========   ========   ========
At December 31, 2001:
---------------------
Interest reserve ........................................   $ 66,020   $  1,354   $     --   $ 67,374
Contract escrow .........................................      2,930         --         --      2,930
Collateral for letters of credit and other
  secured credit ........................................      3,809         --         --      3,809
                                                            --------   --------   --------   --------
                                                            $ 72,759   $  1,354   $     --   $ 74,113
                                                            ========   ========   ========   ========
</TABLE>

(f) Property and Equipment

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

<TABLE>
  <S>                                                                     <C>
  Satellite system, DARS license, and space craft control facilities....  17.5 years
  Terrestrial repeater network..........................................  5-10 years
  Broadcast facilities..................................................  3-7 years
  Computer systems......................................................  3-7 years
  Building and improvements.............................................  20 years
  Furniture and fixtures................................................  3-7 years
  Equipment under capital leases and leasehold improvements.............  Lesser of useful life or
                                                                          remaining lease term
</TABLE>

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

     The Company accounts for long-lived assets in accordance with the newly
adopted provisions of Statement of Financial Accounting Standards ("SFAS") No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
Statement requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.

(g) Goodwill and Other Intangible Assets

     Goodwill, 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. Other intangible assets are
amortized over 10 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 by the amount by which the carrying
amount of the assets exceed the fair value of the assets. The

                                      F-8

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.

     In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations, ("SFAS No. 141") and SFAS No. 142, Goodwill and
Other Intangible Assets ("SFAS No. 142"). SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations. SFAS No.
141 specifies criteria that intangible assets acquired in a business combination
must meet to be recognized and reported separately from goodwill. SFAS No. 142
will require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144 after its adoption.

     Upon adoption of SFAS No. 142 in the first quarter of 2002, the Company is
required to evaluate its existing acquired intangible assets and goodwill, and
to make any necessary reclassifications in order to conform with the new
classification criteria in SFAS No. 141 for recognition separate from goodwill.
The Company will be required to reassess the useful lives and residual values of
all intangible assets acquired, and make any necessary amortization period
adjustments by the end of the first quarter of 2002. If an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
SFAS No. 142 within the first interim period. Impairment is measured as the
excess of carrying value over the fair value of an intangible asset with an
indefinite life. Any impairment loss will be measured as of the date of adoption
and recognized as the cumulative effect of a change in accounting principle.

     In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the Statement requires the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of January 1, 2002. The Company will then have up to six
months from January 1, 2002 to determine the fair value of each reporting unit
and compare it to the carrying amount of the reporting unit. To the extent the
carrying amount of a reporting unit exceeds the fair value of the reporting
unit, an indication exists that the reporting unit goodwill may be impaired and
the Company must perform the second step of the transitional impairment test.
The Company has determined that it only has one reporting unit as defined by the
Standard.

     The second step is required to be completed as soon as possible, but no
later than the end of the year of adoption. In the second step, the Company must
compare the implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill, both of which would be measured as of the
date of adoption. The implied fair value of goodwill is determined by allocating
the fair value of the reporting unit to all of the assets (recognized and
unrecognized) and liabilities of the reporting unit in a manner similar to a
purchase price allocation, in accordance with SFAS No. 141. The residual fair
value after this allocation is the implied fair value of the reporting unit
goodwill. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of income.

     As of the date of adoption of SFAS No. 142, the Company expects to have
unamortized goodwill in the amount of $11,461,000 and unamortized identifiable
intangible assets in the amount of $155,207,000, all of which will be subject to
the transition provisions of SFAS No. 142. Amortization expense related to
goodwill and other intangible assets was $1,220,000, $1,379,000 and $3,604,000
for the years ended December 31, 1999, 2000, and 2001, respectively. Although
the Company has not yet finalized its analysis of the adoption of SFAS No. 141
and No. 142, the Company does not expect to recognize any transitional
impairment losses as the cumulative effect of a change in accounting principle.

(h) Revenue Recognition

     The Company derives revenue from subscriber subscription and activation
fees as well as advertising.

                                      F-9

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

     Subscriber revenue, which is generally billed in advance, consists of fixed
charges for service, which are recognized as the service is provided and through
non-refundable activation fees that are recognized ratably over the expected
life of the customer relationship. Direct activation costs are expensed as
incurred.

     The Company recognizes advertising revenue from sales of spot announcements
to national advertisers that are recognized in the period in which the spot
announcement is broadcast. Agency commissions are presented as a reduction to
revenue in the Consolidated Statement of Operations.

(i) Stock-Based Compensation

     The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principle Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations including FASB Interpretation ("FIN") No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of APB
opinion No. 25 issued in March 2000, and complies with the disclosure provisions
of SFAS No. 123, Accounting for Stock-Based Compensation. 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.

     The Company adopted FIN No. 44 in July 2000 to account for stock options
that had been repriced during the period covered by FIN No. 44. The application
resulted in additional compensation of $1,213,000 and $1,232,000 during the year
ended December 31, 2000 and 2001, respectively. Additional compensation charges
may result depending upon the market value of the common stock at each balance
sheet date.

(j) Research and Development and Advertising

     Research and development costs and advertising costs are expensed as
incurred.

(k) 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 computed 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.

(l) 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 and operating
loss and tax credit carryforwards, based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the sum of taxes payable for the period and the change during the period in
deferred tax assets and liabilities.

(m) Comprehensive Income

     The Company has engaged in no transactions during the years ended December
31, 1999, 2000 and 2001 that would be classified as other comprehensive income.

(n) Accounting Estimates

                                      F-10

<PAGE>
                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

     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, the allowance for doubtful
accounts, the valuation of goodwill and intangible assets, the recoverability of
the XM Radio System assets, the costs to terminate certain terrestrial repeater
site leases, the allocation of purchase price of assets acquired, the estimated
life of a subscriber's subscription, the payments to be made to distributors and
manufacturers for radios sold or activated, the amount of stock-based
compensation arrangements and the valuation allowances against deferred tax
assets. Accordingly, actual amounts could differ from these estimates.

(o) Reclassifications

     Certain fiscal year 1999 and 2000 amounts have been reclassified to conform
to the current presentation.

(p) Derivative Instruments and Hedging Activities

     In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 2000 the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activity, an
amendment of SFAS 133. SFAS No. 133 and SFAS No. 138 require that all derivative
instruments be recorded on the balance sheet at their respective fair values.
SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all
fiscal years beginning after June 30, 2000. The Company adopted SFAS No. 133 and
SFAS No. 138 on January 1, 2001. The Company has reviewed its contracts and has
determined that it has no stand alone derivative instruments and does not engage
in hedging activities.


(2)  Accumulated Deficit

     The Company is devoting its efforts to market its digital audio radio
service and to increase its subscriber base. This effort involves substantial
risk and future operating results will be subject to significant business,
economic, regulatory, technical, and competitive uncertainties and
contingencies. 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 consolidated financial statements do not include any adjustments
that might be necessary should the Company be unable to continue as a going
concern.

     At the Company's current stage of operations, economic uncertainties exist
regarding the successful acquisition of additional debt or equity financings and
the attainment of positive cash flows from the XM Radio Service. The Company has
commenced commercial operations and will require substantial additional
financing to market and distribute the XM Radio Service. Failure to obtain the
required long-term financing may prevent the Company from continuing to provide
its service. Management's plan to fund operations and capital expansion includes
the sale of additional debt and equity securities through public and private
sources. There are no assurances, however, that such financing will be obtained.

(3)  Related Party Transactions

     The Company had the following amounts outstanding to related parties at
December 31, 2000 and 2001 (in thousands):

<TABLE>
<CAPTION>
                                                             December 31,
                                                          ------------------
                                                            2000       2001
                                                          -------    -------
     <S>                                                  <C>        <C>
     General Motors Corporation ("GM") ..............     $    --    $   656
     Hughes .........................................          --      7,686
     DIRECTV, Inc. ("DIRECTV") ......................         200         50
     LCC International, Inc. ("LCCI") ...............      15,141     15,407
</TABLE>

                                      F-11

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

<TABLE>
     <S>                                             <C>       <C>
     Clear Channel ..............................         25     2,101
     Motient ....................................         63       152
                                                     -------   -------
                                                     $15,429   $26,052
                                                     =======   =======
</TABLE>

     The Company has relied upon certain related parties for legal and technical
services during the years ended December 31, 1999, 2000 and 2001. Total costs
incurred in transactions with related parties are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                     Year ended December 31, 1999
                                                     -----------------------------------------------------------
                                                       GM      Hughes    DIRECTV   LCCI   Clear Channel  Motient
                                                     ------   --------   -------  ------  -------------  -------
<S>                                                  <C>      <C>        <C>      <C>     <C>            <C>
Terrestrial repeater network engineering
     and manufacturing ............................  $   --   $ 3,500    $    --  $6,578      $      --  $    --
General and administrative ........................      --        --         --      --             --      224

<CAPTION>
                                                                     Year ended December 31, 2000
                                                     ------------------------------------------------------------
                                                       GM      Hughes    DIRECTV    LCCI   Clear Channel  Motient
                                                     ------   --------   -------  -------  -------------  -------
<S>                                                  <C>      <C>        <C>      <C>      <C>            <C>
Terrestrial repeater network engineering
     and manufacturing ............................  $   --   $ 11,858   $    --  $58,731     $      --   $    --
Terrestrial repeater site leases ..................      --         --        --       --             5        --
Customer care and billing operations ..............      --         --     1,008       --            --        --
Sales and marketing ...............................      --         --        --       --         3,175        --
General and administrative ........................      --         --        --       --             3       252

<CAPTION>
                                                                     Year ended December 31, 2001
                                                     ------------------------------------------------------------
                                                       GM      Hughes    DIRECTV    LCCI   Clear Channel  Motient
                                                     ------   --------   -------  -------  -------------  -------
<S>                                                  <C>      <C>        <C>      <C>      <C>            <C>
Terrestrial repeater network engineering
     and manufacturing ............................  $   --   $ 88,116   $    --  $59,958     $       --  $    --
Terrestrial repeater site leases ..................      --         --        --       --             36       --
Customer care and billing operations ..............      --         --       623       --             --       --
Sales and marketing ...............................   1,264         --        --       --          4,351       --
General and administrative ........................      --         --        --       --             --      193
</TABLE>

(a) GM

     In 1999, the Company established a distribution agreement with GM (see note
15 (f)). Under the terms of the agreement, GM distributes the XM Radio Service
in various models of its vehicles.

(b) Hughes

     In 1999, the Company entered into a terrestrial repeater manufacturing
agreement with Hughes (see note 15 (e)).

(c) DIRECTV

     In 1999, the Company entered into a consulting services agreement with
DIRECTV. The agreement provides for DIRECTV professionals to aid the Company's
efforts in establishing its customer care center and billing operations on a
time and materials basis.

(d) LCCI

     In 1999, the Company entered into the LCCI Services Contract (note 15 (e))
and LCCI also provides certain ongoing consulting engineering work for the
Company relating to the terrestrial repeater network on a time and materials
basis.

                                      F-12

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

(e) Clear Channel

     In 2000, the Company entered into an advertising sales agreement with
Premiere Radio Networks, an affiliate of Clear Channel Communications, pursuant
to which Premiere sells to advertisers the time inventory owned by the Company
for advertisements to be run on XM Radio channels. Also in 2000, the Company
entered into a sponsorship agreement with SFX Marketing, now known as Clear
Channel Entertainment, pursuant to which the Company advertises its service at
Clear Channel Entertainment events and venues.

(f) Motient

     In 1998, the Company entered into an agreement with Motient, in which
Motient would provide technical and administrative support relating to the
Company's operations. Payments for services provided under this agreement were
made based on negotiated hourly rates.

(4)   System Under Construction

     The Company has capitalized costs related to the development of its XM
Radio System to the extent that they have future benefits. During 2001, the
Company placed its Boeing 702 satellites "Rock" and "Roll" into service as well
as its DARS license, ground systems/spacecraft control facilities, related
computer systems, and its terrestrial repeater network and broadcast facilities
by transferring $1,000,228,000 from system under construction to property and
equipment. The remaining components in system under construction include the
ground spare satellite and costs incurred through December 31, 2001 for the
performance broadcasting studio. The amounts recorded as system under
construction consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                December 31,
                                                            -------------------
                                                              2000       2001
                                                            --------   --------
                 <S>                                        <C>        <C>
                 DARS license .........................     $140,220   $     --
                 Satellite system .....................      533,155     55,016
                 Terrestrial system ...................       84,715         --
                 Spacecraft control facilities.........       13,046         --
                 Broadcast facilities .................       27,971         40
                 Computer systems .....................       15,909         --
                                                            --------   --------
                                                            $815,016   $ 55,056
                                                            ========   ========
</TABLE>

(5)  Property and Equipment

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

<TABLE>
<CAPTION>
                                                                        December 31,
                                                                  -----------------------
                                                                    2000          2001
                                                                  --------     ----------
     <S>                                                          <C>          <C>
     DARS license .............................................   $     --     $  146,271
     Satellite system .........................................         --        521,251
     Terrestrial system .......................................         --        243,755
     Spacecraft control facilities ............................         --         24,353
     Broadcast facilities .....................................     16,752         55,686
     Land .....................................................         --          7,156
     Building and improvements ................................         --         42,269
     Computer systems, furniture and fixtures, and equipment...     21,063         68,834
     Leasehold improvements ...................................     14,574             --
                                                                  --------     ----------
                                                                    52,389      1,109,575

     Accumulated depreciation and amortization ................     (2,337)       (43,384)
                                                                  --------    -----------
</TABLE>

                                      F-13


<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

              Net property and equipment, net ......... $50,052   $ 1,066,191
                                                        =======   ===========

     In July 2001, the Company received notification from BSS that the expected
life of its satellites was extended due to the accuracy of the respective
launches, which used less fuel than anticipated. The Company, therefore, changed
the useful life estimate for the satellite system and the DARS license from 15
years to 17.5 years.

     In September 2001, BSS advised the Company of a progressive degradation
problem with the solar array output power of 702 class satellites, including XM
"Rock" and XM "Roll". At the present time, the output power of the solar arrays
and the broadcast signal strength are above minimum acceptable levels and are
expected to remain that way at least through 2005, permitting full operation of
the XM System (based on patterns projected by BSS). The Company has advised its
insurance carriers of the situation. Since the issue is common to 702 class
satellites, the manufacturer is closely watching the progression of the problem,
including data from a satellite in orbit approximately 18 months' longer than XM
"Rock" and XM "Roll". With this 18-month advance visibility of performance
levels, insurance arrangements in place, a spare satellite under construction
that is being modified to address the solar array anomaly and availability of
additional satellites, the Company believes that it will be able to launch
additional satellites prior to the time the solar power problem might cause the
broadcast signal strength to fall below acceptable levels. The Company's
management will continue to monitor this situation carefully over the next few
years.

