UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington, D.C.
20549
 
 
 FORM
20-F
 
 o
              
              Registration
      Statement Pursuant to Section 12(b) or 12(g) of The Securities
      Exchange Act of 1934ORx
              
              Annual Report Pursuant to
      Section 13 or 15(d) of The Securities Exchange Act of
      1934
                For
      the fiscal year ended August 31, 2008ORo
              
              Transition
      Report Pursuant to Section 13 or 15(d) of The Securities
      Exchange Act of 1934ORo
              
              Shell
      Company Report pursuant to Section 13 or 15(d) of The Securities
      Exchange Act of 1934
 
 Commission
File Number: 333-134004
 
 CANADIAN
SATELLITE RADIO HOLDINGS INC.
 
 (Exact
Name of Registrant as Specified in its Charter)
 
 Not
Applicable
 
 (Translation
of Registrant’s Name into English)
 
 Province
of Ontario, Canada
 
 (Jurisdiction
of Incorporation or Organization)
 
 590 King
Street West
 3rd Floor
 Toronto,
Ontario
 Canada,
M5V 1M3
 
 (Address
of Principal Executive Offices)
 
 Securities
registered or to be registered pursuant to Section 12(b) of the Act:
None.
 
 Securities
registered or to be registered pursuant to Section 12(g) of the Act:
None
 
 Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act:
 
 12.75%
Senior Notes due 2014
 
 Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report:
 
 20,951,067 Class A
Subordinate Voting Shares
 81,428,133 Class B
Voting Shares
 0 Class C
Non-Voting Shares
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 o Yes x No
 
 If
this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934.
 o Yes x No
 
 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.
 x Yes o No
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
 
 Large
      accelerated filer o
                Accelerated
      filer o
                Non-accelerated
      Filer x
 Indicate
by check mark which financial statement item the registrant has elected to
follow.
 o Item 17 x
Item 18
 
 If
this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange
Act)
 o Yes x No
  
  
  
 CANADIAN
SATELLITE RADIO HOLDINGS INC.
 FORM
20-F
 
 
 EXPLANATORY
      NOTES
              3FORWARD-LOOKING
      STATEMENTS
              3INDUSTRY
      AND MARKET DATA
              5PRESENTATION
      OF FINANCIAL INFORMATION
              5EXCHANGE
      RATE INFORMATION
              5PART
      IITEM 1 
      - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
              6ITEM 2 
      - OFFER STATISTICS AND EXPECTED TIMETABLE
              6ITEM 3 
      - KEY INFORMATION
              7ITEM 4 
      - INFORMATION ON THE COMPANY
              21ITEM 4A. 
      - UNRESOLVED STAFF COMMENTS
              44ITEM 5. 
      - OPERATING AND FINANCIAL REVIEW AND PROSPECTS
              44ITEM 6 
      - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
              78ITEM 7 
      - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
              88ITEM 8 
      - FINANCIAL INFORMATION
              90ITEM 9 
      - THE OFFER AND LISTING
              90ITEM 10 
      - ADDITIONAL INFORMATION
              91ITEM 11 
      - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
              98ITEM 12 
      - DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
              99PART
      IIITEM 13 
      - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
              99ITEM 14 
      - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
              99ITEM 15 
      - CONTROLS AND PROCEDURES
              100ITEM 16 
      - [RESERVED]
              100ITEM 16A 
      - AUDIT COMMITTEE FINANCIAL EXPERT
              100ITEM 16B 
      - CODE OF ETHICS
              100ITEM 16C 
      - PRINCIPAL ACCOUNTANT FEES AND SERVICES
              100ITEM 16D 
      - EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
    COMMITTEES
              101ITEM 16E 
      - PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
      PURCHASERS
              101PART
      IIIITEM 17 
      - FINANCIAL STATEMENTS
              101ITEM 18 
      - FINANCIAL STATEMENTS
              101ITEM 19 
      - EXHIBIT
              102SIGNATURE
              104INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS
              F-1
 
   2
  
 Explanatory
Notes
 
 References
in this annual report to “we”, “us”, “XM Canada” and the “Company” refer to
Canadian Satellite Radio Holdings Inc. and include its subsidiary, Canadian
Satellite Radio Inc., or CSR Inc., where the context
requires.
 
 XM Canada
is our trade name, which has been licensed to us by XM Satellite Radio
Holdings Inc., or XM.
 
 This
annual report contains company names, product names, trade names, trademarks and
service marks of the Company and other organizations, all of which are the
property of their respective owners.
 
 Forward-Looking
Statements
 
 This
annual report contains “forward-looking statements” within the meaning of the
United States Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical fact, included in this annual
report that address activities, events or developments that we expect or
anticipate will or may occur in the future, including, in particular, statements
regarding the Company’s objectives, plans and goals, including its future
operating results, economic performance and subscriber recruitment efforts are
or involve forward-looking statements. These forward-looking statements are
based on our current expectations and our projections about future events,
including our current expectations regarding:
 
 •
              our
      expenditures and losses;
 
 •
              our
      variable expenses;
 
 •
              our
      capital expenditures;
 
 •
              the
      demand for our services;
 
 •
              increases
      or decreases in the cost of conducting our
  business;
 
 •
              our
      future stability and growth
prospects;
 
 •
              our
      ability to work with Industry Canada and the CRTC in order to implement
      solutions to any existing and future regulatory
  issues;
 
 •
              our
      business strategies, the measures to implement those strategies and the
      benefits to be derived
therefrom; and
 
 •
              the
      outlook for and other future developments in our affairs or in the
      satellite radio industry.
 
 
  3
  
 These
forward-looking statements can sometimes be identified by our use of
forward-looking words such as “believe,” “may,” “will,” “anticipate,”
“estimate,” “expect,” “plan,” “likely,” “forecast,” “intend” or other similar
words or phrases. These forward-looking statements are subject to known and
unknown risks, uncertainties and other factors that could cause our actual
results to differ materially from those contemplated by the statements. Some of
these risks, uncertainties and other factors include:
 
 •
              the
      limited operating history of our
business;
 
 •
              our
      competitive position versus SIRIUS Canada Inc., or SIRIUS Canada, the
      other licensed satellite radio service provider in Canada, which may have
      certain competitive advantages, and versus other forms of audio and video
      entertainment;
 
 •
              our
      reliance on our exclusive relationship with XM for the provision of the
      satellite radio service;
 
 •
              our
      dependence upon third parties, including manufacturers of satellite
      radios, retailers, automakers and programming
  providers;
 
 •
              the
      potential need for additional
financing;
 
 •
              our
      substantial indebtedness;
 
 •
              general
      economic conditions in Canada;
 
 •
              the
      impact of any changes in government
regulation;
 
 •
              the
      impact of the merger between XM and SIRIUS Satellite Radio Inc. or
      (“Sirius”), now Sirius XM Radio Inc.;
and
 
 •
              other
      factors as described in “Risk
Factors.”
 
 Any
forward-looking statements are subject to these factors and other factors
discussed elsewhere in this annual report, including under the section “Risk
Factors.” Although the forward-looking statements contained in this annual
report are based on what management of the Company considers to be reasonable
assumptions based on information currently available to it, there can be no
assurance that actual events, performance or results will be consistent with
these forward-looking statements, and management’s assumptions may prove to be
incorrect. The forward-looking statements included in this annual report are
made only as of the date of this annual report and the Company does not intend,
and does not assume any obligation, to update or revise them to reflect new
events or circumstances, except as required by law. You are cautioned not to
place undue reliance on forward-looking statements.
 
   4
  
 Industry
and Market Data
 
 This
annual report includes market share information and industry data and forecasts,
which we obtained from independent industry publications and surveys, surveys
that we commissioned and internal company surveys. Although we believe these
sources to be reliable, we have not independently verified any of the data nor
ascertained the underlying economic assumptions relied upon therein. Some data
is also based on our estimates, which are derived from our review of internal
surveys, as well as independent sources. We cannot and do not provide any
assurance as to the accuracy or completeness of this information. Market
forecasts, in particular, are likely to be inaccurate, especially over long
periods of time.
 
 This
annual report also includes information relating to the U.S. satellite
radio market, which was obtained from publicly available sources, including the
corporate filings of XM, and SIRIUS XM with the U.S. Securities and
Exchange Commission, or SEC, as well as press releases and corporate websites.
XM and SIRIUS XM do not take any responsibility for the completeness or accuracy
of such information. In compiling information relating to XM and SIRIUS XM, we
have relied upon the accuracy of the information
publicly filed.
 
 Information
contained on the Company’s website is not part of this annual report and is not
incorporated herein by reference and may not be relied upon
by you.
 
 Presentation
of Financial Information
 
 The
financial statements included in this annual report are presented in Canadian
dollars. In this annual report, references to “$” or “dollars” are to Canadian
dollars and references to “US$” or “U.S. dollars” are to United States
dollars. See “Exchange Rate Information” below.
 
 The
financial statements included in this annual report have been prepared in
accordance with generally accepted accounting principles in Canada, or Canadian
GAAP. Canadian GAAP differs in some respects from U.S. generally accepted
accounting principles, or U.S. GAAP, and so these financial statements may
not be comparable to the financial statements of U.S. companies. For a
discussion of the principal differences between Canadian GAAP and U.S. GAAP
as they relate to us, see note 15 to our annual audited financial
statements which are included elsewhere in this annual report.
 
 Exchange
Rate Information
 
 In
this annual report, unless otherwise specified or the context otherwise
requires, all dollar amounts are expressed in Canadian dollars. For convenience,
in certain places in this annual report, unless otherwise indicated, we have
translated Canadian dollar values to U.S. dollars (or vice versa)
using an assumed rate of US$1.00 = $1.062.
 
   5
  
 The
following table sets forth, for each period indicated, the high and low exchange
rates for Canadian dollars expressed in U.S. dollars, the exchange rate at
the end of such period and, the average of such exchange rates on each business
day during such period, based upon the inverse of the noon spot rate on each
business day as reported by the Bank of Canada.
 
 12-month period ended August 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Low
              
              
              0.9365
              
              
              
              0.8437
              
              
              
              0.8361
              
              
              
              0.7652
              
              
              
              0.7159
              
              
              
              0.6273High
              
              
              1.0905
              
              
              
              0.9641
              
              
              
              0.9099
              
              
              
              0.8493
              
              
              
              0.7879
              
              
              
              0.7495Period
      end
              
              
              0.9411
              
              
              
              0.9466
              
              
              
              0.9037
              
              
              
              0.8411
              
              
              
              0.7595
              
              
              
              0.7220Average
      rate
              
              
              0.9935
              
              
              
              0.8924
              
              
              
              0.8713
              
              
              
              0.8113
              
              
              
              0.7510
              
              
              
              0.6748
 
 Listed
below, for each month during the previous six months, are the low and high
exchange rates for Canadian dollars expressed in U.S. dollars, based upon
the inverse of the noon spot rate on each business day as reported by the Bank
of Canada. On November 6, 2008, the noon spot rate published by the Bank of
Canada was $1.00 per U.S.$0.8462.
 One month period ended,May 31,
                  2008
                
                
                June 30,
                  2008
                
                
                July 31,
                  2008
                
                
                August 31,
                  2008
                
                
                September
      30,
                  2008
                
                
                October 31,
                  2008High
                
                
                1.0158
                
                
                
                1.0058
                
                
                
                0.9984
                
                
                
                0.9753
                
                
                
                0.9673
                
                
                
                0.9426Low
                
                
                0.9815
                
                
                
                0.9726
                
                
                
                0.9746
                
                
                
                0.9365
                
                
                
                0.9263
                
                
                
                0.7726
  PART
I
 
 Item 1 
- Identity Of Directors, Senior Management And Advisers
 
 Not
applicable.
 
 Item 2 
- Offer Statistics And Expected Timetable
 
 Not
applicable.
 
   6
  
 Item 3 
- Key Information
 
 A.           SELECTED
FINANCIAL DATA
 
 The
following table presents selected historical financial information as at
August 31, 2008 and 2007, and for the years ending August 31, 2008,
2007 and 2006 derived from our audited consolidated financial statements
included in this annual report, which are comprised of consolidated balance
sheets as at August 31, 2008 and 2007 and the consolidated statements of
operations and deficit and cash flows for each of the years in the three-year
period ended August 31, 2008.These consolidated financial statements have
been audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm. PricewaterhouseCoopers LLP’s report on our
consolidated financial statements is included in this annual report. Selected
data presented below for the years ended August 31, 2004, 2005 and 2006 is
derived from our consolidated financial statements not included in this annual
report. All information contained in the following table should be read in
conjunction with our consolidated financial statements, the notes related to
those financial statements and the section entitled “Item 5  -
Operating and Financial Review and Prospects.”
 
 Our
consolidated financial statements have been prepared in accordance with Canadian
GAAP. For a discussion of the principal differences between Canadian GAAP and
U.S. GAAP, see note 15 to our audited consolidated financial
statements for the years ended August 31, 2008 and 2007 included elsewhere
in this annual report.
 
 Year Ended August 31,
                  (in thousands, except per share amounts)2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Canadian
      GAAPRevenue
                
                
                39,457
                
                
                $
                21,244
                
                
                $
                6,949
                
                
                $
                0
                
                
                $
                0Loss
      before interest revenue, interest expense, revaluation of derivative and
      foreign exchange gains (losses)
                
                
                (56,627
                )
                
                
                (76,357
                )
                
                
                (99,024
                )
                
                
                (6,705
                )
                
                
                (1,688
                )Net
      Loss
                
                
                (74,325
                )
                
                
                (85,640
                )
                
                
                (102,704
                )
                
                
                (6,705
                )
                
                
                (1,688
                )Loss
      per Share
                
                
                1.55
                
                
                
                1.78
                
                
                
                2.99
                
                
                
                17,832
                
                
                
                4,489Total
      Assets
                
                
                256,285
                
                
                
                289,152
                
                
                
                355,846
                
                
                
                3,003
                
                
                
                254Net
      Assets
                
                
                84,011
                
                
                
                146,856
                
                
                
                227,357
                
                
                
                (8,879
                )
                
                
                (2,174
                )Capital
      Stock
                
                
                314,835
                
                
                
                312,949
                
                
                
                312,595
                
                
                
                20
                
                
                
                20Number
      of Shares(1)(2)
                
                
                48,094
                
                
                
                47,684
                
                
                
                47,625
                
                
                
                0
                
                
                
                0Dividends
      declared per share
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0U.S.
      GAAPNet
      Loss
                
                
                (72,720
                )
                
                
                (84,633
                )
                
                
                (102,704
                )
                
                
                (6,705
                )
                
                
                (1,688
                )Loss
      per share
                
                
                1.51
                
                
                
                1.78
                
                
                
                2.99
                
                
                
                17,832
                
                
                
                4,489Net
      Assets
                
                
                79,022
                
                
                
                146,535
                
                
                
                227,357
                
                
                
                (8,879
                )
                
                
                (2,174
                )
 
 
 Notes
 
 (1)           Class B
Voting Shares adjusted to equivalent Class A Subordinate
Voting Shares.
 (2)           Prior
to our initial public offering on December 12, 2005, there were 200 common
shares issued and outstanding.
 
   7
  
 B.
              CAPITALIZATION
      AND INDEBTEDNESS
 
 Not
applicable.
 
 C.           REASONS
FOR THE OFFER AND USE OF PROCEEDS
 
 Not
applicable.
 
 D.           RISK
FACTORS
 
 This
section describes some of the risks that could affect our business, financial
condition and results of operation. The factors below should be considered in
connection with any forward-looking statements in this document and with the
cautionary statements contained in “Forward-Looking Statements” at the beginning
of this document.
 
 If
any of the risks described below materialize, our business, financial condition
or results of operation could be materially and adversely affected. The risks
described below are not the only risks facing us and our business. Additional
risks and uncertainties not presently known to us or that we currently consider
immaterial may also materially affect our business operations and financial
condition.
 
 Risks
Related to Our Business
 
 Our
cumulative expenditures and losses have been significant and are expected to
grow.
  We
have expended and will continue to expend significant funds for marketing,
developing our subscriber management systems, maintaining and enhancing our
terrestrial repeater network, programming and distribution contracts, royalty
fees and the maintenance of our broadcast and office facilities. In addition,
our cumulative losses and cumulative negative cash flow may continue, and
possibly increase, as we incur expenses to grow our subscriber base. If we are
ultimately unable to generate sufficient revenues to become profitable and have
positive cash flow, you could lose your investment.
 
 Current
economic conditions may adversely affect our financial results and financial
position.
 
 At
this time, the Company is unable to predict how current financial market
conditions may affect our financial results from operations. The prevailing
financial market conditions may affect the company’s ability to continue to
generate exceptional revenue growth in its OEM business should Canadian demand
for automobiles equipped with the XM receiver decline in a significant
manner.
 While
we believe that our current liquidity position is adequate to sustain us through
the current economic climate, we are unable to predict the length and severity
of the current economic downturn and how it may ultimately affect our ability to
raise additional capital resources should the need arise.
 
 
 
   8
  
 
 We
rely on our exclusive relationship with XM for the provision of the satellite
radio service.
  We
have an exclusive agreement with XM to provide XM’s satellite digital audio
radio services, or SDARS, in Canada. Our success as a business depends on XM’s
cooperation and its programming content, satellite network and underlying
technology, as well as XM’s operational and marketing efficacy, competitiveness,
finances, regulatory status and overall success in the U.S. Because of our
dependency on XM, should XM’s business suffer as a result of increased
competition, increased costs of programming, satellite malfunctions, regulatory
changes, adverse effects of litigation or other factors, our business may suffer
as well. Furthermore, a breach of our agreement with XM or a failure by XM to
perform its part of the agreement would have detrimental financial consequences
to our business. Our agreement with XM, which became effective November 17,
2005, is only for an initial term of ten years and we have a right to extend
this exclusive agreement for an additional five years only if certain
preconditions are satisfied. If we are unable to renew or extend our agreement
with XM at the conclusion of the ten-year term, it could be impossible to
operate our business. Please see below for additional risks related to our
relationship with XM.
 
 Damage
      to XM’s satellite network or failure by XM to timely replace its existing
      satellites could damage
our business.
 
 We
rely on XM’s satellite network for the delivery of our service. XM placed two
new satellites into service during the second quarter of 2005 and fourth quarter
of 2006, respectively. Its prior two satellites experienced progressive
degradation problems and now serve as in-orbit spares. During 2007, XM entered
into a sale leaseback transaction with respect to the transponders on its fourth
satellite. If XM fails to make the required payments under this arrangement, it
could lose the right to use its fourth satellite to broadcast its service. The
terms of this arrangement also require that upon the occurrence of specified
events, including an operational failure or loss of its fourth satellite, then
XM will have to repurchase the satellite and it may not receive sufficient
insurance proceeds to do so. An operational failure or loss of its two
operational satellites would, at least temporarily, affect the quality of our
service, and could interrupt the continuation of our service and harm our
business. XM would likely not be able to complete and launch its fifth satellite
before the first half of 2009. In the event of any satellite failure prior to
that time, XM would need to rely on its back-up satellites. We cannot assure you
that XM restoring service through either of its backup satellites would allow us
to maintain adequate broadcast signal strength through the in-service date of
XM’s fifth satellite, particularly if either of XM’s backup satellites were to
suffer unanticipated additional performance degradation or experience an
operational failure.
 
 A
number of other factors could decrease the useful lives of our satellites,
including:
 
 •
              defects
      in design or construction;
 
 •
              loss
      of on board station-keeping system;
 
 •
              failure
      of satellite components that are not protected by back-up
      units;
 
 •
              electrostatic
      storms; and
 
 •
              collisions
      with other objects in space.
 
   9
  
 Our
network of terrestrial repeaters communicates principally with one of XM’s
satellites. If a satellite fails, we would have to repoint all of our repeaters
to communicate with another of XM’s satellites. This would result in a
degradation of service that could last several days and could harm
our business.
 
 Demand
for our service may be insufficient for us to become profitable.
 
 We
cannot estimate with any certainty whether consumer demand for our service will
be sufficient for us to continue to increase the number of subscribers at
projected rates or the degree to which we will meet that demand. Among other
things, continuing and increased consumer acceptance of our satellite radio
service in Canada will depend upon:
  •
              the
      willingness of consumers, on a mass-market basis, to pay subscription fees
      to obtain satellite radio service;
and
  •
              the
      marketing and pricing strategies that we employ and that are employed by
      our competitors.
  If
demand for our service does not continue to increase as expected, we may not be
able to generate enough revenues to generate positive cash flow or become
profitable.
  We
will be required to pay royalty fees, which may be more costly than
expected.
 
 Pursuant
to our licensing arrangements, we must contribute based on a prescribed
percentage of our revenue each year to the development of Canadian talent and
capabilities. We may not be able to meet these contribution requirements and,
consequently our license may be revoked and we would lose our ability to
continue to legally operate in Canada.
  We
require music programming royalty arrangements with the following Canadian
copyright collectives in order to operate our service: the Society of Composers,
Authors and Music Publishers of Canada/Société canadienne des auteurs,
compositeurs et éditeurs de musique (SOCAN), The Neighbouring Rights Collective
of Canada (NRCC), The Society for the Reproduction Rights of Authors, Composers
and Publishers in Canada Inc./Société du droit de reproduction des auteurs,
compositeurs, et éditeurs au Canada (SODRAC) Inc. and The Canadian Musical
Reproduction Rights Agency Ltd. (CMRRA). There are no pre-existing tariffs in
Canada that govern our consumer subscription satellite radio
services.  As we were not able to come to a negotiated arrangement
with these Canadian collectives, the royalties payable for the public
performance of music and transfer of music to digital form were adjudicated by
the Copyright Board during a two week hearing which was completed on December
11, 2007. The Copyright Board generally adjudicates copyright royalties in
arrears. This means that a decision will be issued by the Copyright Board, more
than two years after we commenced broadcasting, and such fees will be
retroactive to the commencement of the service in Canada. It is unknown when a
written decision of the Copyright Board will be rendered. Copyright royalties in
Canada are generally payable on the basis of a percentage of gross revenue of
the broadcasting service, or might be negotiated as a “per subscriber” fee.
Decisions of the Copyright Board are subject to appeal in the Federal Court of
Canada, which could further delay finalization of copyright fees. In Canada,
copyright tariffs are filed with the Copyright Board before March 31 of each
year, and become effective the January of the following calendar year. Royalty
fees payable under these tariffs may be more costly than anticipated and may be
significant. As well, we will have to re-negotiate these arrangements once they
come up for renewal. Re-negotiated fees may also be more expensive than current
levels.
  
 
   10
  
 We
      need to obtain rights to programming, which could be more costly than
      anticipated.
 
 Third-party
content is an important part of the marketing of our satellite radio service. In
addition to the content provided to us by XM, we must develop or acquire content
for all Canadian-produced channels on our service. Obtaining third-party content
can be expensive. We may not be able to obtain and retain the third-party
content we need at all or within the costs contemplated by our business plan. In
addition, XM may be unable to consistently obtain third-party content at a
reasonable cost or renegotiate programming agreements successfully, which may
adversely affect our marketing efforts, our reputation and brand, our revenues
and our business.
 
 Higher
      than expected subscriber acquisition costs could adversely affect our
      financial performance.
 
 We
are still spending substantial funds on advertising, marketing and subsidizing
costs of radio devices in transactions with car and radio manufacturers,
retailers and other parties to obtain or as part of the expense of attracting
new subscribers. Our ability to achieve sustained positive free cash
flow  and profitability within the expected timeframe or at all
depends on our ability to continue to maintain or lower these acquisition costs.
If the costs of attracting new subscribers and retaining subscribers are greater
than expected, our financial performance and results of operations could be
adversely affected.
 
 Our
inability to retain customers, including those who purchase or lease vehicles
that include a subscription to our service, could adversely affect our financial
performance.
 
 We
experience subscriber turnover, or churn, among our customers. Because we have
been in commercial operations for a relatively short period of time, we cannot
reliably predict the amount of churn we will experience over the long term. As
such, we have used the experiences of XM as a general guideline, although our
experience in this regard may be different. To the extent our churn is greater
than we currently experience and anticipate, it may be more costly for us to
acquire a sufficient customer base to generate revenues that will enable us to
become profitable and reach positive cash flow.
 
 In
particular, we cannot predict how successful we will be at retaining customers
who purchase or lease vehicles that include a subscription to our service,
beyond the promotional period. We do not know if the percentage will change as
the number of customers with promotional subscriptions increases.
 
 Competition
from SIRIUS Canada and other traditional and emerging audio entertainment
providers could adversely affect our revenues.
 
 In
seeking market acceptance, we encounter competition for both listeners and
advertising revenues from many sources, including SIRIUS Canada, other Canadian
subscription radio services, including traditional and digital AM/FM radio,
Internet based audio providers, direct broadcast satellite television audio
service, MP3 players, digital cable systems that carry audio service and
traditional AM/FM radio.
 
 Our
direct competitor in satellite radio service is SIRIUS Canada, the only other
licensee for satellite radio service in Canada. SIRIUS Canada is a joint venture
between CBC-Radio Canada, Standard Broadcasting and SIRIUS, now SIRIUS XM Radio
Inc.
 
 SIRIUS
Canada’s application for a satellite radio service was approved at the same time
as ours. SIRIUS Canada launched its satellite radio service on December 1,
2005. SIRIUS Canada broadcasts channels and offers programming that we do not
offer, and SIRIUS Canada’s satellite radio service may be offered as an option
on various Canadian car model brands, certain of which may not offer our
service. SIRIUS Canada may offer a more attractive service or enhanced features,
may have stronger marketing or distribution channels, and either or both may
gain a competitive advantage over us.
 
   11
  
 In
addition, unlike satellite radio, traditional AM/FM radio already has a
well-established and dominant market presence for its services and generally
offers free broadcast reception supported by commercial advertising, rather than
by a subscription fee. Many radio stations offer information programming of a
local nature, such as traffic and weather reports, which we are not permitted to
offer under our satellite radio license. To the extent that consumers place a
high value on these features of traditional AM/FM radio, we are at a competitive
disadvantage to the dominant providers of such audio entertainment services. In
the U.S., some radio stations have begun reducing the number of commercials per
hour, expanding the range of music played on the air and experimenting with new
formats in order to compete more directly with satellite radio. Further, radio
companies may launch an advertising campaign designed to assert the benefits of
traditional AM/FM radio, as compared with satellite
radio service.
 
 Digital
(or HD or high definition) radio broadcast services have been expanding, and as
many as 1,500 radio stations in the United States have begun digital
broadcasting and approximately 3,000 have committed to broadcasting in digital
format. The technology permits broadcasters to transmit as many as five stations
per frequency. To the extent that traditional AM/FM radio stations adopt digital
transmission technology, any competitive advantage that we enjoy over
traditional radio because of its digital signal would be lessened. A group of
major broadcast radio networks created a coalition to jointly market digital
radio services.
 
 Internet
radio broadcasts have no geographic limitations and can provide listeners with
radio programming from around the country and the world. We expect that
improvements from higher bandwidths, faster modems and wider programming
selections and mobile internet service will make Internet radio increasingly
competitive as well. In light of the increasing popularity of Internet radio, we
have added XM Radio Online, an Internet based version of our service with
increased channel selection, as a free service to our subscribers as well as
offering it as a stand alone service to which individuals may
subscribe.
 
 The
Apple iPod® is a
portable digital music player that allows users to download and purchase music
through Apple’s iTunes® Music
Store, as well as convert music on compact disc to digital files. Apple sold
over 51 million iPods® during
its fiscal 2007 year. The iPod® is also
compatible with certain car stereos and various home speaker systems. Our
portable digital audio players, including those with advanced recording
functionality, compete with the iPod® and
other downloading technology and devices; and some consumers may use their
digital music players in their vehicles rather than subscribe to XM
Radio.
 
 The
audio entertainment marketplace continues to evolve rapidly, with a steady
emergence of new media platforms and portable devices that compete with us now
or that could compete with us in the future. For example, Slacker and other
companies have begun to introduce portable music players offering customizable
Internet-based channels. Ford and Microsoft recently debuted an in-car
communications system called “Sync,” which allows drivers to use voice commands
or steering wheel controls to play songs from their digital-music players. In
addition, ICO Global Communications (Holdings) Limited recently demonstrated a
satellite-based mobile entertainment platform to deliver live broadcast media
nationwide through a hybrid satellite and terrestrial repeater
network.
 
 Our
relationship with auto manufacturers for installing and distributing satellite
radios to consumers may not result in as many subscribers as we are
expecting.
 
 We
have entered into several exclusive factory installed arrangements with Canadian
auto manufacturers, including, among others, General Motors of Canada Limited,
or GMCL, Honda Canada, Nissan Canada, Hyundai Canada, and Porsche Cars Canada
Ltd. for installation of XM radios in many of these auto manufacturers’
vehicles. We spend a significant amount of money on marketing expenditures
towards auto manufacturers’ initiatives, and purchasers’ of these auto
manufacturers’ vehicles represents a substantial proportion of our subscriber
base. The customers of auto manufacturers with which we have reached agreements
may not subscribe or be attracted by our service. If any of these auto
manufacturers with which we have reached arrangements, lose market share to
manufacturers with whom we do not have distribution arrangements or the market
in general experiences a downturn, then our business may also be adversely
affected.
 
 We
      may be required to install more terrestrial repeaters than currently
      installed, which would impact our capital
  requirements.
 
 We
have built a terrestrial repeater network. As we continuously test reception and
receive direct consumer feedback, we may find that we require more repeaters
than originally planned in order to provide a level of signal availability that
will be acceptable to our customers. To the extent we need a more robust
repeater network than currently planned, our capital requirements may be higher
than we anticipate and we may need to seek additional funding either through
bank, equity or debt financing. Such financing may not be available and, if
available, may not be available on commercially reasonable terms. Given our
current limited cash flow, if we obtain additional financing we will be further
leveraged and we may be less likely to generate sufficient revenue to repay our
debts. As such, you could lose your investment.
 
   12
  
 We
      may need additional funding for our business plan and additional financing
      might not be available.
 
 We
may need additional financing due to future developments, changes in our
business plan or failure of our business plan to succeed, including increasing
marketing, distribution or programming costs. Our actual funding requirements
could vary materially from our current estimates. If additional financing is
needed, we may not be able to raise sufficient funds on favorable terms or at
all. If we fail to obtain any necessary financing on a timely basis, our ability
to execute our current business plan may be limited, and our business could be
adversely affected. As a result, we could default on our commitments to
creditors or others and may have to seek a purchaser for our business or assets.
See “Risk Factors  - Risks Related to our Indebtedness.”
 
 Weaker
than expected market and advertiser acceptance of our satellite radio service in
Canada could adversely affect our advertising revenue and results
of operations.
 
 Market
and advertiser acceptance of our satellite radio service is important to the
success of our business. Our ability to generate advertising revenues is
directly affected by the number of subscribers to our satellite radio service
and the amount of time subscribers spend listening to our various channels. Our
ability to generate advertising revenues also depends on several other factors,
including the level and type of market penetration of our service, competition
for advertising dollars from other media and changes in the advertising industry
and economy generally. We compete directly for audiences and advertising
revenues with SIRIUS Canada, the other approved Canadian satellite radio
licensee, and traditional AM/FM radio stations, some of which maintain
longstanding relationships with advertisers and possess greater resources than
we do, and “new media” including internet, internet radio and podcasts. In
addition, our license restricts us from broadcasting more than six minutes of
national advertisements per clock hour on each of our Canadian- produced
channels. Because CRTC regulations limit our ability to offer our satellite
radio service other than to subscribers on a pay-for-service basis, certain
advertisers may be less likely to advertise on our satellite
radio service.
 
   13
  
 We
believe that advertising is a discretionary business expense for many business
organizations and industries. Consequently, a potential slowdown in the Canadian
economy or in a particular business sector that represents a significant share
of our advertising revenues, could adversely affect our advertising revenues
and, therefore, our results of operations. Also, advertising on the radio,
whether through our satellite service or traditional radio, may fall out of
favor with the advertisers.
 
 Rapid
      technological and industry changes could make our service
      obsolete.
 
 The
satellite radio industry and the audio entertainment industry are both
characterized by rapid technological change, frequent new product innovations,
changes in customer requirements and expectations, and evolving industry
standards. There is no assurance that one or more of the technologies that is
utilized by us may not become obsolete. If we are unable to keep pace with these
changes, our business may be unsuccessful. Products using new technologies, or
emerging industry standards, could make our technologies obsolete. In addition,
we may face unforeseen problems in operating the XM system in Canada that could
harm our business. Because XM Canada depends on third parties to develop
technologies used in key elements of the XM radio system, more advanced
technologies that we may wish to use may not be available to us on reasonable
terms or in a timely manner. Further, our competitors may have access to
technologies not available to us, which may enable them to produce entertainment
products of greater interest to consumers, or at a more
competitive cost.
 
 Our
service network, national broadcast studios or other facilities could be damaged
by natural catastrophes, which would adversely affect
our business.
 
 Since
our ground-based network of terrestrial repeaters is attached to towers,
buildings and other structures around the country, an earthquake, tornado,
flood, power outage or other catastrophic event anywhere in Canada could damage
our network, interrupt our service and harm our business in the affected area.
We do not have replacement or redundant facilities that can be used to assume
the functions of our repeater network or of our central production and broadcast
facility in the event of a catastrophic event. Any damage to our repeater
network would likely result in degradation of our service for some subscribers
and could result in complete loss of service in affected areas. Damage to our
central production and broadcast facility would also restrict our production of
programming and require us to obtain programming from third parties to continue
our service.
 
 The
      unfavourable outcome of pending or future litigation could have an adverse
      impact on us.
 
 In
the ordinary course of business, we become aware from time to time of claims or
potential claims, or may become party to legal proceedings arising out of
various matters, such as contract matters, employment related matters, issues
relating to our repeater network, product liability issues, and copyright,
patent, trademark or other intellectual property matters. Third parties may
bring suit relating to such matters. We cannot predict the outcome of any such
claim, potential claim or these lawsuits and legal proceedings with certainty.
Nevertheless, we believe that the outcome of any such claim, potential claim or
proceeding, of which we are currently aware, even if determined adversely, would
not have a material adverse effect on our business, consolidated results of
operations or financial position.
 
   14
  
 Our
service could be interrupted in areas where there is no direct line of sight
access to a satellite or a terrestrial repeater, which would adversely affect
our business.
 
 Our
service may be unavailable or interrupted from time to time at specific
locations where radios cease to have direct line of sight access to a satellite
or a terrestrial repeater (e.g., in tunnels, parking garages, or within or
next to buildings). Our service could also be subject to occasional interference
from other broadcasting sites.
 
 Failure
      of third parties to perform could affect our
  revenues.
 
 We
need to assure proper manufacturing and distribution of XM radios and the
development and provision of programming in connection with our service. Many of
these tasks are dependent on the efforts and performance of third parties that
are outside of our control. If one or more of these requirements are not
performed in a satisfactory manner, our revenues could be less than expected and
our business may suffer.
 
 We
rely on third party manufacturers and their distributors to manufacture and
distribute XM radios. If current manufacturers of XM radios, such as Audiovox
Electronic Corporation, or Audiovox, Delphi Automotive Systems LLC, or
Delphi, and Pioneer Electronics, or Pioneer, or going forward, other
manufacturers with whom we enter into agreements for the manufacture of XM
radios, fail to develop XM radios for timely commercial sale, at an affordable
price and for mass market nationwide distribution, our revenues would be less
than expected and our business may suffer. In addition to the above mentioned
manufacturers of XM radios, we expect that we may rely on others to develop,
manufacture and market XM radios for car, home and
portable use.
 
 A
bankruptcy or financial difficulties of a third party with whom we have a
significant relationship could harm our results of operations.
 
 In
the event that any other third party with whom we have significant
relationships, including any distributor, licensor, OEM or radio supplier,
files a petition in or is assigned into bankruptcy or becomes insolvent, or
makes any assignment for the benefit of creditors or makes any arrangements or
otherwise becomes subject to any proceedings under applicable bankruptcy laws or
insolvency laws with a trustee, or receiver appointed in respect of a
substantial portion of its property, or in the event that such a third party
liquidates or winds up its daily operations for any reason whatsoever, then our
business and results of operations would likely be materially and adversely
affected.
 
 On
October 8, 2005, Delphi Corporation and 38 of its domestic U.S.
subsidiaries, which we refer to collectively as “Delphi,” filed voluntary
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. Delphi
manufactures, in factories outside the United States, XM radios for installation
in various brands of GM vehicles. Delphi also distributes to consumer
electronics retailers various models of XM radios manufactured abroad. On
January 25, 2008, the Bankruptcy Court entered an order confirming Delphi’s
First Amended Joint Plan of Reorganization, as Modified, which we refer to as
the Delphi Plan, which provides for a reorganization of Delphi and the emergence
of Delphi from bankruptcy as an ongoing entity. The Delphi Plan provides that
Delphi shall assume all executory contracts including those with XM as of the
effective date of the Delphi Plan. The Delphi Plan has not yet become effective,
is subject to various conditions and may not become effective. Certain investors
entered into commitments to provide financing to a reorganized Delphi, but
(according to Delphi) terminated the investment agreement just prior to the
closing of the financing. Delphi has commenced certain litigation alleging
wrongful termination of the investment agreement, and asserting that the
financing is necessary for the successful consummation of the Delphi Plan.
Accordingly, it is unclear at this time whether the Delphi Plan will ever become
effective. Further, even if the Delphi Plan becomes effective, Delphi has taken
the position that any contracts that expire prior to the effective date of the
Delphi Plan will not be assumed under the Delphi Plan and Delphi shall have no
obligation to cure any pre-bankruptcy defaults there under. XM has reserved its
rights to dispute that position.
 
 We
need people with special skills to develop and maintain our new service. If we
cannot find and keep these people, our business could suffer.
 
   15
  
 We
depend on the continued efforts of our executive officers and key employees, who
have specialized technical knowledge regarding our repeater network, broadcast
facilities, information technology systems and radio systems and business
knowledge regarding the radio industry and subscription services. If we lose the
services of one or more of these employees, or fail to attract qualified
replacement personnel, it could harm our business and our future
prospects.
 
 Our
business depends upon certain on-air talent, the loss of whom could reduce the
attractiveness of our XM service to subscribers and advertisers and could
adversely affect our business.
 
 We
employ or independently contract with certain on-air talent, such as Phil
Esposito and Jeff Fillion, who maintain significant loyal audiences in or across
various demographic groups. The fame of our on-air talent and their ability to
retain and grow their respective audiences is a factor in our ability to sell
subscriptions and advertising. Our on-air talent may not attract and/or retain
the number of subscribers that we anticipate and, further, on-air talent may
offend or alienate subscribers that are outside of the target audience of such
on-air talent. We cannot be certain that our on-air talent will remain with us
or will be able to retain their respective audiences. If we lose the services of
one or more of these individuals, and fail to attract comparable on-air talent
with similar audience loyalty, the attractiveness of our service to subscribers
and advertisers could decline, and our business could be adversely
affected.
 
 Consumers
      could steal our service.
 
 Like
all radio transmissions, the XM radio signal in Canada is subject to
interception. Pirates may be able to obtain or rebroadcast XM radio service
without paying the subscription fee. Although XM uses encryption technology to
mitigate the risk of signal theft, such technology may not be adequate to
prevent theft of the XM Radio signal. If widespread, signal theft could harm
our business.
 
 If
we fail to maintain effective internal controls meeting the requirements of
Section 404 of the Sarbanes-Oxley Act, it could have a material adverse
effect on our business in the future.
 
 Management
has designed disclosure controls and procedures to provide reasonable assurance
that material information relating to the Company is made known to it by
others.  As at August 31, 2008, the Chief Executive Officer and the
Chief Financial Officer, with participation of the Company’s management, have
concluded that the design and operation of the Company’s disclosure controls and
procedures were effective to provide that information required to be disclosed
by the Company in reports that it files or submits under the United States
Securities Exchange Act of 1934 and applicable Canadian securities laws is (i)
recorded, processed, summarized and reported within the time periods specified
in applicable rules and forms and (ii) accumulated and communicated to our
management, including its Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure. The Company has
invested resources, including the retention of a third party to conduct testing
of the company’s internal controls, to document and analyze its system of
disclosure controls and its internal control over financial reporting in order
to meet the management reporting requirements of Section 404 of the
Sarbanes-Oxley Act. To continue to satisfy those requirements in the future, may
entail making certain adjustments to our internal control procedures, including
adjustments related to our computer and accounting systems. We cannot assure you
that this process will not be time-consuming or costly. If we fail to maintain
an effective internal control environment, there could be a material adverse
effect on our business, results of operations or financial
condition.
 
 Risks
Related to our Indebtedness
 
 We
have substantial indebtedness and we may be unable to service our
indebtedness.
 
 Subsequent
to successful completion of our US$100 million senior notes offering, our
$20 million convertible unsecured subordinated debenture offering, and the
activation of our standby Credit Facility with XM, we have substantial
indebtedness and significant debt service obligations.
 
 As
of August 31, 2008 we had a total long-term indebtedness of
US$100 million (approximately $106 million), under our senior notes,
$20 million in respect of our convertible unsecured subordinated debentures and
$7.6 million under our standby Credit Facility with XM. In addition, we have the
ability to continue to borrow up to the $45 million limit under a standby
Credit Facility with XM, or the XM Credit Facility.
 
 Our
substantial indebtedness could have important consequences to you. For example,
it could:
 
 •
              make
      it more difficult for us to satisfy our obligations with respect to the
      notes and other indebtedness;
 
 •
              increase
      our vulnerability to adverse economic and industry
    conditions;
 
  
  16
  
 •
              require
      us to dedicate a substantial portion of our cash flow from operations to
      the payment of our indebtedness, thereby reducing the availability of cash
      to fund working capital and capital expenditures and for other general
      corporate purposes;
 
 •
              limit
      our ability to obtain financing for working capital, capital expenditures,
      general corporate purposes or
acquisitions;
 
 •
              place
      us at a disadvantage compared to our competitors that have less
      debt; and
 
 •
              limit
      our flexibility in planning for or reacting to, changes in our business
      and in the satellite
radio industry.
 
 In
addition, the indenture governing the notes and XM Credit Facility contain
financial and other restrictive covenants that limit our ability to engage in
activities that may be in our long-term best interests. Our failure to comply
with those covenants would result in an event of default which, if not cured or
waived, could result in the acceleration of all of our debt.
 
 The
agreements governing our indebtedness contain significant restrictions that
limit our operating and financial flexibility.
 
 The
indenture governing the notes contains covenants that, among other things, limit
our ability to:
 
 •
              incur
      additional indebtedness and issue preferred
  stock;
 
 •
              pay
      dividends and make distributions;
 
 •
              repurchase
      stock or repay subordinated
indebtedness;
 
 •
              make
      certain investments;
 
 •
              transfer,
      sell or make certain dispositions of assets or engage in sale and
      leaseback transactions;
 
 •
              incur
      liens;
 
 •
              enter
      into transactions with affiliates;
 
 •
              create
      dividend or other payment restrictions affecting restricted
      subsidiaries; and
 
 •
              merge,
      consolidate, amalgamate or sell all or substantially all of our assets to
      another person.
 
 In
addition, the XM Credit Facility contains certain restrictive covenants. In
order to continue to draw on the XM Credit Facility, we will be required to
satisfy specific financial ratios and certain financial condition tests as a
condition to the advance of funds. In the event of a default under this
facility, XM could seek to declare all amounts outstanding under the
XM Credit Facility, together with accrued and unpaid interest, if any, to
be immediately due and payable. This could result in a cross-default under the
indenture governing the notes. If the indebtedness under the XM Credit
Facility or the notes were to be accelerated, there can be no assurance that our
assets would be sufficient to repay in full that indebtedness or any of our
other indebtedness.
 
 To
service our indebtedness, we require a significant amount of cash. Our ability
to generate cash depends on many factors beyond our control.
 
 Our
ability to make interest payments on and to repay or refinance our indebtedness
and to fund planned operating and capital expenditures will depend on our
ability to generate cash in the future. This, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control.
 
   17
  
 We
cannot assure you, however, that our business will generate sufficient cash flow
from operations to enable us to pay interest on the notes, the convertible
debentures and the XM Credit Facility, or repay them at maturity or to fund our
other liquidity needs. We may need to refinance all or a portion of our
indebtedness.
 
 Our
ability to refinance our indebtedness or obtain additional financing will depend
on, among other things:
 
 •
              our
      financial condition at the time;
 
 •
              restrictions
      in the indenture governing the notes and the XM Credit Facility or
      other outstanding
indebtedness; and
 
 •
              other
      factors, including the condition of the financial markets or the satellite
      radio industry.
 
 As
a result, we may not be able to refinance any of our indebtedness on
commercially reasonable terms, or at all. If we do not generate sufficient cash
flow from operations, and additional borrowings or refinancings or proceeds of
asset sales are not available to us, we may not have sufficient cash to enable
us to meet all of our obligations, including payments on
the notes.
 
 We
may be able to incur additional indebtedness, which could further exacerbate the
risks associated with our substantial indebtedness.
 
 We
and our subsidiaries may be able to incur substantial additional indebtedness in
the future. Although the XM Credit Facility and the indenture governing the
notes contain restrictions on the incurrence of additional indebtedness, debt
incurred in compliance with these restrictions could be substantial. The
XM Credit Facility permits total borrowings thereunder of up to
$45 million. In addition, the indenture governing the notes, the indenture
governing the convertible debentures, and the XM Credit Facility will not
prevent us from incurring obligations that do not constitute indebtedness. If we
and our subsidiaries incur additional indebtedness or other obligations, the
related risks that we and they face could be magnified.
 
 Risks
Related To Regulatory Matters
 
 Failure
to comply with CRTC and Industry Canada requirements could damage
our business.
 
 As
a licensee under the Broadcasting Act (Canada),
CSR Inc. is subject to CRTC policies and regulations, and the specific
conditions of our broadcasting license. Those conditions of license require,
amongst other things, that we provide: a minimum of eight original Canadian
produced programming channels, four of which must be programmed in the French
language; a minimum of 85% of the total music selections broadcast in any given
week on each Canadian produced channel are to be Canadian selections and a
minimum of 85% of the total spoken word programming content broadcast on all
Canadian-produced channels must be Canadian spoken word programming; a maximum
of nine non-Canadian-produced channels for each original Canadian-produced
channel that CSR Inc. broadcasts; a contribution each year equal to a
minimum of 5% of our gross revenues must be made to eligible third parties who
are associated with the development of Canadian musical and other artistic
talent, and of such contributions must be divided equally between initiatives in
support of English language and French language Canadian talent. In addition
CSR Inc. must not provide any original local programming on any of its
Canadian-produced channels, and is restricted to the broadcast of no more than
six minutes per hour of national commercial messages on each Canadian-produced
channel and is not permitted to broadcast any local advertising. CSR Inc.
is also required to comply with the provisions of the Sex-Role Portrayal Code for
Television and Radio Programming and the Broadcast Code for Advertising to
Children, as well as certain applicable sections of the Radio Regulations, 1986,
promulgated pursuant to the Broadcast Act (Canada).
Compliance with these conditions of license will be monitored by the CRTC and
non-compliance could result in a mandatory order to comply or license
revocation.
 
   18
  
 On
February 10, 2006, the CRTC approved CSR Inc.’s application in which
CSR Inc. voluntarily applied to have its conditions of license amended to
require it to provide a minimum of four of its eight Canadian-produced
programming channels in the French language, (two of the four to be music
channels). Since we launched our service in November 2005 with four French-
language channels this new condition to the license has already been satisfied.
In addition, other amendments to the license include if certain subscriber
penetration figures are achieved and CSR Inc. has not added two additional
Canadian-produced programming channels, for a total of ten, within the three
year period following launch of its service, CSR Inc. will increase to 6%
(from 5%) of its gross service revenues as its annual contribution to approved
third party initiatives in support of Canadian talent development in both of
Canada’s official languages. The two additional Canadian-produced programming
channels have since been added to our programming lineup.
 
 On
March 24th, 2006, CSR Inc. submitted an application to the CRTC
requesting the amendment of its conditions of license. The requested amendment
would allow for the carry over of a credit into subsequent broadcast years for
contributions to the development of Canadian talent in excess of the prescribed
amount. On May 11, 2007, this application was denied by the CRTC.
 
 As
one of two operators of a commercial satellite radio service in Canada, we are
subject to Industry Canada rules and regulations which require us to meet
certain conditions including the power level of radio emissions our receivers
may produce; coordination of our satellite radio service with radio systems
operating in the same range of frequencies in neighbouring countries; and
coordination of our communications links to our satellites or terrestrial
repeaters with other systems that operate in the same frequency band.
Non-compliance by us with these conditions could result in additional costs,
fines, additional license conditions, license revocation or other detrimental
Industry Canada actions.
 
 The
      CRTC may not renew our license, which could force us to discontinue
      operations.
 
 The
license granted by the CRTC will be valid for a period of six years and must be
renewed prior to August 31, 2011. The CRTC has no obligation to renew the
license and if the license is renewed it may be on conditions different than
those existing today. If we are unable to renew this license, then we will be
unable to continue legally to carry on a satellite
radio business.
 
 CRTC
      content regulations may impact our ability to acquire and retain
      subscribers.
 
 Given
the conditions of our license imposed by the CRTC, we may not be able to offer a
service that is sufficiently competitive to other audio offerings, both in
Canada and the U.S. If the XM service in Canada is substantially different
from XM’s offering in the U.S., or if there are specific channels that are
offered in the U.S. but are not offered by us in Canada, Canadians may
choose to subscribe via the U.S. services (XM or SIRIUS in the U.S.)
instead of with us. A significant gray market for U.S. based XM radio has
already developed in Canada and its continued strength may have a material
adverse effect on our business.
 
 Fees
      payable by us may increase.
 
 Broadcasting
license fees are payable by us to the CRTC, based on the broadcasting regulatory
costs incurred each year by the CRTC and other federal departments or agencies,
including spectrum management costs. A failure to pay these fees on a timely
basis or at all could result in the loss of our license. Fees may vary from year
to year based on increasing broadcasting regulatory costs incurred by the CRTC
and other federal departments or agencies.
 
   19
  
 Interference
      from other users could damage our
business.
 
 We
may be subject to interference from adjacent radio frequency users, such as
recently licensed WCS telecommunications services. Further, we may be restricted
by Industry Canada in the transmitting power levels or the location(s) of the
terrestrial repeater facilities that we will require to serve
urban areas.
 
 Interference
      with other users could limit our
operations.
 
 Industry
Canada may require us to correct any interference, at our cost, to existing
broadcasting or land-mobile services (including WCS licensees) occasioned
through the operation of our terrestrial repeaters. We may also be required to
bear the costs of relocating some incumbent Fixed Service (FS) Operators within
the 2320-2356 MHz band, whose stations are within 300 kilometers of
the terrestrial repeater transmitter sites. We do not see this as a significant
concern as there are currently a small number of these operators.
 
 We
are required to adhere to Safety Code 6 “Limits of Human Exposure to
Radiofrequency Electromagnetic Fields in the Frequency Range from 3 kHz to
300 GHz” (“Safety Code 6”) prepared by the Radiation Protection Bureau of
Health Canada in 1999, as amended from time to time. We are required to conduct
Radio Frequency surveys, at repeater facilities, in order to verify compliance
with Safety Code 6, and if such facilities do not comply with Safety Code 6, we
may be required by Industry Canada to reduce power levels or curtail the
transmissions from the terrestrial transmitters. This could result in service
interruption to our subscribers in areas where structures impede direct
reception of the signals from the XM satellites.
 
 Risks
Related To Our Relationship With XM
 
 We
      rely heavily on our relationship with XM for continued
      service.
 
 On
February 19, 2007, XM entered into a merger agreement with Sirius and Vernon
Merger Corporation (“Merger Co.”). On July 28, 2008, subsequent to receiving all
necessary regulatory approvals to complete the merger, XM merged with and into
Merger Co., and is now being operated as a wholly-owned subsidiary of Sirius XM
Radio Inc. ("Sirius XM"), formerly, Sirius Satellite Radio Inc. XM is now a
wholly owned subsidiary of Sirius XM which owns an indirect 23.03% equity
interest in the Company and a 49.9% equity interest in Sirius Canada our direct
competitor in satellite radio service in Canada. Both the Company and Sirius
Canada are operated separately under their own respective broadcasting licenses
from the CRTC and are controlled by different people.
 
 We
have entered into an exclusive license arrangement with XM, pursuant to which it
provides our service. We will therefore rely heavily on the services and
relationships provided by XM. A breach of this agreement or a failure by us or
XM to perform our respective parts of the agreement could have serious financial
consequences to our business. Our agreement with XM, which became effective
November 17, 2005, is for an initial term of ten years and we have a right to
extend this exclusive agreement for an additional five years. We may, at our
option to be exercised at least one year prior to the termination of the initial
term, extend the License Agreement for a further five years, provided that: (i)
CSR Inc.’s broadcasting license from the CRTC has been renewed at the end of the
current CRTC license term without any adverse modification and (ii) we are not
at such time in breach of any provision of the License Agreement and have not
failed to cure any breach of a provision of the License Agreement in accordance
with its term. If we are unable to renew or extend the agreement with XM at the
conclusion of the ten-year term, it would be more difficult to operate
our business.
 
 As
a result of this dependency, should XM’s business suffer as a result of
increased competition, increased costs of programming, satellite malfunctions,
regulatory changes, adverse effects of litigation or other factors, the
Company’s business may suffer as well.
 
 Additional
      costs to the business may result based on the outcome of XM’s negotiations
      with third party programmers.
 
 We
are responsible for the costs of Canadian distribution rights of third party
programming content. XM, however, has the responsibility for negotiating
distribution arrangements with third party programmers. XM has disclosed that
third-party content is an important part of marketing the XM service and
obtaining third-party content can be more expensive than formerly anticipated,
given the growth of the satellite radio industry and amounts paid for other
programming. As a result, agreements that XM enters into with third-party
suppliers of programming, including the amendment or renewal of existing
agreements, could involve substantial costs to us. It is difficult to anticipate
what the additional costs will be, how often they will need to be paid and how
frequently these third party contracts will need to be re-negotiated. These
payment obligations could significantly delay our becoming
profitable.
 
 Our
      business may be impaired by third party intellectual property
      rights.
 
 We
have the exclusive right and license to commercially offer and provide to
Canadian subscribers certain XM channels that are offered by XM in the
U.S. as part of its satellite digital audio radio services, in combination
with those Canadian channels we supply to XM, as transmitted by the XM satellite
system or as retransmitted within Canada using terrestrial repeaters located in
Canada. We do not have a direct interest in the technology comprising the XM
system. However, we have agreed to bear a pro rata share of the cost of
licensing necessary third party intellectual property incurred by XM, and this
cost could be significant to us. Further, other parties may have patents or
pending patent applications which will later mature into patents or inventions
which may block XM’s ability to operate its system or may negatively affect our
ability to license our technology from XM. The loss of necessary technologies by
XM could require XM to obtain substitute technology of lower quality performance
standards, at greater cost or on a delayed basis, which could harm both of our
businesses. Litigation that is successfully brought by a third party against XM
could require us to seek alternative licenses from third parties which may offer
services of an inferior quality which could adversely affect
our business.
 
   20
  
 Risks
related to Sirius XM
 
 Sirius
XM has indicated that XM and its business will be operated as an unrestricted
subsidiary under its existing indebtedness. In its previous financial and
operational estimates and predictions set forth in its most recent reports filed
with the Securities and Exchange Commission, XM indicated that, provided that it
meets the revenue, expense and cash flow projections of its current business
plan, XM expected to be fully funded and not need additional liquidity to
continue operations beyond its existing assets, credit facilities and cash
generated by operations; XM’s current business plan is based on estimates
regarding expected future costs, expected future revenue and assumes the
refinancing or renegotiating of certain of its obligations as they become due,
including the maturity of its existing credit facilities and $400 million
of 1.75% Notes and its escrow arrangement with Major League Baseball® (“MLB”).
XM’s financial and operational estimates and predictions were made in the
context of being a stand-alone enterprise, and may not be reflective of results
that will be achieved.
 
 Sirius
XM’s operations will also be affected by the FCC order approving the merger. In
addition, Sirius XM’s future liquidity may be adversely affected by, among other
things, changes in its operations or business plans following the merger, the
termination of XM’s GM Facility in connection with the merger, or by the nature
and extent of the benefits, if any, achieved by operating XM as a wholly-owned
subsidiary. Sirius XM has indicated that it may be unwilling to contribute or
loan XM capital to support its operations or unable to do so under the terms of
XM’s existing or future debt obligations. It cannot be assumed that Sirius XM
will contribute or loan XM additional capital to satisfy its
liquidity.
 
 Risk
Related to Our Principal Shareholders
 
 A
small number of shareholders own a significant percentage of our voting shares
and could significantly affect matters requiring a
shareholder vote.
 
 Because
a small number of shareholders own a significant percentage of our Subordinate
Voting Shares and Class B Voting Shares, they may influence all major
corporate decisions and our other shareholders may not be able to affect these
corporate decisions. In addition, under the terms of a shareholders agreement,
each of CSRI Inc., formerly Canadian Satellite Radio Investments Inc., and XM
has certain board nomination rights and certain consent rights with respect to
fundamental corporate actions. As a result, these shareholders will be able to
directly impact our ability to undertake certain actions.
 
 Item 4 
- Information on the Company
 
 A.           HISTORY
AND DEVELOPMENT OF THE COMPANY
 
 Our
legal name is Canadian Satellite Radio Holdings Inc. Our trade name is
XM Canada. We were incorporated under the Business Corporations Act
(Ontario) on July 31, 2002, as 2014503 Ontario Inc. Our name was
changed to “Canadian Satellite Radio Holdings Inc.” by articles of
amendment filed on July 7, 2003 and on December 7, 2005 we amalgamated
with 2087609 Ontario Inc., under Part XIV of the Business Corporations
Act (Ontario).
 
 Our
head office is located at 590 King Street West, 3rd Floor,
Toronto, Ontario, Canada, M5V 1M3, and our telephone number is
(416) 408-6000. Our corporate website can be accessed through www.xmradio.ca. The
information found on our corporate website is, however, not part of this annual
report. Our agent for service of process in the United States with respect
to our senior notes is CT Corporation System, 111 Eighth Avenue,
New York, New York 10011.
 
 On
August 19, 2003, our subsidiary CSR Inc. filed its initial application
to the CRTC for a broadcasting license to provide subscription-based satellite
radio service in Canada. On June 16, 2005, the CRTC granted CSR Inc. a
broadcasting license, based on certain conditions outlined in this annual
report. On September 7, 2005, CSR Inc. voluntarily applied to amend
the CRTC broadcasting license to, among other things, increase the minimum
number of Canadian French-language channels that are offered from three
to four.
 
  
  21
  On
November 21, 2005, the CRTC advised us that it was satisfied that the
conditions to the grant of our broadcasting license were fulfilled, and that the
license would therefore be issued when: (i) the Department of Industry
notified the CRTC that its technical requirements had been met, and (ii) we
confirmed to the CRTC that we were prepared to commence operations. The
Department of Industry notified the CRTC that its technical requirements had
been met on November 22, 2005. Similarly, on November 22, 2005, we
confirmed to the CRTC that we were prepared to commence operations. As a result
of the satisfaction of these conditions, we fulfilled all regulatory conditions
to launch, and we were authorized to launch our service.
 
 On
November 22, 2005, we launched our English and French satellite radio
service across Canada.
 
 On
December 12, 2005, we completed our initial public offering.
 
 On
February 10, 2006, we completed our offering of US$100 million senior
notes.
 
 On
February 10, 2006, our application to amend the CRTC broadcasting license
was approved.
 
 On
July 1, 2007, we became the exclusive satellite radio home of the
NHL.
 
 On
August 31, 2007, we achieved more than 300,000 subscribers.
 
 On
September 12, 2007 we completed a $20 million convertible debt
offering.
  With
the support of our strategic partner, XM, we have signed or negotiated
agreements with various suppliers and distributors, including retailers,
automotive manufacturers, hardware manufacturers, infrastructure implementation
suppliers, and programming content providers. As we grow the business, we will
continue to pursue relationships with other distribution, supplier and
programming partners.
 
 On
February 19, 2007, XM entered into a merger agreement with Sirius and Vernon
Merger Corporation (“Merger Co.”). On July 28, 2008, subsequent to receiving all
necessary regulatory approvals to complete the merger, XM merged with and into
Merger Co., and is now being operated as a wholly-owned subsidiary of Sirius XM
Radio Inc. ("Sirius XM"), formerly, Sirius Satellite Radio Inc. XM is now a
wholly owned subsidiary of Sirius XM which owns an indirect 23.03% equity
interest in the Company and a 49.9% equity interest in Sirius Canada our direct
competitor in satellite radio service in Canada. In light of the merger, the
Company continues to provide XM SDARS in Canada to its customers while it
diligently reviews all strategic options and opportunities.
 