     In August 2001, the Company acquired its corporate headquarters, which was
previously subject to a long-term lease. The related leasehold improvements have
been classified as buildings and improvements as of December 31, 2001.

     In December 2001, the Company determined that the planned number of
terrestrial repeater sites could be reduced due to a network optimization study
that was conducted. The Company established a formal plan and recognized a
charge of $26,300,000 with respect to the terrestrial repeater sites no longer
required. The costs are principally related to the site acquisition and
build-out of the identified sites. These costs have been included within system
operations at December 31, 2001. Included within the charge is $8,595,000 for
costs to be incurred in 2002 related to these sites (see note 15 (h)).

(6) Goodwill and Other Intangible Assets

     On July 7, 1999, Motient acquired a former investor's remaining debt and
equity interests in the Company in exchange for approximately 8,600,000 shares
of Motient's common stock. Concurrent with Motient's acquisition of the
remaining interest in the Company, the Company recognized goodwill and other
intangible assets of $51,624,000, which has been allocated as follows (in
thousands):

                        DARS License ....................   $25,024
                        Goodwill ........................    13,738
                        Programming agreements ..........     8,000
                        Receiver agreements .............     4,600
                        Other intangibles ...............       262
                                                            -------
                                                            $51,624
                                                            =======

(7) Other Assets

     Other assets consist of the following at December 31, 2000 and 2001 (in
thousands):

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                          ----------------------
                                                                             2000        2001
                                                                           -------     ---------
   <S>                                                                    <C>          <C>
   14% senior secured notes deferred financing fees ...................    $ 8,493     $ 8,858
   7.75% convertible subordinated notes deferred financing fees .......         --       2,665
   Mortgage deferred financing fees ...................................         --         496
   Loan payable deferred financing fees ...............................         --         943
</TABLE>

                                      F-14

<PAGE>
                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001


<TABLE>
   <S>                                                                   <C>         <C>
   Refundable deposits and other long-term prepaid expenses ..........       1,444       1,726
                                                                         ---------   ---------
                                                                             9,937      14,688

        Less accumulated amortization ................................        (672)     (2,167)
                                                                         ---------   ---------

        Other assets, net ............................................   $   9,265   $  12,521
                                                                         =========   =========
</TABLE>

(8) Long-Term Debt

     Long-term debt at December 31, 2000 and 2001 consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                        ----------------------
                                                                           2000        2001
                                                                          --------   ---------
     <S>                                                                <C>          <C>
     14% senior secured notes .......................................    $ 325,000   $ 325,000
          Less unamortized discount on 14% senior secured notes .....      (63,702)    (60,694)
     7.75% convertible subordinated notes ...........................           --      79,057
     Mortgage .......................................................           --      28,909
     Loan payable ...................................................           --      35,000
     Capital leases .................................................        1,923       6,158
                                                                         ---------   ---------
          Total long-term debt ......................................      263,221     413,430

          Less current installments .................................         (556)     (1,910)
                                                                         ---------   ---------

          Long-term debt, excluding current installments ............    $ 262,665   $ 411,520
                                                                         =========   =========
</TABLE>

(a) 14% Senior Secured Notes

     On March 15, 2000, the Company closed a private placement of 325,000 units,
each unit consisting of $1,000 principal amount of 14% senior secured notes due
2010 of XMSR and one warrant to purchase 8.024815 shares of the Company's Class
A common stock at a price of $49.50 per share. The Company realized net proceeds
of $191,500,000, excluding $123,000,000 used to acquire securities that will be
used to pay interest payments due under the notes for the first three years. The
$325,000,000 face value of the notes was offset by a discount of $65,746,000
associated with the fair value of the related warrants. The Company had
amortized $2,044,000 and $5,052,000 of the discount through December 31, 2000
and 2001, respectively. See note 10(f) for further discussion regarding
adjustments that have occurred to the related warrants.

(b) 7.75% Convertible Subordinated Notes

     On March 6, 2001, the Company closed a public offering of $125,000,000 of
its 7.75% convertible subordinated notes due 2006, which yielded net proceeds of
$120,700,000. The subordinated notes are convertible into shares of the
Company's Class A common stock at a conversion price of $12.23 per share. The
first interest payment on the 7.75% convertible subordinated notes of $3.0
million was paid in September 2001. In July and August 2001, the holders of the
7.75% convertible subordinated notes exchanged $45,900,000 of notes for
4,194,272 shares of the Company's Class A common stock. The Company incurred a
charge to interest for the incentivized conversion of $6,500,000.

(c) Mortgage

      On August 24, 2001, the Company entered into a loan and security agreement
with a lender that provided it with $29,000,000 to purchase its corporate
headquarters and incurred $500,000 in financing costs associated with the
transaction. The loan bears interest at 8% until it adjusts on March 1, 2002 to
the six month LIBOR rate plus 3.5%. The interest rate will then be adjusted
every six months and may not exceed the ceiling rate of 14% or the floor rate of
8%. The loan will mature on September 1, 2006. The Company used the proceeds
along with $5,000,000 to purchase its corporate headquarters for $34,000,000 and
incurred $800,000 in closing costs on the

                                      F-15

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

transaction. The mortgage is secured by the building and an escrow of $2,000,000
at December 31, 2001. The Company is obligated to either increase the escrow by
$1,000,000 and $500,000 in 2002 and 2003, respectively, or establish letters of
credit to provide for these obligations.

(d) Loan Payable

     On December 5, 2001, the Company entered into a Customer Credit Agreement
with Boeing Capital Corporation ("BCC") pursuant to which the Company borrowed
$35,000,000 from BCC at an interest rate equal to LIBOR plus 3.5%, increasing to
LIBOR plus 4.5% after December 5, 2003, which is compounded annually and payable
quarterly in arrears. The principal is due on the earlier of December 5, 2006 or
the launch of the ground spare satellite. The principal would also become due
should the Boeing Satellite Contract (note 15(d)) be terminated. The loan is
secured by the Company's interest in the ground spare satellite, excluding its
payload.

(9)   Fair Value of Financial Instruments

     The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 2000 and 2001 (in
thousands). The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.

<TABLE>
<CAPTION>
                                                                   December 31,
                                                --------------------------------------------------
                                                         2000                      2001
                                                         ----                      ----
                                                 Carrying                   Carrying
                                                  Amount     Fair Value      Amount     Fair Value
                                                  ------     ----------      ------     ----------
<S>                                             <C>          <C>           <C>          <C>
Financial assets:
   Cash and cash equivalents .................   $ 224,903    $ 224,903    $ 182,497    $ 182,497
   Short-term investments ....................          --           --       28,355       28,355
   Restricted investments ....................     161,166      162,226       72,759       74,113
   Accounts receivable .......................          --           --          478          478
   Letters of credit .........................          --           12           --           13

Financial liabilities:
   Accounts payable ..........................      31,793       31,793       36,559       36,559
   Accrued expenses ..........................       3,474        3,474       22,541       22,541
   Accrued network optimization expenses .....          --           --        8,595        8,595
   Due to related parties ....................      15,429       15,429       26,052       26,052
   Royalty payable ...........................       5,165        5,165        5,357        5,357
   Long-term debt ............................     263,221      181,486      413,430      456,294
   Other non-current liabilities .............       4,787        4,787        1,354        1,354
</TABLE>

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

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

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

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

     Long-term debt: The fair value of the Company's long-term debt is
determined by either estimation by discounting the future cash flows of each
instrument at rates currently offered to the Company for similar debt

                                      F-16

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

instruments of comparable maturities by the Company's bankers or by quoted
market prices at the reporting date for the traded debt securities (the carrying
value of XMSR's 14% senior secured notes is significantly less than face value
because the notes were sold at a discount for value allocated to the related
warrants).

(10) Equity

(a) Recapitalization

     Concurrent with the transaction discussed in note 6, the Company's capital
structure was reorganized. The Company's common stock was converted into the
newly authorized Class B common stock, which has three votes per share. The
Company also authorized Class A common stock, which is entitled to one vote per
share, and non-voting Class C common stock.

     The Company authorized 60,000,000 shares of preferred stock, of which
15,000,000 shares are designated Series A convertible preferred stock, 3,000,000
shares are designated 8.25% Series B convertible redeemable preferred stock, and
250,000 shares are designated 8.25% Series C convertible redeemable preferred
stock, which are all 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. The Series B and C convertible
redeemable preferred stock are convertible to Class A common stock at the option
of the holder and are mandatorily redeemable in Class A common stock. The Series
B convertible redeemable preferred stock is non-voting. The Series C redeemable
preferred stock contains voting and certain veto rights.

     On January 15, 1999, the Company issued a convertible note to Motient for
$21,419,000. This convertible note bore interest at LIBOR plus 5% per annum and
was due on December 31, 2004. The principal and interest balances were
convertible at prices of $16.35 and $9.52, respectively, per Class B common
share. Following the transaction discussed in note 6, the Company issued a
convertible note maturing December 31, 2004 to Motient for $81,676,000 in
exchange for the $54,536,000 subordinated convertible notes payable to a former
investor, $6,889,000 in demand notes to a former investor, $20,251,000 in
accrued interest to a former investor and all of the former investor's
outstanding options to acquire the Company's common stock. This note bore
interest at LIBOR plus 5% per annum. The note was convertible at Motient'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 this note. These
Motient convertible 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.

     At the closing of the transaction discussed in note 6, the Company issued
an aggregate $250.0 million of Series A subordinated convertible notes to six
new investors--GM, $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 were 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 was $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.

     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.

     In 2000, at the request of the Company, one of the Class B common
stockholders converted 1,314,914 shares of the Company's Class B common stock
into Class A common stock on a one-for-one basis.

     On July 14, 2000, the Company filed an application with the FCC to allow
the Company to transfer its control from Motient to a diffuse group of owners,
none of whom will have controlling interest. On December 22, 2000, the

                                      F-17

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

application was approved by the FCC. In 2001, Motient converted the remaining
16,557,262 shares of the Company's Class B common stock into Class A common
stock on a one-for-one basis.

(b) Initial Public Offering

     In October 1999, the Company completed an initial public offering of
10,241,000 shares of Class A common stock at $12.00 per share. The offering
yielded net proceeds of $114,134,000.

(c) 2000 Common Stock 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 $120,837,000. 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 $96,472,000.
The Series B convertible redeemable preferred stock 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.

     On August 1, 2000, the Company entered into agreements with certain holders
of its 8.25% Series B convertible redeemable preferred stock to exchange their
shares of 8.25% Series B convertible redeemable preferred stock for shares of
the Company's Class A common stock. By August 31, 2000, the Company had issued
1,700,016 shares of its Class A common stock in exchange for 1,132,711 shares of
its 8.25% Series B convertible redeemable preferred stock. The Company recorded
an $11,200,000 charge to earnings attributable to common stockholders in the
third quarter related to this transaction. This charge represents the difference
in the fair value of the stock issued upon this conversion in excess of the
stock that the holders were entitled to upon a voluntary conversion.

     The Company paid the 2000 quarterly dividends on the 8.25% Series B
convertible redeemable preferred stock on May 1, 2000, August 1, 2000 and
November 1, 2000 by issuing 62,318, 57,114 and 25,734 shares of Class A common
stock, respectively, to the respective holders of record. The Company paid the
2001 quarterly dividends on February 1, 2001, May 1, 2001, August 1, 2001 and
November 1, 2001 by issuing 56,269, 178,099, 63,934 and 167,878 shares of Class
A common stock, respectively, to the respective holders of record.

(d) Series C Convertible Redeemable Preferred Stock

     On July 7, 2000, the Company reached an agreement for a private offering of
235,000 shares of its Series C convertible redeemable preferred stock for $1,000
per share, which closed on August 8, 2000 and yielded net proceeds of
$206,379,000 and a stock subscription of $20,000,000 that earned interest at 7%
per annum until it was paid on November 30, 2000. The stock subscription was
received in November 2000 and provided an additional $20,443,000. The Series C
convertible redeemable preferred stock provides for 8.25% cumulative dividends
payable in cash. As no dividends have been declared on the Series C convertible
redeemable preferred stock, the value of the cumulative dividends has increased
the liquidation preference. The Series C convertible redeemable preferred stock
is convertible, at the holders' option, into Class A common stock at the
conversion price then in effect. Initially, the conversion price was $26.50, but
is subject to change upon the occurrence of certain dilutive events. The
conversion price has been adjusted as discussed below. The Company must redeem
the Series C convertible redeemable preferred stock in Class A common stock on
February 1, 2012. At its option, the Company may redeem the Series C convertible
redeemable preferred stock beginning on February 8, 2005 in cash or, at the
holder's option, in Class A common stock.

     As a result of the current conversion price of $26.50 being less than the
market value of the Company's Class A common stock of $40.375 on the commitment
date, the Company recorded a $123,000,000 beneficial conversion charge that
reduced earnings available to common stockholders.

(e) 2001 Common Stock Offerings

                                      F-18

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

     On March 6, 2001, the Company completed a follow-on offering of 7,500,000
shares of its Class A common stock, which yielded net proceeds of $72,000,000.
On December 6, 2001, the Company completed a follow-on offering of 11,500,000
shares of its Class A common stock, which yielded net proceeds of $126,500,000.

(f) Adjustments To Warrants and Series C Convertible Redeemable Preferred Stock

     The issuance of the Series C convertible redeemable preferred stock caused
the exercise price of the warrants sold in March 2000 to be adjusted from $49.50
to $47.94 and the number of warrant shares to be increased to 8.285948 per
warrant.

     The closings of the offerings of 7.75% convertible subordinated notes in
March 2001 and Class A common stock in March and December 2001 caused the
conversion price of the Series C convertible redeemable preferred stock to be
adjusted from $26.50 to $22.17, the exercise price of the warrants sold in March
2000 to be adjusted to $45.27 and the number of warrant shares to be increased
to 8.776003 per warrant.