 For
a description, including the amount invested, of our principal capital
expenditures for fiscal year ended August 31, 2008, see the “Liquidity and
Capital Resources” section in our “Management Discussion and Analysis of
Financial Condition and Results of Operation” included in this annual report
under “Item 5  - Operating and Financial Review
and Prospects.”
 
 B.           BUSINESS
OVERVIEW
 
 Our
Business
 
 We
continue in our mission to become the market leader in providing subscription
based satellite radio entertainment to the Canadian market, based on the number
of satellite radio subscribers. During our third fiscal year, which ended August
31, 2008, we achieved 497,400 subscribers, a 58% increase over the 315,200
subscribers we had as of August 31, 2007. We are the exclusive Canadian licensee
of XM, a pioneer in satellite radio and the leader, by total subscribers, in the
U.S. satellite radio market. XM has publicly stated that it had over
9.7 million satellite radio subscribers as of June 30, 2008. As the
exclusive licensed provider of XM SDARS, in Canada, our service leverages
XM’s existing satellite network and technology, its brand and distribution
relationships and significant operational know-how. Through XM, we currently
offer up to 130 channels, which include commercial-free music, as well as
news, talk, sports and children’s programming, including at least 13 Canadian
channels designed and developed by us from our studios in Toronto, Montréal and
Québec City. The subscription fee for our service is $14.99 per month.
Subscribers are offered a discount on the monthly subscription rate by prepaying
for a fixed term of one year or greater. Each subscriber also has the
opportunity to purchase a limited number of additional subscriptions for $9.99
per month.
 
   22
  
 Distribution
of our receivers is primarily through automobile OEMs and consumer
electronic retailers.
 
 We
have multi-year distribution arrangements with several automobile OEMs,
including, among others, GMCL, Honda Canada, Nissan Canada, Toyota Canada,
Hyundai Auto Canada, Porsche Cars Canada, Subaru Canada and Suzuki Canada. As a
result of these agreements, we have secured relationships to factory install XM
satellite radios with automotive companies that represent approximately 58% of
vehicles sold in Canada in 2008 and XM satellite radios are now available in
more than 100 vehicle models for the 2009 model year. Similar to U.S. OEMs, most
Canadian OEMs commence their model year during the summer, such that the 2009
model year started in the summer of 2008. Together with these automobile OEM
partners, we generally offer a 3-month trial to all new purchasers of vehicles
that are XM enabled.
 
 Under
our exclusive 13 year agreement with GMCL, which became effective November 10,
2005 at least 90% of GMCL’s vehicle lines for the 2007 model year and beyond
must offer factory installed XM radios. GMCL is the single largest seller of
automobiles in Canada A summary of the key terms of our distribution agreement
with GMCL is contained below under the heading “Business - GMCL Distribution
Arrangement”.
 
 Our
exclusive 8-year agreement with Honda Canada provides that Honda will factory
install XM satellite radios in Honda and Acura models. Honda Canada began
factory installations starting in the fall of 2007 with the Acura MDX and TL
models and expanded to a wider range of products for the 2008 model year to
include the Acura RDX, the Honda Accord and the Honda Odyssey. Model year 2009
brought the introduction of the Acura TSX, RL and CSX for select packages as
well as the Honda Pilot and Ridgeline. Part of the agreement with Honda Canada
includes an equity stake in our company. Honda Canada is the country’s fifth
largest automobile manufacturer, with sales of almost than 170,000 vehicles in
2007.
 
 Our
exclusive 10-year agreement with Nissan Canada includes the factory installation
of satellite radios in select 2009 model Nissan vehicles, including the
top-selling Nissan Altima, and standard on all 2009 Infiniti vehicles. It is
anticipated that XM satellite radios will eventually be factory installed in the
majority of Nissan’s lineup. Nissan Canada also assumed an equity position in
our Company as part of this agreement.
 
 We
have a 5 year distribution agreement with Toyota Canada. Toyota is the second
largest auto retailer in Canada with sales of almost 200,000 vehicles in 2007.
Toyota auto dealers have already begun factory installing XM satellite radio
receivers in select Toyota/Lexus models.
 
 We
have an exclusive multi-year distribution agreement with Hyundai Auto Canada.
Hyundai is among the best-selling foreign manufacturers in Canada, having sold
almost 65,000 vehicles in 2007. XM is currently offered as standard equipment on
the award winning Azera and Sonata sedans, as well as the VeraCruz cross-over,
Santa Fe sport utility vehicles and the new 2009 Genesis sedan.
 We
have an exclusive multi-year distribution agreement with Porsche Cars Canada and
Harley Davidson Motorcycles for the installation of XM satellite
radios.
 
 In
addition to our distribution arrangements with automobile OEMs, we have
multi-year distribution agreements with Rogers Communication to provide XM
Canada content across the Rogers Wireless, Cable and Internet platforms, Telus
Mobility to provide XM Canada content across the Telus wireless, Avis Rent A Car
and Budget Rent A Car to provide the XM service in rental vehicles across Canada
and Air Canada for exclusive programming of in-flight music channels. XM radios
are also available in Canada at national and regional consumer electronics
retailers, such as Best Buy, Canadian Tire, Future Shop, The Source, and other
large national, regional and independent retailers that sell consumer
electronics in Canada. These retailers represent over
4,700 stores.
 
 On
September 12, 2005, we and XM announced an approximately
US$100 million ten-year contract to broadcast National Hockey League, or
NHL, games as part of the XM service. This ten-year contract was non-exclusive
to us for the first two years and we became the exclusive Canadian satellite
radio provider of NHL games beginning July 1, 2007. We believe that this
transaction has had a significant positive impact on attracting subscribers to
the XM service in Canada. We are responsible for a substantial portion of the
fees payable to the NHL under this agreement.
 
 We
are one of only two applicants who have received approval from the CRTC, for a
Canadian broadcasting license to provide subscription-based satellite radio
service in Canada. The other approved satellite license applicant is SIRIUS
Canada, a joint venture between CBC-Radio Canada, Standard Broadcasting and
SIRIUS. A third applicant, CHUM Limited, or CHUM, also received approval from
the CRTC for a broadcasting license to provide a subscription- based radio
service in Canada, but only through terrestrial transmitters.
 
 We
are broadcasting our service using XM’s existing satellite network, which covers
the continental U.S. and Canada. We are supplementing XM’s satellite coverage
with a terrestrial repeater network of approximately 68 repeaters, owned
and operated by us. Our repeater deployment is focused on the 16 largest
Canadian cities to improve coverage and reduce interruptions by buildings or
other obstacles.
 
 Satellite
radios designed to serve the car, home, portable and wearable stereo markets are
available throughout Canada at national and regional consumer electronic
retailers under the Audiovox, Delphi and Pioneer brand names. The XMp3 is
the newest addition to our portable radio portfolio.  This wearable XM
radio and MP3 player receives live satellite radio and lets consumers record up
to 100 hours of XM programs, record multiple channels simultaneously,
auto-record, pause and replay.The XMp3 also features
new XM2go Music Manager for organizing content and micro-SD card slot for
additional MP3 storage. The XMp3 will be available to consumers Canada-wide as
of November 2008. The initial cost of any of these radios to the consumer ranges
from approximately $30 to $300, inclusive of rebates.
 
 For
the fiscal period ending August 31, 2008, we generated revenues of
approximately $39,457,043. Nearly all of our revenue comes from subscriptions,
activations and sales of radios from the direct fulfillment channel. Incremental
revenue is generated from advertising spots on the non-music channels that we
program in Canada and U.S. focused advertisements that we place on our
National Hockey League Talk Channel. Our wireless partners (Rogers
Communications and Telus Mobility) are also a source of incremental revenue. As
we grow our subscriber base, we expect that our service will become an
increasingly attractive medium for advertisers to target customers on a
nationwide basis.
 
   23
  
 Exclusive
XM Relationship
 
 XM
offers innovative and diverse radio programming in digital quality sound with
more than 170 channels in the U.S. featuring music, news, talk,
sports, traffic and weather and a variety of other content. We have an initial
ten-year agreement with XM, which became effective November 17, 2005,
providing us with the exclusive rights to sell XM’s SDARS in Canada. XM has a
significant equity interest in our business.
 
 Our
service currently includes up to 130 channels, including commercial-free
music, as well as news, talk, sports and children’s programming, including at
least 117 XM channels and at least 13 Canadian channels developed by
us. We believe the content provided on these channels is well suited to Canada’s
diverse listening population.
 
 We
leverage XM’s existing content and existing satellite network, which
significantly lowers the capital required to enter and operate in the satellite
radio market. In addition to XM’s satellite network, we utilize XM’s established
programming and broadcasting facilities and benefit from the significant capital
invested by XM to date in research and development and on developing its
satellite network. XM has agreed to provide us with technical expertise in
connection with our terrestrial repeater network across Canada and our
information technology platform and broadcasting operations.
 
 We
have had, and will continue to have, the benefit of utilizing XM’s experience in
conducting our business and when making broadcasting, advertising and other
arrangements with third parties. In developing our information technology and
business processes, including our call center, we have utilized XM’s
experiences, and will continue to leverage its relationships. We have worked
closely with XM’s management to identify key success factors in both marketing
to the consumer and training our distribution forces.
 
 A
summary of the key terms of the operational agreements between us and XM are
contained below under the heading “Business  - Operational
Agreements.”
 
 Competitive
Strengths and Business Strategy
 
 We
believe that our business benefits from a number of factors as a result of our
affiliation with XM and the later launch of our service in Canada. In
particular, we have had the benefit of observing four years of XM’s operations
in the U.S. before launching our service in Canada and we have been able to
leverage many of the economies of scale XM has already achieved. We believe that
other factors benefitting our business include the following:
 
 •
              Low funding requirements.Since XM’s satellite infrastructure already covers the continental
      U.S. and Canada, we are not required to build, launch, maintain or manage
      our own satellites, which saves us significant time and funding. In
      addition, as we continue to develop our information technology systems, we
      intend to leverage XM’s experience and existing broadcasting licenses.
      This is less expensive, and requires less time than building our own set
      of systems. We also believe that our relationship with XM, and XM’s
      experience in rolling out its U.S. service, has allowed us to design
      an efficient network of terrestrial repeaters. We had the benefit of
      designing our repeater network and coverage testing Canadian cities with
      the XM satellites already in place, and as a result, we believe that we
      were able to model the optimal repeater sites more
      effectively.
 
 •
              XM
      continues to change programming in response to its listenership and offers
      a unique radio listening experience for Canadians. XM reports that it has
      a wider variety of programming than it did when it originally launched in
      the U.S. With the addition of a greater variety of sports channels,
      including exclusive coverage of the National Hockey League play-by-play,
      as well as well-known talk show personalities, such as Oprah Winfrey and
      Bob Edwards, XM continues to refine its programming lineup. We believe
      that Canadians have an appetite for specialized radio programming and are
      eager to have access to the depth and choice that the XM system provides.
      We have fully functional broadcast studios in Toronto, Montréal and Québec
      City. These studios are well equipped to program and broadcast music and
      talk channels in both French
and English
 
 
 
 
   24
  
 •
              Well-developed distribution
      channels.According to DesRosiers Automotive Consultants Inc., we
      have secured relationships to factory install receivers with automotive
      companies that represent approximately 58% of vehicles sold in Canada in
      2008, including General Motors, Honda, Toyota, Hyundai and Nissan. As a
      result of our relationship with XM, we have been able to reach comparable
      distribution arrangements with most of the Canadian counterparts of these
      auto manufacturers. Also, given the increased market awareness of
      satellite radio in Canada, retailers in Canada have been willing to carry
      and display satellite radio devices on
  their shelves.
 
 •
              Lower cost and more variety of
      radios.We entered the market when the cost of manufacturing radios
      has been less expensive than it has been historically due to technology
      improvements and improved scale of production. This has resulted in lower
      cost radios to the consumer, significantly lowering a barrier to satellite
      radio technology adoption. This trend continues to reduce subsidies
      provided by satellite radio service providers, significantly lowering
      their cost to acquire new subscribers. Lower costs also have resulted in a
      proliferation of stationary, portable and wearable radios and other
      technological devices equipped for the playing and recording of music and
      other audio files. We believe that this expansion of devices has
      dramatically expanded the market opportunity for satellite radio beyond
      car stereos.
 
 •
              Future growth opportunities.As we continue to build our subscriber business through traditional
      retail and automobile OEM channels, we also plan to grow the business by
      offering specific hardware and services through non-traditional retail
      channels, including rental car companies, national and local businesses,
      hotel chains, and to boat and airplane owners, commercial airlines,
      truckers and others. Subscribers through these channels will have distinct
      hardware and service packages, including weather information for marine
      and aviation. We expect that subscriber fees may be different for each of
      these channels. XM also reports that XM’s telematics service offerings are
      becoming more widespread in the U.S. Telematics, which includes real
      time data and traffic information through vehicle navigation systems such
      as XM NavTraffic, is being integrated into select Honda/Acura,
      Toyota/Lexus, Nissan/Infiniti and General Motor models. XM NavTraffic
      is the U.S. first real-time satellite traffic data service and is
      available in 79 major metropolitan cities across North America,
      including 3 Canadian cities for a monthly fee. We anticipate that the
      Canadian partners of these automobile OEMs will promote telematics
      here in Canada. XM, working with several partners, introduced the
      XM Advanced Services vehicle at the 2006 Consumer Electronics Show.
      This concept car featured in-car video (On2 Technologies), voice
      command (VoiceBox (R) Technologies), weather alerts (WxWorx), parking
      spot locator (Nu-Metrics Inc. and InfoGation) and other
      innovations.
 
 Our
      Product
  We
currently offer 130 channels including commercial-free music, as well as
news, talk, sports and children’s programming, including at least
117 American channels and 13 Canadian channels.  All 130
channels are received for a base subscription fee of $14.99 per month, or $12.91
per month for subscribers who sign a 3 year subscription
agreement.  Additional family subscriptions are $9.99 per
subscription. Subscribers are offered a discount on the monthly subscription
rate by prepaying for a fixed term of one year or greater.
 
 Our
service offers a broad range of music genres that are popular but currently
unavailable in many Canadian markets. Hallmarks of our channel lineup in Canada
include music from a variety of genres, including:
 
 •
              Decades  -
      individual channels that broadcast music hits specific to each decade from
      the “40s through to the 90s”;
 
 •
              Rock  - more than
      a dozen channels of different kinds of rock music, as well as exclusive
      artist interviews and live
performances;
 
 •
              Country  -
      old-time, classic, contemporary, bluegrass and alternative
      country;
 
   25
  
 •
              Pop &
      Hits  - dedicated channels for pop hits from around the world,
      love songs, movie soundtracks, show tunes and
      chart toppers;
 
 •
              Urban  -
      rhythm & blues, rap and hip
hop;
 
 •
              Jazz and Blues  -
      classical jazz, as well as contemporary and future fusion
      hits;
 
 •
              Classical  -
      complete coverage of the classical spectrum, from the renaissance
      to today;
 
 •
              Dance  - dance
      music from around the world; and
 
 •
              Lifestyle  - an
      eclectic mix of classical, jazz and
rock.
 
 Our
digital signal transmitted via satellite and our terrestrial repeater network
provide coast-to-coast coverage, which is a particular benefit for music formats
that have strong widespread demand on a nationwide basis but have been relegated
to AM stations with weaker signals.
 
 In
addition to music genres, we also offer a broad array of sports, news, comedy
and talk entertainment channels. These types of programming are not available in
many radio markets and we believe this makes our service appealing to dedicated
sports fans and listeners whose tastes are not served by existing AM/FM radio
stations. On September 12, 2005, we and XM announced a US$100 million
(approximately $106 million) ten-year contract to broadcast National Hockey
League, or NHL, games as part of the XM service. The ten-year contract was
non-exclusive for the first two years and as of July 1, 2007, XM Canada is the
exclusive Canadian satellite radio provider of NHL games. We believe that the
exclusivity of this deal will have a significant positive impact on attracting
subscribers to the XM service in Canada. We are responsible for a substantial
portion of the fees payable to the NHL under this agreement.
 
 In
addition to at least 117 XM channels, we also offer at least
13 Canadian channels designed and developed by us. These 13 channels,
of which 8 are English and 5 are French, are:
 
 English
Channels
 
 •
              Home Ice - an
      all-hockey talk channel. The channel provides Canadians with live,
      play-by-play coverage from more than 1,000 NHL games each season and
      features coverage from well-known commentators and former National Hockey
      League stars;
 
 •
              Home Ice Info - hockey
      scores, updates and play-by-play coverage of NHL
  games;
 
 •
              Home Plate Info -
      baseball scores, updates, interviews and player profiles available
      24/7;
 
 •
              Scoreboard- a 24/7
      sports score information channel covering all major league sports
      including tennis and auto racing.
 
 •
              The Verge - a 24/7 rock
      music channel featuring new, emerging and recently established Canadian
      rock artists;
 
 •
              Laugh Attack - a comedy
      channel spotlighting Canadian
comedians.
 
 •
              Canada 360 - a 24/7
      national news and information channel focused on the latest news, weather,
      sports, business and entertainment information and issues of importance to
      Canadians.
 
 •
              ATN -a 24/7 channel
      produced by the Asian Television Network for XM Canada, Canada’s pioneer
      South Asian Broadcaster,  serving the South Asian community
      across North America with the latest news, sports and
      entertainment.
 
   26
  
 French
Channels
 
 •
              Radio
      Parallel- Featuring “Le Pirate” Jeff Filion, Radio Parallel focuses on
      controversial issues of importance to
Quebecers.
 
 •
              Quoi
      de Neuf - a 24/7 national news and information channel focused on the
      latest news, weather, sports, business and entertainment information and
      issues of importance to
Francophones.
 
 •
              Calendrier Sportif - a
      24/7 sports channel featuring continuously updated schedules of sporting
      events taking place North America with a particular focus on
      Quebec.
 
 •
              Air Musique - a music
      station featuring selections chosen based on real time subscriber
      requests.
 
 •
              Sur La Route - a music
      station featuring a blend of modern and classic pop, folk, rock and roll,
      “chanson” and soul featuring yesterday’s, today’s and tomorrow’s
      stars.
 
 Our
music channels are completely commercial-free and our talk and sports channels
have a reduced amount of advertising relative to terrestrial radio. We believe
that a significant portion of the listening market will pay to subscribe to a
radio service that provides 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. Of the at least 13 Canadian content
channels that we program, those that have advertising do not broadcast more than
six minutes of national commercial messages during any hour, in accordance with
our CRTC broadcasting license.
 
 We
believe that our service is an appealing alternative to traditional AM/FM radio
in Canada as well as other in-vehicle audio entertainment options. Local radio
stations, even those that 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 coast-to-coast
coverage and ability to provide up to 130 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 some of the
principal differences between XM radio in Canada and traditional
AM/FM radio.
 
 XM Radio
      in Canada
              
              Traditional
      AM/FM RadioProgramming
      quality and choice
              
              Up
      to 130 channels with an extensive variety of
    programming
              
              Limited
      formats in many marketsCoverage
              
              Coast-to-coast
      coverage in the densely populated regions of Canada
              
              Local
      area coverageAudio
      quality
              
              Digital
      quality sound
              
              Analog
      AM/FM quality soundCommercial
      Advertising
              
              Features
      100% commercial-free music channels. Six minutes or less of commercials
      per hour on our programmed talk channels
              
              Up
      to 18 minutes of commercials per hourRadio
      Displays
              
              Text
      display with title/name of song/artist, as well as sports scores and stock
      ticker on certain radios
              
              Limited
      visual display
 
 XM
creates most of its music channels at its studio facilities in Washington,
District of Columbia; New York City, New York; and at the Country
Music Hall of Fame and Museum in Nashville, Tennessee. We have broadcasting
studios in Toronto, Montreal and Québec City that have technological facilities
linked to XM’s studios in the U.S. We have created our own unique Canadian
channels at these Canadian broadcasting facilities. To that end, we have hired
key programming and production staff and on-air talent to prepare our content
for broadcast on our Canadian channels. There is a large pool of Canadian
talent, and we are very selective in order to ensure that our programming meets
the high standards established by XM.
 
 
   27
  
 Accompanying
the audio portion of the broadcast, the digital display of our radios indicates
the channel name, number and category. It also can be adjusted to indicate the
name of the song and artist, or the name of the talk show being aired. A
personal stock ticker, sports ticker and clock are also displayed on
certain radios.
 
 XM
continues to implement its technology plan, which aims to reduce the cost of XM
radios while increasing their functionality. We intend to continue to leverage
any cost reductions and technological innovations achieved
by XM.
 
 Other
      Offerings
 
 Our
subscribers and Canadian non-subscribers can now listen to a live stream of
selected XM Canada channels over the internet via our XM Radio Online Service,
located at http://listen.xmradio.ca. XM Radio Online is available as part of the
basic subscriber package for free, and as a seven-day complimentary trial
available to non-subscribers.
 
 We
continue our partnership with TELUS to deliver select XM Canada channels to
TELUS mobile phone users. As at June 30, 2008, TELUS had
approximately 5.8 million wireless subscribers. TELUS wireless subscribers
can pick a stand alone package of 15 channels for a price of $8.00, a stand
alone package of 50 channels for $15 per month or a day pass with 50 channels
for $3 per day.
 We
also have a partnership with Rogers to deliver select XM Canada channels to
Rogers mobile phone users. As at June 30, 2008, Rogers had 7.5 million
wireless subscribers. Rogers wireless subscribers can pick a stand alone
package of 50 channels for $15 per month or it is included in the ‘Vision’
Bundle for $25.00.
 
 We
also offer XM NavTraffic(r) the nation's first satellite-delivered traffic
information service. It enables your vehicle's navigation system to display
constantly refreshing and current traffic conditions for your desired route. XM
NavTraffic makes it possible for drivers to easily access critical and
customized info such as traffic congestion, accidents, incidents, road
construction, average speed and estimated driving time.  NavTraffic is
available in Toronto, Montreal, and Vancouver in addition to 79 metropolitan
areas across the USA for a monthly fee. For aviation and marine, the XM WX
Satellite Weather service provides real-time graphical weather data for advanced
situational awareness in prevailing weather conditions.
 
 Marketing
 
 Our
marketing strategy is aimed at educating and building awareness and demand among
potential subscribers in Canada of XM’s SDARS as the leader in the new satellite
radio category, with XM offering appealing features compared to traditional
radio.
 
 Our
promotion of XM’s service in Canada has been and will continue to be supported
by both traditional and non-traditional advertising programs including radio,
print, outdoor, television and direct marketing, some of which may be co-branded
(and potentially co-funded) with our distribution, programming,
wireless and hardware manufacturer partners. We will focus on educating
consumers about XM in particular and satellite radio in general
through hands-on experiences at locations such as retail outlets,
automotive dealerships, various sports and entertainment venues, as well as
through real-time streaming via internet trial. We have and will continue to
offer promotional programs geared to the consumer when the timing and
opportunity is appropriate. These opportunities may include discounts on
hardware pricing or multi-year subscription fees, or bundling XM with other
related products and services. We also distribute sample programming and
marketing materials at retail outlets, automotive dealerships, car rental
outlets, commercial airlines, sports and entertainment venues and on the
Internet to generate consumer interest.
 
 We
have allocated significant funds to GMCL to be utilized for mutually agreed upon
advertising opportunities, dealer promotions, on-site activities, training and
vehicle literature. Some examples of these co-branded opportunities include:
direct mail and outbound call programs to new GMCL vehicle owners with
information on how to subscribe to the XM service through us once the
three-month trial period is complete; Canadian Auto Show presence; GMCL website
representation; and various consumer promotions.
 
 We produce
and supply on a monthly basis, custom audio content branded as XM enRoute for Air
Canada’s audio/video entertainment systems in both English and French,
which is accessible to the 31 million passengers Air Canada carries each year.
Additionally, we engage in various marketing activities both on-board Air
Canada’s aircraft in its Maple Leaf lounges across the
country.
 
 Our
wireless distribution partners, Rogers Wireless and Telus Mobility, offer
subscription packages for real-time streaming of XM satellite
radio programming to customers through their mobile phones. 
XM satellite radio programming is also available free of charge to
customers of Avis Rent A Car and Budget Rent a Car, with rentals of higher
General Motors vehicles, subject to availability.
 
   28
  
 Distribution
 
 We
market our satellite radio service through several distribution channels
including automotive manufacturers, national and regional electronics retailers,
car audio dealers and mass retailers. We continue to focus on distribution of
radios through retail distributors and automotive manufacturers to promote rapid
market penetration.
 
 Automobile
      OEMs
 
 We
have multi-year distribution arrangements with several automobile OEMs,
including, among others, GMCL, Honda Canada, Nissan Canada, Toyota Canada,
Hyundai Auto Canada, Porsche Cars Canada, Subaru Canada and Suzuki Canada. As a
result of these agreements, XM satellite radios represented more than 58 percent
of all factory-installed satellite radios in 2009 vehicle models and are now
available in more than 120 vehicle models for the 2009 model year. Similar
to U.S. OEMs, most Canadian OEMs commence their model year during the summer,
such that the 2008 model year started in the summer of 2007. Together with these
automobile OEM partners, we generally offer a 3-month trial to all new
purchasers of vehicles that are XM enabled.
 
 Under
our exclusive 13 year agreement with GMCL, which became effective November 10,
2005 at least 90% of GMCL’s vehicle lines for the 2007 model year and beyond
must offer factory installed XM radios. GMCL is the single largest seller of
automobiles in Canada. A summary of the key terms of our distribution agreement
with GMCL is contained below under the heading “Business - GMCL Distribution
Arrangement”.
 
 Our
exclusive multi-year agreement with Honda Canada provides that Honda will
factory install XM satellite radios in Honda and Acura models. Honda Canada
began factory installations starting in the fall of 2007 with the Acura MDX and
TL models and is expanding to a wider range of products for the 2008 model year
to include the Acura RDX, the Honda Accord and the Honda Odyssey. Part of the
agreement with Honda Canada includes an equity stake in our company. Honda
Canada is the country’s fifth largest automobile manufacturer, with sales of
more than 158,000 vehicles in 2007.
 
 Our
exclusive 10-year agreement with Nissan Canada includes the factory installation
of satellite radios in select 2008 model Nissan vehicles, including the
top-selling Nissan Altima, and standard on all 2008 Infiniti vehicles. It is
anticipated that XM satellite radios will eventually be factory installed in the
majority of Nissan’s lineup. Nissan Canada also assumed an equity position in
our Company as part of this agreement.
 
 We
have a 5 year distribution agreement with Toyota Canada. Toyota is the second
largest auto retailer in Canada with sales of almost 160,000 vehicles. Toyota
auto dealers have already begun installing XM satellite radio receivers in
select Toyota/Lexus models.
 
 We
have an exclusive multi-year distribution agreement with Hyundai Auto Canada.
Hyundai is among the best-selling foreign manufacturers in Canada, having sold
almost 65,000 vehicles in 2007. XM is currently offered as standard equipment on
the award winning Azera and Sonata sedans, as well as the Vera Cruz cross-over
and Sante Fe sport utility vehicles.
 
 We
have an exclusive multi-year distribution agreement with Porsche Cars
Canada.
 
 Suzuki
Canada will factory install satellite radios on the 2008 XL-7 JLX and dealer
installation kits will be available for the 2007 Grand Vitara and SX4
models.
 
 Subaru
Canada will commence factory installation in select 2008 model year
cars.
 
 We
have also entered into a multi-year distribution agreement with Harley Davidson
Motorcycles.
 
   29
  
 National
and Regional Consumer Electronics Retailers
 
 XM
radios are available at national and regional consumer electronics retailers,
such as Best Buy, Future Shop, The Source and other large national, regional and
independent retailers that sell consumer electronics in Canada. These retailers
represent over 4,700 stores in Canada. We develop in-store merchandising
materials, including fully functional displays for several retailers, and train
the sales forces of all major retailers
 
 The
XM Radio System
 
 Overview
 
 The
XM radio system broadcasts satellite radio signals over Canada and the
United States and their respective coastal waters using radio frequencies.
These radio frequencies are within a range of frequencies called the S-Band. XM
reports that its 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 and personal portable
devices. XM reports that the XM radio system uses a network consisting of
high-power satellites in two orbital slots, an uplink facility, and ground-based
repeaters in the U.S. primarily in dense urban areas to provide coverage
where the satellite signal is obstructed.
 
 Consumer
      Hardware
 
 Subscribers
access our service through specialized satellite radios that may also receive
traditional AM/FM channels. We launched our service with a focus on three XM
radio categories. The XM2go radios were the first portable units available that
receive the live satellite feeder that can be used in the home, in the car or on
the go, and are currently available under the Delphi MyFi and Pioneer innoTM
brand names. The Pioneer innoTM also includes MP3 functionality. Second,
Plug-n-Play radios allow subscribers to listen to XM radio in the car, or at
home through their home stereo system or portable boom box. We currently market
a broad selection of radios and accessories, across different price points, by
Delphi and Audiovox, including the Xpress family and RoadyXT’s. Finally,
permanent in-car and home radios allow subscribers to upgrade their existing
radios to include XM’s service, and are supported by a variety of radio
manufacturers including Alpine, Audiovox, Pioneer, Polk Audio, Sony, Yamaha and
others. The initial cost of these radios to the consumer ranges from
approximately $30 to $300, inclusive of rebates. XM radios are available in
Canada at national consumer electronics retailers such as Best Buy, Future
Shop,  The Source, Canadian Tire and other large national, regional
and independent retailers.
 
 Advanced
      Satellite Radio Technology
 
 Since
the introduction of the first XM radio in 2001, XM reports that there has been
significant advancement in the selection and features of XM hardware. On
August 9, 2005, XM unveiled the Delphi RoadyXT and Audiovox Xpress, the
smallest satellite radios ever. In 2006, the Pioneer innoTM with
MP3 capabilities, the next generation of XM2go portable satellite radio
receivers, became available in many stores across Canada. A particularly
innovative feature of the inno allows the user to “bookmark” songs heard on XM,
connect the inno to a personal computer, and instantly purchase the songs from
the XM + Napster online service. The XMp3 is the newest addition
to our portable radio portfolio.  This wearable XM radio and MP3
player receives live satellite radio and lets consumers record up to 100 hours
of XM programs, record multiple channels simultaneously, auto-record, pause and
replay.  The XMp3 also features new XM2go Music Manager for organizing
content and micro-SD card slot for additional MP3 storage. The XMp3 will be
available to consumers Canada-wide as of November 2008. The initial cost of any
of these radios to the consumer ranges from approximately $30 to $300, inclusive
of rebates.
 
   30
  
 Terrestrial
      Repeaters
 
 The
terrestrial repeater system that we have deployed in 16 major cities across
Canada supplements the coverage of the XM satellites in Canada. In some areas,
satellite signals may be subject to blockages from tall buildings and other
obstructions. XM reports that due to the satellites’ longitudinal separation, in
most circumstances where reception is obscured from one satellite, XM radio’s
signal will still be available from another XM satellite. XM has indicated,
however, that in some urban areas with a high concentration of tall buildings,
line-of-sight obstructions to all satellites may be more frequent. Terrestrial
repeaters are ground-based electronics equipment installed on rooftops or
existing tower structures that receive the signal from one of the satellites,
amplify it and retransmit it at a significantly higher signal strength to
overcome any satellite signal obstruction. XM’s network operating center
monitors the terrestrial repeater network to ensure that the XM radio system is
operating properly. We utilize XM’s fault detection diagnostics systems to
detect various system failures before they significantly impact our quality
of service.
 
 Satellite
      Network
 
 XM
currently transmits its signal throughout the US and Canada from its two
satellites XM-3 and XM-4. Satellites XM-1 and XM-2 are currently inactive,
in-orbit spares, available for use in the event either XM-3 or XM-4 fail
unexpectedly. XM expects to complete construction of another satellite, XM-5, in
2009 for use as a ground spare or to be available for launch in the event there
is an early operations failure with XM-4.
 
 Competition
 
 We
face competition for both listeners and advertising dollars. In addition to
pre-recorded music purchased for playing in cars, homes and using portable
players, we compete most directly with the following providers of radio or other
audio services:
 
 SIRIUS Canada.Our direct
competitor in satellite radio service is SIRIUS Canada, the only other CRTC
licensee for satellite radio service in Canada. SIRIUS Canada is a joint venture
between CBC-Radio Canada, Standard Broadcasting and SIRIUS.. SIRIUS Canada
launched its satellite radio service on December 1, 2005. SIRIUS Canada
broadcasts channels and offers programming that we do not offer, and SIRIUS
Canada’s satellite radio service may be offered as an option on various Canadian
car model brands, certain of which may not offer our service.
 
 CHUM.CHUM, in conjunction
with Astral Media Ltd., received CRTC approval to receive a broadcasting
license at the same time that we and SIRIUS Canada received approvals for
broadcasting licenses. CHUM’s business plan is, however, different from our
business plan, as CHUM’s system would broadcast channels of audio programming
via terrestrial transmission towers in the L-band. CHUM has applied to the CRTC
to amend its license conditions to more closely match the conditions of our
broadcasting license. Should it launch its service, we expect CHUM to become one
of our competitors. Astral Media Ltd. has announced that it has agreed to
provide certain content to SIRIUS.
 
 Traditional AM/FM Radio.Our
competition also includes traditional AM/FM radio. Unlike XM’s SDARS,
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 detailed local traffic and weather
reports. The AM/FM radio broadcasting industry is highly competitive. Radio
stations compete for listeners and advertising revenues directly with other
radio stations within their markets on the basis of a variety of factors,
including program content, on-air talent, transmitter power, clarity or fidelity
of sound, audience characteristics, local program acceptance, and the number and
characteristics of other radio stations in the market.
 
   31
  
 Internet Radio.A number of
Internet radio broadcasts provide listeners with radio programming from across
the country and around the world. Although we believe that the current sound
quality of Internet radio is below standard and may vary depending on factors
that can distort or interrupt the broadcast, such as network traffic, we expect
that improvements from higher bandwidths, faster modems and wider programming
selection may make Internet radio a more significant competitor in the future.
There are a number of Internet-based audio formats in existence or in
development that could compete directly with XM’s SDARS. 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 disc players. Music in the public
MP3 audio standard is readily available and growing with sound files
available on the websites of online music retailers, artists and record labels
and through numerous file sharing software programs. These MP3 files can be
played instantly, burned to a compact disc or stored in various portable players
available to consumers.
 
 Recently,
podcasting has become a popular method of publishing sound files to the
Internet, allowing users to subscribe to a feed and receive new audio files
automatically. Podcasting has enabled independent producers to create
self-published, syndicated radio shows, and has given broadcast radio programs a
new distribution channel.
 
 Although
presently available formats have drawbacks such as hardware requirements and
download bandwidth constraints, which we believe make XM radio a more attractive
option to consumers, Internet-based audio formats may become increasingly
competitive as quality improves and costs are reduced. In light of the
increasing popularity of Internet radio, we have added XM Radio Online. Our
subscribers and Canadian non-subscribers can now listen to a live stream of
selected XM Canada channels over the internet via our XM Radio Online Service,
located at http://listen.xmradio.ca. XM Radio Online is available as part of the
basic subscriber package for free, and as a seven-day complimentary trial
available to non-subscribers.
 
 Downloading MP3 Devices. The
Apple iPod® is a portable digital music player that sells for approximately
$80-$350 and allows users to download and purchase music through Apple’s iTunes®
Music Store, as well as convert music on compact disc to digital files. The
iPod® enables consumers to buy and store up to 20,000 songs. In addition, iPods®
are compatible with certain car stereos and various home speaker systems, and
certain automobile manufacturers have entered into arrangements with
manufacturers of portable media players that are expected to enhance this
compatibility. Availability of music in the public MP3 audio standard has been
growing in recent years with sound files available on the websites of online
music retailers, artists and record labels and through numerous file sharing
software programs. These MP3 files can be played instantly, burned to a compact
disc or stored in various portable players available to consumers. Although
presently available formats have drawbacks such as hardware requirements and
download bandwidth constraints, which we believe could make XM Radio a more
attractive option to consumers, Internet-based audio formats are becoming
increasingly competitive as quality improves and costs are reduced. Also, some
recently introduced XM radio devices have the ability to store and play MP3
files.
 
 Cellphones.Cellular
telephones have increased in functionality over the past few years. Many cell
phone providers offer personalized musical ring tones. Some providers also offer
streaming music and video services. These streaming services are relatively new
to Canadian consumers. We continue our partnerships with TELUS and Rogers
to deliver select XM Canada channels to mobile phone users. TELUS wireless
subscribers can pick a standalone package of 15 channels for a price of $8.00, a
stand alone package of 50 channels for $15 per month, or a day pass with 50
channels for $3 per day. Rogers wireless subscribers can pick a standalone
package of 50 channels for a price of $15.00 or it is included in the ‘Vision’
Bundle for $25.00.
 
 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. In addition, cable
audio systems typically offer a limited number of channels with little to no
live content and a high level of repetitive program content, however, this
could change.
 
 
   32
  
 Recent
Developments
 
 We
launched our service on November 22, 2005. As of the completion of our
third fiscal year since launch, we achieved 497,400 subscribers. XM has
publicly stated that it had over 9.7 million satellite radio subscribers as of
June 30, 2008.
 
 Operational
Agreements
 
 XM License
      Agreement
 
 We
and CSR Inc. have entered into a license agreement with XM
(the ”License Agreement”). The following is a summary of certain material
terms of the License Agreement, and is not intended to be complete. Reference is
made to the License Agreement for the full text of its provisions. See “Material
Contracts.”
 
 Overview
 
 The
License Agreement gives us an exclusive, non-transferable right and license, on
the terms set forth in the License Agreement: (i) to offer and provide to
subscribers in Canada at least 72 programming channels, as selected
mutually by XM and us, that are offered by XM as part of its basic services in
the U.S., in combination with the XM Canada Channels (as defined
below), (ii) to offer and provide to subscribers in Canada certain premium
channels, as selected mutually by XM and us, that are offered by XM as part of
its premium services in the U.S., as applicable, (iii) to sell
subscriptions in Canada to our basic Canadian services and, as applicable, our
premium Canadian services, and (iv) to retransmit the signal received
within Canada from XM’s satellites through our terrestrial repeater
network.
 
 Under
the License Agreement, we and XM have agreed that we and they will work together
to develop and implement commercially reasonable methods to minimize the number
of Canadian gray market subscribers who subscribe to XM’s satellite
radio service.
 
 Term
 
 The
License Agreement, which became effective November 17, 2005, has an initial
term of 10 years. We may, at our option to be exercised at least one year
prior to the termination of the initial term, extend the License Agreement for a
further five years, provided that: (i) CSR Inc.’s broadcasting license
from the CRTC has been renewed at the end of the current CRTC license term
without any adverse modification (as described below); and (ii) we are
not at such time in breach of any provision of the License Agreement and have
not failed to cure any breach of a provision of the License Agreement in
accordance with its terms.
 
 If
CSR Inc.’s license from the CRTC is renewed at the end of its current term,
but as part of such renewal is modified by the CRTC in a material manner,
including without limitation any manner that adversely affects our ability or
the ability of XM to carry out the arrangements made under the License
Agreement, or that increases the Canadian content requirements or imposes
additional conditions of license beyond those specified in CSR Inc.’s
current CRTC license (as amended to reflect the September 7, 2005
application to the CRTC submitted by CSR Inc.) that, in XM’s reasonable
determination, make it technically less feasible or economically less attractive
in any significant respect to perform under the License Agreement, then such
modification will be an “adverse modification,” and in such event we shall not
have the right to automatically extend the License Agreement. If there is such
an adverse modification, then under the terms of the License Agreement we and XM
have agreed to negotiate in good faith whether to extend the term of the License
Agreement.
 
   33
  
 Fees
 
 In
consideration for the license granted to us by XM, we must, among other charges,
pay a monthly fee to XM equal to 15% of all subscriber fees earned by us in such
month in respect of our basic service, and 50% of the net revenues earned by us
in such month in respect of our premium service (if any), in each case as
determined in accordance with GAAP, consistently applied. If in any month we
are, on a per subscriber basis, based on the number of cumulative activations
and deactivations, and less any short-term promotional subscribers, providing
our basic service for less than 70% of the amount that XM charges its
subscribers for our basic services (as converted into Canadian dollars
based on the average exchange rate for such month), then for such month we must
pay our ongoing subscriber fee as if we had received 70% of the amount charged
by XM for its basic services in such month. The monthly basic and premium fees
must be paid by us on a monthly basis in arrears, with payment for each month to
be due by the tenth business day of the following month.
 
 Under
the License Agreement, we must pay XM an activation charge each time XM
activates a subscriber’s radio identification at our request.
 
 All
payments that must be made by us under the License Agreement must be made
without any deduction for taxes. To the extent that we are required to withhold
any amount in respect of taxes, other than net income or capital taxes, then we
must pay such additional amounts as are necessary to ensure that XM receives a
net amount equal to the full amount which it would have received had payment not
been made subject to such tax.
 
 Channel
      Determination and Content Costs
 
 We
and XM will mutually select the XM SDARS channels that will form part of
the basic services and premium services (if any) to be offered by us. XM
has the right to determine the format, nature, content and quality of the
channels chosen by XM and us. The parties have agreed, however, that
approximately 50 of the 72 XM SDARS channels will be
music channels.
 
 Under
the License Agreement, XM has sole responsibility for maintaining relationships
and negotiating agreements with third party programming providers to acquire
Canadian distribution rights for the XM SDARS channels to be broadcast in
Canada as part of our basic and premium services. We must reimburse XM for costs
relating to such Canadian distribution rights.
 
 We
are responsible for all costs and expenses incurred to obtain, maintain, and
report on all Canadian performance rights for the XM SDARS, including
required payments for the XM SDARS channels to be broadcast to Canadian
subscribers as part of our basic and premium services.
 
 Subscriber
      Activation and Deactivation
 
 XM,
from time to time, activates and deactivates subscribers to our basic service
upon our request. XM has agreed that it will process activation and deactivation
requests consistent with the level of effort and with the timing that XM uses
for its own subscribers. XM will not, however, have any liability to us for
failures to activate or deactivate subscribers within any specified
period.
 
   34
  
 Third
      Party Relationships
 
 Under
the License Agreement, we have primary responsibility, in consultation with XM,
for maintaining relationships and negotiating distribution agreements for Canada
with U.S. based retailers that sell XM’s satellite radio services within
the U.S. and that have retail operations in Canada, as well as for
U.S. based airlines, hotels, cable companies and similar entities that wish
to incorporate XM’s satellite radio services within the services offered by such
entities to their patrons or customers in Canada. Before entering into such
relationships, however, we and XM must discuss the commission, revenue share or
other payment to be paid to each such retailer for generating any new
subscribers.
 
 The
License Agreement provides that we will, upon XM’s written instructions,
authorize one or more automobile manufacturer, radio manufacturer and other OEM
to distribute our services within Canada. XM will have primary responsibility
for maintaining relationships and negotiating distribution agreements for Canada
with such third parties, and we will have primary responsibility for negotiating
joint or co-marketing arrangements with such third parties in consultation with
XM. Prior to authorizing any such third party to distribute our services, we and
XM must mutually agree with respect to the revenue share or other payment to be
paid to each such third party for generating any new subscribers, such payments
to be set by reference to then-prevailing market practices with respect to sales
of similar types of services and to the payments paid by XM with respect to
sales of its satellite radio services within the U.S.
 
 We
have agreed that with respect to common relationships that we will have with XM
and with radio manufacturers, retail distributors, strategic marketing entities,
technology providers and others, we will cooperate and coordinate with XM to the
extent and in the manner reasonably requested by XM to enable XM to maintain a
successful relationship with such person or entity for the benefit of both our
and XM’s service, and to coordinate the terms and conditions for our services
with those of XM’s service so as to obtain volume discounts and consistent
arrangements for particular technologies, joint advertising and marketing, and
the like.
 
 Restrictions
 
 The
License Agreement provides that our license is subject to certain restrictions,
including the following:
 
 (a)
              we
      may only offer our basic service package in its entirety to our
      subscribers, and may only offer premium services to customers who are
      subscribers to our
basic service;
 
 (b)
              we
      may not, without XM’s prior written consent, deliver our basic or premium
      services via any method of transmission (such as terrestrial or wireless
      transmission, via the Internet or otherwise) other than as transmitted by
      XM’s satellites or as rebroadcast through our terrestrial repeater
      network;
 
 (c)
              we
      may not provide satellite radio services or digital terrestrial radio
      services in Canada by means of any other satellite radio or other
      transmission system without the prior written consent of
      XM; and
 
 (d)
              we
      must offer our services on a Canada-wide basis, within the coverage of the
      XM satellites and our terrestrial repeater
  network.
 
 XM Representations,
      Warranties and Covenants
 
 Under
the License Agreement, XM represents, warrants and covenants to us
that:
 
 (a)
              XM
      owns or has sufficient rights in and to its satellites, its satellite
      transmission spectrum and the associated regulatory licenses, permits and
      regulatory approvals needed to operate its satellites in order to grant
      the license under the License
Agreement;
 
   35
  
 (b)
              XM
      has the full power and authority and has obtained all necessary rights
      and/or permissions to grant the license contemplated by the License
      Agreement, including without limitation all necessary rights from talent
      or other third parties in order to grant us the license to use the
      XM SDARS channels to be broadcast in Canada as part of our basic and
      premium services, and advertising included
  therein;
 
 (c)
              XM
      will use reasonable commercial efforts to make the XM SDARS channels
      to be broadcast in Canada as part of our basic and premium services, as
      well as the XM Canada Channels, available to us for distribution to
      our subscribers via broadcast over XM’s satellites throughout the
      footprint of XM’s satellites within Canada twenty-four hours a day, seven
      days a week, provided that XM shall have no obligations or liability with
      respect to any satellite or other failures that cause the services to be
      unavailable within Canada for any
  period; and
 
 (d)
              XM
      will use reasonable commercial efforts to make the signal quality and
      strength for the XM SDARS channels to be broadcast in Canada as part
      of our basic and premium services, as well as the XM Canada Channels,
      transmitted between XM’s satellites and the ground of high quality
      throughout the coverage beam of such satellites within Canada
      24 hours a day, seven days
a week.
 
 XM
has also agreed that if at any time there is a disruption in the satellite
transmission of our services in the Canadian footprint of XM’s satellites for a
period of greater than five minutes as a result of an error, problem or failure
with or originating with XM’s satellites or XM’s satellite network system
(and not our terrestrial repeater network), XM will keep us advised of XM’s
efforts to resolve such service disruption.
 
 XM
has agreed to indemnify and hold us harmless from any and all loss, liability,
cost, damages and expenses suffered, including reasonable legal fees and
expenses, with respect to any third party claim based on (i) any breach or
violation by XM or any of its agents of any of its obligations contained in the
License Agreement, or (ii) any negligence or willful misconduct by XM in
connection with the License Agreement that results in personal injury, death or
tangible property damage. There is no indemnity for any loss of XM service,
other than as a result of negligence or willful misconduct.
 
 Termination
 
 XM
may, in its sole discretion, terminate the License Agreement by written notice
to us in the event that:
 
 (a)
              we
      materially breach the License Agreement, other than a payment breach, and
      such breach, if capable of being remedied, is not remedied within
      60 days after we receive from XM a written notice identifying the
      breach and requiring it to be remedied or longer if the nature of the cure
      requires longer, provided we are diligently pursuing
      the cure;
 
 (b)
              we
      fail to pay any material amount payable under the License Agreement when
      due and such failure is not remedied within 30 days after we receive
      from XM a written notice identifying the failure and requiring it to be
      remedied, unless we have, in good faith, disputed in writing to XM the
      obligation to pay such amount and deposited the amount specified in such
      notice in escrow, and such dispute has not been finally
      resolved;
 
 (c)
              any
      of the Programming Agreement, Technical Services Agreement or Trademark
      License Agreement expire or are terminated for any reason (other than
      material default by XM or expiration in accordance with its terms after
      performance by us has been completed), or we materially breach our share
      issuance agreement with XM or the Shareholders
  Agreement;
 
 (d)
              we
      fail to obtain distribution rights as needed to meet our XM Canada
      Channel commitments by the date that our service is launched, or
      subsequent to that date during the term of the License Agreement, and such
      failure is not remedied within 60 days (120 days in the case of
      a failure to meet such commitments by the date that our service is
      launched) after we receive from XM a written notice identifying such
      failure and requiring it to
be remedied;
 
   36
  
 (e)
              we
      fail to capture and maintain during the one year period commencing on the
      later to occur of the second anniversary of the date of the License
      Agreement and the OEM Condition Date (being the first date on which we
      with the assistance of XM have entered into, have been offered the
      opportunity to enter into or are a party to agreements with automobile
      manufacturers with an aggregate 33% market share in Canada for the
      installation of satellite radios in automobiles) and each subsequent one
      year period during the term of the License Agreement (each, a “Contract
      Year”), on average during such Contract Year, at least: (i) the
      specified percentage of actual SDARS subscribers within Canada, which
      percentage will vary depending upon the number of subscription radio
      providers within Canada, or (ii) if less, 15 percentage points
      less than the percentage of actual SDARS subscribers within the
      U.S. held by XM on average during such Contract Year, provided,
      however, that with respect to the first (and only the first) time we
      fail to meet the applicable subscriber requirements, we shall have a
      period of one Contract Year to seek to cure such default, and if during
      the immediately succeeding Contract Year our subscribers exceed the
      applicable threshold in this paragraph, XM shall not have the right to
      terminate for the
prior failure;
 
 (f)
              we
      undergo a change of control, which shall mean either of: (i) CSRI
      Inc. holding or beneficially owning less than 15% of our voting shares or
      equity; (ii) Us owning less than 100% of the equity of CSR Inc.;
      or (iii) John I. Bitove holding, directly or indirectly,
      less than 50.01% of the voting rights or less than the lower of:
      (x) 33(1)/3% of
      the equity of CSRI Inc., or (y) 50% of the number of shares of CSRI
      Inc. currently held by
John I. Bitove;
 
 (g)
              XM
      is no longer transmitting its SDARS channels within Canada due to
      (i) loss or damage (including natural end of life) or technical
      problems with respect to XM’s satellites or any other element of XM’s
      satellite network system (including space and/or ground segments)
      reasonably needed to make such transmissions, (ii) loss of applicable
      governmental licenses or other required regulatory approvals needed for XM
      to continue operating its satellite network system and/or to continue
      transmitting within Canada, or (iii) a decision by XM to discontinue,
      in whole or in substantial part,
  offering SDARS;
 
 (h)
              any
      CRTC or Industry Canada license, or any portion thereof, that is required
      for us to provide our services within Canada expires or is terminated, or
      is challenged and overturned by the Governor in Council or the Federal
      Court of Canada or any other governmental or regulatory authority with
      jurisdiction over such matters, or is modified by the CRTC or Industry
      Canada in any material manner, including without limitation any manner
      that adversely affects our or XM’s ability to carry out the arrangements
      made under the License Agreement, or that increases the Canadian content
      requirements or imposes additional conditions of license beyond those
      specified in the license award received by CSR Inc. from the CRTC in
      June 2005 (as modified to reflect the September 7, 2005
      application to the CRTC submitted by CSR Inc. to the extent such
      application is approved by the CRTC) that, in XM’s reasonable
      determination, makes it technically less feasible or economically less
      attractive in any significant respect to perform under the License
      Agreement, provided that before terminating under this paragraph following
      such a modification, XM must seek to conduct good faith negotiations with
      us to address any such modification that primarily has economic
      consequences with appropriate changes to the License
      Agreement;
 
 (i)
              our
      business operations are curtailed by decisions or rulings under applicable
      law in Canada and in consequence we cease carrying on or are compelled to
      discontinue all or substantially all of our business in Canada within a
      period of sixty (60) days or
less; or
 
 (j)
              we
      have filed a petition in or have been assigned into bankruptcy or become
      an insolvent person within the meaning of any applicable bankruptcy or
      insolvency legislation, or make any assignment for the benefit of
      creditors or make any arrangements or otherwise become subject to any
      proceedings under applicable bankruptcy laws or insolvency laws with a
      trustee, or receiver appointed in respect of a substantial portion of our
      property, or in the event we liquidate or wind up our daily operations for
      any reason whatsoever.
 
   37
  
 Other
Services
 
 Under
the License Agreement XM has agreed that it shall not license any other person
or entity to provide XM’s satellite radio services in Canada, or provide
Canada-focused marketing or promotion of XM’s satellite radio services, without
our prior written consent. We and XM have also agreed that we shall have a right
of first refusal with respect to any new non-SDARS introduced by XM
in Canada.
 
 XM Programming
      Agreement
 
 We
have entered into a programming agreement with XM (the ”Programming
Agreement”). The following is a summary of certain material terms of the
Programming Agreement, and is not intended to be complete. Reference is made to
the Programming Agreement for the full text of its provisions.
 
 Under
the Programming Agreement, we must, at our own expense, develop, produce,
deliver and license certain programs to be distributed by XM over audio channels
in its satellite system and terrestrial repeater network
(the ”XM Canada Channels”) in the satellite footprint and over the
Internet. So long as we remain in compliance with the Programming Agreement and
the License Agreement, XM will carry the XM Canada Channels as part of its
SDARS service made available to subscribers in both the U.S. and Canada. We will
not receive a fee or other payment for the broadcast of the XM Canada
Channels to XM subscribers.
 
 We
maintain creative control with respect to the XM Canada Channels. We have
agreed to consult with XM regarding general creative direction, concerns and
issues in connection with the nature, subject and production of the
XM Canada Channels. Any name branding of the programs on the XM Canada
Channels and the XM Canada Channels themselves and any related slogans
(“Channel Brand Names”) will be subject to approval by XM, not to be
unreasonably withheld. We will have the rights to the Channel Brand Names with
respect to Canada and XM will have the rights to the Channel Brand Names with
respect to all areas outside of Canada. We and XM have licensed the Channel
Brand Names to each other under the Trademark License Agreement.
 
 We
are entitled to retain substantially all advertising revenues collected on the
XM Canada Channels. In selling advertisements, we have agreed to comply
with certain XM and CRTC policies regarding the amount of advertising that can
be included in each broadcast hour on non-music channels and will not include
any advertisements on any music-oriented XM Canada Channel. In addition,
advertising included on the XM Canada Channels may not be used to
(i) advertise or promote goods or services that are intended to be used or
consumed primarily in the U.S., its territories or possessions without
coordinating with XM in advance and obtaining XM’s approval to do so, or
(ii) advertise or promote other satellite radio broadcasters, or goods or
services that could reasonably be deemed detrimental to the image of our
services or XM. We are, however, entitled to place U.S. focused
advertisements relating to the National Hockey League Talk Channel (Home Ice)
without the consent or approval of XM.
 
 The
Programming Agreement has the same term as the License Agreement, and will
automatically be extended if the License Agreement is extended. Either party may
terminate the Programming Agreement upon written notice to the other in the
event that the defaulting party has materially breached its obligations under
the Programming Agreement and such breach has not been cured within 60 days
after written notice thereof is given by the other party. In addition, the
Programming Agreement will terminate if the License Agreement
terminates.
 
 Under
the Programming Agreement, we and XM have agreed to indemnify each other for any
losses or damages relating to the development, production or supply of their
respective programming and the content of such programming.
 
   38
  
 Other
      Agreements
 
 We
and XM have also entered into a: (i) repeater purchase agreement
(the ”Repeater Purchase Agreement”); (ii) technical services agreement
(the ”Technical Services Agreement”); and (iii) trademark license
agreement (the ”Trademark License Agreement”). The following are summaries
of certain material terms of these agreements, and are not intended to
be complete.
 
 Repeater
      Purchase Agreement
 
 A
total of 60 standard and 18 high power terrestrial repeaters have
already been delivered by XM.
 
 The
Repeater Purchase Agreement provides that we may at our option purchase
additional terrestrial repeaters from XM from time to time, provided that XM has
terrestrial repeaters in inventory available for sale. The agreement is not
exclusive, and we are not precluded from ordering repeaters from alternative
sources (subject to XM’s technical approval) if XM does not have sufficient
quantities available or if widespread defects in repeater quality are
encountered. Any terrestrial repeaters delivered by XM under the Repeater
Purchase Agreement are delivered “as is” and without warranty and will be deemed
to be finally accepted by us if we have failed to notify XM of any material
defects in the terrestrial repeaters within the earlier of (i) 60 business
days following the date of delivery or (ii) ten business days after
completion of the installation and testing of the applicable terrestrial
repeaters.
 
 The
Repeater Purchase Agreement will be in effect until the earlier of the second
anniversary of the date of the agreement and the date that XM notifies us that
its inventory of terrestrial repeaters available to be sold to us has
been exhausted.
 
 Technical
      Services Agreement
 
 Under
the Technical Services Agreement, XM has agreed that it will from time to time
provide design, engineering, support and technical services for our terrestrial
repeater system, as well as information technology and broadcast operations. In
consideration for these services, we have agreed to pay a monthly fee, initially
set at US$100,000 from September 2005 to December 2005. The rate
decreased to US$50,000 in January 2006 and to US$28,000 in April 2006
and to $25,000 in January 2007. The current rate is US$26,600.
 
 In
addition to the general services contemplated by the Technical Service
Agreement, we may request from time to time that XM provide services for
specific projects not included in the monthly services. These project requests
will be subject to a specific work order made by us to XM and will become
binding upon acceptance of the specific work order by XM. In connection with any
such projects, we will pay XM based on a time and materials basis at hourly
rates as agreed between the parties.
 
 Trademark
      License Agreement
 
 Under
the Trademark License Agreement, each of XM and we have granted a
non-transferable license to use within the XM satellite footprint our and XM’s
respective trademarks to the other party in association with our and XM’s
respective SDARS. In addition to granting a license to our and XM’s respective
trademarks, each of XM and we have also granted each other a non-transferable
license to use any trade name, service mark, logo, design, domain name or
business name derived from our and XM’s respective trademarks.
 
 The
Trademark License Agreement has the same term as the License Agreement, and will
automatically be extended if the License Agreement
is extended.
 
   39
  
 GMCL
Distribution Arrangement
 
 CSR Inc.,
XM and GMCL have entered into an exclusive distribution arrangement
(the ”GM Distribution Arrangement”). The following is a summary of certain
material terms of the GM Distribution Arrangement, and is not intended to
be complete.
 
 Under
the GM Distribution Arrangement, GMCL will exclusively distribute XM radios
configured for Canadian satellite radio subscription services, and will install
these radios in certain specified General Motors branded Canadian vehicles and
market our satellite radio service in Canada. GMCL will use commercially
reasonable efforts to have all purchasers of enabled General Motors vehicles
subscribe to our satellite radio service. The GM Distribution Arrangement has a
term of 13 years from November 10, 2005, the effective date of
the agreement.
 
 Under
the GM Distribution Arrangement, GMCL must use commercially reasonable efforts
to make XM radios configured for Canadian satellite radio subscription services
available as a factory-installed option in at least ninety percent (90%) of its
vehicle lines in the with the 2007 model year.
 
 The
GM Distribution Arrangement provides for the payment of a number of specific
fees by us to GMCL, including a revenue share and an incentive payment, all as
described below. For the first three years of the term of the GM Distribution
Arrangement following the launch of our service, all payments have been waived
by GMCL with the exception of the activation portion of the incentive payment.
If we breach any of our material obligations under the GM Distribution
Arrangement and fail to cure such breach in accordance with the terms thereof,
however, then we must pay to GMCL any amounts that were otherwise waived
by GMCL.
 
 The
GM Distribution Arrangement authorizes GMCL to offer incentives to induce new
vehicle purchasers to subscribe to our satellite radio service. As part of this
incentive, GMCL is authorized to offer such purchasers three months of free
trial service. Under this promotional program, GMCL will pay us our regular
subscription fee for the second and third months of this trial service. We
expect that the amounts owing by GMCL to us in respect of the second and third
months of this trial service will be approximately equal to the amount owing by
us to GMCL in respect of the activation portion of the incentive
payment.
 