(g) Stock-Based Compensation

     The Company operates three separate stock 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 Class A common stock under the
Plan, which was increased to 2,675,700 in July 1999, 5,000,000 in May 2000, and
8,000,000 in May 2001. 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 years ended
December 31, 1999, 2000 and 2001 are summarized below:

<TABLE>
<CAPTION>
                                                           Outstanding Options
                                                     -------------------------------
                                                                       Weighted-
                                                        Number of       Average
                                                         Shares     Exercise Price
                                                         ------     --------------
            <S>                                      <C>            <C>
            Balance, January 1, 1999 ..............        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
                 Options granted ..................      1,176,683        30.21
                 Options canceled or expired ......       (131,267)       17.01
                 Options exercised ................        (48,817)        9.52
                                                       -----------
            Balance, December 31, 2000 ............      3,095,688     $  17.61
                 Options granted ..................      2,680,415        15.54
                 Options canceled or expired ......        (23,570)        9.55
                 Options exercised ................       (253,593)       17.88
                                                       -----------
            Balance, December 31, 2001 ............      5,498,940     $  16.62
                                                       ===========
</TABLE>

                                      F-19

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001


<TABLE>
<CAPTION>
                           Options Outstanding                      Options Exercisable
          -----------------------------------------------------  -------------------------
                                            Weighted-
                                             Average    Weighted-               Weighted-
                                            Remaining    Average                 Average
                                                                 -------------------------
                              Number       Contractual  Exercise      Number     Exercise
             Exercise Price  Outstanding      Life       Price     Exercisable    Price
             --------------  -----------      ----       -----     -----------    -----
<S>       <C>                <C>           <C>          <C>      <C>             <C>
1999           $9.52-$12.00   2,099,089    9.24 years     $10.32       416,294      $ 9.52
          --------------------------------------------------------------------------------
2000           $9.52-$12.00   2,120,400    8.26 years     $10.39     1,110,756      $10.06
              $12.01-$30.50     297,685    9.03 years     $23.13         5,334      $13.13
              $30.51-$45.44     677,603    9.54 years     $37.92        20,000      $43.69
          --------------------------------------------------------------------------------
2001            $4.82-$9.42     363,700    9.31 years      $7.91        55,000      $ 8.46
               $9.44-$12.00   2,256,263    7.50 years     $10.37     1,716,153      $10.21
              $12.06-$26.88   2,142,409    9.14 years     $17.75       165,132      $18.90
              $27.63-$45.44     736,568    8.52 years     $36.81       272,681      $36.93
          --------------------------------------------------------------------------------
</TABLE>

     There were 416,294, 1,136,090 and 2,208,966 stock options exercisable at
December 31, 1999, 2000 and 2001, respectively. At December 31, 2001, there were
2,197,579 shares available under the plan for future grants. At December 31,
2001, all options have been issued to employees, officers and directors, except
for 76,000 options granted to non-employees for which the Company recognized
$1,147,000 in non-cash compensation.

     The per share weighted-average fair value of employee options granted
during the year ended December 31, 1999, 2000 and 2001 was $6.21, $22.06 and
$8.77, respectively, on the date of grant using the Black-Scholes Option Pricing
Model with the following weighted-average assumptions:

<TABLE>
<CAPTION>
                                                                     December 31,
                                                    ---------------------------------------------------
                                                          1999              2000              2001
                                                      ------------     -------------       ------------
            <S>                                     <C>               <C>                <C>
            Expected dividend yield ...........                 0%                0%                 0%
            Volatility ........................             63.92%            68.21%             62.40%
            Risk-free interest rate range .....     5.47% to 5.97%    4.99% to 6.71%     3.66% to 4.99%
            Expected life .....................            5 years           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, which was
increased to 600,000 shares in 2001. 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 5% 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% 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, 2000 and 2001, the Company had issued
28,791, 53,539 and 217,401 shares, respectively, under this plan. At December
31, 2001, there were 382,599 shares available under the plan for future sale.

     The per share weighted-average fair value of purchase rights granted during
the year was $3.30, $11.28, and $5.37 for the years ended December 31, 1999,
2000 and 2001, respectively. The estimates were calculated at the grant date
using the Black-Scholes Option Pricing Model with the following assumptions at
December 31, 1999, 2000 and 2001:

<TABLE>
<CAPTION>
                                                                                December 31,
                                                              -----------------------------------------
                                                                    1999        2000           2001
                                                                ----------   -----------     ----------
                        <S>                                   <C>            <C>             <C>
                        Expected dividend yield ............            0%            0%             0%
                        Volatility .........................        62.92%        68.21%         62.40%
                        Risk-free interest rate range ......         4.73%   5.33%-6.23%     2.4%-5.89%
                        Expected life ......................    0.23 years    0.24 years     0.24 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 and stock purchase plan in the financial statements other than for
performance based stock options, for options granted with exercise prices below
fair value on the date of

                                      F-20

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

grant and for repriced options under FIN No. 44. During 1999, 2000 and 2001, the
Company incurred $4,070,000, $2,557,000, $2,336,000, respectively, 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,
                                                                  ------------------------------
                                                                    1999       2000       2001
                                                                  --------- ---------- ----------
            <S>                                                   <C>       <C>        <C>
            Net loss:
                 As reported ...................................    $36,896   $201,338   $307,532
                 Pro forma .....................................     37,706    209,582    323,685
                 As reported--net loss per share--basic and
                    diluted ....................................      (2.40)     (4.15)     (5.13)
                 Pro forma--net loss per share--basic and
                    diluted ....................................      (2.62)     (4.32)     (5.40)
                                                                  =========   ========   ========
</TABLE>

     Talent Option Plan

     In May 2000, the Company adopted the XM Talent Option Plan ("Talent Plan")
under which non-employee programming consultants to the Company may be granted
options to purchase shares of Class A common stock of the Company. The Company
authorized 500,000 shares of Class A common stock under the Talent Plan. The
options are exercisable in installments determined by the talent committee of
the Company's board of directors. The options expire as determined by the talent
committee, but no later than ten years from the date of the grant. As of
December 31, 2000 and 2001, no and 144,500 options had been granted under the
Talent Plan. In 2001, the Company recognized $575,000 in non-cash compensation
expense related to these options under SFAS 123. At December 31, 2001, there
were 355,500 options available under the plan for future grant.

(11) 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% of their compensation on a pre-tax basis
through contributions to the savings plan. The Company contributed $0.50 in
1999, 2000 and 2001 for every dollar the employees contributed up to 6% of
compensation, which amounted to $164,000, $229,000 and $543,000, respectively.

(12) Interest Cost

     The Company capitalizes a portion of interest cost as a component of the
cost of the XM Radio System. The following is a summary of interest cost
incurred during December 31, 1999, 2000 and 2001 (in thousands):

<TABLE>
<CAPTION>
                                                               1999        2000       2001
                                                              -------    -------    -------
                      <S>                                     <C>        <C>        <C>
                      Interest cost capitalized ............  $15,343    $39,052    $45,211
                      Interest cost charged to expense .....    9,121         --     18,131
                                                              -------    -------    -------
                      Total interest cost incurred .........  $24,464    $39,052    $63,342
                                                              =======    =======    =======
</TABLE>

     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 a related party note in 1999 and by $18,131,000 in 2001.

(13) 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 Motient. The Company generated net operating losses and
other deferred tax benefits that were not utilized by Motient. As no formal tax
sharing agreement has been finalized,

                                      F-21

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

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, 2001,
the Company's tax provision would be as follows:

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

<TABLE>
<CAPTION>
                                                         December 31,
                                                      ------------------
                                                      1999   2000   2001
                                                      ----   ----   ----
     <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,
                                                                                -------------------------------
                                                                                  1999       2000        2001
                                                                                --------   --------   ---------
     <S>                                                                        <C>        <C>        <C>
     Income (loss) before taxes on income, as reported in the statements
        of income ...........................................................   $(36,896)  $(51,873)  $(284,380)
                                                                                ========   ========   =========
     Theoretical tax benefit on the above amount at 35% .....................    (12,545)   (18,156)    (99,533)
     State tax, net of federal benefit ......................................        462     (2,588)    (13,225)
     Increase in taxes resulting from permanent differences, net ............      2,060        562       2,701
     Adjustments arising from differences in the basis of measurement
        for tax purposes and financial reporting purposes and other .........     13,182          9          --
     Change in valuation allowance ..........................................     (3,159)    20,173     110,057
                                                                                --------   --------   ---------
     Taxes on income for the reported year ..................................   $     --   $     --   $      --
                                                                                ========   ========   =========
</TABLE>

     At December 31, 1999, 2000 and 2001, deferred income tax consists of future
tax assets/(liabilities) attributable to the following (in thousands):


<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                -------------------------------
                                                                                  1999       2000        2001
                                                                                --------   --------   ---------
     <S>                                                                        <C>        <C>        <C>
     Deferred tax assets:
          Net operating loss/other tax attribute carryovers .................   $  2,490   $ 14,716   $  60,369
          Start-up costs ....................................................     17,765     40,033      99,822
          Other deferred tax assets .........................................         --         --      18,886
                                                                                --------   --------   ---------
               Gross total deferred tax assets ..............................     20,255     54,749     179,077
     Valuation allowance for deferred tax assets ............................     (4,819)   (24,992)   (135,049)
                                                                                --------   --------   ---------
               Net deferred assets ..........................................     15,436     29,757      44,028
                                                                                --------   --------   ---------
     Deferred tax liabilities:
          Fixed assets ......................................................        (51)   (15,500)    (29,437)
          DARS license ......................................................    (10,160)    (9,735)     (9,670)
          Other intangible assets ...........................................     (5,225)    (4,522)     (4,921)
                                                                                --------   --------   ---------
               Net deferred tax liabilities .................................    (15,436)   (29,757)    (44,028)
                                                                                --------   --------   ---------
               Deferred income tax, net .....................................   $     --   $     --   $      --
                                                                                ========   ========   =========
</TABLE>

     At December 31, 2001, the Company had accumulated net operating losses of
$150,884,000 for Federal income tax purposes that are available to offset future
regular taxable income. These operating loss carryforwards expire between the
years 2012 and 2021. Utilization of these net operating losses are subject to
limitations because there have been significant changes in the stock ownership
of the Company. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future

                                      F-22

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment.

(14)  Supplemental Cash Flows Disclosures

     The Company paid $0, $11,198,000, and $9,174,000 for interest (net of
amounts capitalized) during 1999, 2000, and 2001, respectively. Additionally,
the Company incurred the following non-cash financing and investing activities
(in thousands):

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                              --------------------------------
                                                                                1999       2000        2001
                                                                              --------   --------   ----------
       <S>                                                                    <C>        <C>        <C>
       Increase in DARS license, goodwill and intangibles .................   $ 51,624   $     --   $       --
       Liabilities exchanged for new convertible note to related parties...     81,676         --           --
       Non-cash capitalized interest ......................................     15,162     16,302        4,571
       Accrued system milestone payments ..................................     15,500     30,192       37,775
       Systems under construction placed into service .....................         --         --    1,000,228
       Property acquired through capital leases ...........................        470      1,688        6,177
       Conversion of debt to equity .......................................    353,315         --       50,992
       Use of deposit/escrow for terrestrial repeater contracts ...........         --      3,422       80,431
       Interest converted into principal note balance .....................      4,601         --           --
       Accrued expenses transferred to loan balance .......................      7,405         --           --
</TABLE>

(15)  Commitments and Contingencies

(a) DARS License

     The Company's DARS license is valid for eight years upon successful launch
and orbital insertion of the satellites and can be extended by the Company. The
DARS license requires that the Company comply with a construction and launch
schedule specified by the FCC for each of the two authorized satellites, which
has occurred. The FCC has the authority to revoke the authorizations and in
connection with such revocation could exercise its authority to rescind the
Company's license. The Company believes that the exercise of such authority to
rescind the license is unlikely. Additionally, the FCC has not yet issued final
rules permitting the Company to deploy its terrestrial repeaters to fill gaps in
satellite coverage. The Company is operating its repeaters on a non-interference
basis pursuant to a grant of special temporary authority from the FCC, which
expired March 18, 2002. On March 11, 2002, the Company applied for an extension
of this special temporary authority and can continue to operate its terrestrial
repeaters pursuant to the special temporary authority pending a final
determination on this extension request. This authority is currently being
challenged by operators of terrestrial wireless systems who have asserted that
the Company's repeaters may cause interference.

(b) Application for Review of DARS License

     One of the losing bidders for the DARS licenses filed an Application for
Review by the full FCC of the Licensing Order that granted the Company its DARS
license. The Application for Review alleges that a former investor had
effectively taken control of the Company without FCC approval. The FCC has
denied the Application for Review and the losing bidder has appealed to the
United States Court of Appeals for the District of Columbia Circuit. The FCC or
the U.S. Court of Appeals has the authority to overturn the award of the DARS
license should they rule in favor of the losing bidder. Although the Company
believes that its right to the DARS license will withstand the challenge as the
former investor is no longer a stockholder in the Company, no prediction of the
outcome of this challenge can be made with any certainty. The FCC's approval of
the transfer of control of the DARS license to a diffuse group of owners,
granted in December 2000, is conditioned upon the outcome of the application for
review.

(c) Technology Licenses

                                      F-23

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

     Effective January 1, 1998, XMSR entered into a technology licensing
agreement with Motient and WorldSpace Management Corporation ("WorldSpace MC")
by which as compensation for certain licensed technology then under development
to be used in the XM Radio System, XMSR will pay up to $14,300,000 to WorldSpace
MC over a ten-year period. As of December 31, 2001, XMSR incurred costs of
$6,696,000 payable to WorldSpace MC. 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 Motient or WorldSpace MC should such
developments prove unsuccessful. XMSR maintains an accrual of $5,357,000 payable
to WorldSpace MC for quarterly royalty payments to be made after XMSR recognizes
$5,000,000 in revenue.

(d) Satellite Contract

     During the first half of 1999, the Company and BSS 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. BSS has delivered two
satellites in orbit and is to complete the construction of a ground spare
satellite. BSS has also provided ground equipment and software used in the XM
Radio System and certain launch and operations support services. The contract
also provides for in-orbit incentives to be earned depending on the performance
of the in-orbit satellites over their useful lives. Such payments could total up
to an additional $70,183,000 over the useful lives of the satellites. As of
December 31, 2001, the Company had paid $470,376,000 under the satellite
contract and had accrued $741,000.

     On December 5, 2001, the Company and Boeing amended the satellite contract
so as to permit the deferral of approximately $31 million of payments to be made
under the agreement, as well as to provide certain additional rights and
obligations to the Company, including the launch of the ground spare satellite
on the SeaLaunch launch vehicle should the ground spare satellite be launched
between specified dates. Under the amendment, deferred amounts must be repaid by
December 5, 2006 and the amounts deferred bear interest at the rate of 8%,
compounded annually, and are payable quarterly in arrears.

(e) Terrestrial Repeater System Contracts

     As of December 31, 2001, the Company had incurred aggregate costs of
approximately $243,500,000 for its terrestrial repeater system. These costs
covered the capital costs of the design, development and installation of a
system of terrestrial repeaters to cover approximately 60 cities and
metropolitan areas. In August 1999, the Company signed a contract with LCCI
calling for engineering and site preparation. As of December 31, 2001, the
Company had paid $109,860,000 and accrued an additional $15,407,000 under this
contract. The Company also entered into a contract effective October 22, 1999
with Hughes for the design, development and manufacture of the terrestrial
repeaters. Payments under the contract are expected to be approximately
$128,000,000, which could be modified based on the number of terrestrial
repeaters that are required for the system. As of December 31, 2001, the Company
had paid $95,788,000 and accrued an additional $7,685,000 under this contract.