 Under
the GM Distribution Arrangement, we have agreed that we will pay GMCL an
incentive payment for each purchaser of a new General Motors vehicle that is
installed with an XM radio who becomes a subscriber to our satellite radio
service within 12 months of the purchase of such vehicle. This incentive
payment will consist of an activation charge, which is payable within
30 days after the purchase of a new General Motors vehicle that includes an
activated XM Canada radio, and a loyalty payment, which is payable after a
purchaser has been a subscriber for three months. The loyalty payment has been
waived for the first three years of the term of the GM Distribution Arrangement
following the launch of our service. We have also agreed to pay GMCL a revenue
share based on the revenue billed to GMCL subscribers by us for our basic
satellite radio services. This revenue share will resume after the initial three
year waiver period, including in respect of purchasers who became subscribers
during the waiver period but who remain subscribers following the waiver period.
As an additional incentive, we have agreed to pay GMCL a one-time lump sum
amount if, at the end of the third year of the term, there are a specified
number of GMCL/XM Canada subscribers.
 
 The
GM Distribution Arrangement also requires us to allocate to GMCL certain amounts
for market support funds, which are to be utilized for mutually agreed marketing
efforts.
 
 The
GM Distribution Arrangement provides that any commercial arrangements between us
and any other vehicle manufacturer will be no more favorable than the terms
provided by us to GMCL, including, but not limited to, on a timing of
payment basis.
 
 Each
party may terminate the GM Distribution Arrangement upon 60 days prior
written notice in the event of a breach by the other party of any of its
material obligations under the GM Distribution Arrangement that is not cured
within such period. Each of GMCL and we shall also have the right to renegotiate
certain terms of the GM Distribution Arrangement, or to be excused from certain
obligations under the GM Distribution Arrangement, in certain circumstances and
on the occurrence of certain events, including our failure to satisfy certain
financing conditions or the occurrence of a force majeure event.
In addition:
 
   40
  
 (a)
              provided
      that GMCL has used commercially reasonable efforts to install radios in
      General Motors vehicles and market our services in Canada, GMCL may be
      relieved of its exclusivity obligations under the GM Distribution
      Arrangement if, four years following initial launch of our satellite radio
      services, or for any twelve month period thereafter, and subject to a
      three-month cure period, our share of mobile aftermarket SDARS subscribers
      in Canada is less than a specified percentage, based on the number of
      mobile aftermarket SDARS providers
  in Canada;
 
 (b)
              we
      may trigger a renegotiation of the GM Distribution Arrangement if GMCL
      elects to install interoperable radios in the absence of a regulatory
      requirement; and
 
 (c)
              provided
      we maintain a high quality, cost-competitive full channel service to our
      subscribers, we may trigger a renegotiation (with commercially reasonable
      efforts to conclude a deal) of the GM Distribution Arrangement five years
      following launch of our full Canadian service if, at that time, the
      cumulative total number of our satellite radio enabled General Motors
      vehicles sold or leased by GMCL is less than a prescribed
      amount.
 
 Under
the GM Distribution Arrangement we and XM have agreed not to directly or
indirectly market, promote or endorse any company that distributes radio
hardware of any description on an after-market basis to GMCL’s authorized motor
vehicle dealers without the prior written consent of GMCL.
 
 Regulatory
Matters
 
 CRTC License.On
June 16, 2005, the CRTC approved the application of CSR Inc. for a
broadcasting license to offer satellite radio services across Canada subject to
certain conditions set out below. On February 10, 2006, the CRTC approved
amendments to CSR Inc.’s license, as outlined below.
 
 In
its approval, the CRTC stated that a broadcasting license would be granted to
CSR Inc. only when certain conditions had been fulfilled, including CRTC’s
approval of the operating agreements between XM and us. On November 21,
2005, the CRTC advised us that it was satisfied that the conditions to the grant
of our broadcasting license were fulfilled, and that the license would therefore
be issued when: (i) the Department of Industry notified the CRTC that its
technical requirements had been met, and (ii) we confirmed to the CRTC that
we were prepared to commence operations. The Department of Industry notified the
CRTC that its technical requirements had been met on November 22, 2005.
Similarly, on November 22, 2005, we confirmed to the CRTC that we were
prepared to commence operations. As a result of the satisfaction of these
conditions, we have fulfilled all regulatory conditions to launch, and we have
been authorized to launch our service.
 
 The
satellite radio services offered by us are, inter alia, subject to
the following conditions:
 
 •
              CSR Inc.
      is required to distribute a minimum of eight original Canadian produced
      channels, four of which must be French language original Canadian produced
      channels.
 
 •
              CSR Inc.
      must distribute one Canadian produced channel for every nine non-Canadian
      produced channels to be provided by XM, and at no time shall a subscriber
      be able to receive a package of channels that contains less than 10% of
      Canadian produced channels.
 
 •
              A
      minimum of 85% of the total music selections broadcast in any given week
      on the Canadian-produced channels is required to be Canadian
      content.
 
 •
              A
      minimum of 85% of the total spoken word programming broadcast on all
      Canadian-produced channels in any given week is required to be Canadian
      spoken word programming.
 
   41
  
 •
              On
      each of the four French-language Canadian produced channels, a minimum of
      65% of its vocal musical selections must be French language musical
      selections.
 
 •
              Between
      6:00 am and midnight each week, each Canadian produced music channel
      is required to contain a minimum of 25% of new Canadian musical selections
      by artists who have not had a musical selection that has reached a
      position on one or more of the charts identified by the CRTC from time
      to time.
 
 •
              CSR Inc.
      will be required to contribute a minimum of 5% of its gross revenues in
      each broadcast year to eligible third parties directly associated with the
      development of Canadian musical and other artistic talent, or to other
      initiatives approved by the CRTC for the purpose of Canadian talent
      development, half of this amount is to be allocated to Canadian French
      language talent and half to Canadian English language
    talent.
 
 •
              CSR Inc.
      is not permitted to broadcast any original local programming on a Canadian
      produced channel.
 
 •
              No
      more than six minutes of national commercial messages are permitted to be
      broadcast on the Canadian content channels during any hour and no local
      advertising is permitted.
 
 •
              CSR Inc.
      is required to comply with applicable requirements of the Radio Regulations, 1986
      promulgated under the Broadcasting Act
      (Canada), the Canadian Association of Broadcasters, Sex-Role Portrayal Code for
      Television and Radio Programming and its Broadcast Code for Advertising
      to Children.
 
 •
              CSR Inc.
      is required to submit statements of account, certain reports and
      self-assessments to the CRTC as required by
  the CRTC.
 
 The
term of the broadcasting license is six years and the license must be renewed
prior to August 31, 2011. The broadcasting license does not specifically
set out the parameters of spectrum assignment and related issues, however,
Industry Canada and the Department of Canadian Heritage have provided some
guidance in this respect as well as in respect of repeater licensing
requirements.
 
 Amendments to CRTC Broadcast
License.On February 10, 2006, the CRTC approved CSR Inc.’s
application to amend its CRTC broadcasting license to allow it to continue to
distribute a minimum of eight original Canadian produced channels, four of which
are in the French language and four in the English language. In that application
CSR Inc. proposed adding two more Canadian channels, for a total of ten,
provided that certain conditions are satisfied relating to technology and to
CSR Inc.’s subscription base. The two additional Canadian produced channels
have since been added to our programming lineup.
 
 On
March 24th, 2006,
CSR Inc. submitted an application to the CRTC requesting the amendment of its
conditions of license. The requested amendment would allow for the carry over of
a credit into subsequent broadcast years for contributions to the development of
Canadian talent in excess of the prescribed amount. On May 11, 2007, this
application was denied by the CRTC.
 
 Foreign Ownership Restrictions.We own all of the outstanding shares of CSR Inc., which holds the
CRTC broadcast license under the Broadcasting Act (Canada).
The Governor General in Council (i.e., the cabinet of the Canadian federal
government) has, pursuant to its authority under the Broadcasting Act (Canada),
issued a direction setting out the legal requirements relating to Canadian
ownership and control of broadcasting undertakings entitled the Direction to the
CRTC (Ineligibility of Non-Canadians) (the ”Direction”). Under the
Direction, non-Canadians are only permitted to own and control, directly or
indirectly, up to 331/3% of the
voting shares and 331/3% of the
votes of a parent company which has a subsidiary operating company licensed
under the Broadcasting
Act (Canada). In addition, up to 20% of the voting shares and 20% of the
votes of the operating licensee company may be owned and controlled, directly or
indirectly, by non-Canadians. The Direction also provides that the Chief
Executive Officer and 80% of the members of the board of directors of the
operating company must be Canadian. In addition, where the parent company is
less than 80% Canadian-owned, the parent company and its directors are
prohibited from exercising any control or influence over the programming
decisions of a subsidiary operating company. There are no restrictions on the
number of non-voting shares that may be held by the non-Canadians at either the
parent company or licensee operating company level. Under all circumstances, the
licensee must not be controlled by non-Canadians. The CRTC, however, retains the
discretion under the Direction to determine as a question of fact whether a
given licensee is controlled by non-Canadians.
 
   42
  
 Spectrum.In
August 1998, the governments of both the U.S. and Canada signed a spectrum
coordination agreement with respect to broadcasts in the 2320-2345 MHz
bands. In essence, this agreement was an acknowledgement by the Canadian
government that U.S. SDARS services would be broadcasting across North
America in that spectrum, and that in the future, existing Canadian Mobile
Aeronautical Telemetry Services, or MATS, could not claim protection from SDARS
interference. As such, Canada put a moratorium on usage of the SDARS bandwidth
within Canada.
 
 Since
our approval to broadcast has been granted by the CRTC, the relevant portion of
SDARS bandwidth used by XM in the U.S. has been authorized for our usage
in Canada.
 
 U.S. SDARS Operators.Industry Canada mandated that we coordinate with U.S. SDARS
operators at all border sites where broadcast power is over a prescribed minimum
level. As our repeater deployment was performed in conjunction with staff at XM,
this did not result in any material issues.
 
 Wireless Communication Services
Operators.Industry Canada has auctioned off the Wireless Communications
Services, or WCS, spectrum bordering 2320-2345 MHz to various telecom
enterprises. These auctions were conducted under a series of policy statements
highlighting the possible future existence of terrestrial repeaters, and the
operating parameters of such as described above. As such, on September 21,
2004 Industry Canada issued the following policy statement, in the form of a
letter written to the CRTC by the Director Broadcasting, Multi Media Planning
and Technical Policy, Industry Canada:
 
 •
              SDARS
      terrestrial repeaters deployed during the initial phase application of
      implementation, i.e., the existing application to the CRTC, for the
      purpose of augmenting the satellite coverage within the core urban areas
      which meet the requirements for technical certification will not need to
      coordinate further with WCS operators. In all other cases SDARS
      terrestrial transmitters exceeding a maximum EIRP of 50 Watts
      (17 dBW) will need to seek an arrangement with the WCS operator
      licensed to operate within the coverage area of the SDARS terrestrial
      repeater. Written confirmation shall be provided to the Department. This
      power level for exemption is
under review.
 
 We
do not see this as a concern as repeaters are typically not required outside
urban areas.
 
 Fixed Service (FS) Operators.Industry Canada requires us to reach a working arrangement with incumbent
FS operators within the 2320-2345 MHz band whose stations are within
300 km of a terrestrial repeater transmitter site. These include the MATS
services described above. We do not see this as a significant concern as there
are currently a small number of these operators and the band has all been
vacated in the wake of strong interference from the SDARS operators.
Furthermore, very few FS operators have become established in
urban areas.
 
 System
      Technology
 
 We
have not and will not acquire any intellectual property rights in the
satellites. We do not own the design of XM’s system, including aspects of the
technology used in communicating from the satellites and certain aspects of the
design of, and features that may be used in, XM radios.
 
 The
XM Trademark
 
 XM
has registered the trademark “XM” and “XM Canada,” as well as the “XM” logo
and certain XM slogans with the Trademarks Branch of the Canadian Intellectual
Property Office. We have an exclusive license from XM to use these trademarks in
Canada in connection with satellite radio service.
 
  
  43
  
 We
are in the process of registering the titles of our Canadian content channels,
as applicable, as trademarks in Canada.
 
 Legal
Matters
 
 Except
as disclosed above, under the heading “Risk factors - We will be
required to pay royalty fees, which may be more costly than expected”,we
are not aware of any legal proceedings or litigation outstanding, threatened or
pending as of the date hereof by or against us or relating to our business,
which would be material to our financial condition or results
of operations.
 
 C.           ORGANIZATIONAL
STRUCTURE
 
 We
operate our business through our wholly-owned subsidiary, Canadian Satellite
Radio Inc., a corporation incorporated under the Canada Business
Corporations Act on July 6, 2002 as 600455 Canada Inc. It changed
its name to “Canadian Satellite Radio Inc.” by articles of amendment filed
on July 7, 2003.
 
 A.
              PROPERTY,
      PLANTS AND EQUIPMENT
 
 Our
corporate office is located in leased space at 590 King Street West, 3rd Floor,
Toronto, Ontario, M5V 1M3.
 
 We
also lease a broadcast studio at 175 Avenue Road, Toronto, Ontario,
M5R 2J2.
 
 We
have 68 terrestrial repeaters located across Canada on properties we lease
from various parties.
 
 Item 4A. 
- Unresolved Staff Comments
 
 None.
 
 Item 5. 
- Operating and Financial Review and Prospects
 
   44
  
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


The
following management’s discussion and analysis of the financial condition and
results of operations of Canadian Satellite Radio Holdings Inc. (the “Company”)
has been prepared as of November 6, 2008 at which time 20,951,067 Class A
Subordinate Voting shares are outstanding and 81,428,133 Class B Voting shares
are outstanding.  The discussion and analysis should be read in
conjunction with our audited Consolidated Financial Statements and Notes
included herewith, and with our Management’s Discussion and Analysis of
Financial Condition and Results of Operations and audited consolidated financial
statements and related notes thereto, included in the Company’s Annual Report
for 2008.  The financial statements of the Company are prepared in
accordance with Canadian generally accepted accounting principles (“GAAP”) and
expressed in Canadian dollars.
  This
discussion contains certain information that may constitute forward-looking
statements within the meaning of securities laws.  These statements
relate to future events or future performance and reflect management’s
expectations and assumptions regarding the growth, results of operations,
performance and business prospects and opportunities of the Company on a
consolidated basis.  In some cases, forward-looking statements can be
identified by terminology such as “may”, “would”, “could”, “will”, “should”,
“expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”,
“potential”, “continue”, “seek” or the negative of these terms or other similar
expressions concerning matters that are not historical facts. In particular,
statements regarding the Company’s objectives, plans and goals, including future
operating results, economic performance and subscriber recruitment efforts
involve forward-looking statements.  A number of factors could cause
actual events, performance or results to differ materially from what is
projected in the forward-looking statements.  Although the
forward-looking statements contained in this discussion are based on what
management of the Company considers to be reasonable assumptions based on
information currently available to it, there can be no assurance that actual
events, performance or results will be consistent with these forward-looking
statements, and management’s assumptions may prove to be
incorrect.   Our financial projections are based on estimates
regarding expected future costs and expected revenue, which are fully described
in this MD&A. Other than as required by applicable Canadian Securities Law
the Company does not update or revise any forward-looking statements to reflect
new information, future events or otherwise.  These forward-looking
statements are subject to risks and uncertainties that could cause actual
results or events to differ materially from expectations.  These
include but are not limited to the risk factors included in this MD&A
(including those listed under the heading “Certain Risk Factors”) in addition to
the risks itemized in our Annual Report in Form 20-F (“Form 20-F”) for the
fiscal year ended August 31, 2008.  Readers are advised to review
these risk factors for a detailed discussion of the risks and uncertainties
affecting the Company’s business.  Readers should not place undue
reliance on forward-looking statements.
   45
  
  1.0
              Overview
  1.1
Our Business
  Our
vision is to be the leading premium digital audio entertainment and information
service provider in Canada. Our strategy is founded on the principles of
acquiring subscribers in the near and long term in the most cost effective
manner.
  We
offer 130 channels, which include commercial-free music as well as news, talk,
sports and children’s programming, and thirteen Canadian channels designed and
developed from studios in Toronto, Montréal and Québec City. We will leverage
our unique programming assets, such as our exclusive broadcasting agreement with
the National Hockey League®(“NHL”)
and our NHL Home Ice channel.
  Our
target market includes more than 25 million registered vehicles on the road, 1.5
million new vehicles sold annually and more than 12 million households in
Canada. We are the leader in distributing digital audio entertainment and
information delivered via satellite to new vehicles sold in Canada. XM service
is available as standard equipment or as a factory-installed option in more than
150 different vehicles for model year 2008, including: General Motors,
Honda/Acura, Toyota/Lexus, Nissan/Infiniti, Hyundai and Porsche. XM radios are
available under Delphi, Pioneer and Audiovox and other brand names at national
consumer electronics retailers such as Best Buy, Future Shop, The Source,
Canadian Tire and other national and regional retailers.
  The
Company is focused on achieving positive operating income as quickly as possible
by maximizing our revenues through subscriptions, advertising and other
ancillary opportunities as well as maintaining effective cost controls, managing
subscriber acquisition costs and by creating a long-term customer base through
quality service. We believe that a premium service will attract a premium
customer.
  1.2
Highlights for the Year and the Fourth Quarter of 2008
  The
following are the highlights from the three months ended August 31,
2008:
  •
              For
      the second consecutive quarter, the Company generated positive cash of
      $0.5 million in the fourth quarter of 2008. Our definition of positive
      cash is a non-GAAP measure and is calculated from the Consolidated
      Statement of Cash Flows as: change in cash during the period minus sale
      (purchase) of short-term investments and restricted investments,
      net;
  •
              Ending
      Total Subscribers of almost 500,000, an increase from 315,200 at the end
      of the fourth quarter of fiscal 2007 to 497,400 at the end of the fourth
      quarter of fiscal 2008, representing a 58% year-over-year
      increase;
  •
              Revenue
      increased 72% year over year for the quarter as total revenue increased
      from $6.8 million during the three months ended August 31, 2007 to $11.8
      million during the three months ended August 31,
  2008;
  •
              A
      41% increase in automobile (“OEM”) gross additions versus the same period
      in the prior year;
   46
  
  •
              Self-Paying
      Subscribers increased 29,700 during the
quarter;
  •
              Average
      monthly subscription revenue per subscriber (“ARPU”) increased from $11.33
      in the fourth quarter of 2007 to $12.06 in the fourth quarter of
      2008;
  •
              Cost
      Per Gross Addition (“CPGA”) decreased from $183 in the fourth quarter of
      2007 to $125 in the fourth quarter of
2008;
  •
              This
      has been our first quarter of achieving Pre-Marketing Adjusted Operating
      Profit since launch.  A 147% improvement in Pre-Marketing
      Adjusted Operating Profit (Loss). For the quarter we achieved a
      Pre-Marketing Adjusted Operating Profit (Loss) of $2.0 million in the
      fourth quarter of 2008 compared to a Pre-Marketing Adjusted Operating
      Profit (Loss) of ($4.3 million) in the fourth quarter of 2007. This
      represents an improvement of $6.3 million versus the same period last
      year;
  •
              Adjusted
      Operating Profit (Loss) improved by 67% from ($12.2 million) during the
      three months ended August 31, 2007 to ($4.1 million) during the three
      months ended August 31, 2008;
  •
              Deferred
      Revenue increased by $3 million for the
quarter.
  The
following are the highlights from the year ended August 31, 2008:
  •
              Ending
      Total Subscribers increased 58% year-over-year, from 315,200 at the end of
      fiscal 2007 to 497,400 at the end of fiscal
  2008;
  •
              Automobile
      net additions (“OEM”) increased by 80% versus the prior
    year;
  •
              Total
      revenue increased 86% from $21.2 million during the year ended August 31,
      2007 to $39.5 million during the year ended August 31,
    2008;
  •
              Self-Paying
      Subscribers increased 124,700 during the year, a 67%
    increase;
  •
              ARPU
      increased from $11.32 in 2007 to $11.85 in the of 2008, a 5%
      increase;
  •
              CPGA
      decreased from $208 in 2007 to $144 in 2008, a 31%
    decrease;
  •
              An
      80% improvement in Pre-Marketing Adjusted Operating Profit (Loss) of ($4.3
      million) in 2008 compared to Pre-Marketing Adjusted Operating Profit
      (Loss) of ($22.1 million) in 2007. This represents an improvement of $17.8
      million versus last year;
  •
              Adjusted
      Operating Profit (Loss) improved from ($50.6 million) in 2007 to ($30.7)
      million in 2008. This represents an improvement of $19.9
      million;
  •
              Deferred
      Revenue increased by $9.4 million for the
year.
   47
  
  1.3
U.S. Satellite Radio
  As
XM Satellite Radio Holdings Inc. (“XM”) and Sirius Satellite Radio Inc have now
completed their business combination in the United States, we will diligently
review the possible alternatives available to the Company to benefit our
shareholders and customers. At this point in time it is premature to comment on
how this merger will impact our business.
  We
rely on XM for the provision of our satellite radio service.  Our
success will depend on XM’s co-operation in provided programming content,
satellite network and underlying technology. Our business is unique from the
operations in the U.S: 1) Our debt, significantly smaller in
amount,  spans over a longer period of time which gives us ample time
to build the foundation of the business. Specifically, $133.8 million matures
between December 31st, 2012
and September 14th, 2014,
2) we have had two consecutive quarters of positive cash and 3) as discussed in
the Liquidity and Capital resource section, we believe that our current
liquidity and cash resources will be sufficient to cover our funding needs until
we reach positive free cash flow to service our debt.
  2.0
Operating Definitions
  2.1
Self-Paying Subscribers - Self-Paying
Subscribers are those who are receiving and have agreed to pay for our satellite
radio service through a credit card, prepaid card or invoice. Radio receivers
that are revenue generating are counted individually as Self-Paying
Subscribers.
  2.2
Other Paying Subscribers -Other Paying Subscribers include: subscribers currently in an OEM trial
period and vehicles factory-activated with the XM service, whereby automakers
have agreed to pay for a portion or all of the trial period service; and
Partnership Subscribers, which include those who are accessing a portion of our
programming through other subscription services that we are partnered with. With
respect to Partnership Subscribers, in exchange for providing the programming,
we receive a portion of the monthly revenue collected by our partners, on a per
subscriber basis. Revenue generated from Other Paying Subscribers contributes to
other revenue in our Results from Operations.
  2.3
OEM Promotional
Subscribers - OEM Promotional Subscribers include subscribers in the OEM
trial period (generally a three-month period) where none of the trial is paid
for by automakers, and all subscribers in the OEM post-trial period. The OEM
post-trial period is the three-month period following the OEM trial period where
we continue to attempt to convert subscribers into Self-Paying
Subscribers.
  2.4
Rental Car Subscribers
- Rental Car Subscribers include rental cars installed with XM Canada’s service
for which the Company receives compensation.
  In
Q1, 2008, as part of the Company’s continuing efforts to align its definitions
more closely with industry norms, we started to include Rental Car Subscribers
in our calculation of total subscribers. Rental Car Subscribers, which are now
disclosed as an additional category and were not included in calculations of
total subscribers prior to the first quarter of 2008.
   48
  Other
Paying Subscribers, OEM Promotional Subscribers and Rental Car Subscribers are
not included in our reporting of Subscription Revenue, ARPU, Cost per Gross
Addition and Subscriber Acquisition Costs.
  2.5
Subscription Revenue -
Our revenue consists primarily of monthly subscription fees for our satellite
audio service charged to consumers, commercial establishments and fleets, which
are recognized as the service is provided.  Promotions and discounts
are treated as a reduction to revenue over the term of the plan purchased by the
subscriber.  Subscription revenue growth is predominantly driven by
the growth in our subscriber base but is affected by fluctuations in the
percentage of subscribers in our various discount plans and rate
changes.
  2.6
Subscriber Acquisition Costs
and SAC -Subscriber acquisition costs include subsidies and distribution
costs and net costs related to equipment sold direct to the consumer. Subscriber
acquisition costs are divided by Self-Paying gross additions for the period to
calculate what we refer to as “SAC”. SAC is a measure of operational performance
and not a measure of financial performance under generally accepted accounting
principles. Management believes SAC is a useful measure of the operating
performance of the business. This non-GAAP measure, which uses certain expense
line items from our statement of operations, should be used in addition to, but
not as a substitute for, the analysis provided in the Consolidated Statement of
Operations and Deficit. In our financial statements, most of our SAC costs are
captured in marketing.
  2.7
Cost Per Gross Addition -CPGA includes the amounts in SAC, as well as Advertising and marketing,
which includes advertising, media and other discretionary marketing
expenses.  CPGA costs do not include the costs of marketing
staff.  CPGA is a measure of operational performance and not a measure
of financial performance under generally accepted accounting principles. We
believe CPGA is a useful measure of our operating performance and is a
significant basis used by our management to measure the operating performance of
our business. This non-GAAP measure, which uses certain expense line items from
our statement of operations, should be used in addition to, but not as a
substitute for, the analysis provided in statement of operations. CPGA is
primarily captured by the combination of subsidies & distribution,
advertising & marketing, plus the negative margins from equipment
sales.  These costs are divided by the number of Self-Paying
Subscriber gross additions for the period to calculate Average
CPGA.
  2.8
Average Monthly Subscription
Revenue Per Subscriber -ARPU is derived from the total of earned
subscription revenue (net of promotions and rebates) divided by the monthly
weighted average number of Self-Paying Subscribers for the period
reported.  ARPU is a measure of operational performance and not a
measure of financial performance under generally accepted accounting
principles.  We believe ARPU is a useful measure of our operating
performance and is a significant basis used by our management to measure the
operating performance of our business. This non-GAAP measure, which uses certain
revenue line items from our statement of operations, should be used in addition
to, but not as a substitute for, the analysis provided in the Consolidated
Statement of Operations and Deficit. Average monthly subscription revenue per
subscriber will fluctuate based on promotions, changes in our rates, as well as
the adoption rate of annual and multi-year prepayment plans, multi-radio
discount plans (such as the family plan), commercial plans and premium
services.
   49
  2.9
Adjusted Operating Profit
(Loss) - Adjusted Operating Profit (Loss) is defined as Operating profit
(loss) before the undernoted excluding amortization, stock-based compensation to
employees, directors, officers and service providers, and non-cash costs paid by
our parent company. We believe that Adjusted Operating Profit (Loss), as opposed
to Operating profit (loss) or Net profit (loss), provides a better measure of
our core business operating results and improves comparability. This non-GAAP
measure should be used in addition to, but not as a substitute for, the analysis
provided in the Consolidated Statement of Operations and Deficit.  We
believe Adjusted Operating Profit (Loss) is a useful measure of our operating
performance and is a significant basis used by our management to measure the
operating performance of our business.  While amortization and
stock-based compensation are considered operating costs under GAAP, these
expenses primarily represent non-cash current period allocation of costs
associated with long-lived assets acquired or constructed in prior periods and
non-cash employee and service provider compensation. Costs paid by parent
company are non-cash costs related to the license application process and are
not related to ongoing operations of the business. Adjusted Operating Profit
(Loss) is a calculation used as a basis for investors and analysts to evaluate
and compare the periodic and future operating performances and value of similar
companies in our industry, although our measure of Adjusted Operating Profit
(Loss) may not be comparable to similarly titled measures of other companies.
Adjusted Operating Profit (Loss) does not purport to represent operating profit
(loss) or cash flow from operating activities, as those terms are defined under
GAAP, and should not be considered as an alternative to those measurements as an
indicator of our performance.
  2.10
Pre-Marketing Adjusted Operating Profit
(Loss) - Pre-Marketing Adjusted Operating Profit (Loss) is calculated by
adding back total marketing expenses to Adjusted Operating Profit (Loss) (as
defined in Section 2.9). We believe that Pre-Marketing Adjusted Operating Profit
(Loss) is a good measure of operating performance before investing to acquire
new subscribers. This non-GAAP measure should be used in addition to, but not as
a substitute for, the analysis provided in statement of
operations.  We believe Pre-Marketing Adjusted Operating Profit (Loss)
is a useful measure of our operating performance and is a significant basis used
by our management to measure the operating performance of our
business.
  Fiscal Year 2008($000’s)
              
              
              Q1
              
              
              
              Q2
              
              
              
              Q3
              
              
              
              Q4Reconciliation
      of loss before the undernoted to Adjusted Operating Profit
      (Loss)Profit
      (Loss) before the undernoted
              
              
              (17,194
              )
              
              
              (15,429
              )
              
              
              (13,495
              )
              
              
              (10,509
              )Add
      back non-Adjusted Operating Profit (Loss) items included in
      lossAmortization
              
              
              5,574
              
              
              
              5,570
              
              
              
              5,569
              
              
              
              5,570Stock-based
      Compensation
              
              
              1,072
              
              
              
              770
              
              
              
              763
              
              
              
              783Costs
      paid by parent company
              
              
              54
              
              
              
              56
              
              
              
              57
              
              
              
              58Adjusted
      Operating Profit (Loss)
              
              
              (10,494
              )
              
              
              (9,033
              )
              
              
              (7,106
              )
              
              
              (4,098
              )Add
      total marketing
              
              
              7,039
              
              
              
              7,426
              
              
              
              5,827
              
              
              
              6,114Pre-Marketing
      Adjusted Operating  Profit (Loss)
              
              
              (3,455
              )
              
              
              (1,607
              )
              
              
              (1,279
              )
              
              
              2,016
 
  50
  
 Fiscal Year 2007($000’s)
              
              
              Q1
              
              
              
              Q2
              
              
              
              Q3
              
              
              
              Q4Reconciliation
      of loss before the undernoted to Adjusted Operating Profit
      (Loss)Profit
      (Loss) before the undernoted
              
              
              (19,286
              )
              
              
              (22,292
              )
              
              
              (16,157
              )
              
              
              (18,622
              )Add
      back non-Adjusted Operating Profit (Loss) items included in
      lossAmortization
              
              
              5,602
              
              
              
              5,603
              
              
              
              5,606
              
              
              
              5,599Stock-based
      Compensation
              
              
              845
              
              
              
              842
              
              
              
              720
              
              
              
              736Costs
      paid by parent company
              
              
              49
              
              
              
              51
              
              
              
              52
              
              
              
              53Adjusted
      Operating Profit (Loss)
              
              
              (12,790
              )
              
              
              (15,796
              )
              
              
              (9,779
              )
              
              
              (12,234
              )Add
      total marketing
              
              
              6,266
              
              
              
              9,260
              
              
              
              5,048
              
              
              
              7,935Pre-Marketing
      Adjusted Operating Profit (Loss)
              
              
              (6,524
              )
              
              
              (6,536
              )
              
              
              (4,731
              )
              
              
              (4,299
              )
  Fiscal Year 2006($000’s)
              
              
              Q1
              
              
              
              Q2
              
              
              
              Q3
              
              
              
              Q4Reconciliation
      of loss before the undernoted to Adjusted Operating Profit
      (Loss)Profit
      (Loss) before the undernoted
              
              
              (14,607
              )
              
              
              (44,400
              )
              
              
              (19,188
              )
              
              
              (20,828
              )Add
      back non-Adjusted Operating Profit (Loss) items included in
      lossAmortization
              
              
              479
              
              
              
              4,713
              
              
              
              5,253
              
              
              
              5,470Stock-based
      Compensation
              
              
              0
              
              
              
              22,245
              
              
              
              691
              
              
              
              759Costs
      paid by parent company
              
              
              2,863
              
              
              
              0
              
              
              
              0
              
              
              
              186Adjusted
      Operating Profit (Loss)
              
              
              (11,265
              )
              
              
              (17,443
              )
              
              
              (13,244
              )
              
              
              (14,413
              )Add
      total marketing
              
              
              4,630
              
              
              
              9,385
              
              
              
              6,231
              
              
              
              7,775Pre-Marketing
      Adjusted Operating Profit (Loss)
              
              
              (6,635
              )
              
              
              (8,058
              )
              
              
              (7,013
              )
              
              
              (6,638
              )
  12 Months Ended August 31,($000’s)
              
              2008
              
              
              2007
              
              
              2006Reconciliation
      of loss before the undernoted to Adjusted Operating Profit
      (Loss)Profit
      (Loss) before the undernoted
              
              
              (56,627
              )
              
              
              (76,357
              )
              
              
              (99,024
              )Add
      back non-Adjusted Operating Profit (Loss) items included in
      lossAmortization
              
              
              22,283
              
              
              
              22,409
              
              
              
              15,914Stock-based
      Compensation
              
              
              3,388
              
              
              
              3,144
              
              
              
              23,695Costs
      paid by parent company
              
              
              225
              
              
              
              205
              
              
              
              3,049Adjusted
      Operating Profit (Loss)
              
              
              (30,731
              )
              
              
              (50,599
              )
              
              
              (56,366
              )Add
      total marketing
              
              
              26,406
              
              
              
              28,509
              
              
              
              28,021Pre-Marketing
      Adjusted Operating Profit (Loss)
              
              
              (4,325
              )
              
              
              (22,090
              )
              
              
              (28,345
              )
   
   51
  3.0
Selected Financial Information
  The
following selected financial information for the three and twelve months ended
August 31, 2008 and 2007 has been derived from our audited consolidated
financial statements and should be read in conjunction with our audited
consolidated financial statements and related notes included elsewhere in this
annual report.
  Three
      Months
                Ending
      August 31,
              
              
              Twelve
      Months
                Ending
      August 31,2008
              
              
              2007
              
              
              2008
              
              
              2007RevenueSubscription
              
              
              10,673,847
              
              
              
              5,662,610
              
              
              
              35,183,050
              
              
              
              17,968,931Activation
              
              
              247,770
              
              
              
              181,092
              
              
              
              895,061
              
              
              
              610,972Equipment
      sales
              
              
              233,890
              
              
              
              421,894
              
              
              
              1,623,329
              
              
              
              1,283,668Advertising
      and other revenue
              
              
              624,034
              
              
              
              567,644
              
              
              
              1,755,603
              
              
              
              1,380,809Total
      Revenue
              
              
              11,779,541
              
              
              
              6,833,240
              
              
              
              39,457,043
              
              
              
              21,244,380Operating
      expensesCost
      of revenueRevenue
      share & royalties
              
              
              3,350,009
              
              
              
              1,818,751
              
              
              
              11,062,961
              
              
              
              5,651,743Customer
      care & billing operations
              
              
              815,329
              
              
              
              581,712
              
              
              
              3,170,202
              
              
              
              2,501,325Cost
      of merchandise
              
              
              677,682
              
              
              
              1,260,265
              
              
              
              3,796,889
              
              
              
              2,869,738Broadcast
      and operations
              
              
              671,690
              
              
              
              948,363
              
              
              
              2,781,402
              
              
              
              3,414,826Programming
      & content
              
              
              1,107,315
              
              
              
              1,495,261
              
              
              
              8,273,821
              
              
              
              10,875,672Total
      cost of revenue
              
              
              6,622,025
              
              
              
              6,104,352
              
              
              
              29,085,275
              
              
              
              25,313,304General
      & administrative
              
              
              3,199,671
              
              
              
              3,630,207
              
              
              
              14,921,996
              
              
              
              16,201,717Special
      charges
              
              
              -
              
              
              
              1,450,680
              
              
              
              -
              
              
              
              2,024,080Stock
      based compensation
              
              
              782,510
              
              
              
              736,070
              
              
              
              3,388,354
              
              
              
              3,143,643MarketingSupport
              
              
              650,602
              
              
              
              672,307
              
              
              
              2,748,049
              
              
              
              3,394,413Subsidies
      & distribution
              
              
              2,503,260
              
              
              
              2,075,651
              
              
              
              11,635,007
              
              
              
              5,506,628Advertising
      & marketing
              
              
              2,960,296
              
              
              
              5,187,182
              
              
              
              12,022,589
              
              
              
              19,608,453Total
      marketing
              
              
              6,114,158
              
              
              
              7,935,140
              
              
              
              26,405,645
              
              
              
              28,509,494Amortization
              
              
              5,570,076
              
              
              
              5,598,817
              
              
              
              22,283,112
              
              
              
              22,409,443Total
      operating expenses
              
              
              22,288,440
              
              
              
              25,455,266
              
              
              
              96,084,382
              
              
              
              97,601,681Loss
      before the undernoted
              
              
              (10,508,899
              )
              
              
              (18,622,026
              )
              
              
              (56,627,339
              )
              
              
              (76,357,301
              )Interest
      income
              
              
              559,895
              
              
              
              555,144
              
              
              
              1,741,037
              
              
              
              2,491,256Interest
      expense
              
              
              (4,517,577
              )
              
              
              (3,646,493
              )
              
              
              (16,858,559
              )
              
              
              (15,287,703
              )Revaluation
      of derivative
              
              
              531,000
              
              
              
              
              
              
              
              1,034,600Foreign
      exchange gain / (loss)
              
              
              (6,612,581
              )
              
              
              1,327,548
              
              
              
              (1,545,219
              )
              
              
              4,513,905Net
      loss and comprehensive loss for the period
              
              
              (21,610,162
              )
              
              
              (20,385,827
              )
              
              
              (74,324,680
              )
              
              
              (84,639,843
              )
  52
  The
following is a summary of our quarterly results for the past eight fiscal
quarters.
  Fiscal
      QuarterIn
      thousands except per share amounts
              
              
              Q1
      ‘08
              
              
              
              Q2
      ‘08
              
              
              
              Q3
      ‘08
              
              
              
              Q4
      ‘08Revenue
              
              
              8,146
              
              
              
              9,196
              
              
              
              10,336
              
              
              
              11,780Net
      income (loss)
              
              
              (16,157
              )
              
              
              (17,768
              )
              
              
              (18,789
              )
              
              
              (21,610
              )Net
      income (loss) per basic and fully diluted share
              
              
              (0.34
              )
              
              
              (0.37
              )
              
              
              (0.39
              )
              
              
              (0.45
              )
  Fiscal
      QuarterIn
      thousands except per share amounts
              
              
              Q1
      ‘07
              
              
              
              Q2
      ‘07
              
              
              
              Q3
      ‘07
              
              
              
              Q4
      ‘07Revenue
              
              
              3,839
              
              
              
              4,862
              
              
              
              5,711
              
              
              
              6,833Net
      income (loss)
              
              
              (23,922
              )
              
              
              (27,064
              )
              
              
              (13,268
              )
              
              
              (20,386
              )Net
      income (loss) per basic and fully diluted share
              
              
              (0.50
              )
              
              
              (0.57
              )
              
              
              (0.28
              )
              
              
              (0.43
              )
  Revenue
grew by 14% from the third quarter of 2008 to the fourth quarter of 2008 and by
72% from the fourth quarter of 2007 compared to the fourth quarter of 2008.
Growth was driven by our growing subscriber base and an increase in ARPU during
the period.
   53
  Results
of Operations
  For
the three and twelve months ended August 31 2007 and 2008.
  The
following table is a summary of some of the key financial and operating metrics
that we use to help measure the success of operations. Please refer to Section
2.0 for operating definitions.
  Three
      Months
                Ending
      August 31,
              
              
              Twelve
      Months
                Ending
      August 31,2008
              
              
              2007
              
              
              2008
              
              
              2007Financial
      Metrics ($000s)Revenue
              
              
              11,780
              
              
              
              6,833
              
              
              
              39,457
              
              
              
              21,244Adjusted
      Operating Profit  (Loss)
              
              
              (4,098
              )
              
              
              (12,234
              )
              
              
              (30,731
              )
              
              
              (50,599
              )Operating
      MetricsSubscribers
              
              
              497,400
              
              
              
              315,200
              
              
              
              497,400
              
              
              
              315,200ARPU
              
              $
              12.06
              
              
              $
              11.33
              
              
              $
              11.85
              
              
              $
              11.32SAC
              
              $
              59
              
              
              $
              58
              
              
              $
              74
              
              
              $
              51CPGA
              
              $
              125
              
              
              $
              183
              
              
              $
              144
              
              
              $
              208
  Subscribers
  
  As
at August 31, 2008 we had a total subscriber count of 497,400, comprised of
433,600 Paying Subscribers, 50,500 OEM Promotional Subscribers and 13,300 Rental
Car Subscribers. Included in the 433,600 Paying Subscribers are 310,100
Self-Paying and 123,500 Other Paying. Paying Subscribers are the primary source
of our revenues. Total subscribers increased 13% during the quarter and 58%
versus Q4 2007, driven largely in part by a 41% increase in OEM gross additions
versus the same period prior year.
   54
  
  ARPU ($)
  
  ARPU
was $11.33 and $12.06 for the three months ended August 31, 2007 and 2008,
respectively. On a full year basis, ARPU grew 5% year-over-year.  We
attribute much of this growth to an increasing proportion of our subscribers
transitioning from our previous basic monthly subscription price of $12.99 to
the new $14.99 price and to a reduction in the level of discounting to attract
subscribers. ARPU is below the basic service price due to promotions offered to
new OEM Self-Paying Subscribers, family plan subscribers and discounted
multi-year plans that provide the Company with a significant working capital
benefit.
  Deferred Revenue on Balance
Sheet (short-term and long-term) ($ millions)
  
  The
amount of deferred revenue on our balance sheet includes cash received on the
purchase of service plans as well as the unamortized amount of activation
revenue, which is typically amortized over 40 months. A majority of the balance
is from the prepayment of service plans. As a contributing factor towards
positive working capital for our business, we strategically offer discounted
service plans to incent long-term prepayment. Our short-term and long-term
deferred revenue balance on our balance sheet has increased by approximately
$9.4 million over the past 12 months. We attribute this to the growing number of
months that customers typically prepay for service, as well as our growing
subscriber base. As we continue to grow our subscriber base, we expect this
balance to continue to increase.
  
   55
  
  Revenue
  Revenue
includes Subscription Revenue, activation fees, the sale of merchandise through
our direct fulfillment channel, advertising revenue from our Canadian-produced
channels and other revenue from Partnership Subscribers.
  ($
millions)
  
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, Revenue was $6.8 million and
      $11.8 million, respectively, an increase of 72% or $4.9 million. The
      increase was mostly attributable to our growing subscriber base and
      increasing ARPU.
  •
              Twelve months: For the
      twelve months ended August 31, 2007 and 2008, Revenue was $21.2 million
      and $39.5 million, respectively, an increase of 86% or $18.2 million. The
      increase was mostly attributable to our growing subscriber base and
      increasing ARPU.
  Cost of Revenue
  For
the three months ended August 31, 2007 and 2008, cost of revenue was $6.1
million and $6.6 million, respectively, an increase of 8% or $0.5 million. For
the twelve months ended August 31, 2007 and 2008, cost of revenue was $25.3
million and $29.1 million, respectively, an increase of 15% or $3.8 million.
These expenses are comprised of the following:
   56
  
  Revenue share & royalties
- Revenue share & royalties includes CRTC fees, Canadian talent development
fees, performance rights obligations to composers, artists, and copyright owners
for public performances of their creative works broadcast on XM Canada, residual
commissions paid to distribution partners, and fees paid to XM, including a 15%
monthly royalty on all subscriber revenue.
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, revenue share & royalties
      were $1.8 million and $3.4 million, respectively, an increase of 84% or
      $1.5 million. This increase is directly attributable to our increasing
      revenue and subscriber base.  We expect these costs to continue
      to increase with the growth in revenues and subscribers, and may fluctuate
      based on future agreements.
  •
              Twelve months: For the
      twelve months ended August 31, 2007 and 2008, revenue share &
      royalties were $5.7 million and $11.1 million, respectively, an increase
      of 96% or $5.4 million. This increase is directly attributable to growth
      in both our revenue and subscriber base.  We expect these costs
      to continue to increase with the growth in revenues and subscribers, and
      may fluctuate based on future
agreements.
  Customer Care & Billing
Operations - Customer care & billing operations consist primarily of
personnel and related costs associated with the ongoing operations of a call
centre to activate and bill satellite radio subscribers.
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, Customer care & billing
      operations were $0.6 million and $0.8 million, respectively, an increase
      of 40% or $0.2 million. These costs are primarily driven by the volume
      derived from our growing subscriber base and the rate of growth in gross
      activations of subscribers.
  •
              Twelve months: For the
      twelve months ended August 31, 2007 and 2008, customer care & billing
      operations were $2.5 million and $3.2 million, respectively, an increase
      of 27% or $0.7 million. These costs are primarily driven by the volume
      derived from our growing subscriber base and the rate of growth in gross
      activations of subscribers.
  •
              The
      average cost of customer care & billing operations per average
      Self-Paying Subscriber for the three months ended August 31, 2007 and 2008
      was $1.16 and $0.92, respectively, a decrease of $0.24 or
    21%.
  
   57
   Average Cost
per  Self-Paying Subscriber
  
   Cost of Merchandise - We sell
merchandise direct to employees, friends and family, existing subscribers who
want additional radios, and to commercial accounts through our Direct
Fulfillment Channel.  Cost of merchandise consists primarily of the
cost of radios and accessories and related fulfillment costs associated with the
direct sale of this merchandise.
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, cost of merchandise was $1.3
      million and $0.7 million, respectively, a decrease of 46% or $0.6 million.
      These costs are primarily driven by the volume and levels of discounts on
      radio sales, which are mostly affected by promotional programs and
      commercial accounts.
  •
              Twelve months: For the
      twelve months ended August 31, 2007 and 2008, cost of merchandise was $2.9
      million and $3.8 million, respectively, an increase of 32% or $0.9
      million. These costs are primarily driven by the volume and levels of
      discounts on radio sales, which are mostly affected by promotional
      programs and commercial accounts.
  Broadcast & Operations -
Broadcast & operations includes costs associated with operating our
terrestrial repeater network, the management and maintenance of systems and
facilities as well as information technology expense related to our
studios.  Broadcast expenses include costs associated with the
management and maintenance of the systems, software, hardware, production and
performance studios used in the creation and distribution of our
Canadian-produced channels.  Operations expenses include facilities,
operations costs for the repeater network and information technology expenses
related to the broadcast facilities.
   58
  
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, broadcast & operations
      expenses were $0.9 million and $0.7 million, respectively, a decrease of
      29% or $0.3 million. Timing of maintenance and repairs on our broadcast
      repeaters will fluctuate quarter to
quarter.
  •
              Twelve months: For the
      twelve months ended August 31, 2007 and 2008, broadcast & operations
      expenses were $3.4 million and $2.8 million, respectively, a decrease of
      19% or $0.6 million.
  •
              The
      average cost of broadcast & operations per average Self-Paying
      Subscriber for the three months ended August 31, 2007 and 2008 was $1.90
      and $0.76, respectively, a decrease of $1.14 or 60%.  We expect
      broadcast and operations to continue to decrease on an average cost per
      subscriber basis.
  Average Cost per Self-Paying
Subscriber
  
  Programming & Content -
Programming & content include the creative, production and licensing costs
associated with our Canadian-produced channels, which includes third party
content acquisition.  We view programming & content as a cost of
attracting and retaining subscribers. This includes costs of programming staff
and fixed payments for third party content. These costs are primarily driven by
programming initiatives. NHLwas
launched on the XM Service in October 2005.  NHL seasons run for the
nine month period beginning in October of each year and we have amortized these
costs over the same period.
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, programming & content was
      $1.5 million and $1.1 million, respectively, a decrease of 26% or $0.4
      million. This decrease is a result of our ongoing efforts to improve the
      Company’s efficiencies, improve content on talk and music channels
      produced by the Company, and allocate resources to high growth subscriber
      channels.
   59
  
  •
              Twelve months: For the
      twelve months ended August 31, 2007 and 2008, programming & content
      was $10.9 million and $8.3 million, respectively, a decrease of 24% or
      $2.6 million. This decrease is a result of actions taken during 2007 to
      improve the Company’s efficiencies, improve the content on talk and music
      channels produced by the Company, and allocate resources to high growth
      subscriber channels. The Company also benefitted from the appreciation of
      the Canadian dollar during the year as a significant portion of our
      programming costs are paid in US
dollars.
  Marketing -For the three
months ended August 31, 2007 and 2008, marketing was $7.9 million and $6.1
million, respectively, a decrease of 23% or $1.8 million. This decrease is a
direct result of our continued efforts to optimize marketing by shifting our
focus from general awareness campaigns to in-store promotions and direct
marketing campaigns. Marketing costs consist of the direct cost to acquire a
subscriber, which include subsidies to drive hardware price points and
distribution commissions, as well as discretionary costs consisting of
advertising and brand development and promotion of the launch of our
service.  Marketing also includes the cost of marketing
staff.
  Marketing Support - Marketing
support includes staffing directly associated with selling radio receivers
through our distribution channels, converting OEM trial customers into
Self-Paying Subscribers, and marketing the brand.
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, marketing support remained
      flat at $0.7 million despite our significant revenue increase over the
      same period prior year.
  •
              Twelve months: For the
      twelve months ended August 31, 2007 and 2008, marketing support was $3.4
      million and $2.7 million, respectively, a decrease of 19% or $0.6 million.
      This decrease is a result of actions taken during the third quarter of
      2007 to improve the Company’s
efficiencies.
  Subsidies & Distribution
- These direct costs include the subsidization of radios, commissions for the
sale and activation of radios, and certain promotional costs.
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, subsidies & distribution
      were $2.1 million and $2.5 million, respectively, an increase of 21% or
      $0.4 million. Subsidies & distribution expenses increased due
      to:
  •
              Higher
      gross subscriber additions versus the fourth quarter of
    2007.
  •
              Management’s
      decision to shift expenditures from advertising and marketing to targeted
      hardware promotions and service
discounts.
  •
              Twelve months: For the twelve
      months ended August 31, 2007 and 2008, subsidies & distribution were
      $5.5 million and $11.6 million, respectively, an increase of 111% or $6.1
      million. Subsidies & distribution  increased as a result of
      the following:
  •      Significantly higher gross subscriber
additions versus the prior year.
   60
  
 •      Management’s decision to shift expenditures
from Advertising and Marketing to targeted hardware promotions.
  SAC ($)
  
  Subscriber Acquisition Costs
- SAC was $59 for Q4 2008, essentially in line with the same period prior year.
For the twelve months ended August 31, 2007 and 2008, SAC was $51 and $74,
respectively, an increase of $23.The increase in SAC is attributable to negative
margin on equipment sales and management’s decision to shift expenditures from
general advertising and media towards targeted marketing via hardware promotions
at retailers. As a result, SAC is higher in the year ended August 31, 2008 than
the year ended August 31, 2007, however, CPGA continued to decline
year-over-year from $208 to $144, representing a decrease of 31%.
  Advertising & Marketing -
We achieve success in these areas through coordinated marketing campaigns that
include retail advertising through various media, cooperative advertising with
our distribution partners, sponsorships, and ongoing market research. These
costs fluctuate based on the timing of these activities.
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, advertising & marketing
      was $5.2 million and $3.0 million, respectively, a decrease of 43% or $2.2
      million. Advertising & marketing decreased partly due to a
      reallocation of spending to direct marketing initiatives such as hardware
      promotions and to direct marketing for OEM gross additions. Advertising
      and marketing also decreased in the fourth quarter of 2008 compared to the
      fourth quarter of 2007 as the Company incurred $2 million of non-cash,
      non-recurring advertising and marketing expenses related to the write-off
      of prepaid advertising expenses during the fourth quarter of
      2007.
  •
              Twelve months: For the
      twelve months ended August 31, 2007 and 2008, advertising & marketing
      was $19.6 million and $12.0 million, respectively, a decrease of 39% or
      $7.6 million. Advertising & marketing decreased partly due to a
      reallocation of spending to directly targeting customers through hardware
      promotions and to direct marketing for OEM gross additions. Advertising
      and marketing also decreased in 2008 compared 2007 as the Company incurred
      $2 million of non-cash, non-recurring advertising and marketing expenses
      related to the write-off of prepaid advertising expenses during the fourth
      quarter of 2007.
   61
  
  CPGA ($)
  
  Cost Per Gross Addition
(CPGA) - CPGA was $183 and $125 for the three months ended August 31,
2007 and 2008, respectively. CPGA was $208 and $144 for the twelve months ended
August 31, 2007 and 2008, respectively. CPGA declined year-over-year as a result
of lower marketing costs and higher subscriber additions. We expect that we will
be able to continue to leverage CPGA downward as we grow our subscriber base
through cost efficient distribution channels.
  General & Administrative
- General & administrative expenses primarily include compensation, IT
support and processing costs as well as other expenses which include public
company costs, bad debt expense, office occupancy expenses and other corporate
expenses.
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, general & administrative
      expenses were $3.6 million and $3.2 million, respectively, a decrease of
      12% or $0.4 million. General & administrative expenses consist of the
      following:
  •
              Compensation
      increased from $0.7 million during the fourth of 2007 to $0.9 million for
      the fourth quarter of 2008,
  •
              IT
      support and processing decreased 35%, from $1.4 million during the fourth
      quarter of 2007 to $0.9 million for the fourth quarter of 2008. One factor
      included in this decrease is our renegotiations with our IT service
      support provider; and
  •
              Other
      expenses decreased from $1.6 million during the fourth quarter of 2007 to
      $1.4 million for the fourth quarter of
2008.
  •
              Twelve months: For the
      twelve months ended August 31, 2007 and 2008, general & administrative
      expenses were $16.2 million and $14.9 million, respectively, a decrease of
      8% or $1.3 million. General & administrative expenses consist of the
      following:
   62
  
  •
              Compensation
      increased from $3.4 million during the twelve months ended August 31, 2007
      to $4.1 million for the twelve months ended August 31,
    2008.
  •
              IT
      support and processing decreased from $6.0 million during the twelve
      months ended August 31, 2007 to $5.0 million for the twelve months ended
      August 31, 2008.One factor included in this decrease
      is   our renegotiations with our IT service support
      provider; and
  •
              Other
      expenses decreased from $6.9 million during the twelve months ended August
      31, 2007 to $5.8 million for the twelve months ended August 31, 2008,
      largely due to reduced capital taxes related to fiscal 2007 and expected
      for fiscal 2008.
  •
              The
      average cost of general & administrative per Self-Paying Subscriber
      for the three months ended August 31, 2007 and 2008 was $7.51 and $3.61,
      respectively, a decrease of $3.90 or
52%.
  Average Cost per Self-Paying
Subscriber
  
  Stock based compensation -
These are expenses related to the issuance of stock options.
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, stock based compensation was
      $0.7 million and $0.8 million,
respectively.
  •
              Twelve months: For the
      twelve months ended August 31, 2007 and 2008, stock based compensation was
      $3.1 million and $3.4 million,
respectively.
   63
  
  Special Charges -In March
2007, management commenced actions designed to improve the Company’s
efficiencies, improve the content on talk and music channels produced by the
Company, and allocate resources to high growth subscriber channels. Charges
incurred in connection with these initiatives during the year ended August 31,
2007 totaled $2.0 million. No special charges have been incurred during the year
ended August 31, 2008.
  Adjusted Operating Profit
(Loss) ($ millions)
 
  
  Adjusted Operating Profit
(Loss) - We believe that Adjusted Operating Profit (Loss), as opposed to
operating profit (loss) or net profit (loss), provides a better measure of our
core business operating results and improves comparability.  A more
detailed definition and calculation of Adjusted Operating Profit (Loss) is
provided in Section 2.9.
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, Adjusted Operating Profit
      (Loss) was ($12.2 million) and ($4.1 million), respectively, an
      improvement of $8.1 million. The significant improvement in Adjusted
      Operating Profit (Loss) was driven primarily by a $4.9 million revenue
      improvement and a reduction of $1.8 million in marketing expenses versus
      the fourth quarter of 2007. As we continue to grow our revenue and manage
      programming, general & administrative and marketing costs, we expect
      Adjusted Operating Profit (Loss) to continue to
  improve.
  •
              Twelve months: For the
      twelve months ended August 31, 2007 and 2008, Adjusted Operating Profit
      (Loss) was ($50.6 million) and ($30.7 million), respectively, an
      improvement of $19.9 million. The significant improvement in Adjusted
      Operating Profit (Loss) was driven primarily by an $18.2 million revenue
      improvement offset by an increase of $3.8 million in cost of revenue, a
      reduction of $1.3 million in general & administrative costs and a
      reduction of $2.1 million in marketing expenses versus the twelve months
      ended August 31, 2007. As we continue to grow our revenue and manage
      programming, general & administrative and marketing costs, we expect
      Adjusted Operating Profit (Loss) to continue to
  improve.
   64
  
  
  Pre-Marketing Adjusted
Operating Profit (Loss) ($ millions)
  
  Pre-Marketing Adjusted Operating
Profit (Loss) - We believe that Pre-Marketing Adjusted Operating Profit
(Loss) is a good measure of operating performance before investing to acquire
new subscribers. A more detailed definition and calculation of Pre-Marketing
Adjusted Operating Profit (Loss) is provided in Section 2.10.
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, Pre-Marketing Adjusted
      Operating Profit (Loss) was ($4.3 million) and $2.0 million, respectively,
      an improvement of $6.3 million. This quarter is the first quarter in which
      we have generated Pre-Marketing Adjusted Operating Profit since launch. As
      we continue to grow our revenue and manage Programming and general &
      administrative costs, we expect Pre-Marketing Adjusted Operating Profit
      (Loss) to continue to improve. Pre-Marketing Adjusted Operating Profit
      (Loss) has improved or remained consistent every quarter since we launched
      operations in the second quarter of
2006.
  •
              Twelve months: For the
      twelve months ended August 31, 2007 and 2008, Pre-Marketing Adjusted
      Operating Profit (Loss) was ($22.1 million) and ($4.3 million),
      respectively, an improvement of $17.8 million. As we continue to grow our
      revenue and manage programming and general & administrative costs, we
      expect Pre-Marketing Adjusted Operating Profit (Loss) to continue to
      improve.
   65
  
  Net
Non-operating Expenses
  Interest Expense -Interest
expense includes costs associated with our US$100 million senior notes, our $20
million unsecured subordinated convertible notes (“Convertible Notes”), and
other interest bearing obligations.
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, interest expense was $3.6
      million and $4.5 million, respectively. The primary increase in interest
      expense is due to the issuance of the Convertible Notes during the
      Company’s first fiscal quarter of
2008.
  •
              Twelve months: For the
      twelve months ended August 31, 2007 and 2008, interest expense was $15.3
      million and $16.9 million, respectively. The primary reason for the
      increase in interest expense is due to the issuance of the Convertible
      Notes during the Company’s first fiscal quarter of
  2008.
  Interest Income -Interest
income includes income from our cash balances and restricted
investments.
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, interest income was $0.6
      million and $0.6 million, respectively, remaining
    consistent.
  •
              Twelve months: For the
      twelve months ended August 31, 2007 and 2008, interest Income was $2.5
      million and $1.7 million, respectively, a decrease of $0.8 million.
      Interest income has decreased as the restricted and unrestricted cash
      balances have declined since the fourth quarter of
  2007.
  Revaluation of derivative -The Company had determined that the Senior Notes contain an embedded
derivative relating to the right to prepay the debt with an original value of
approximately US$1 million.  During the three months ended August 31,
2008, the embedded derivative was determined to have a value of zero and an
expense of $0.5 million was recorded in the income statement.  During
the twelve months ended August 31, 2008, the derivative was revalued and an
expense of $1.0 million was recorded in the income statement.
  Foreign Exchange Gain (Loss) -Includes costs or gains associated with our Senior Notes, restricted
investment, short-term investments and cash balances which are denominated in US
dollars.
  •
              Three months: For the
      three months ended August 31, 2007 and 2008, foreign exchange gain (loss)
      was $1.3 million and ($6.6 million), respectively. The foreign exchange
      loss in the fourth quarter of 2008 was due to the softening of the
      Canadian dollar versus the US dollar during this
  period.
  •
              Twelve months: For the
      twelve months ended August 31, 2007 and 2008, foreign exchange gain (loss)
      was $4.5 million and ($1.5 million), respectively. The loss was due to the
      Canadian dollar weakening versus the US dollar during this
      period.
   66
  
  
  Liquidity
and Capital Resources
  Change in Cash and
Short-term and Restricted (LC) Investments, excluding Convertible Notes ($ in
millions)
  
  At
August 31, 2008, the Company had total cash, short-term investments and
investments secured for a Letter of Credit, of $21.6 million. Cash, short-term
investments and investments secured for a Letter of Credit, increased $0.5
million in the fourth quarter. We attribute this increase to improved revenue
through strong subscriber growth and increasing ARPU, as well as effective cost
controls through expense reduction and working capital management.
  At
August 31, 2008, the Company had financial assets of $33.8 million comprised of
cash, short-term investments, restricted investments and accounts receivables.
Short term investments which represented 33% of financial assets or $11.3
million are invested in short term securities of highly rated Canadian issuers
and are not exposed to the risk of fluctuating interest rates. Accounts
receivable of $5.5 million net of allowance for doubtful accounts is composed
primarily of receivables from customers or subscriber receivables and
receivables from our partners or nonsubscriber receivables. Based on our
experience, we believe collection risk to be minimal for our receivables, of
which 79% are considered current (0 - 30 days). During the normal course of
business we continually review our subscriber receivables and believe that our
current allowance for uncollectible accounts is sufficient based on our
collection history. As our business grows we expect our trade accounts
receivable balance will continue to grow proportionally.
  During
the year, our accounts payable and accrued liabilities may fluctuate as the
Company manages its working capital. Accounts payable and accrued liabilities
increased slightly year-over-year from $19.8 million as at August 31, 2007 to
$20.6 million as at August 31, 2008.
  We
believe that our current liquidity and cash resources will be sufficient to
cover our funding needs until we reach consistent positive free cash flow. This
is defined as the point at which revenues and working capital sources will fund
operating expenses, working capital requirements, interest and principal
payments and capital expenditures. We make the above assessment despite credit
and liquidity issues that are currently impacting the global economy, based on
the following:
   67
  