(f) GM Distribution Agreement

     The Company has signed a long-term distribution agreement with the OnStar
division of GM providing for the installation of XM radios in GM vehicles.
During the term of the agreement, which expires 12 years from the commencement
date of the Company's commercial operations, GM has agreed to distribute the
service to the exclusion of other S-band satellite digital radio services. The
Company will also have a non-exclusive right to arrange for the installation of
XM radios included in OnStar systems in non-GM vehicles that are sold for use in
the United States. The Company has significant annual, fixed payment obligations
to General Motors through 2004. These payments approximate $35,000,000 in the
aggregate during this period. Additional annual fixed payment obligations beyond
2004 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 GM vehicles, the Company has agreed to subsidize a
portion of the cost of XM radios, and to make incentive payments to GM when the
owners of GM vehicles with installed XM radios become subscribers for the
Company's service. The Company must also share with GM a percentage of the
subscription revenue attributable to GM vehicles with installed XM radios, which
percentage increases until there are more than 8 million GM vehicles with
installed XM radios. The Company will also make available to GM 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

                                      F-24

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

or capable of receiving Sirius Satellite Radio, Inc.'s ("Sirius Radio") service.
The agreement is subject to renegotiations if, four years after the commencement
of the Company's commercial operations and at two-year intervals thereafter GM
does not achieve and maintain specified installation levels of GM vehicles
capable of receiving the Company's service, 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. GM's 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. Prior to 2001, the
Company had not incurred any costs under the contract. As of December 31, 2001,
the Company has paid $608,000 and accrued costs of $656,000 under the agreement.

(g) Joint Development Agreement

     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. Each
party is obligated to fund one half of the development cost for a unified
standard for satellite radios. 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 for these fees or credits will be determined over time by agreement of
the parties or by arbitration. The parties have yet to agree on the validity,
value, use, importance and available alternatives of their respective
technologies. The companies have agreed to seek arbitration to resolve issues
with respect to certain existing technology. 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.

(h)  Accrued Network Optimization Expenses

     In December 2001, the Company determined that the planned number of
terrestrial repeater sites could be reduced due to a network optimization study
that was conducted. The Company established a formal plan and recognized a
charge of $26,300,000 with respect to the terrestrial repeater sites no longer
required. Included within the charge is $8,595,000 for costs to be incurred in
2002 related to these sites.

     The Company estimated lease termination costs based upon contractual lease
costs and expected negotiation results as determined by discussions with
landlords and consultants. Approximately 53% of these leases are subject to
master lease agreements with large tower companies. Based upon preliminary
discussions with the tower companies, the Company assumed that they would be
able to swap a portion of the existing sites for other sites in other areas in
which terrestrial repeater networks will be developed in the future, without
incurring all of the contractual obligations. As a result, the Company estimated
the total of the lease termination costs would be substantially lower than the
contractual lease obligations. The contractual payments amount to approximately
$35,100,000. Additionally, the Company's leases typically contain a clause that
requires the Company to return a site to its original condition upon lease
termination. The Company has established an accrual of $8,595,000 for the
estimated lease termination costs and costs to deconstruct the sites. The actual
amount to be incurred could vary significantly from this estimate.

(i) Warrants

     Sony Warrant

     In February 2000, the Company issued a warrant to Sony exercisable for
shares of the Company's Class A common stock. The warrant will vest at the time
that the Company attains its 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, the warrant will be exercisable for 2% of the total number
of shares of the Company's Class A common stock on a fully-diluted basis. The
exercise price of the

                                      F-25

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

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. As the
Company has commenced commercial operations and Sony began selling its radios in
the fourth quarter of 2001, the Company recognized $131,000 of compensation
expense related to this warrant in 2001.

     CNBC Warrant

     In May 2001, the Company granted a warrant to purchase 90,000 shares of
Class A common stock consisting of three 30,000 share tranches to purchase
shares at $26.50 per share, which expire in 11, 12, and 13 years, respectively.
The warrants began to vest on September 25, 2001 when the Company reached its
commercial launch and will be vested on September 1, 2002, 2003, and 2004,
respectively. The Company recognized $290,000 in non-cash compensation expense
related to these warrants in 2001.

(j) Sales, Marketing and Distribution Agreements


     The Company has entered into various joint sales, marketing and
distribution agreements. Under the terms of these agreements, the Company is
obligated to provide incentives, subsidies and commissions to other entities
that may include fixed payments, per-unit radio and subscriber amounts and
revenue sharing arrangements. The amount of these operational, promotional,
subscriber acquisition, joint development, and manufacturing costs related to
these agreements cannot be estimated, but are expected to be substantial future
costs. During the years ended December 31, 1999, 2000 and 2001 the Company
incurred expenses of $0, $0 and $19,545,000, respectively, in relation to these
agreements. The amount of these costs will vary in future years, but is expected
to increase in the next year as the number of subscribers and revenue increase.

(k) Programming Agreements

     The Company has entered into various programming agreements. Under the
terms of these agreements, the Company is obligated to provide payments and
commissions to other entities that may include fixed payments, advertising
commitments and revenue sharing arrangements. The amount of these costs related
to these agreements cannot be estimated, but are expected to be substantial
future costs. During the years ended December 31, 1999, 2000, 2001, the Company
incurred expenses of $0, $0 and $7,230,000, respectively, in relation to these
agreements. The amount of these costs will vary in future years, but is expected
to increase in the next year as the number of subscribers and revenue increase.

(l) Leases

     The Company has noncancelable operating leases for office space and
terrestrial repeater sites and noncancelable capital leases for equipment that
expire over the next ten years. Additionally, the Company owns a building and
leases a portion of the space to other entities. The future minimum lease
payments and rentals under noncancelable leases as of December 31, 2001 are (in
thousands):

<TABLE>
<CAPTION>
                                                     Capital  Operating
                                                      Lease     Lease     Rental
                                                    Payments   Payments   Income
                                                    --------   --------   ------
<S>                                                 <C>       <C>        <C>
Year ending December 31:
     2002 ........................................  $  2,974   $20,471   $ 1,511
     2003 ........................................     2,835    20,966     1,427
     2004 ........................................     1,098    21,423     1,716
     2005 ........................................       141    17,351     1,802
     2006 ........................................        --     6,687     1,804
     Thereafter ..................................        --     9,439    26,065
                                                    --------   -------   -------
          Total ..................................     7,048   $96,337   $34,325
                                                               =======   =======
Less amount representing interest ................      (890)
                                                    --------
Present value of net minimum lease payments ......     6,158
Less current maturities ..........................    (1,530)
                                                    --------
Long-term obligations ............................  $  4,628
                                                    ========
</TABLE>

                                      F-26

<PAGE>

                XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

     Rent expense for 1999, 2000 and 2001 was $649,000, $6,082,000 and
$22,724,000, respectively.

     As discussed in note 15(h), in December 2001, the Company determined that
the planned number of terrestrial repeater sites could be reduced due to the
relative signal strength provided by the Company's satellites. The Company
recognized a charge of $26,300,000 with respect to the terrestrial repeater
sites no longer required. This charge includes a lease termination accrual of
$8,595,000 for 646 terrestrial site leases, which would reduce the future
minimum lease payments.

(16)  Quarterly Data (Unaudited)

<TABLE>
<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 attributable to common stockholders...     4,367     3,999    17,402    11,128
     Net loss per share--basic and diluted ....   $ (0.65)  $ (0.60)  $ (2.60)  $ (0.27)


<CAPTION>
                                                                  2000
                                                  -------------------------------------
                                                    1st       2nd        3rd      4th
                                                    ---       ---        ---      ---
                                                  Quarter   Quarter    Quarter   Quarter
                                                  -------   -------    -------   -------
<S>                                               <C>       <C>       <C>       <C>
Revenues ......................................   $    --   $    --   $     --  $     --
Operating loss ................................    16,888    13,937     28,109    20,544
Loss before income taxes ......................    12,740     5,088     20,060    13,985
Net loss attributable to common stockholders...    14,212     7,259    160,095    19,773
     Net loss per share--basic and diluted ....   $ (0.30)  $ (0.15)  $  (3.26) $  (0.40)

<CAPTION>
                                                                  2001
                                                  -------------------------------------
                                                    1st       2nd       3rd      4th
                                                    ---       ---       ---      ---
                                                  Quarter   Quarter   Quarter   Quarter
                                                  -------   -------   -------   -------
<S>                                               <C>       <C>       <C>      <C>
Revenues ......................................   $    --   $    --   $     1  $    532
Operating loss ................................    42,124    42,094    62,114   135,274
Loss before income taxes ......................    36,948    38,478    64,982   143,971
Net loss attributable to common stockholders...    42,736    44,267    70,770   149,759
     Net loss per share--basic and diluted ....   $ (0.80)  $ (0.76)  $ (1.14) $  (2.26)
</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.

     During the fourth quarter of 2001, the Company completed the nationwide
launch of its service. The Company also completed a public offering of
11,500,000 million shares of its Class A common stock (see note 10(e)),
realizing net proceeds of $126,500,000. In addition, the Company also closed on
a $66,000,000 financing package with The Boeing Company (see notes 8(d) and
15(d)), including $35,000,000 in new debt financing. Further, the Company
incurred a charge of $26,300,000 to system operations for terrestrial repeater
sites no longer required (see note 15(h)).

                                      F-27

<PAGE>

    Independent Auditors' Report on Consolidated Financial Statement Schedule

The Board of Directors
XM Satellite Radio Holdings Inc.:

     Under date of January 23, 2002, we reported on the consolidated balance
sheets of XM Satellite Radio Holdings Inc. and subsidiaries as of December 31,
2000 and 2001, 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, 2001, which are included in the XM
Satellite Radio Holdings Inc. and subsidiaries 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 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 does not
include any adjustments that might result from the outcome of this uncertainty.

                                               /s/ KPMG LLP

McLean, VA
January 23, 2002

                                      F-28

<PAGE>

                  Schedule I--Valuation And Qualifying Accounts
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                          Charged to
                                                                             Charged to      Other     Write-Offs/
                                                                   Balance    Costs and   Accounts--    Payments/     Balance
Description                                                       January 1   Expenses     Describe       Other     December 31
-----------                                                       ---------   --------     --------       -----     -----------
<S>                                                               <C>        <C>          <C>          <C>          <C>
Year Ended December 31, 1999
   Allowance for doubtful accounts ............................   $     --         --            --          --       $     --
   Deferred Tax Assets--Valuation
        Allowance .............................................   $  7,978     (3,159)           --          --       $  4,819
   Accrued network optimization
        expenses ..............................................   $     --         --            --          --       $     --

Year Ended December 31, 2000
   Allowance for doubtful accounts ............................   $     --         --            --          --       $     --
   Deferred Tax Assets--Valuation
        Allowance .............................................   $  4,819     20,173            --          --       $ 24,992
   Accrued network optimization
        expenses ..............................................   $     --         --            --          --       $     --

Year Ended December 31, 2001
   Allowance for doubtful accounts ............................   $     --         10            --          --       $     10
   Deferred Tax Assets--Valuation
        Allowance .............................................   $ 24,992    110,057            --          --       $135,049
   Accrued network optimization
        expenses ..............................................   $     --      8,595            --          --       $  8,595
</TABLE>

                                      F-29

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

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

     We have audited the accompanying consolidated balance sheets of XM
Satellite Radio Inc. and subsidiaries as of December 31, 2000 and 2001, and the
related consolidated statements of operations, stockholder's equity, and cash
flows for each of the years in the three-year period ended December 31, 2001.
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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of XM Satellite
Radio Inc. and subsidiaries as of December 31, 2000 and 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
2 to the consolidated financial statements, the Company 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 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

                                                 /s/ KPMG LLP


McLean, VA
January 23, 2002

                                      F-30

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2000 AND 2001

<TABLE>
<CAPTION>
                                                                                                             2000         2001
                                                                                                          ----------   ----------
                                                 ASSETS                                                    (in thousands, except
                                                                                                                  share data)
<S>                                                                                                       <C>          <C>
Current assets:
     Cash and cash equivalents ........................................................................   $  203,191   $   62,368
     Short-term investments ...........................................................................           --       10,296
     Restricted investments ...........................................................................       45,585       44,861
     Accounts receivable, net of allowance for doubtful accounts of $0 and $10 ........................           --          478
     Prepaid and other current assets .................................................................        8,815       15,271
                                                                                                          ----------   ----------
          Total current assets ........................................................................      257,591      133,274
Other assets:
     Restricted investments, net of current portion ...................................................      115,581       25,873
     System under construction ........................................................................      786,159       18,597
     Property and equipment, net of accumulated depreciation and amortization of $2,337 and $42,904 ...       50,052    1,031,810
     Goodwill and intangibles, net of accumulated amortization of $2,599 and $3,974 ...................       24,001       22,626
     Other assets, net of accumulated amortization of $672 and $1,587 .................................        9,133        9,182
                                                                                                          ----------   ----------
          Total assets ................................................................................   $1,242,517   $1,241,362
                                                                                                          ==========   ==========

                                   LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
     Accounts payable .................................................................................   $   31,706   $   35,308
     Accrued expenses .................................................................................        6,030       26,498
     Accrued network optimization expenses (note 15) ..................................................           --        8,595
     Current portion of long-term debt ................................................................          556        1,530
     Due to related parties ...........................................................................       15,366       25,900
     Accrued interest .................................................................................       13,397       13,486
                                                                                                          ----------   ----------
          Total current liabilities ...................................................................       67,055      111,317
Long-term debt, net of current portion ................................................................      262,665      268,934
Royalty payable, net of current portion ...............................................................        2,600        1,800
Other non-current liabilities .........................................................................        4,787        3,857
                                                                                                          ----------   ----------
          Total liabilities ...........................................................................      337,107      385,908
                                                                                                          ----------   ----------
Stockholder's equity:
   Common stock, par value $0.10; 3,000 shares authorized, 125 shares issued and outstanding ..........           --           --
   Additional paid-in capital .........................................................................    1,004,879    1,238,898
   Accumulated deficit ................................................................................      (99,469)    (383,444)
                                                                                                          ----------   ----------
          Total stockholder's equity ..................................................................      905,410      855,454
                                                                                                          ----------   ----------
Commitments and contingencies (notes 1, 2, 3, 5, 10 and 15)
          Total liabilities and stockholder's equity ..................................................   $1,242,517   $1,241,362
                                                                                                          ==========   ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-31

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

<TABLE>
<CAPTION>
                                                                                   1999        2000         2001
                                                                                 --------    --------    ---------
                                                                                  (in thousands, except share data)
<S>                                                                              <C>         <C>        <C>
Revenue:
     Subscriber revenue ......................................................   $     --    $     --    $     246
     Ad sales revenue ........................................................         --          --          294
        Less:  Agency commissions ............................................         --          --          (43)
     Other revenue ...........................................................         --          --           36
                                                                                 --------    --------    ---------
          Total revenue ......................................................         --          --          533
                                                                                 --------    --------    ---------
Operating expenses:
     Broadcasting operations:
        Content/programming ..................................................     (1,014)     (6,878)     (27,924)
        System operations ....................................................     (2,877)    (23,227)     (67,571)
        Customer care and billing operations .................................         --        (856)      (6,034)
     Sales and marketing .....................................................     (3,352)    (16,078)     (99,789)
     General and administrative ..............................................    (14,475)    (16,272)     (25,782)
     Research and development ................................................     (7,440)    (12,701)     (14,255)
     Depreciation and amortization ...........................................     (1,512)     (3,115)     (41,491)
                                                                                 --------    --------    ---------
          Total operating expenses ...........................................    (30,670)    (79,127)    (282,846)
                                                                                 --------    --------    ---------
Operating loss ...............................................................    (30,670)    (79,127)    (282,313)

Other income (expense):
     Interest income .........................................................        533      27,200       14,102
     Interest expense ........................................................        (43)         --      (15,157)
     Other expense, net ......................................................         --          --         (607)
                                                                                 --------    --------    ---------
             Net loss ........................................................    (30,180)    (51,927)    (283,975)
                                                                                 --------    --------    ---------
</TABLE>

     See accompanying notes to consolidated financial statements.