  •
              Our
      capital expenditure requirements in the next few years are not
      significant.
  •
              Our
      current debt maturities are 2012 and beyond, which obviates the need to
      roll over existing debt in the near
term.
  •
              The
      Company will continue to draw on the XM credit
  facility.
  •
              Our
      current business plans do not anticipate any additional capital funding
      requirements in the near term.
  Our
current business plan includes consideration for an economic downturn and our
ability to continue to generate significant revenue growth. More specifically,
our plan is designed to increase subscribers and revenues while reducing CPGA
and fixed expenditures. While we believe our assumptions are reasonable, they do
contain elements of uncertainty. In the fourth quarter of fiscal 2008 we
achieved positive cash, for the second consecutive quarter.
  We
continuously review and update our business plan and financial projections. This
review process may result in changes to our business plan and financial
projections which may materially change our cash requirements or delay
achievement of sustained positive free cash flow. Our financial projections are
based on estimates regarding expected future costs and expected revenue that
includes:
  •
              Increasing
      revenue as we continue to add Self-Paying Subscribers to the
      service;
  •
              Reducing
      CPGA;
  •
              Improvement
      of the Company’s efficiencies and reduction of costs from
      suppliers;
  •
              Deferral
      of payments made to suppliers and license agreements, including the
      deferral of a portion of the NHL license fee for the 2007/2008 and
      2008/2009 hockey season to 2011/2012, 2012/2013 and
    2013/2014;
  •
              Contractual
      obligations;
  •
              Utilization
      of the XM Credit Facility (defined below);
and
  •
              Sale
      of multi-year plans.
  A
change in any of these factors may increase our need for funds, which would
require us to seek additional financing to continue implementing our current
business plan. Our ability to obtain additional funding depends on several
factors including future market conditions, our success or lack of success in
developing, implementing and marketing our satellite audio service and data
services. If we fail to obtain necessary financing on a timely basis, a number
of adverse effects could occur, or we may have to revise our business plan.
However, we are confident today that our projections will be met.
  We
have a $45 million standby credit facility from XM that can be utilized to
finance purchases of terrestrial repeaters or for the payment of license fees
(the “XM Credit Facility”).  The facility matures on December 31,
2012.  XM has a right to convert unpaid principal amounts into Class A
Subordinate Voting Shares, subject to regulatory approval. The Company has drawn
on the XM Credit Facility for the payment of license fees, purchase repeater
equipment parts and for interest accrued. As at August 31, 2008, we have drawn
approximately $7.6 million against this credit facility. We expect to continue
to utilize the XM Credit Facility during 2009.
   68
  
  In
addition, an amendment to the XM Credit Facility allows the Company to draw on
the credit facility for payments due on a specific purchase of radio inventory
totaling $3 million. This draw does not accrue interest. During the twelve
months ended August 31, 2008, the Company utilized $3 million under the facility
to purchase radio inventory and this amount was repaid during the fourth quarter
of this year.
  During
the year ended August 31, 2008, an amendment to the credit facility was signed
which will be effective for draws on the credit facility made after August 31,
2008. The amendment revised the condition to be met prior to drawing on the
credit facility and amended the interest rate. The amended interest rate has
been set at 17.75%, based on XM’s and the Company’s effective cost of borrowing,
plus 1.75%.
  Operating Activities -
Operating activities primarily consist of net loss adjusted for certain non-cash
items including amortization, stock-based compensation, unrealized foreign
exchange gains and losses and the effect of changes in working
capital.
  •
              During
      the fourth fiscal quarter of 2008, cash used in operating activities was
      $3.6 million, consisting of a net loss of $21.6 million adjusted for net
      non-cash expenses of $10.0 million and an $8.0 million source from working
      capital. As we continue to grow our subscriber base, we expect operating
      losses to decrease.
 •
              During
      the twelve months of fiscal 2008, cash used in operating activities was
      $25.7 million, consisting of a net loss of $74.3 million adjusted for net
      non-cash expenses of $30.2 million and an $18.4 million source of working
      capital. As we continue to grow our subscriber base, we expect operating
      losses to decrease.
 
 Investing Activities -
Investing activities primarily consist of capital expenditures and activity in
our restricted investment accounts.
 
 •
              During
      the fourth fiscal quarter of 2008, cash used in investing activities was
      $7.9 million, consisting of a use of $0.1 million for capital
      expenditures, payment of interest of $6.5m from restricted investments,
      and net sale of $1.4 million of short term investments and restricted
      investments.
 •
              During
      the twelve months of fiscal 2008, cash used in investing activities was
      $3.1 million, consisting of a use of $0.4 million for capital
      expenditures, net purchase of $9.5 million of short-term investments and
      restricted investments and a $12.9 million payment for interest expense on
      our U.S. debt, paid from restricted
investments.
 
 Financing Activities -
Financing activities primarily consist of net proceeds from debt and equity
financing.
 
 •
              During
      the fourth fiscal quarter of 2008, $2.3 million was used in financing
      activities to repay a draw on the XM Credit Facility for a specific
      purchase of radio equipment during the
year.
  69
  
 •
              During
      the twelve months of fiscal 2008, $19.4 million of cash was provided by
      financing activities from the net proceeds raised through the Convertible
      Notes. On September 12, 2007, we closed a private placement of $20 million
      aggregate principal amount of unsecured subordinated convertible notes due
      September 12, 2014. The Convertible Notes bear interest at a rate of 8.0
      per cent per annum payable semi-annually in arrears on December 31 and
      June 30. Each debenture holder shall have the option to receive such
      interest either in the form of cash or Class A Subordinated Voting Shares
      of CSR. At any time prior to September 12, 2014, the Convertible Notes are
      convertible at a conversion price of $5.92 at the holders' option into
      Shares of CSR which is equal to a conversion ratio of 168.919 Shares per
      $1,000 principal amount of Convertible Notes, subject to adjustment in
      certain circumstances. During the twelve months of fiscal 2008, $3.1
      million was provided by the XM Credit Facility for a specific purchase of
      radio equipment. This draw on the XM Credit Facility was repaid during the
      year.
 
 Contractual
Commitments
 We
have entered into a number of leases and other contractual
commitments.  The following table summarizes our outstanding
contractual commitments as of August 31, 2008 (in $000’s):
  Total(1)
              
              
              Less
      than
                1
      Year
              
              
              1
      - 3 Years
              
              
              4
      - 5 Years
              
              
              More
      than
                5
      YearsNHL
      Agreement
              
              
              61,177
              
              
              
              5,209
              
              
              
              15,134
              
              
              
              19,913
              
              
              
              20,921Principal
      on 12.75% Senior Notes
              
              
              106,200
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              106,200Interest
      on 12.75% Senior Notes
              
              
              74,473
              
              
              
              13,541
              
              
              
              27,081
              
              
              
              27,081
              
              
              
              6,770Principal
      on 8.0% Convertible Notes
              
              
              20,000
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              20,000Interest
      on 8.0% Convertible Notes
              
              
              9,933
              
              
              
              1,600
              
              
              
              3,200
              
              
              
              3,200
              
              
              
              1,933Operating
      leases
              
              
              4,945
              
              
              
              1,192
              
              
              
              2,008
              
              
              
              441
              
              
              
              1,304Marketing
      & advertising(2)
              
              
              24,568
              
              
              
              7,530
              
              
              
              3,301
              
              
              
              3,502
              
              
              
              10,235Information
      technology
              
              
              18,243
              
              
              
              3,113
              
              
              
              10,280
              
              
              
              4,850
              
              
              
              0Other
              
              
              709
              
              
              
              183
              
              
              
              401
              
              
              
              0
              
              
              
              0320,248
              
              
              
              32,492
              
              
              
              61,404
              
              
              
              58,987
              
              
              
              167,364
 __________________
  Notes:
  (1)In connection
with our broadcasting license, amended February 10, 2006, we are required to
contribute or make payments based on a minimum of 5% of revenues over the six
year license term towards Canadian talent development. In addition, the Company
will be required to make certain music programming royalty payments to Canadian
copyright collectives. The specific amounts payable under these arrangements are
negotiated on a periodic basis. These arrangements have not been included in the
table above due to the variability of the commitments.
  (2)We have
committed to purchase for cash $7 million of a total $10 million of advertising
committed from an entity over a three period commencing on the closing of the
initial public offering, subject to a per annum minimum of $1.5 million. In
addition, we have a commitment with one of our distribution partners to provide
advertising and marketing spend towards co-branding
initiatives.
  Off-Balance
Sheet Arrangements
  We
have no off-balance sheet arrangements.
  Arrangements,
Relationships and Transactions with Related Parties
  During
the three months ended August 31, 2008, the Company had the following
transactions with related parties, which were in the normal course of
operations.
   70
  As
at August 31, 2008, XM had a 23.3% ownership interest in the
Company.
  The
Company entered into a license agreement and a technical services agreement with
XM in fiscal 2006. The Company paid XM US$26,600 per month from January 2008 to
August 2008 and US $25,000 per month from January 2007 to December 2007 for
these services.
  The
following amount included in accounts payable, is due to XM in respect of fees
under the License Agreement related to subscriber revenues and activation
charges, fees under the Technical Services Agreement, and the reimbursement of
call centre and other charges paid on CSR’s behalf.
  August
      31, 2008
              
              
              August
      31, 2007Accounts
      payable to XM
              
              $
              2,244,960
              
              
              $
              3,466,953
  During
the twelve months ended August 31, 2008, the Company utilized $5,493,419 under
the credit facility of $45 million previously provided to XM. This facility is
to be utilized to finance the purchase of terrestrial repeater equipment and to
pay license fees.  The details of this credit facility are included in
note 4.
  During
the three and twelve months ended August 31, 2008, the Company received printing
services from AMI Printing valued at approximately $0 and $136,165 respectively
(2007 - $34,646 and $671,046). An affiliate of CSRI holds an indirect minority
interest in AMI Printing.
  The
Company has a payroll service agreement with Priszm LP for an annual amount of
$30,000. In addition, the Company sold approximately $10,108 and $184,393 (2007
- $96,000 and $226,800) of advertising to Priszm LP during the three and twelve
months ended August 31, 2008. Priszm LP is owned, directly and indirectly,
approximately 60% by Priszm Canadian Income Fund and approximately 40% by a
company controlled by the Executive Chairman of the Company.
  During
the three and twelve months ended August 31, 2008, the Company had a marketing
agreement with Vision Group of Companies (Vision), under which the Company
received field marketing services valued at approximately $111,519 and $605,079
respectively (2007 - $216,400 and $2,277,600).  This amount consists
of fees paid to Vision of $37,500 and $197,500 respectively and amounts paid by
Vision to vendors on the Company’s behalf of $74,019 and $407,579 respectively.
The principal of Vision is related to the Executive Chairman of the
Company.
  During
the three and twelve months ended August 31, 2008, the Company incurred $80,304
and $364,926  (2007 - $81,327 and $536,427) for expenses related to
the reimbursement of operating and travel expenses and the lease of its Toronto
studio from companies controlled by the Executive Chairman of the Company. The
Company has leased this property for a 15-year period for a total amount of
approximately $2.5 million.
   71
  During
the three and twelve months ended August 31, 2008, the Company incurred
consulting services related to public relations from the Wilcox Group totaling
approximately $43,447 and $196,917 respectively (2007 - $44,926 and $388,226). A
director of the Company is the principal of the Wilcox Group.
  During
the three and twelve months ended August 31, 2008, the Company incurred costs on
behalf of Data Audio-Visual Enterprises Wireless Inc in the amount of $52,725
for which the Company was reimbursed. The Company’s Executive Chairman is the
Chairman and controlling shareholder of Data Audio-Visual Enterprises Wireless
Inc.
  During
September 2007, the Company issued convertible notes. $4.0 million of the
convertible notes were issued to XM and $6.0 million were issued to shareholders
of CSRI, including John I. Bitove. A description of the Convertible Notes is
included in note 3 in the Notes to Consolidated Financial
Statements.
  Critical
Accounting Policies and Estimates
  The
preparation of financial statements in accordance with Canadian GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the year.  We believe that the accounting estimates
used to assess the carrying value of intangibles and long-lived assets, as well
as estimates related to stock-based compensation, revenue recognition, asset
retirement obligations and royalties to artists are critical accounting
estimates.
  Intangibles
and Long-Lived Assets
  We
review the carrying value of our amortizable intangible assets and capital
assets whenever events and circumstances indicate that the carrying value of an
asset may not be recoverable from the estimated future cash flows expected to
result from its use and eventual disposition. Significant management judgment is
required in the forecasting of future operating results, which are used in the
preparation of the projected cash flows. Any change in estimates which cause the
undiscounted expected future cash flows to be less than the carrying value would
result in an impairment loss being recognized equal to the amount by which the
carrying value of the asset exceeds the fair value of the asset.
  Stock-based
Compensation
  The
estimated fair value of stock awards granted to employees as of the date of
grant is recognized as compensation expense over the period in which the related
employee services are rendered. For stock options granted to non-employees, the
estimated fair value of stock awards granted to non-employees is recognized as
expense over the period in which the related goods or services are
rendered.   The determination of the fair value of stock awards
includes the use of option pricing models and the use of the following
estimates:  expected volatility, expected option life and expected
interest rates.
   72
  Revenue
Recognition
  Revenue
from subscribers consists of our monthly subscription fee, which is recognized
as the service is provided, and a non-refundable activation fee, which is
recognized on a pro-rata basis over an estimated term of the subscriber
relationship (currently 40 months), which is based upon management’s judgment
and experience in the United States. We expect to refine this estimate as more
data becomes available. If the actual term of our subscriber relationships is
significantly greater than our current estimate of 40 months, the period over
which we recognize the non-refundable activation fee will be extended to reflect
the actual term of our subscriber relationships.  Sales incentives,
consisting of discounts and rebates to subscribers, offset earned
revenue.
  Accrued
Royalties to Artists
  We
have accrued a liability for amounts expected to be owed for royalties with the
Society of Composers, Authors and Music Publishers of Canada/Société canadienne
des auteurs, compositeurs et éditeurs de musique (SOCAN), The Society for the
Reproduction Rights of Authors, Composers and Publishers in
Canada Inc./Société du droit de reproduction des auteurs, compositeurs, et
éditeurs au Canada (SODRAC) Inc. and The Canadian Musical Reproduction
Rights Agency Ltd. (CMRRA).  While we believe that these accruals
are adequate, the use of different estimates could have a significant impact on
our results of operations.
  Asset
Retirement Obligations
  We
have recorded asset retirement obligations with respect to the retirement of
terrestrial repeater equipment and restoration of facilities back to their
original state at the end of their respective lease
terms.   Accruals have been made based on management’s estimates
of current market restoration costs, inflation rates and discount rates. At the
inception of the lease, the present value of the expected future cash payments
related to the asset retirement.   We believe that the
assumptions used for these accruals are reasonable based on information
currently available, but changes to these assumptions could impact the asset
retirement obligation balance in future periods.
  Disclosure
Controls and Procedures
  Management
has designed disclosure controls and procedures to provide reasonable assurance
that material information relating to the Company is made known to it by
others.  As at August 31, 2008, the Chief Executive Officer and the
Chief Financial Officer, with participation of the Company’s management, have
concluded that the design and operation of the Company’s disclosure controls and
procedures were effective to provide that information required to be disclosed
by the Company in reports that it files or submits under the United States
Securities Exchange Act of 1934 and applicable Canadian securities laws is (i)
recorded, processed, summarized and reported within the time periods specified
in applicable rules and forms and (ii) accumulated and communicated to our
management, including its Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure. Due to the inherent
limitations in control systems and procedures, their evaluation can provide only
reasonable, not absolute, assurance that such disclosure controls and procedures
are operating effectively. A control system, no matter how well conceived or
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.
   73
  Internal
Controls
  During
the three months ended August 31, 2008, there were no changes in the Company’s
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
  Accounting
Changes
  In
April 2005, the Canadian Institute of Chartered Accountants (CICA) issued the
following new Handbook Sections: Section 1530, “Comprehensive Income”; Section
3251, “Equity”; Section 3855, “Financial Instruments - Recognition and
Measurement”; Section 3861, “Financial Instruments - Disclosure and
Presentation”; and Section 3865 “Hedges”, for annual periods beginning on or
after October 1, 2006. Section 1530 establishes standards for reporting
comprehensive income.  These standards require that an enterprise
present comprehensive income and its components in a separate financial
statement that is displayed with the same prominence as other primary financial
statements.  Section 3251 establishes standards for the presentation
of equity and changes in equity during the reporting period in addition to the
requirements of Section 1530.  Section 3855 establishes standards for
the recognition and measurement of all financial instruments, provides a
characteristics-based definition of a derivative financial instrument, provides
criteria to be used to determine when a financial instrument should be
recognized, and provides criteria to be used when a financial instrument is
extinguished. Section 3865 specifies the criteria that must be satisfied in
order for hedge accounting to be applied and the related
accounting.  CSR adopted Sections 1530, 3251, 3855, 3861 and 3865 on
September 1, 2007.  Details of the impact of the application of these
standards are discussed in Note 2 to the Company’s consolidated financial
statements.
  In
December 2006, the CICA issued Section 3862, “Financial Instruments -
Disclosures,” and Section 3863 “Financial Instruments - Presentation”. These
standards enhance existing disclosures in previously issued Section 3861
“Financial Instruments - Disclosure and Presentation”.  Section 3862
places greater emphasis on disclosures about risks related to recognized and
unrecognized financial instruments and how those risks are managed. Section 3863
carries forward the same presentation standards as Section
3861.  These new standards are effective for interim and annual
financial statements relating to fiscal years commencing on or after October 1,
2007 on a prospective basis.  The Company adopted these new standards
early, effective September 1, 2007.  This standard impacts note
disclosures provided by the Company (see Note 16 of the Company’s consolidated
financial statements) but does not impact the consolidated financial position,
results of operations or cash flows.
  Recent
Accounting Pronouncements
  In
May 2007, the Accounting Standards Board amended Section 1400, General Standards
of Financial Statement Presentation, to change the guidance related to
management’s responsibility to assess the ability of the entity to continue as a
going concern. Management is required to make an assessment about the future and
disclose any material uncertainties related to events or conditions which may
cast significant doubt upon the entity’s ability to continue as a going concern.
This amendment is effective for annual periods beginning after January 1, 2008
and the Company will adopt this new guidance effective September 1,
2008.
   74
  In
February 2008, the CICA issued Section 3064, Goodwill and Intangible Assets,
which introduces changes to the recognition, measurement and disclosure of
goodwill and intangible assets. The Section applies to interim and annual
financial statements relating to fiscal years beginning on or after October 1,
2008 with earlier adoption encouraged and will be adopted by the Company
effective September 1, 2009. The Company is currently assessing the impact of
this standard.
  Accounting
for Consideration Given by a Service Provider to Manufacturers or Resellers of
Equipment Necessary for an End-Customer to Receive Service from the Service
Provider
  In
September 2006, the FASB Emerging Issues Task Force issued EITF No. 06-1,
Accounting for Consideration Given by a Service Provider to Manufacturers or
Resellers of Equipment Necessary for an End-Customer to Receive Service from the
Service Provider, which states how a service provider company that depends on
specialized equipment should account for consideration paid to the manufacturers
and resellers of such equipment. EITF No. 06-1 requires that the service
provider recognize payments based on the form of benefit the end-customer
receives from the manufacturer or reseller. If the form of benefit is “other
than cash” or the service provider does not control the form of benefit provided
to the customer, the consideration would be classified as an expense. If the
form of benefit is cash, the consideration would be classified as an offset to
revenue. The consensus requires retrospective application to all prior periods
as of the beginning of the first annual reporting period beginning after June
15, 2007. This Issue is effective for the first annual reporting period
beginning after June 15, 2007.  We adopted this standard September 1,
2007 and it did not impact our consolidated results of operations or financial
position.
  Certain
Risk Factors
  The
risk factors below are selected and have been updated from the risks itemized in
our Form 20-F for the fiscal year ended August 31, 2008. Readers are advised to
review these risk factors for a detailed discussion of the risks and
uncertainties affecting the Company’s business.
  Our
cumulative expenditures and losses have been significant.
  We
have expended and will continue to expend significant funds for marketing,
developing our subscriber management systems, maintaining and enhancing our
terrestrial repeater network, programming and distribution contracts, royalty
fees and the maintenance of our broadcast and office facilities. In addition,
our cumulative losses and cumulative negative cash flow may continue, and
possibly increase, as we incur expenses to grow our subscriber base. If we are
ultimately unable to generate sufficient revenues to become profitable and have
positive cash flow, you could lose your investment.
  Current
economic conditions may adversely affect our financial results and financial
position.
  Although
our business plans contain assumptions predicated on an economy that may weaken
in the near term, the Company is unable to predict with certainty how current
financial market conditions may affect our financial results from operations.
The prevailing financial market conditions may affect the company’s ability to
continue to generate exceptional revenue growth in its OEM business should
Canadian demand for automobiles equipped with the XM receiver declines in a
significant manner.
  While
we believe that our current liquidity position is adequate to sustain us through
the current economic climate, we are unable to predict the length and severity
of the current economic downturn and how it may ultimately affect our ability to
raise additional capital resources should the need arises.
   75
  We
rely on our exclusive relationship with XM for the provision of the satellite
radio service.
  We
have an exclusive agreement with XM to provide XM’s satellite digital audio
radio services, or SDARS, in Canada. Our success as a business depends on XM’s
cooperation and its programming content, satellite network and underlying
technology, as well as XM’s operational and marketing efficacy, competitiveness,
finances, regulatory status and overall success in the U.S. Because of our
dependency on XM, should XM’s business suffer as a result of increased
competition, increased costs of programming, satellite malfunctions, regulatory
changes, adverse effects of litigation or other factors, our business may suffer
as well. Furthermore, a breach of our agreement with XM or a failure by XM to
perform its part of the agreement would have detrimental financial consequences
to our business. Our agreement with XM, which became effective November 17,
2005, is for an initial term of ten years and we have a right to extend this
exclusive agreement for an additional five years. We may, at our option to be
exercised at least one year prior to the termination of the initial term, extend
the License Agreement for a further five years, provided that: (i) CSR Inc.’s
broadcasting license from the CRTC has been renewed at the end of the current
CRTC license term without any adverse modification and (ii) we are not at such
time in breach of any provision of the License Agreement and have not failed to
cure any breach of a provision of the License Agreement in accordance with its
term.
  Demand
for our service may be insufficient for us to become profitable.
  We
cannot estimate with any certainty whether consumer demand for our service will
be sufficient for us to continue to increase the number of subscribers at
projected rates or the degree to which we will meet that demand. Among other
things, continuing and increased consumer acceptance of our satellite radio
service in Canada will depend upon:
  •
              the
      willingness of consumers, on a mass-market basis, to pay subscription fees
      to obtain satellite radio service;
and
  •
              the
      marketing and pricing strategies that we employ and that are employed by
      our competitors.
  If
demand for our service does not continue to increase as expected, we may not be
able to generate enough revenues to generate positive cash flow or become
profitable.
  We
will be required to pay royalty fees, which may be more costly than
expected.
  Pursuant
to our licensing arrangements, we must contribute based on a prescribed
percentage of our revenue each year to the development of Canadian talent and
capabilities. We may not be able to meet these contribution requirements and,
consequently our license may be revoked and we would lose our ability to
continue to legally operate in Canada.
   76
  We
require music programming royalty arrangements with the following Canadian
copyright collectives in order to operate our service: the Society of Composers,
Authors and Music Publishers of Canada/Société canadienne des auteurs,
compositeurs et éditeurs de musique (SOCAN), The Neighbouring Rights Collective
of Canada (NRCC), The Society for the Reproduction Rights of Authors, Composers
and Publishers in Canada Inc./Société du droit de reproduction des auteurs,
compositeurs, et éditeurs au Canada (SODRAC) Inc. and The Canadian Musical
Reproduction Rights Agency Ltd. (CMRRA). There are no pre-existing tariffs in
Canada that govern our consumer subscription satellite radio
services.  As we were not able to come to a negotiated arrangement
with these Canadian collectives, the royalties payable for the public
performance of music and transfer of music to digital form were adjudicated by
the Copyright Board during a two week hearing which commenced on November 27,
2007. The Copyright Board generally adjudicates copyright royalties in arrears.
This means that a decision will be issued by the Copyright Board, more than two
years after we commenced broadcasting, and such fees will be retroactive to the
commencement of the service in Canada. It is unknown how long after this hearing
a written decision of the Copyright Board will be rendered. Copyright royalties
in Canada are generally payable on the basis of a percentage of gross revenue of
the broadcasting service, or might be negotiated as a “per subscriber” fee.
Decisions of the Copyright Board are subject to appeal in the Federal Court of
Canada, which could further delay finalization of copyright fees. In Canada,
copyright tariffs are filed with the Copyright Board before March 31 of each
year, and become effective the January of the following calendar year. Royalty
fees payable under these tariffs may be more costly than anticipated and may be
significant. As well, we will have to re-negotiate these arrangements once they
come up for renewal. Re-negotiated fees may also be more expensive than current
levels.
  Outstanding
Share Data and Other Information
  The
Company is authorized to issue an unlimited number of Class A Subordinate Voting
Shares, an unlimited number of Class B Voting Shares and an unlimited number of
Class C non-voting shares.  As at November 6, 2008, we had 20,951,067
fully paid and non-assessable Class A Subordinate Voting Shares and 81,428,133
fully paid and non-assessable Class B Voting Shares
outstanding.  There are currently no Class C non-voting shares
outstanding.  A total of 3,489,500 stock options are outstanding under
our stock option plan.  Additional information concerning the Company,
including our Form 20-F for the fiscal year ended August 31, 2008, is available
on SEDAR at www.sedar.com.


77
  
 
 Item 6 
- Directors, Senior Management And Employees
 
 A.
              DIRECTORS
      AND SENIOR MANAGEMENT
 
 The
following table provides certain information regarding our directors and
executive officers as of November 6, 2008.
 
 Name & Place of Principal Residence
              
              Age
              
              Position with the CompanyJohn
      I. Bitove,Toronto,
      Ontario
              
              48
              
              Director
      and Executive ChairmanMichael
      Moskowitz, Toronto, Ontario
              
              38
              
              President
      and Chief Executive OfficerMichael
      Washinushi,Toronto,
      Ontario
              
              39
              
              Chief
      Financial Officer, Treasurer and SecretaryStewart
      Lyons,(1)Toronto,
      Ontario
              
              35
              
              Executive
      Vice PresidentMark
      Knapton, Toronto,
      Ontario
              
              49
              
              Vice
      President, Customer OperationsJanet
      Gillespie, Toronto,
      Ontario
              
              49
              
              Vice
      President, MarketingJoseph
      A. Verbrugge, Silver
      Spring, Maryland
              
              39
              
              DirectorMarc
      Comeau, Courtice,
      Ontario
              
              49
              
              DirectorRobert
      Storey(2)(3)(4)Ottawa,
      Ontario
              
              66
              
              DirectorJames
      W. McCutcheon(2)(3)(4)Toronto,
      Ontario
              
              72
              
              DirectorPierre
      Boivin,(2)(3)(4)Mount Royal,
      Québec
              
              55
              
              DirectorPhilip
      Evershed,Toronto,
      Ontario
              
              48
              
              DirectorMat
      WilcoxVancouver,
      British Columbia
              
              47
              
              DirectorGary
      M. Parsons,(5)Potomac,
      Maryland
              
              58
              
              Director
 
 Notes:
 (1)
              Effective
      August 1, 2008, Mr. Lyons was seconded to an affiliate of the Company,
      Data Audio-Visual Enterprises Wireless Inc.
  (DAVE).
 (2)
              Denotes member of the Audit
      Committee.
 (3)
              Denotes
      member of the Compensation
Committee.
 (4)
              Denotes
      member of the Corporate Governance
Committee.
 (5)
              Mr.
      Parsons was Chairman of Motient Corporation (MTNT: Nasdaq) a company which
      made a proposal under legislation relating to bankruptcy in January 2002
      while Mr. Parsons was serving as Chairman. Mr. Parsons ceased as Director
      and Chairman of Motient Corporation upon its emergence from Chapter 11
      bankruptcy protection four months later in May
  2002.
 
 John I. Bitove.John I.
Bitove is our Executive Chairman and controls CSRI Inc., formerly Canadian
Satellite Radio Investments Inc., our controlling shareholder. Mr. Bitove
has also been our Director since 2003. He is also the Chairman and Chief
Executive Officer of Priszm Canadian Income Fund (TSX:QSR.UN), the owner and
operator of 465 KFCTM, Pizza HutTM and Taco BellTM restaurants in seven
provinces across Canada, and Chairman and Chief Executive Officer of Scott’s
Real Estate Investment Trust (TSX:SRQ.UN). In 1993, he founded the Toronto
Raptors Basketball Club. While with the Raptors, Mr. Bitove helped to
launch what is now Raptors TV almost eleven years ago. Mr. Bitove has been
associated in various broadcasting ventures for more than a decade.
Mr. Bitove has been associated in various broadcasting ventures for more
than a decade. Mr. Bitove is currently involved in a new venture, DAVE
Wireless, and is planning to launch wireless services in 10 of Canada’s 13
largest metropolitan markets.
 
 Michael Moskowitz. Michael
Moskowitz is our President and Chief Executive Officer. Mr. Moskowitz has over
15 years of experience in a leadership role within the Canadian communications
and technology industries. Prior to joining us at the beginning of 2008 Mr.
Moskowitz served as President, Americas International of Palm, Inc. which
encompasses Canada, Latin America and the Caribbean. Prior to Palm, he worked at
several leading global consumer electronics product companies. Mr. Moskowitz was
a Top 40 Under 40 award recipient in 2004 and holds an honors degree from York
University and an MBA from Dalhousie University.
 