                                      F-32

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                  YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
<TABLE>
<CAPTION>
                                                                             Additional                       Total
                                                           Common Stock        Paid-in      Accumulated   Stockholder's
                                                         Shares    Amount      Capital        Deficit        Equity
                                                         ------    ------      -------        -------        ------
                                                          (in thousands)
<S>                <C>                                   <C>       <C>      <C>            <C>            <C>
Balance at January 1, 1999 ............................     125     $  --   $   144,818    $   (17,362)       127,456
Contributions to paid in capital ......................      --        --       301,994             --        301,994
Increase in DARS license, goodwill and intangibles.....      --        --        51,624             --         51,624
Non-cash stock compensation ...........................      --        --         4,210             --          4,210
Net Loss ..............................................      --        --            --        (30,180)       (30,180)
                                                           ----     -----   -----------    -----------      ---------
Balance at December 31, 1999 ..........................     125        --       502,646        (47,542)       455,104
Contributions to paid in capital ......................      --        --       499,490             --        499,490
Non-cash stock compensation ...........................      --        --         2,743             --          2,743
Net Loss ..............................................      --        --            --        (51,927)       (51,927)
                                                           ----     -----   -----------    -----------      ---------
Balance at December 31, 2000 ..........................     125        --     1,004,879        (99,469)       905,410
Contributions to paid in capital ......................      --        --       196,249             --        196,249
Transfer of satellite bus to Parent ...................      --        --       (35,321)            --        (35,321)
Funds received for transfer of satellite bus ..........      --        --        31,600             --         31,600
Contribution of fixed assets from Parent ..............      --        --        36,624             --         36,624
Non-cash stock compensation ...........................      --        --         4,867             --          4,867
Net Loss ..............................................      --        --            --       (283,975)      (283,975)
                                                           ----     -----   -----------    -----------      ---------
Balance at December 31, 2001 ..........................     125     $  --   $ 1,238,898    $  (383,444)     $ 855,454
                                                           ----     -----   -----------    -----------      ---------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-33

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

<TABLE>
<CAPTION>
                                                                                     1999         2000         2001
                                                                                  ---------    ---------    ---------
                                                                                             (in thousands)
<S>                                                                               <C>          <C>          <C>
Cash flows from operating activities:
  Net loss .....................................................................  $ (30,180)   $ (51,927)   $(283,975)
  Adjustments to reconcile net loss to net cash used in operating
activities:
    Bad debt expense ...........................................................         --           --           10
    Depreciation and amortization ..............................................      1,478        3,369       41,942
    Loss on disposal computer equipment ........................................         --           --          435
    Non-cash stock-based compensation ..........................................      4,210        2,743        4,867
    Changes in operating assets and liabilities:
      Increase in accounts receivable ..........................................         --           --         (488)
      Increase in prepaid and other current assets .............................       (905)      (7,738)      (6,456)
      Decrease in other assets .................................................         62           --           --
      Increase in accounts payable and accrued expenses ........................      7,149       16,012       31,278
      Increase due to related parties ..........................................         --           25        2,607
      Increase in accrued interest .............................................         --           --           90
                                                                                  ---------    ---------    ---------
        Net cash used in operating activities ..................................    (18,186)     (37,516)    (209,690)
                                                                                  ---------    ---------    ---------
Cash flows from investing activities:
  Purchase of property and equipment ...........................................     (2,008)     (41,925)     (15,402)
  Additions to system under construction .......................................   (159,510)    (424,342)    (142,321)
  Proceeds from transfer of ground spare satellite bus to Parent ...............         --           --       31,600
  Net purchase/maturity of short-term investments ..............................    (69,472)      69,472      (10,296)
  Net purchase/maturity of restricted investments ..............................         --     (106,338)      40,317
  Other investing activities ...................................................     (3,422)     (56,268)     (30,915)
                                                                                  ---------    ---------    ---------
        Net cash used in investing activities ..................................   (234,412)    (559,401)    (127,017)
                                                                                  ---------    ---------    ---------
Cash flows from financing activities:
  Proceeds from sale of common stock and capital contribution ..................         --      499,490      196,249
  Capital contribution from parent through transfer of liabilities .............    302,002           --           --
  Proceeds from issuance of 14% senior secured notes and warrants ..............         --      259,353           --
  Payments for deferred financing costs ........................................         --       (8,365)        (365)
  Other net financing activities ...............................................        (84)          --           --
                                                                                  ---------    ---------    ---------
        Net cash provided by financing activities ..............................    301,918      750,478      195,884
                                                                                  ---------    ---------    ---------
Net increase (decrease) in cash and cash equivalents ...........................     49,320      153,561     (140,823)
Cash and cash equivalents at beginning of period ...............................        310       49,630      203,191
                                                                                  ---------    ---------    ---------
Cash and cash equivalents at end of period .....................................  $  49,630    $ 203,191    $  62,368
                                                                                  =========    =========    =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-34

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

(1)  Summary of Significant Accounting Policies and Practices

(a) Nature of Business

     XM Satellite Radio Inc. (the "Company"), was incorporated on December 15,
1992 in the State of Delaware as a wholly owned subsidiary of Motient
Corporation ("Motient"), for the purpose of operating a digital audio radio
service ("DARS") under a license from the Federal Communications Commission
("FCC"). XM Satellite Radio Holdings Inc. (the "Parent") was formed as a holding
company for the Company on May 16, 1997.

     The Company became the first digital satellite radio service in the United
States of America on September 25, 2001 when it commenced commercial operations
in the lead markets of Dallas, Texas and San Diego, California as part of its
national rollout. On October 18, 2001, the Company continued its national
rollout as it launched service in the southern half of the country and completed
its national rollout on November 12, 2001. In 2001, the Company's satellites,
"Rock" and "Roll", were successfully launched on March 18, 2001 and May 8, 2001,
respectively.

(b) Principles of Consolidation and Basis of Presentation

     The consolidated financial statements include the accounts of XM Satellite
Radio Inc. and its subsidiaries. All significant intercompany transactions and
accounts have been eliminated. The Company emerged from the development stage in
the fourth quarter of 2001 as its principal operations had commenced and its
national rollout had been completed. Accordingly, the Company revised the
presentation of its Consolidated Statements of Operations to reflect that of a
commercial enterprise.

(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,
                                                        --------------------
                                                          2000        2001
                                                        --------    --------
             <S>                                        <C>         <C>
             Cash on deposit .........................  $     92     ($4,257)
             Overnight investments ...................        --      41,181
             Money market funds ......................   203,099       2,794
             Commercial paper ........................        --      22,650
                                                        --------    --------
                                                        $203,191    $ 62,368
                                                        ========    ========
</TABLE>

(d) Short-term Investments

     At December 31, 2001, the Company held commercial paper with maturity dates
of less than one year that were stated at amortized cost, which approximated
fair value.

(e) Restricted Investments

     Restricted investments consist of fixed income securities and are stated at
amortized cost plus accrued interest income. At December 31, 2000 and 2001,
restricted investments represent securities held in escrow to secure the
Company's future performance with regard to certain contracts and obligations,
which include the interest payments required on the Company's 14% senior secured
notes through March 2003, payments under the Hughes Electronics Corporation
("Hughes") terrestrial repeater contract, and certain facility leases and other
secured credits. The interest reserve consists of US Treasury securities and are
classified as held-to-maturity investments. The remaining investments are
principally money market funds and certificates of deposit. The amortized cost,
gross unrealized holding gains, gross unrealized holding losses and fair value
of the restricted investments at December 31, 2000 and 2001, were as follows (in
thousands):

                                      F-35

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

<TABLE>
<CAPTION>
                                                                                          Gross       Gross
                                                                                       Unrealized   Unrealized
                                                                            Amortized    Holding      Holding
                                                                              Cost        Gains       Losses    Fair Value
                                                                              ----        -----       ------    ----------
<S>                                                                         <C>        <C>          <C>         <C>
At December 31, 2000:
---------------------
Interest reserve ........................................................   $ 106,338    $ 1,060      $    --    $107,398
Contract escrow .........................................................      49,692         --           --      49,692
Collateral for letters of credit and other secured credit ...............       5,136         --           --       5,136
                                                                            ---------    -------      -------    --------
                                                                            $ 161,166    $ 1,060      $    --    $162,226
                                                                            =========    =======      =======    ========
At December 31, 2001:
---------------------
Interest reserve ........................................................   $  66,020    $ 1,354      $    --    $ 67,374
Contract escrow .........................................................       2,930         --           --       2,930
Collateral for letters of credit and other secured credit ...............       1,784         --           --       1,784
                                                                            ---------    -------      -------    --------
                                                                            $  70,734    $ 1,354      $    --    $ 72,088
                                                                            =========    =======      =======    ========
</TABLE>

(f) Property and Equipment

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

<TABLE>
    <S>                                                                         <C>
    Satellite system, DARS license, and space craft control facilities.......   17.5 years
    Terrestrial repeater network ............................................   5-10 years
    Broadcast facilities ....................................................   3-7 years
    Computer systems ........................................................   3-7 years
    Furniture and fixtures ..................................................   3-7 years
    Equipment under capital leases and leasehold improvements ...............   Lesser of useful life or
                                                                                remaining lease term
</TABLE>

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

     The Company accounts for long-lived assets in accordance with the newly
adopted provisions of Statement of Financial Accounting Standards ("SFAS") No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
Statement requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.

(g) Goodwill and Other Intangible Assets

     Goodwill, 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. Other intangible assets are
amortized over 10 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 by the amount by which the carrying
amount of the assets exceed the fair value of the assets. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.

     In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations, ("SFAS No. 141") and SFAS No. 142, Goodwill and
Other Intangible Assets ("SFAS No. 142"). SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations. SFAS No.
141 specifies criteria that intangible assets acquired in a business combination
must meet to be recognized and

                                      F-36

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

reported separately from goodwill. SFAS No. 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144 after its adoption.

     Upon adoption of SFAS No. 142 in the first quarter of 2002, the Company is
required to evaluate its existing acquired intangible assets and goodwill, and
to make any necessary reclassifications in order to conform with the new
classification criteria in SFAS No. 141 for recognition separate from goodwill.
The Company will be required to reassess the useful lives and residual values of
all intangible assets acquired, and make any necessary amortization period
adjustments by the end of the first quarter of 2002. If an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
SFAS No. 142 within the first interim period. Impairment is measured as the
excess of carrying value over the fair value of an intangible asset with an
indefinite life. Any impairment loss will be measured as of the date of adoption
and recognized as the cumulative effect of a change in accounting principle.

     In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the Statement requires the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of January 1, 2002. The Company will then have up to six
months from January 1, 2002 to determine the fair value of each reporting unit
and compare it to the carrying amount of the reporting unit. To the extent the
carrying amount of a reporting unit exceeds the fair value of the reporting
unit, an indication exists that the reporting unit goodwill may be impaired and
the Company must perform the second step of the transitional impairment test.
The Company has determined that it only has one reporting unit as defined by the
Standard.

     The second step is required to be completed as soon as possible, but no
later than the end of the year of adoption. In the second step, the Company must
compare the implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill, both of which would be measured as of the
date of adoption. The implied fair value of goodwill is determined by allocating
the fair value of the reporting unit to all of the assets (recognized and
unrecognized) and liabilities of the reporting unit in a manner similar to a
purchase price allocation, in accordance with SFAS No. 141. The residual fair
value after this allocation is the implied fair value of the reporting unit
goodwill. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of income.

     As of the date of adoption of SFAS No. 142, the Company expects to have
unamortized goodwill in the amount of $11,461,000 and unamortized identifiable
intangible assets in the amount of $155,207,000 all of which will be subject to
the transition provisions of SFAS No. 142. Amortization expense related to
goodwill and other intangible assets was $1,220,000, $1,379,000 and $3,604,000
for the years ended December 31, 1999, 2000, and 2001, respectively. Although
the Company has not yet finalized its analysis of the adoption of SFAS No. 141
and No. 142, the Company does not expect to recognize any transitional
impairment losses as the cumulative effect of a change in accounting principle.

(h) Revenue Recognition

     The Company derives revenue from subscriber subscription and activation
fees as well as advertising.

     Subscriber revenue, which is generally billed in advance, consists of fixed
charges for service, which are recognized as the service is provided and through
non-refundable activation fees that are recognized ratably over the expected
life of the customer relationship. Direct activation costs are expensed as
incurred.

     The Company recognizes advertising revenue from sales of spot announcements
to national advertisers that are recognized in the period in which the spot
announcement is broadcast. Agency commissions are presented as a reduction to
revenue in the Consolidated Statement of Operations.

(i) Stock-Based Compensation

                                      F-37

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

     The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principle Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations including FASB Interpretation ("FIN") No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of APB
opinion No. 25 issued in March 2000, and complies with the disclosure provisions
of SFAS No. 123, Accounting for Stock-Based Compensation. 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.

     The Company adopted FIN No. 44 in July 2000 to account for stock options
that had been repriced during the period covered by FIN No. 44. The application
resulted in additional compensation of $1,213,000 and $1,232,000 during the year
ended December 31, 2000 and 2001, respectively. Additional compensation charges
may result depending upon the market value of the common stock at each balance
sheet date.

(j) Research and Development and Advertising

     Research and development costs and advertising costs are expensed as
incurred.

(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 and operating
loss and tax credit carryforwards, based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the sum of taxes payable for the period and the change during the period in
deferred tax assets and liabilities.

(l) Comprehensive Income

     The Company has engaged in no transactions during the years ended December
31, 1999, 2000 and 2001 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, the allowance for doubtful
accounts, the valuation of goodwill and intangible assets, the recoverability of
the XM Radio System assets, the costs to terminate certain terrestrial repeater
site leases, the allocation of purchase price of assets acquired, the estimated
life of a subscriber's subscription, the payments to be made to distributors and
manufacturers for radios sold or activated, the amount of stock-based
compensation arrangements and the valuation allowances against deferred tax
assets. Accordingly, actual amounts could differ from these estimates.

(n) Reclassifications

     Certain fiscal year 1999 and 2000 amounts have been reclassified to conform
to the current presentation.

(o) Derivative Instruments and Hedging Activities

     In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 2000 the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging

                                      F-38

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

Activity, an amendment of SFAS 133. SFAS No. 133 and SFAS No. 138 require that
all derivative instruments be recorded on the balance sheet at their respective
fair values. SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters
of all fiscal years beginning after June 30, 2000. The Company adopted SFAS No.
133 and SFAS No. 138 on January 1, 2001. The Company has reviewed its contracts
and has determined that it has no stand alone derivative instruments and does
not engage in hedging activities.

(2) Accumulated Deficit

     The Company is devoting its efforts to market its digital audio radio
service and to increase its subscriber base. This effort involves substantial
risk and future operating results will be subject to significant business,
economic, regulatory, technical, and competitive uncertainties and
contingencies. 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 consolidated financial statements do not include any adjustments
that might be necessary should the Company be unable to continue as a going
concern.

     At the Company's current stage of operations, economic uncertainties exist
regarding the successful acquisition of additional debt or equity financings and
the attainment of positive cash flows from the XM Radio Service. The Company has
commenced commercial operations and will require substantial additional
financing to market and distribute the XM Radio Service. Failure to obtain the
required long-term financing may prevent the Company from continuing to provide
its service. Management's plan to fund operations and capital expansion includes
the sale of additional debt and equity securities through public and private
sources or future contributions from the Parent. There are no assurances,
however, that such financing will be obtained.

(3) Related Party Transactions

     The Company had the following amounts outstanding to related parties at
December 31, 2000 and 2001 (in thousands):

<TABLE>
<CAPTION>
                                                           December 31,
                                                       -------------------
                                                         2000        2001
                                                       -------     -------
     <S>                                               <C>         <C>
     General Motors Corporation ("GM") ...........     $    --     $   656
     Hughes ......................................          --       7,686
     DIRECTV, Inc. ("DIRECTV") ...................         200          50
     LCC International, Inc. ("LCCI") ............      15,141      15,407
     Clear Channel ...............................          25       2,101
                                                       -------     -------
                                                       $15,366     $25,900
                                                       =======     =======
</TABLE>

     The Company has relied upon certain related parties for legal and technical
services during the years ended December 31, 1999, 2000 and 2001. Total costs
incurred in transactions with related parties are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                     Year ended December 31, 1999
                                                      --------------------------------------------------------------
                                                         GM    Hughes     DIRECTV      LCCI  Clear Channel   Motient
                                                         --    ------     -------      ----  -------------   -------
<S>                                                   <C>      <C>        <C>        <C>     <C>             <C>
Terrestrial repeater network engineering
     and manufacturing .............................    $--    $3,500        $ --    $6,578          $  --      $ --
General and administrative .........................     --        --          --        --                      224
</TABLE>



<TABLE>
<CAPTION>
                                                                     Year ended December 31, 2000
                                                      -------------------------------------------------------------
                                                         GM    Hughes     DIRECTV      LCCI  Clear Channel   Motient
                                                         --    ------     -------      ----  -------------   -------
<S>                                                   <C>     <C>         <C>       <C>      <C>             <C>
Terrestrial repeater network engineering
     and manufacturing .............................    $--   $11,858      $   --   $58,731         $   --       $--
Terrestrial repeater site leases ...................     --        --          --        --              5        --
Customer care and billing operations ...............     --        --       1,008        --             --        --
Sales and marketing ................................     --        --          --        --          3,175        --
</TABLE>

                                      F-39

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

<TABLE>
<S>                                                <C>       <C>         <C>       <C>            <C>      <C>
General and administrative ..................      --        --          --        --              3       252
</TABLE>

<TABLE>
<CAPTION>
                                                                      Year ended December 31, 2001
                                               ------------------------------------------------------------------------
                                                   GM    Hughes     DIRECTV      LCCI  Clear Channel   Motient   Parent
                                                   --    ------     -------      ----  -------------   -------   ------
<S>                                            <C>     <C>          <C>      <C>       <C>             <C>       <C>
Terrestrial repeater network engineering
     and manufacturing ......................  $   --  $ 88,116        $ --  $ 59,958         $   --      $ --   $   --
Terrestrial repeater site leases ............      --        --          --        --             36        --       --
Customer care and billing operations ........      --        --         623        --             --        --       --
Sales and marketing .........................   1,264        --          --        --          4,351        --       --
General and administrative ..................      --        --          --        --             --       193       --
Facility rental costs .......................      --        --          --        --             --        --    1,512
</TABLE>

(a) GM

     In 1999, the Company established a distribution agreement with GM (see note
15 (f)). Under the terms of the agreement, GM distributes the XM Radio Service
in various models of its vehicles.

(b) Hughes

     In 1999, the Company entered into a terrestrial repeater manufacturing
agreement with Hughes (see note 15 (e)).

(c) DIRECTV

     In 1999, the Company entered into a consulting services agreement with
DIRECTV. The agreement provides for DIRECTV professionals to aid the Company's
efforts in establishing its customer care center and billing operations on a
time and materials basis.

(d) LCCI

     In 1999, the Company entered into the LCCI Services Contract (note 15 (e))
and LCCI also provides certain ongoing consulting engineering work for the
Company relating to the terrestrial repeater network on a time and materials
basis.

(e) Clear Channel

     In 2000, the Company entered into an advertising sales agreement with
Premiere Radio Networks, an affiliate of Clear Channel Communications, pursuant
to which Premiere sells to advertisers the time inventory owned by the Company
for advertisements to be run on XM Radio channels. Also in 2000, the Company
entered into a sponsorship agreement with SFX Marketing, now known as Clear
Channel Entertainment, pursuant to which the Company advertises its service at
Clear Channel Entertainment events and venues.

(f) Motient

     In 1998, the Company entered into an agreement with Motient, in which
Motient would provide technical and administrative support relating to the
Company's operations. Payments for services provided under this agreement were
made based on negotiated hourly rates. Liabilities for these services are
absorbed by the Parent.

(g) Parent

     Through December 31, 1999, the Parent provided funding to the Company of
$373,705,000 through both public and private equity and debt offerings that it
had completed.

     On January 31, 2000, the Parent closed on a secondary offering of its Class
A common stock and newly designated Series B convertible redeemable preferred
stock. The Parent sold 4,000,000 shares of its Class A

                                      F-40

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

common stock for $32.00 per share, which yielded net proceeds of $120,837,000.
The Parent concurrently sold 2,000,000 shares of its Series B convertible
redeemable preferred stock for $50.00 per share, which yielded net proceeds of
$96,472,000. 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. All proceeds were contributed to the
Company by the Parent.

     On March 15, 2000 the Parent and the Company closed a private placement of
325,000 units, each unit consisting of $1,000 principal amount of 14 percent
Senior Secured Notes due 2010 of the Company (note 8) and one warrant to
purchase 8.024815 shares of the Parent's Class A common stock at a price of
$49.50 per share. The Company realized net proceeds of $191,500,000, excluding
$123,000,000 used to acquire securities to pay interest payments due under the
notes for the first three years. The $325,000,000 face value of the notes was
offset by a discount of $65,746,000 associated with the fair value of the
warrants sold, the net proceeds from which were contributed to the Company.

     On July 7, 2000, the Parent reached an agreement for a private offering of
235,000 shares of its Series C convertible redeemable preferred stock for $1,000
per share, which closed on August 8, 2000 and yielded net proceeds of
$206,379,000 and a stock subscription of $20,000,000 that earned interest at 7
percent per annum until it was paid on November 30, 2000. The stock subscription
was received by the Parent in November 2000 and provided an additional
$20,443,000. All proceeds, except the receipt of the stock subscription and
$1,177,000 were contributed to the Company by the Parent.

     On March 6, 2001, the Parent completed a follow-on offering of 7,500,000
shares of its Class A common stock, which yielded net proceeds of $72,000,000,
which was contributed to the Company. Also on March 6, 2001, the Parent closed a
public offering of $125,000,000 of its 7.75% convertible subordinated notes due
2006, which yielded net proceeds of $120,700,000, which was contributed to the
Company.

     On December 6, 2001, the Parent completed a follow-on offering of
11,500,000 shares of its Class A common stock, which yielded net proceeds of
$126,500,000, of which, $3,549,000 was contributed to the Company.

     In August 2001, the Company's facility lease for its corporate headquarters
was amended and the Parent became the Company's new landlord (note 15 (l)).

      On December 5, 2001, the Company transferred its rights in the spare
satellite, excluding the satellite payload, to the Parent, which had a carrying
value of $35,300,000. In return, the Company received $31,600,000 in cash, which
was the estimated fair value of the satellite bus as determined by management
with the assistance of a third-party appraiser. Concurrent with the asset
transfer, the Parent entered into a Customer Credit Agreement with Boeing
Capital Corporation ("BCC") pursuant to which the Parent borrowed $35,000,000
from BCC at an interest rate equal to LIBOR plus 3.5%, increasing to LIBOR plus
4.5% after December 5, 2003, which is compounded annually and payable quarterly
in arrears. The principal is due on the earlier of December 5, 2006 or the
launch of the ground spare satellite. The principal would also become due should
the Boeing Satellite Contract (note 15(d)) be terminated. The loan is secured by
the Parent's interest in the ground spare satellite, excluding its payload.

      During 2001, the Parent transferred $36,624,000 in capitalized interest
associated with the construction of the XM Radio System to the Company.

(4) System Under Construction

     The Company has capitalized costs related to the development of its XM
Radio System to the extent that they have future benefits. During 2001, the
Company placed its Boeing 702 satellites "Rock" and "Roll" into service as well
as its DARS license, ground systems/spacecraft control facilities, related
computer systems, and its terrestrial repeater network and broadcast facilities
by transferring $971,861,000 from system under construction to property and
equipment. The remaining components in system under construction include the
ground spare satellite payload and costs incurred through December 31, 2001 for
the performance broadcasting studio. The amounts recorded as system under
construction consist of the following (in thousands):

                                      F-41

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

                                                           December 31,
                                                 ----------------------------
                                                       2000         2001
                                                     --------     --------
               DARS license ...................     $ 122,944    $      --
               Satellite system ...............       521,573       18,557
               Terrestrial system .............        84,715           --
               Spacecraft control facilities ..        13,046           --
               Broadcast facilities ...........        27,971           40
               Computer systems ...............        15,910           --
                                                    ---------    ---------
                                                    $ 786,159    $  18,597
                                                    =========    =========

(5)  Property and Equipment

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

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                       ------------------------------
                                                                              2000          2001
                                                                            -------       -------
<S>                                                                      <C>          <C>
     DARS license ...................................................    $       --   $   146,271
     Satellite system ...............................................            --       521,251
     Terrestrial system .............................................            --       243,755
     Spacecraft control facilities ..................................            --        24,353
     Broadcast facilities ...........................................        16,752        55,686
     Computer systems, furniture and fixtures, and equipment ........        21,063        68,824
     Leasehold improvements .........................................        14,574        14,574
                                                                         ----------   -----------
                                                                             52,389     1,074,714

     Accumulated depreciation and amortization ......................        (2,337)      (42,904)
                                                                         ----------   -----------

              Net property and equipment, net .......................    $   50,052   $ 1,031,810
                                                                         ==========   ===========
</TABLE>

     In July 2001, the Company received notification from BSS that the expected
life of its satellites was extended due to the accuracy of the respective
launches, which used less fuel than anticipated. The Company, therefore, changed
the useful life estimate for the satellite system and the DARS license from 15
years to 17.5 years.

     In September 2001, BSS advised the Company of a progressive degradation
problem with the solar array output power of 702 class satellites, including XM
"Rock" and XM "Roll". At the present time, the output power of the solar arrays
and the broadcast signal strength are above minimum acceptable levels and are
expected to remain that way at least through 2005, permitting full operation of
the XM System (based on patterns projected by BSS). The Company has advised its
insurance carriers of the situation. Since the issue is common to 702 class
satellites, the manufacturer is closely watching the progression of the problem,
including data from a satellite in orbit approximately 18 months' longer than XM
"Rock" and XM "Roll". With this 18-month advance visibility of performance
levels, insurance arrangements in place, a spare satellite under construction
that is being modified to address the solar array anomaly and availability of
additional satellites, the Company believes that it will be able to launch
additional satellites prior to the time the solar power problem might cause the
broadcast signal strength to fall below acceptable levels. The Company's
management will continue to monitor this situation carefully over the next few
years.

     In December 2001, the Company determined that the planned number of
terrestrial repeater sites could be reduced due to a network optimization study
that was conducted. The Company established a formal plan and recognized a
charge of $26,300,000 with respect to the terrestrial repeater sites no longer
required. The costs are principally related to the site acquisition and
build-out of the identified sites. These costs have been included within system
operations at December 31, 2001. Included within the charge is $8,595,000 for
costs to be incurred in 2002 related to these sites (see note 15 (h)).

                                      F-42

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

(6)  Goodwill and Other Intangible Assets

     On July 7, 1999, Motient acquired a former investor's remaining debt and
equity interests in the Parent in exchange for approximately 8,600,000 shares of
Motient's common stock. Concurrent with Motient's acquisition of the remaining
interest in the Parent, the Company recognized goodwill and other intangible
assets of $51,624,000, which has been allocated as follows (in thousands):

               DARS License .............................   $25,024
               Goodwill .................................    13,738
               Programming agreements ...................     8,000
               Receiver agreements ......................     4,600
               Other intangibles ........................       262
                                                            -------
                                                            $51,624
                                                            =======

(7)  Other Assets

     Other assets consist of the following at December 31, 2000 and 2001 (in
thousands):

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                          ------------------------
                                                                               2000        2001
                                                                              ------      ------
<S>                                                                        <C>         <C>
     14% senior secured notes deferred financing fees ..................   $   8,493   $   8,858
     Refundable deposits and other long-term prepaid expenses ..........       1,444       1,911
                                                                           ---------   ---------
                                                                               9,937      10,769

        Less accumulated amortization ..................................        (672)     (1,587)
                                                                           ---------   ---------

        Other assets, net ..............................................   $   9,265   $   9,182
                                                                           =========   =========
</TABLE>


(8)  Long-Term Debt

     Long-term debt at December 31, 2000 and 2001 consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                          ------------------------
                                                                               2000        2001
                                                                              ------      ------
<S>                                                                        <C>         <C>
     14% senior secured notes ..........................................   $ 325,000   $ 325,000
          Less unamortized discount on 14% senior secured notes ........     (63,702)    (60,694)
     Capital leases ....................................................       1,923       6,158
                                                                           ---------   ---------
          Total long-term debt .........................................     263,221     270,464

          Less current installments ....................................        (556)     (1,530)
                                                                           ---------   ---------

          Long-term debt, excluding current installments ...............   $ 262,665   $ 268,934
                                                                           =========   =========
</TABLE>

14% Senior Secured Notes

     On March 15, 2000, the Parent and 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 the Company and one warrant to purchase 8.024815
shares of the Parent's Class A common stock at a price of $49.50 per share. The
Company realized net proceeds of $191,500,000, excluding $123,000,000 used to
acquire securities that will be used to pay interest payments due under the
notes for the first three years. The $325,000,000 face value of the notes was
offset by a discount of $65,746,000 associated with the fair value of the
warrants sold, which was contributed to the Company. The Company had amortized
$2,044,000 and $5,052,000 of the discount through December 31, 2000 and 2001,
respectively.

                                      F-43

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

(9)  Fair Value of Financial Instruments

     The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 2000 and 2001 (in
thousands). The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.

<TABLE>
<CAPTION>
                                                                    December 31,
                                              ----------------------------------------------------
                                                          2000                       2001
                                                          ----                       ----
                                                 Carrying                   Carrying
                                                  Amount      Fair Value     Amount      Fair Value
                                                  ------      ----------     ------      ----------
<S>                                              <C>          <C>          <C>            <C>
Financial assets:
   Cash and cash equivalents .................   $ 203,191    $ 203,191    $  62,368      $  62,368
   Short-term investments ....................          --           --       10,296         10,296
   Restricted investments ....................     161,166      162,226       70,734         72,088
   Accounts receivable .......................          --           --          478            478
   Letters of credit .........................          --           12           --             13

Financial liabilities:
   Accounts payable ..........................      31,706       31,706       35,308         35,308
   Accrued expenses ..........................       3,465        3,465       22,941         22,941
   Accrued network optimization expenses .....          --           --        8,595          8,595
   Due to related parties ....................      15,366       15,366       25,900         25,900
   Royalty payable ...........................       5,165        5,165        5,357          5,357
   Long-term debt ............................     263,221      181,486      270,464        263,314
   Other non-current liabilities .............       4,787        4,787        3,857          3,857
</TABLE>

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

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

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

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

     Long-term debt: The fair value of the Company's long-term debt is
determined by either estimation by discounting the future cash flows of each
instrument at rates currently offered to the Company for similar debt
instruments of comparable maturities by the Company's bankers or by quoted
market prices at the reporting date for the traded debt securities (the carrying
value of the Company's 14% senior secured notes is significantly less than face
value because the notes were sold at a discount for value allocated to the
related warrants).

(10) Stock-Based Compensation

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

(a)  1998 Shares Award Plan

                                      F-44

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

     On June 1, 1998, the Parent 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 Parent. The Parent
initially authorized 1,337,850 shares of Class A common stock under the Plan,
which was increased to 2,675,700 in July 1999, 5,000,000 in May 2000, and
8,000,000 in May 2001. The options are exercisable in installments determined by
the compensation committee of the Parent'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 Parent'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 years ended
December 31, 1999, 2000 and 2001 are summarized below:

<TABLE>
<CAPTION>
                                                               Outstanding Options
                                                         ---------------------------------
                                                                             Weighted-
                                                            Number of        Average
                                                             Shares       Exercise Price
                                                             ------       --------------
<S>                                                      <C>             <C>
            Balance, January 1, 1999 .................      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
                 Options granted .....................    1,176,683            30.21
                 Options canceled or expired .........     (131,267)           17.01
                 Options exercised ...................      (48,817)            9.52
                                                          ---------
            Balance, December 31, 2000 ...............    3,095,688         $  17.61
                 Options granted .....................    2,680,415            15.54
                 Options canceled or expired .........      (23,570)            9.55
                 Options exercised ...................     (253,593)           17.88
                                                          ---------
            Balance, December 31, 2001 ...............    5,498,940         $  16.62
                                                          =========
</TABLE>

<TABLE>
<CAPTION>
                           Options Outstanding                                    Options Exercisable
           ----------------------------------------------------------------- -------------------------------
                                                 Weighted-
                                                  Average       Weighted-
                                                 Remaining       Average                         Weighted-
                                    Number      Contractual      Exercise         Number          Average
               Exercise Price    Outstanding        Life          Price         Exercisable       Exercise
               --------------    -----------        ----          -----         -----------       --------
<S>       <C>                    <C>            <C>             <C>             <C>              <C>
1999               $9.52-$12.00    2,099,089     9.24 years       $10.32           416,294        $ 9.52
          --------------------------------------------------------------------------------------------------
2000               $9.52-$12.00    2,120,400     8.26 years       $10.39         1,110,756        $10.06
                  $12.01-$30.50      297,685     9.03 years       $23.13             5,334        $13.13
                  $30.51-$45.44      677,603     9.54 years       $37.92            20,000        $43.69
          --------------------------------------------------------------------------------------------------
2001                $4.82-$9.42      363,700     9.31 years       $ 7.91            55,000        $ 8.46
                   $9.44-$12.00    2,256,263     7.50 years       $10.37         1,716,153        $10.21
                  $12.06-$26.88    2,142,409     9.14 years       $17.75           165,132        $18.90
                  $27.63-$45.44      736,568     8.52 years       $36.81           272,681        $36.93
          --------------------------------------------------------------------------------------------------
</TABLE>

     There were 416,294, 1,136,090 and 2,208,966 stock options exercisable at
December 31, 1999, 2000 and 2001, respectively. At December 31, 2001, there were
2,197,579 shares available under the plan for future grants. At December 31,
2001, all options have been issued to employees, officers and directors, except
for 76,000 options granted to non-employees for which the Company recognized
$1,147,000 in non-cash compensation.

     The per share weighted-average fair value of employee options granted
during the year ended December 31, 1999, 2000 and 2001 was $6.21, $22.06 and
$8.77, respectively, on the date of grant using the Black-Scholes Option Pricing
Model with the following weighted-average assumptions:

                                      F-45

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

<TABLE>
<CAPTION>
                                                                            December 31,
                                                         ---------------------------------------------------
                                                              1999              2000               2001
                                                         --------------    --------------    ---------------
            <S>                                          <C>               <C>                <C>
            Expected dividend yield ...............                  0%                0%                0%
            Volatility ............................              63.92%            68.21%            62.40%
            Risk-free interest rate range .........      5.47% to 5.97%    4.99% to 6.71%    3.66% to 4.99%
            Expected life .........................             5 years           5 years           5 years
                                                         ==============    ==============    =============
</TABLE>

(b) Employee Stock Purchase Plan

     In 1999, the Parent established an employee stock purchase plan that
provides for the issuance of 300,000 shares of Class A common stock, which was
increased to 600,000 shares in 2001. 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 5% or more of the Parent's total combined voting power
immediately after an offering date under the plan is not eligible to
participate. Eligible employees must authorize the Parent to deduct an amount
from their pay during offering periods established by the compensation
committee. The purchase price for shares under the plan will be determined by
the compensation committee but may not be less than 85% of the lesser of the
market price of the common stock on the first or last business day of each
offering period. As of December 31, 1999, 2000 and 2001, the Parent had issued
28,791, 53,539 and 217,401 shares, respectively, under this plan. At December
31, 2001, there were 382,599 shares available under the plan for future sale.

     The per share weighted-average fair value of purchase rights granted during
the year was $3.30, $11.28, and $5.37 for the years ended December 31, 1999,
2000 and 2001, respectively. The estimates were calculated at the grant date
using the Black-Scholes Option Pricing Model with the following assumptions at
December 31, 1999, 2000 and 2001:

<TABLE>
<CAPTION>
                                                                           December 31,
                                                             -----------------------------------------
                                                                   1999         2000           2001
                                                                ----------   ----------    -----------
<S>                                                          <C>            <C>            <C>
                    Expected dividend yield ...............            0%            0%             0%
                    Volatility ............................        62.92%        68.21%         62.40%
                    Risk-free interest rate range .........         4.73%   5.33%-6.23%     2.4%-5.89%
                    Expected life .........................    0.23 years    0.24 years     0.24 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 and stock purchase plan in the financial statements other than for
performance based stock options, for options granted with exercise prices below
fair value on the date of grant and for repriced options under FIN No. 44.
During 1999, 2000 and 2001, the Company incurred $4,070,000, $2,557,000,
$2,336,000, respectively, 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,
                                                                 ----------------------------------
                                                                    1999       2000       2001
                                                                 ---------   --------   --------
<S>                                                              <C>         <C>        <C>
            Net loss:
                 As reported ................................      $30,180    $51,927   $283,975
                 Pro forma ..................................       30,990     60,171    300,127
</TABLE>

(c) Talent Option Plan

     In May 2000, the Parent adopted the XM Talent Option Plan ("Talent Plan")
under which non-employee programming consultants to the Company may be granted
options to purchase shares of Class A common stock of the Parent. The Parent
authorized 500,000 shares of Class A common stock under the Talent Plan. The
options are exercisable in installments determined by the talent committee of
the Parent's board of directors. The options expire as determined by the talent
committee, but no later than ten years from the date of the grant. As of
December 31, 2000 and 2001, no and 144,500 options had been granted under the
Talent Plan. In 2001, the Company recognized $575,000 in non-cash compensation
expense related to these options under SFAS 123. At December 31, 2001, there
were 355,500 options available under the plan for future grant.

                                      F-46

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

(11)  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 % of their compensation on a pre-tax basis
through contributions to the savings plan. The Company contributed $0.50 in
1999, 2000 and 2001 for every dollar the employees contributed up to 6% of
compensation, which amounted to $164,000, $229,000 and $543,000, respectively.

(12)  Interest Cost

     The Company capitalizes a portion of interest cost as a component of the
cost of the XM Radio System. The following is a summary of interest cost
incurred during December 31, 1999, 2000 and 2001 (in thousands):

<TABLE>
<CAPTION>
                                                              1999        2000        2001
                                                            --------    --------    --------
<S>                                                         <C>         <C>         <C>
               Interest cost capitalized ................   $    210    $ 39,022    $ 36,153
               Interest cost charged to expense .........         43          --      15,157
                                                            --------    --------    --------
               Total interest cost incurred .............   $    253    $ 39,022    $ 51,310
                                                            ========    ========    ========
</TABLE>

(13)  Income Taxes

     For the period from December 15, 1992 (date of inception) to October 8,
1999, the Parent and the Company filed consolidated federal and state tax
returns with its majority stockholder Motient. The Company generated net
operating losses and other deferred tax benefits that were not utilized by
Motient. 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, 2001, the
Company's tax provision would be as follows:

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

                                                          December 31,
                                                    --------------------------
                                                      1999     2000     2001
                                                     ------   ------   ------
     Current taxes:
          Federal ...............................   $    --  $    --  $    --
          State .................................        --       --       --
                                                    -------  -------  -------
               Total current taxes ..............        --       --       --
                                                    -------  -------  -------

     Deferred taxes:
          Federal ...............................   $    --  $    --  $    --
          State .................................        --       --       --
                                                    -------  -------  -------
               Total deferred taxes .............        --       --       --
                                                    -------  -------  -------
               Total tax expense (benefit) ......   $    --  $    --  $    --
                                                    =======  =======  =======

     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,
                                                                                 ------------------------------------
                                                                                     1999        2000        2001
                                                                                    ------      ------      ------
<S>                                                                                <C>         <C>        <C>
     Income (loss) before taxes on income, as reported in the statements
        of operations ...........................................................  $(30,181)   $(51,972)  $(283,975)
                                                                                   ========    ========   ==========
     Theoretical tax benefit on the above amount at 35% .........................   (10,563)    (18,174)    (99,391)
     State tax, net of federal benefit ..........................................     1,370      (2,877)    (13,274)
     Increase in taxes resulting from permanent differences, net ................     2,120         562       2,701
     Adjustments arising from differences in the basis of measurement
</TABLE>

                                      F-47

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

<TABLE>
<S>                                                                                <C>         <C>        <C>

        for tax purposes and financial reporting purposes and other .............   13,252           7         --
     Change in valuation allowance ..............................................   (6,179)     20,482    109,964
                                                                                   -------     -------    -------
     Taxes on income for the reported year ......................................  $    --     $    --    $    --
                                                                                   =======     =======    =======
</TABLE>

     At December 31, 1999, 2000 and 2001, deferred income tax consists of future
tax assets/(liabilities) attributable to the following (in thousands):

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                        -----------------------------------
                                                                                             1999       2000        2001
                                                                                           --------   --------    --------
<S>                                                                                        <C>        <C>        <C>
     Deferred tax assets:
          Net operating loss/other tax attribute carryovers ...........................    $  2,054   $ 12,396   $  58,377
          Start-up costs ..............................................................      14,972     42,252     106,609
          Other deferred tax assets ...................................................          --         --      11,533
                                                                                           --------   --------    --------
               Gross total deferred tax assets ........................................      17,026     54,648     176,519
     Valuation allowance for deferred tax assets ......................................      (1,590)   (22,072)   (132,036)
                                                                                           --------   --------   ---------
               Net deferred assets ....................................................      15,436     32,576      44,483
                                                                                           --------   --------   ---------
     Deferred tax liabilities:
          Fixed assets ................................................................         (51)   (16,532)    (29,541)
          DARS license ................................................................     (10,160)    (9,821)     (9,670)
          Other intangible assets .....................................................      (5,225)    (6,223)     (5,272)
                                                                                           --------   --------   ---------
               Net deferred tax liabilities ...........................................     (15,436)   (32,576)    (44,483)
                                                                                           --------   --------   ---------
               Deferred income tax, net ...............................................    $     --   $     --   $      --
                                                                                           ========   ========   =========
</TABLE>

     At December 31, 2001, the Company had accumulated net operating losses of
$145,945,000 for Federal income tax purposes that are available to offset future
regular taxable income. These operating loss carryforwards expire between the
years 2012 and 2021. Utilization of these net operating losses are subject to
limitations because there have been significant changes in the stock ownership
of the Company. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment.

(14) Supplemental Cash Flows Disclosures

     The Company paid $0, $11,198,000, and $14,026,000 for interest (net of
amounts capitalized) during 1999, 2000, and 2001, respectively. Additionally,
the Company incurred the following non-cash financing and investing activities
(in thousands):

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                        -----------------------------------
                                                                                             1999       2000        2001
                                                                                           --------   --------    --------
<S>                                                                                        <C>        <C>        <C>
        Increase in DARS license, goodwill and intangibles ............................    $ 51,624   $     --   $      --
        Non-cash capitalized interest .................................................          --     16,302       3,923
        Accrued system milestone payments .............................................      15,500     30,192      37,775
        Systems under construction placed into service ................................          --         --     971,861
        Contribution of fixed assets from Parent ......................................          --         --      36,624
        Transfer of ground spare satellite bus to Parent ..............................          --         --       3,721
        Property acquired through capital leases ......................................         470      1,688       6,177
        Use of deposit/escrow for terrestrial repeater contracts ......................          --      3,422      80,431
</TABLE>

(15) Commitments and Contingencies

(a) DARS License

                                      F-48

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

     The Company's DARS license is valid for eight years upon successful launch
and orbital insertion of the satellites and can be extended by the Company. The
DARS license requires that the Company comply with a construction and launch
schedule specified by the FCC for each of the two authorized satellites, which
has occurred. The FCC has the authority to revoke the authorizations and in
connection with such revocation could exercise its authority to rescind the
Company's license. The Company believes that the exercise of such authority to
rescind the license is unlikely. Additionally, the FCC has not yet issued final
rules permitting the Company to deploy its terrestrial repeaters to fill gaps in
satellite coverage. The Company is operating its repeaters on a non-interference
basis pursuant to a grant of special temporary authority from the FCC, which
expired March 18, 2002. On March 11, 2002, the Company applied for an extension
of this special temporary authority and can continue to operate its terrestrial
repeaters pursuant to the special temporary authority pending a final
determination on this extension request. This authority is currently being
challenged by operators of terrestrial wireless systems who have asserted that
the Company's repeaters may cause interference.

(b) Application for Review of DARS License

     One of the losing bidders for the DARS licenses filed an Application for
Review by the full FCC of the Licensing Order that granted the Company its DARS
license. The Application for Review alleges that a former investor had
effectively taken control of the Company without FCC approval. The FCC has
denied the Application for Review and the losing bidder has appealed to the
United States Court of Appeals for the District of Columbia Circuit. The FCC or
the U.S. Court of Appeals has the authority to overturn the award of the DARS
license should they rule in favor of the losing bidder. Although the Company
believes that its right to the DARS license will withstand the challenge as the
former investor is no longer a stockholder in the Parent, no prediction of the
outcome of this challenge can be made with any certainty. The FCC's approval of
the transfer of control of the DARS license to a diffuse group of owners,
granted in December 2000, is conditioned upon the outcome of the application for
review.

(c) Technology Licenses

     Effective January 1, 1998, the Company entered into a technology licensing
agreement with Motient and WorldSpace Management Corporation ("WorldSpace MC")
by which as compensation for certain licensed technology then under development
to be used in the XM Radio System, the Company will pay up to $14,300,000 to
WorldSpace MC over a ten-year period. As of December 31, 2001, the Company
incurred costs of $6,696,000 payable to WorldSpace MC. Any additional amounts to
be incurred under this agreement are dependent upon further development of the
technology, which is at the Company's option. No liability exists to Motient or
WorldSpace MC should such developments prove unsuccessful. The Company maintains
an accrual of $5,357,000 payable to WorldSpace MC, for quarterly royalty
payments to be made after the Company recognizes $5,000,000 in revenue.

(d) Satellite Contract

     During the first half of 1999, the Company and BSS 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. BSS has delivered two
satellites in orbit and is to complete the construction of a ground spare
satellite. BSS has also provided ground equipment and software used in the XM
Radio System and certain launch and operations support services. The contract
also provides for in-orbit incentives to be earned depending on the performance
of the in-orbit satellites over their useful lives. Such payments could total up
to an additional $68,700,000 over the useful lives of the satellites. As of
December 31, 2001, the Company had paid $470,376,000 under the satellite
contract and had accrued $741,000.

     On December 5, 2001, the Company and Boeing amended the satellite contract
so as to permit the deferral of approximately $31,000,000 of payments to be made
under the agreement, as well as to provide certain additional rights and
obligations to the Company; including the launch of the ground spare satellite
on the SeaLaunch launch vehicle should the ground spare satellite be launched
between specified dates. Under the amendment, deferred amounts must be repaid by
December 5, 2006 and the amounts deferred bear interest at the rate of 8%,
compounded annually, and are payable quarterly in arrears.

(e) Terrestrial Repeater System Contracts

                                      F-49

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

     As of December 31, 2001, the Company had incurred aggregate costs of
approximately $243,500,000 for its terrestrial repeater system. These costs
covered the capital costs of the design, development and installation of a
system of terrestrial repeaters to cover approximately 60 cities and
metropolitan areas. In August 1999, the Company signed a contract with LCCI
calling for engineering and site preparation. As of December 31, 2001, the
Company had paid $109,860,000 and accrued an additional $15,407,000 under this
contract. The Company also entered into a contract effective October 22, 1999
with Hughes for the design, development and manufacture of the terrestrial
repeaters. Payments under the contract are expected to be approximately
$128,000,000, which could be modified based on the number of terrestrial
repeaters that are required for the system. As of December 31, 2001, the Company
had paid $95,788,000 and accrued an additional $7,685,000 under this contract.

(f) GM Distribution Agreement

     The Company has signed a long-term distribution agreement with the OnStar
division of GM providing for the installation of XM radios in GM vehicles.
During the term of the agreement, which expires 12 years from the commencement
date of the Company's commercial operations, GM has agreed to distribute the
service to the exclusion of other S-band satellite digital radio services. The
Company will also have a non-exclusive right to arrange for the installation of
XM radios included in OnStar systems in non-GM vehicles that are sold for use in
the United States. The Company has significant annual, fixed payment obligations
to General Motors through 2004. These payments approximate $35,000,000 in the
aggregate during this period. Additional annual fixed payment obligations beyond
2004 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 GM vehicles, the Company has agreed to subsidize a
portion of the cost of XM radios, and to make incentive payments to GM when the
owners of GM vehicles with installed XM radios become subscribers for the
Company's service. The Company must also share with GM a percentage of the
subscription revenue attributable to GM vehicles with installed XM radios, which
percentage increases until there are more than 8 million GM vehicles with
installed XM radios. The Company will also make available to GM bandwidth on the
Company's systems. The agreement is subject to renegotiation at any time based
upon the installation of radios that are compatible with a unified standard or
capable of receiving Sirius Satellite Radio, Inc.'s ("Sirius Radio") service.
The agreement is subject to renegotiation if, four years after the commencement
of the Company's commercial operations and at two-year intervals thereafter GM
does not achieve and maintain specified installation levels of GM vehicles
capable of receiving the Company's service, 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
renegotiation. GM's 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. Prior to 2001, the
Company had not incurred any costs under the contract. As of December 31, 2001,
the Company has paid $608,000 and accrued costs of $656,000 under the agreement.

(g) Joint Development Agreement

     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. Each
party is obligated to fund one half of the development cost for a unified
standard for satellite radios. 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 for these fees or credits will be determined over time by agreement of
the parties or by arbitration. The parties have yet to agree on the validity,
value, use, importance and available alternatives of their respective
technologies. The companies have agreed to seek arbitration to resolve issues
with respect to certain existing technology. 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.

                                      F-50

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

(h)  Accrued Network Optimization Expenses

     In December 2001, the Company determined that the planned number of
terrestrial repeater sites could be reduced due to a network optimization study
that was conducted. The Company established a formal plan and recognized a
charge of $26,300,000 with respect to the terrestrial repeater sites no longer
required. Included within the charge is $8,595,000 for costs to be incurred in
2002 related to these sites.

     The Company estimated lease termination costs based upon contractual lease
costs and expected negotiation results as determined by discussions with
landlords and consultants. Approximately 53% of these leases are subject to
master lease agreements with large tower companies. Based upon preliminary
discussions with the tower companies, the Company assumed that they would be
able to swap a portion of the existing sites for other sites in other areas in
which terrestrial repeater networks will be developed in the future, without
incurring all of the contractual obligations. As a result, the Company estimated
the total of the lease termination costs would be substantially lower than the
contractual lease obligations. The contractual payments amount to approximately
$35,100,000. Additionally, the Company's leases typically contain a clause that
requires the Company to return a site to its original condition upon lease
termination. The Company has established an accrual of $8,595,000 for the
estimated lease termination costs and costs to deconstruct the sites. The actual
amount to be incurred could vary significantly from this estimate.

(i)  Warrants

     Sony Warrant

     In February 2000, the Parent issued a warrant to Sony exercisable for
shares of the Parent's Class A common stock. The warrant will vest at the time
that the Company attains its 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, the warrant will be exercisable for 2% of the total number
of shares of the Parent's Class A common stock on a fully-diluted basis. 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. As the Company has commenced commercial operations and Sony
began selling its radios in the fourth quarter of 2001, the Company recognized
$131,000 of compensation expense related to this warrant in 2001.

     CNBC Warrant

     In May 2001, the Parent granted a warrant to purchase 90,000 shares of the
Parent's Class A common stock consisting of three 30,000 share tranches to
purchase shares at $26.50 per share, which expire in 11, 12, and 13 years,
respectively. The warrants began to vest on September 25, 2001 when the Company
reached its commercial launch and will be vested on September 1, 2002, 2003, and
2004, respectively. The Company recognized $290,000 in non-cash compensation
expense related to these warrants in 2001.

(j) Sales, Marketing and Distribution Agreements

     The Company has entered into various joint sales, marketing and
distribution agreements. Under the terms of these agreements, the Company is
obligated to provide incentives, subsidies and commissions to other entities
that may include fixed payments, per-unit radio and subscriber amounts and
revenue sharing arrangements. The amount of these operational, promotional,
subscriber acquisition, joint development, and manufacturing costs related to
these agreements cannot be estimated, but are expected to be substantial future
costs. During the years ended December 31, 1999, 2000 and 2001 the Company
incurred expenses of $0, $0 and $19,545,000, respectively, in relation to these
agreements. The amount of these costs will vary in future years, but is expected
to increase in the next year as the number of subscribers and revenue increase.

(k) Programming Agreements

     The Company has entered into various programming agreements. Under the
terms of these agreements, the Company is obligated to provide payments and
commissions to other entities that may include fixed payments,

                                      F-51

<PAGE>

                    XM SATELLITE RADIO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 2001

advertising commitments and revenue sharing arrangements. The amount of these
costs related to these agreements cannot be estimated, but are expected to be
substantial future costs. During the years ended December 31, 1999, 2000, 2001,
the Company incurred expenses of $0, $0 and $7,230,000, respectively, in
relation to these agreements. The amount of these costs will vary in future
years, but is expected to increase in the next year as the number of subscribers
and revenue increase.

(l) Leases

     The Company has noncancelable operating leases for office space and
terrestrial repeater sites and noncancelable capital leases for equipment that
expire over the next ten years. The future minimum lease payments and rentals
under noncancelable leases as of December 31, 2001 are (in thousands):

<TABLE>
<CAPTION>
                                                           Capital      Operating
                                                            Lease         Lease
                                                          Payments       Payments
                                                          --------       --------
<S>                                                     <C>            <C>
      Year ending December 31:
           2002 .......................................     $ 2,974       $ 23,771
           2003 .......................................       2,835         24,385
           2004 .......................................       1,098         25,166
           2005 .......................................         141         21,205
           2006 .......................................          --         10,658
           Thereafter .................................          --         72,328
                                                            -------       --------
                Total .................................       7,048       $177,513
                                                                          ========
      Less amount representing interest ...............        (890)
                                                            -------
      Present value of net minimum lease payments .....       6,158
      Less current maturities .........................      (1,530)
                                                            -------
      Long-term obligations ...........................     $ 4,628
                                                            =======
</TABLE>

     Rent expense for 1999, 2000 and 2001 was $649,000, $6,082,000 and
$24,236,000, respectively.

     As discussed in note 15(h), in December 2001, the Company determined that
the planned number of terrestrial repeater sites could be reduced due to the
relative signal strength provided by the Company's satellites. The Company
recognized a charge of $26,300,000 with respect to the terrestrial repeater
sites no longer required. This charge includes a lease termination accrual of
$8,595,000 for 646 terrestrial site leases, which would reduce the future
minimum lease payments.

                                      F-52

<PAGE>

    Independent Auditors' Report on Consolidated Financial Statement Schedule

The Board of Directors
XM Satellite Radio Inc.:

     Under date of January 23, 2002, we reported on the consolidated balance
sheets of XM Satellite Radio Inc. and subsidiaries as of December 31, 2000 and
2001, and the related consolidated statements of operations, stockholder's
equity, and cash flows for each of the years in the three-year period ended
December 31, 2001, which are included in the XM Satellite Radio Inc. and
subsidiaries 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 Inc. and subsidiaries referred to above contains an explanatory paragraph
that states that the Company 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 does not include
any adjustments that might result from the outcome of this uncertainty.

                                                 /s/ KPMG LLP

McLean, VA
January 23, 2002

                                      F-53

<PAGE>

                  Schedule I--Valuation And Qualifying Accounts
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                        Charged to
                                                         Charged to       Other      Write-Offs/
                                              Balance     Costs and     Accounts--    Payments/     Balance
Description                                  January 1    Expenses      Describe        Other      December 31
-----------                                  ---------    --------      --------        -----      -----------
<S>                                          <C>         <C>           <C>           <C>          <C>
Year Ended December 31, 1999
   Allowance for doubtful accounts ........  $      --          --            --              --    $       --
   Deferred Tax Assets--Valuation
        Allowance .........................  $   7,769      (6,179)           --              --    $    1,590
   Accrued network optimization
        expenses ..........................  $      --          --            --              --    $       --

Year Ended December 31, 2000
   Allowance for doubtful accounts ........  $      --          --            --              --    $       --
   Deferred Tax Assets--Valuation
        Allowance .........................  $   1,590      20,482            --              --    $   22,072
   Accrued network optimization
        expenses ..........................  $      --          --            --              --    $       --

Year Ended December 31, 2001
   Allowance for doubtful accounts ........  $      --          10            --              --    $       10
   Deferred Tax Assets--Valuation
        Allowance .........................  $  22,072     109,964            --              --    $  132,036
   Accrued network optimization
        expenses ..........................  $      --       8,595            --              --    $    8,595
</TABLE>

                                      F-54

<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.

                                       XM SATELLITE RADIO HOLDINGS INC.


                                       By: /s/ Hugh Panero
                                          -------------------------------
                                          Hugh Panero
                                          President and Chief Executive Officer
                                       Date: March 18, 2002

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

<TABLE>
<CAPTION>
Signature                                Title                                         Date
---------                                -----                                         ----
<S>                                      <C>                                           <C>
 /s/ Hugh Panero
-------------------------------          President, Chief Executive Officer and        March 18, 2002
Hugh Panero                              Director (Principal Executive Officer)


                                         Senior Vice President, Chief Financial
/s/ Heinz Stubblefield                   Officer (Principal Financial and              March 18, 2002
-------------------------------
Heinz Stubblefield                       Accounting Officer)


/s/ Gary M. Parsons                      Chairman of the Board of Directors            March 18, 2002
-------------------------------
Gary M. Parsons


/s/ Nathaniel A. Davis                   Director                                      March 18, 2002
-------------------------------
Nathaniel A. Davis


/s/ Thomas J. Donohue                    Director                                      March 18, 2002
-------------------------------
Thomas J. Donohue


/s/ Chester A. Huber, Jr.                Director                                      March 18, 2002
-------------------------------
Chester A. Huber, Jr.


/s/ Randall T. Mays                      Director                                      March 18, 2002
-------------------------------
Randall T. Mays


/s/ Pierce J. Roberts, Jr.               Director                                      March 18, 2002
-------------------------------
Pierce J. Roberts, Jr.
</TABLE>

<PAGE>

/S/ Jack Shaw                        Director                 March 18, 2002
-------------------------------
Jack Shaw

/S/ Dr. Rajendra Singh               Director                 March 18, 2002
-------------------------------
Dr. Rajendra Singh