 Michael Washinushi.Michael
Washinushi is our Chief Financial Officer, Treasurer and Secretary. Prior to
joining us in 2005, Mr. Washinushi served as the Director of Development
and Acquisitions for KIT Limited Partnership where he was responsible for
managing the firm’s existing real estate portfolio and identifying new real
estate opportunities, from 2003 to 2005. From 2000 to 2003, Mr. Washinushi
served as the Director of Finance for Priszm Brandz where he was responsible for
the planning and corporate finance of the company. Mr. Washinushi holds a
Bachelor of Arts degree in Economics from York University.
 
   78
  
 Stewart Lyons.Stewart Lyons
is our Executive Vice President. Mr. Lyons joined us at inception and
worked with XM throughout its critical launch and early growth period.
Mr. Lyons joined us while he was employed at Scotia Capital Inc.,
where, from 2003 to 2005, he served as an interest rate derivatives trader in
Global Trading. From 1999 to 2001, Mr. Lyons worked as the Director of
Operations for the Toronto 2008 Olympic Bid. Mr. Lyons has an MBA from the
University of Toronto and an LLB from Osgoode Hall Law School.
 
 Mark Knapton.Mark Knapton is our Vice
President, Customer Operations. In his role, Mr. Knapton is responsible for
managing Listener Care activities as well as customer operations including the
repeater network and customer service strategies to drive sales and manage
churn. Mr. Knapton has more than 24 years of experience in customer care
environments in both the airline and telecommunications industries.
 
 Janet Gillespie. Janet
Gillespie is our Vice President, Marketing. Ms. Gillespie has over 20 years of
marketing and sales experience with leading technology and communications firms,
including the past eight years at Palm Canada Inc. Initially as director of
marketing, Ms. Gillespie led marketing efforts for Palm handheld computers and
smartphones and was instrumental in the successful positioning and launch of the
Treo product family. Most recently, Ms. Gillespie was responsible for Palm's
wireless business development and overall account management of three wireless
business partners. Prior to Palm, Ms. Gillespie held account management and
marketing positions enabling her to gain management experience in strategic
communications and public relations, channel marketing, as well as building
advertising and direct marketing strategies
 
 Philip Evershed.Philip
Evershed has been our Director since 2005. Mr. Evershed is a principal of
Genuity, a Canadian investment bank. Prior to co-founding Genuity,
Mr. Evershed spent 14 years at CIBC World Markets, most recently
as Co-Head of Investment Banking and Head of Mergers and Acquisitions. Prior to
joining CIBC, Mr. Evershed was Chief of Staff to the Deputy Prime Minister
of Canada. Mr. Evershed has an MA (Economics) from the University of
Toronto and a BA (School of Business and Economics) from Wilfrid Laurier
University.
 
 Mat Wilcox.Mat Wilcox has
been our Director since 2005. Ms. Wilcox oversees all operations at Wilcox
Group, one of Canada’s largest national, independent public relations firms with
offices in Toronto and Vancouver. Ms. Wilcox has provided strategic
communications advice and support to CEOs of leading Canadian companies. She has
also counseled global corporations entering the Canadian marketplace and
provided growth strategies as they expanded across Canada.
 
 Gary M. Parsons.Gary M.
Parsons has been our Director since 2005. Mr. Parsons has served as
Chairman of the Board of Directors of XM since May 1997 and is now the
Chairman of Sirius XM Radio Inc. Mr. Parsons is Chairman and was previously
Chief Executive Officer of Mobile Satellite Ventures L.P., and serves on
the board of WorldSpace, Inc. Mr. Parsons was Chairman of the Board of
Directors of Motient Corporation from March 1998 to May 2002.
Previously, Mr. Parsons was with MCI Communications Corporation where he
served in a variety of roles from 1990 to 1996, including most recently as
Executive Vice President of MCI Communications, and as Chief Executive Officer
of MCI’s subsidiary MCImetro, Inc. From 1984 to 1990, Mr. Parsons was
one of the principals of Telecom*USA, which was acquired by MCI. Prior to the
recruitment of Hugh Panero, Mr. Parsons served as XM’s Chief Executive
Officer.
  Joseph A. Verbrugge.Joseph
A. Verbrugge has been our Director since 2005. Dr. Verbrugge is Senior Vice
President, Automotive Partnerships and International Operations for XM1.
Currently, he oversees all XM automotive partnerships, including General Motors,
Honda, Toyota, Nissan, Hyundai and Porsche. Prior to joining XM,
Dr. Verbrugge was a management consultant with The Dealy Strategy
Group LLC, a Washington, DC-based advisory firm providing
financial/negotiating/strategic consulting services and operational support
primarily to satellite communications companies (including XM), as well as
private equity and investment banking firms active in the satellite industry.
Dr. Verbrugge holds an MBA from Georgetown University and a Ph.D. in
Management Studies from Oxford University.
 
 Marc Comeau.Marc J. Comeau
joined our board in 2006. Mr. Comeau began his career with General Motors
in 1983 as a Product Distribution Specialist in the Montreal Zone. He served in
a variety of assignments leading to a District Manager position. In 1988, Marc
became the Distribution Manager and in 1989 was appointed Regional Human
Resources Development Manager. Mr. Comeau also served as the Regional
Marketing/Business Planning Manager, Area Marketing Manager, and Montreal Zone
Manager. In 1995, Marc was appointed Director Strategic Marketing and Research
for Buick Motor Division in Flint. In 1997, he returned to General Motors of
Canada as the General Director  - Sales. Marc J. Comeau was appointed to
his current position of Vice President, Sales, Service & Marketing
effective April 1, 2002, and a member of the Board of Directors for General
Motors of Canada Limited. In 2005, Mr. Comeau was an award recipient of
Marketing Magazine’s “Marketers That Mattered”.
 
  
 1 XM is now a wholly owned subsidiary of
Sirius XM Radio Inc.
  79
  
 Robert Storey.Robert Storey
has been our Director since 2005. Mr. Storey is Chairman of the consulting
company MASABE and Company and President of Teraca Communications Corporation.
He has worked in the broadcasting and communications industry in Canada and
abroad for more than 30 years. Mr. Storey is the founding officer of
South Fraser Broadcasting Ltd. and has served on the board of several
private companies with broadcast and cable interests in Canada and the
U.S. Mr. Storey is a two time Olympian; President of the Fédération
Internationale de Bobsleigh et de Tobogganing; director of the Association of
International Olympic Winter Sports Federation; director of the Canadian Olympic
Committee; a member of the Canadian Olympic Committee Hall of Fame and several
International Olympic Committee commissions. Mr. Storey was the Chief
International Strategist for the successful Vancouver 2010
Olympic Bid.
 
 James W. McCutcheon, Q.C.James W. McCutcheon has been our Director since 2005. Mr. McCutcheon
practices law as independent Counsel and is an active Corporate Director. He was
Counsel to McCarthy Tétrault LLP from 1990 until December 31, 2005.
Mr. McCutcheon was called to the Ontario Bar in 1962. He was a founding
partner of Shibley, Righton & McCutcheon in 1964. For some ten years
Mr. McCutcheon practiced predominantly civil litigation before Ontario
courts and tribunals. His practice was diversified to include commercial real
estate, insurance, trust and corporate law. As independent Counsel, he now
advises on a broad variety of litigation, corporate, individual and charity
issues. Mr. McCutcheon has served as a director of many public
corporations, presently Dominion of Canada General Insurance Company, Empire
Life Insurance Company and Guardian Capital Group Limited. Mr. McCutcheon
has also served on boards of the Art Gallery of Ontario Foundation, Canadian
Institute of International Affairs, Eglinton St. George’s United Church, Royal
Agricultural Winter Fair, Royal Ontario Museum, University Health Network
Toronto, Victoria University in the University of Toronto and World Wildlife
Fund (Canada).
 
 Pierre Boivin.Pierre Boivin
has been our Director since 2005. Mr. Boivin is President of the Montréal
Canadiens, L’Arena des Canadiens Inc. and Gillett Entertainment Group. In 1994,
Mr. Boivin was appointed President and Chief Executive Officer of Canstar
Sports Inc., a Montréal based public company in the hockey equipment industry.
In 1995, Canstar was acquired by Nike, Inc. and formed Bauer Nike Hockey
Inc., and Mr. Boivin remained Chief Executive Officer of the new company
until 1999. Mr. Boivin is a member of the Board of Governors of the
National Hockey League. He is Chairman of the Board of Directors of Kangaroo
Media Inc. and Vice Chairman of the Board of Hexagram. Mr. Boivin is also
Chairman of the Sainte-Justine Hospital Foundation and member of the Board of
Directors for Special Olympics Quebec.
 
 B.           COMPENSATION
 
 Remuneration
of Directors
  Mat
Wilcox, Phil Evershed and each of the independent directors will be paid an
annual fee of $25,000 for serving on the board, as well as $1,000 per director
for each regularly scheduled meeting of the board of directors, or a committee
thereof, attended in person, and $250 for each meeting of the board of
directors, or a committee thereof, attended by teleconference. In addition, the
chair of each committee of the board of directors will be paid an annual fee of
$10,000 ($15,000 in the case of the chair of the audit committee). At the time
of our initial public offering, we issued 25,000 options to acquire
Subordinate Voting Shares to each of the independent directors. The exercise
price of these options is our initial public offering price of the Subordinate
Voting Shares, or $16 per Subordinate Voting Share. These options vested
immediately. On November 14, 2007, the Board of Directors approved a grant
of a further 50,000 options to acquire Subordinate Voting Shares to each of the
independent directors and 25,000 options to acquire Subordinate Voting Shares to
each of Mat Wilcox and Phil Evershed. See “Item 6 - Directors, Senior Management
And Employees - E. Share Ownership - Stock Option Plan”.
 
 Each director of the Company has been
elected to serve until the close of the next annual meeting of shareholders or
until his or her successor is elected or appointed.
 
 Executive
Compensation
 
 The
following table provides a summary of the compensation of the President and
Chief Executive Officer and the Chief Financial Officer of the Company and the
three most highly compensated individuals who served as executive officers of
the Company (collectively, the “Named Executive Officers”) for
the fiscal years ended August 31, 2008, 2007and 2006, respectively, whose
total bonus and salary exceeded $150,000(1).
 
   80
  
 Annual
      Compensation
                  Long-Term
      CompensationName
      and Principal Position
                  Year
                  Salary
                  Bonus
                  Other
      Annual
                    Compensation
                  Securities
                    Under
                    Options
                    Granted
                  Restricted
                    Stock
      Units
                  All
      Other
                    CompensationJohn
      I. Bitove, ExecutiveChairman(2)
                  2008
                  $250,000
                  $147,563
                  Nil
                  45,000
                  Nil
                  Nil2007
                  $250,000
                  $55,340(3)
                  Nil
                  Nil
                  $28,878(4)
                  Nil2006
                  $250,000
                  $75,000(4)
                  Nil
                  1,000,000
                  Nil
                  NilMichael
      Moskowitz
                  2008
                  $233,333.28
                  $275,000(6)
                  Nil
                  545,000
                  Nil
                  NilPresident and Chief Executive
      Officer(5)
                  2007
                  N/A
                  N/A
                  N/A
                  N/A
                  N/A
                  N/A2006
                  N/A
                  N/A
                  N/A
                  N/A
                  N/A
                  N/AMichael
      Washinushi,
                  2008
                  $257,500
                  $119,887
                  Nil
                  45,000
                  Nil
                  NilChief
      Financial Officer, Treasurer and
                  2007
                  $250,000
                  $29,665
                  Nil
                  Nil
                  $15,480
      (7)
                  NilSecretary
                  2006
                  $244,583
                  $40,000
                  Nil
                  300,000
                  Nil
                  NilStewart
      Lyons,
                  2008
                  $190,000
                  $53,200
                  Nil
                  45,000
                  Nil
                  NilExecutive
      Vice President(8)
                  2007
                  $150,000
                  $35,400
                  Nil
                  Nil
                  Nil
                  Nil2006
                  $150,000
                  $34,800
                  Nil
                  300,000
                  Nil
                  NilMark
      Knapton
                  2008
                  $165,000
                  $42,702
                  Nil
                  21,000
                  $9,511(9)
                  NilVice
      President, Customer Operations
                  2007
                  $160,000
                  $15,132
                  Nil
                  4,000
                  Nil
                  Nil2006
                  $135,000
                  $18,835
                  Nil
                  10,000
                  Nil
                  NilJanet
      Gillespie
                  2008
                  $104,307.74
                  $29,844
                  Nil
                  21,000
                  Nil
                  NilVice
      President, Marketing(10
                  2007
                  N/A
                  N/A
                  N/A
                  N/A
                  N/A
                  N/A2006
                  N/A
                  N/A
                  N/A
                  N/A
                  N/A
                  N/A
 
 Notes:
 (1)
              Based
      on the foregoing, the individuals were the only Named Executive Officers
      during the Company’s most recent completed
      financial year.
 (2)           Mr.
Bitove changed from Chairman and CEO to Executive Chairman effective December
31, 2007.
 (3)
              Mr. Bitove
      elected to defer receipt of his 2007 fiscal year bonus entitlement until
      such time as the Company is cash flow positive,
  annualized.
 (4)
              On
      January 12, 2007, Mr. Bitove’s 2006 fiscal year bonus
      entitlement of $75,000 was paid in the form of 10,965 RSUs which were
      settled on January 25, 2008. As at January 25, 2008, the total market
      value of these RSUs was $46,053. On January 18, 2007, Mr. Bitove
      was granted 6,716 RSUs  as a 2007 fiscal year bonus entitlement
      which were settled on January 24, 2008. As at January 24, 2008, the total
      market value of these RSUs was
$28,878.
 (5)
              Mr.
      Moskowitz was appointed President and Chief Executive Officer effective
      January 1, 2008.
 (6)
              Includes
      a signing bonus of $100,000, as per Mr. Moskowitz’s employment
      agreement.
 (7)
              On
      January 12, 2007, Mr. Washinushi’s 2006 fiscal year bonus
      entitlement of $40,000 was paid in the form of 5,848 RSUs which were
      settled on January 25, 2008. As at January 25, 2008, the total market
      value of these RSUs was $24,561. On January 18, 2007,
      Mr. Washinushi was granted 3,600 RSUs as a 2007 fiscal year bonus
      entitlement which were settled on January 24, 2008. As at January 24,
      2008, the total market value of these RSUs was
  $15,480.
 (8)
              Effective
      August 1, 2008, Mr. Lyons was seconded to an affiliate of the Company,
      Data Audio-Visual Enterprises Wireless Inc. (DAVE) which, as of the
      secondment, reimburses the Company for Mr. Lyons
    compensation.
 (9)
              Mr.
      Knapton was granted 2,212 RSUs on November 14, 2007 which were settled on
      January 24, 2008. As at January 24, 2008, the total market value of these
      RSUs was $9,511.
 (10)
              Ms.
      Gillespie was appointed Vice President, Marketing effective January 7,
      2008.
 
 
 
 
 
 
   81
  
 Long-Term
Compensation  - Option Granted During the Fiscal Year Ended August 31,
2008
 
 During
the most recently completed financial year, we issued to our directors, officers
and employees a total of 1,117,000 options to acquire Subordinate Voting Shares,
of which 722,000 options were issued to the Named Executive Officers. However,
as of the date hereof, such 156,000 options have been cancelled (in accordance
with the terms of the Company’s Stock Option Plan) in connection with the
resignations or terminations of employment of certain employees.
 
 Long
Term Compensation - Restricted Stock Unit Granted During the Fiscal Year Ended
August 31, 2008
 
 During
the most recently completed financial year, we issued a total of 59,661
Restricted Stock Units, or RSUs, 21,523 of which were issued to the Named
Executive Officers, as summarized above in the Executive Compensation table and
to former Executive Officers. Each of James McCutcheon and Bob Storey received
8,049 RSUs and 8,002 RSUs, respectively, in lieu of their director compensation
for the 2007 fiscal year. The remaining 22,087 RSUs were issued to senior
members of management other than the Named Executive officers, former Executive
Officers, former employees and senior level directors as part of their
bonus entitlement for the fiscal year ended August 31, 2008.
 
 Long-Term
      Compensation  - Option Grants During the Current Fiscal
      Year
 
 No
options have yet been granted to the Board of Directors during the 2009
fiscal year. On November 6, 2008 the Board of Directors approved a
grant of 177,000 options to acquire Subordinate Voting Shares to the Named
Executive Officers and 169,500 options to senior members of management other
than the Named Executive Officers and senior level directors.
 
 Employment
Agreements
 
 We
have entered into employment agreements with the Named Executive Officers and
other members of senior management, certain material terms of which are
summarized below.
 
   82
  
 John I. Bitove.The
employment agreement with Mr. Bitove is for an indefinite term, subject to
the provisions within the agreement. The agreement provides for a current base
salary of $250,000 and eligibility to receive a maximum annual bonus of up to
100% of his base salary based on the goals established pursuant to the bonus
plan. The agreement contains non-solicitation and non-competition covenants in
our favor, which apply during the term of Mr. Bitove’s employment and for a
period of 24 months following the termination of his employment, and
confidentiality covenants in our favor, which apply indefinitely. In addition,
if Mr. Bitove’s employment is terminated for any reason other than for
cause, Mr. Bitove will receive his base salary (and a pro rata
share of his bonus and other forms of compensation) for a period of
24 months following the date of such termination. If Mr. Bitove’s
employment is terminated, or if he resigns for good reason, within
12 months following a change of control, Mr. Bitove will receive his
base salary (and a pro rata share of his bonus and other forms of
compensation) for a period of 24 months following the date of such
termination.
 
 Michael
Moskowitz.The employment agreement with Mr. Moskowitz is for
an indefinite term, subject to the provisions within the agreement. The
agreement provides for a current base salary of $350,000 and eligibility to
receive a maximum annual bonus of up to 100% of his base salary based on the
goals established pursuant to the bonus plan and a guaranteed minimum annual
bonus of $175,000 in the first year of employment. The agreement provides for a
signing bonus of $100,000. The agreement contains non-solicitation and
non-competition covenants in our favor, which apply during the term of Mr.
Moskowitz’s employment and for periods of 18 and 12 months, respectively,
following the termination of his employment, and confidentiality covenants in
our favor, which apply indefinitely. In addition, if Mr. Moskowitz's employment
is terminated for any reason other than for cause, Mr. Moskowitz will receive
his base salary and an amount equivalent to 24 months of his bonus, (based on a
minimum of $175,000 for the first two years of employment and thereafter an
amount equal to the sum of the two years bonus preceding any termination) and
other forms of compensation for a period of 24 months following the date of such
termination. If Mr. Moskowitz's employment is terminated, or if he resigns for
good reason, within 6 months following a change of control, Mr. Moskowitz will
receive the payments and benefits referred to above as if his termination was
for any reason other than cause.
  
 Michael Washinushi.The
employment agreement with Mr. Washinushi is for an indefinite term, subject
to the provisions within the agreement. The agreement provided for a current
base salary of $250,000, which has increased to the current level disclosed
above  in the table under  “Item 6 - Directors, Senior
Management And Employees - B. Executive Compensation”, and eligibility to
receive a maximum annual bonus of up to 60% of his base salary based on the
goals established pursuant to the bonus plan. The agreement contains
non-solicitation and non-competition covenants in our favor, which apply during
the term of Mr. Washinushi’s employment and for a period of 12 months
following the termination of his employment, and confidentiality covenants in
our favor, which apply indefinitely. In addition, if Mr. Washinushi’s
employment is terminated for any reason other than for cause,
Mr. Washinushi will receive his base salary (and a pro rata share
of his bonus and other forms of compensation) for a period of 12 months
following the date of such termination. If Mr. Washinushi’s employment is
terminated, or if he resigns for good reason, within 12 months following a
change of control, Mr. Washinushi will receive his base salary (and a
pro rata share of his bonus and other forms of compensation) for a period
of 18 months following the date of such termination.
 
 
 Stewart Lyons.The employment
agreement with Mr. Lyons is for an indefinite term, subject to the
provisions within the agreement. The agreement provides for a current base
salary of $150,000, which has increased to the current level disclosed above in
the table under  “Item 6 - Directors, Senior Management And Employees
- B. Executive Compensation”, and eligibility to receive a maximum annual bonus
of up to 50% of his base salary based on the goals established pursuant to the
bonus plan. The agreement contains non-solicitation and non-competition
covenants in our favor, which apply during the term of Mr. Lyons’
employment and for a period of 12 months following the termination of his
employment, and confidentiality covenants in our favor, which apply
indefinitely. In addition, if Mr. Lyons’ employment is terminated for any
reason other than for cause, Mr. Lyons will receive his base salary
(and a pro rata share of his bonus and other forms of compensation)
for a period of 12 months following the date of such termination. If
Mr. Lyons’ employment is terminated, or if he resigns for good reason,
within 12 months following a change of control, Mr. Lyons will receive
his base salary (and a pro rata share of his bonus and other forms of
compensation) for a period of 18 months following the date of such
termination.
 
 
   83
  
 C.           BOARD
PRACTICES
 
 Our
board of directors has three committees: an audit committee (the ”Audit Committee”); a
compensation committee (the ”Compensation Committee”); and
a corporate governance committee (the ”Corporate Governance
Committee”), all of which are comprised entirely of independent
directors.
 
 Audit
Committee
 
 The
Directors appointed the Audit Committee, which consists of three
(3) Directors, all of whom are independent and financially literate within
the meaning of applicable securities laws. The Audit Committee is responsible
for the oversight and supervision of:
 
 •
              our
      accounting and financial reporting practices and
    procedures;
 
 •
              the
      adequacy of our internal accounting controls and procedures;
      and
 
 •
              the
      quality and integrity of our financial
  statements.
 
 In
addition, the Audit Committee is responsible for the appointment, compensation,
retention and oversight of the external auditor, as well as the pre-approval of
all non-audit services provided by the external auditor, and for directing the
auditor’s examination into specific areas of our business. The Audit Committee
has a written charter and procedures to address complaints regarding accounting,
internal accounting controls or auditing matters and has established a procedure
to address confidential, anonymous employee submissions of concerns regarding
questionable accounting or auditing matters.
 
 During
the fiscal year ended August 31, 2008, the Audit Committee of the Company
consisted of the following three directors: Pierre Boivin; James W. McCutcheon;
and Robert Storey. Pierre Boivin serves as Chairman of the Audit Committee.
During the fiscal year ended August 31, 2008, the Audit Committee met
4 times.
 
 Compensation
Committee
 
 The
Compensation Committee reviews and makes recommendations to the board concerning
the appointment of our officers and the hiring, compensation, benefits and
termination of our senior executive officers and all other key employees. The
committee will annually review the Chief Executive Officer’s goals and
objectives for the upcoming year and provide an appraisal of the Chief Executive
Officer’s performance. The committee administers and makes recommendations
regarding the operation of our stock option plan as previously
described.
 
 Our
Compensation Committee Charter provides that profitable growth is fundamental to
our long-term viability. In each year of profitable operation, a nominal
percentage (as determined by the Compensation Committee) of our pre-tax
profits for that year, shall be included as part of the overall annual
compensation plan for our senior officers (as recommended by the Chief
Executive Officer with concurrence by the Compensation Committee). For the
purposes of determining the amount of this payment, any compensation earned by
any officer in the corresponding year under any existing compensation
arrangement shall be deducted from the amount otherwise payable to such officer
under these profit sharing arrangements. The Compensation Committee Charter
additionally provides that a nominal percentage of pre-tax profits in each
profitable year shall be allocated to charitable foundations or social causes
(as recommended by the Chief Executive Officer with concurrence by the
Compensation Committee). The Compensation Committee, in exercising its fiduciary
obligation, shall ensure that these nominal profit sharing allocations remain
consistent with appropriate overall executive compensation levels and annual
budget objectives and performance.
 
 During
the fiscal year ended August 31, 2008, the Compensation Committee of the Company
consisted of the following three directors, all of whom are independent within
the meaning of applicable securities laws: Pierre Boivin; James W. McCutcheon;
and  Robert Storey. Robert Storey serves as Chairman of the
Compensation Committee. During the fiscal year ended August 31, 2008, the
Compensation Committee met 2 times.
    84
  
 Corporate
Governance Committee
 
 The
Corporate Governance Committee is responsible for developing our approach to
corporate governance issues, advising the board in filling vacancies on the
board and periodically reviewing the composition and effectiveness of the board
and the contribution of individual directors. All members of this committee are
directors who are independent within the meaning of applicable
securities laws.
 
 During
the fiscal year ended August 31, 2008, the Corporate Governance Committee
consisted of the following three directors: Pierre Boivin; James W. McCutcheon;
and Robert Storey. James W. McCutcheon serves as Chairman of the Corporate
Governance Committee.
 
 D.           EMPLOYEES
 
 As
of October 31, 2008, we had 88.5 full-time equivalent employees, which
included 6 members of senior management and 82.5 employees working in
Finance, Human Resources, Sales & Marketing, Programming,
Infrastructure and IT. This is an increase of 13.5 full-time equivalent
employees since August 31, 2007. We also continue to engage
Accenture Inc. to design, build, and deploy a subscriber management system
that includes billing, customer care, supply chain, subscriber management and
radio provisioning systems. 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 are represented by a labor union, and we believe
that our relationship with our employees is good.
 
 E.
              SHARE
      OWNERSHIP
 
 The
following table sets forth the names of the Company’s Named Executive Officers
and directors and the number of Subordinate Voting Shares, assuming conversion
of all Class B Voting Shares into Subordinate Voting Shares, beneficially
owned, directly or indirectly, or over which control or direction is exercised
by each of them as at the date hereof.
 
 
 Name
              
              Subordinate Voting Shares
                Beneficially Owned or
                Controlled as of November 6, 20081)
              
              Percent of total shares heldJohn
      I. Bitove
              
              27,795,030(2)
              
              57.79
              %Michael
      Moskowitz
              
              203,000(3)
              
              *Michael
      Washinushi
              
              273,712(4)
              
              *Stewart
      Lyons
              
              457,387(5)
              
              *Mark
      Knapton
              
              9,445(6)
              
              *Janet
      Gillespie
              
              1,400(7)
              
              *Philip
      Evershed
              
              25,000(8)
              
              *Mat
      Wilcox
              
              178,055(9)
              
              *Gary
      M. Parsons
              
              Nil
              
              NilJoseph
      A. Verbrugge
              
              Nil
              
              NilMarc
      Comeau
              
              Nil
              
              NilRobert
      Storey
              
              85,739(10)
              
              *James
      W. McCutcheon
              
              100,995(11)
              
              *Pierre
      Boivin
              
              77,500(12)
              
              *
 
   85
  
 
 Notes
 
 (1)
              Individual
      directors have furnished information as to Subordinate Voting Shares,
      assuming conversion of all Class B Voting Shares into Subordinate
      Voting Shares, beneficially owned by them, directly or indirectly, or over
      which they exercise control or direction and assuming exercise of
      vested options.
  (2)
              Includes:
      27,142,711 Subordinate Voting Shares, assuming conversion of all
      Class B Voting Shares into Subordinate Voting Shares, which are
      controlled indirectly by John I. Bitove through CSRI Inc.; and assuming
      exercise of 553,000 vested options.
  (3)
              Assuming
      exercise of 203,000 vested options.
  (4)
              Assuming
      exercise of 228,000 vested options.
  (5)
              Assuming
      exercise of 138,000 vested options.
  (6)
              Assuming
      exercise of 6,733 vested options.
  (7)
              Assuming
      exercise of 1,400 vested options.
  (8)
              Assuming
      exercise of 25,000 vested options.
  (9)
              Assuming
      exercise of 25,000 vested options.
  (10)
              Assuming
      exercise of 75,000 vested options.
  (11)
              Assuming
      exercise of 75,000 vested options.
  (12)
              Assuming
      exercise of 75,000 vested options.
 
 *
              Individual
      beneficially owns less than 1% of all Subordinate Voting
      Shares.
 
 Stock
      Option Plan
 
 We
have established a stock option plan (the “Plan”) for our employees,
directors, senior officers and consultants and our affiliates. The Plan was
established to provide additional incentives for us and our affiliates to
attract and retain employees, directors, senior officers and
consultants.
 
 Under
the Plan, options to purchase our Subordinate Voting Shares may be granted
by the board of directors to our, and our affiliates, directors, senior
officers, employees and consultants. Options granted under the Plan will have an
exercise price of not less than the volume weighted average trading price of the
Subordinate Voting Shares on the stock exchange on which the Subordinate Voting
Shares are traded for the five trading days immediately preceding the day on
which the option is granted. The maximum aggregate number of Subordinate Voting
Shares which may be subject to options under the Plan is 10% of our shares
outstanding from time to time. As a result, any increase in the issued and
outstanding shares will result in an increase in the available number of the
Subordinate Voting Shares issuable under the Plan, and any exercises of options
will make new grants available under the Plan, effectively resulting in a
re-loading of the number of options available to grant under the Plan. The
number of shares issuable to insiders, at any time, under all our security-based
compensation arrangements, cannot exceed 10% of the number of shares in our
capital that are outstanding from time to time. Similarly, the number of shares
issued to insiders, within any one year period, under all security based
compensation arrangements, cannot exceed 10% of the number of shares in our
capital that are outstanding from time to time.
 
 Unless
the Board decides otherwise, options granted under the Plan will vest over a
five-year period and may be exercised in whole or in part at any time
as to one-fifth on each anniversary of the grant date for the five-year period.
Unless the Board decides otherwise, options will expire on the seventh
anniversary of the grant date. Any option not exercised prior to the expiry date
will become null and void.
 
 In
connection with certain change of control transactions, including a take-over
bid, merger or other structured acquisition, the board of directors
may accelerate the vesting date of all unvested options such that all
optionees will be entitled to exercise their full allocation of options and in
certain circumstances where such optionee’s employment is terminated in
connection with such transactions, such accelerated vesting will
be automatic.
 
 Unless
the Board decides otherwise, options granted under the Plan terminate on the
earlier of the expiration date of the option or 180 days following the
death of the optionee, termination of the optionee’s employment because of
permanent disability, termination of the optionee’s employment because of the
retirement of an optionee or as a result of such optionee ceasing to be a
director, 30 days following termination of an optionee’s employment without
cause or immediately upon an optionee’s employment being terminated
for cause.
 
   86
  
 As
at the end of our last fiscal year, we had issued to our directors, officers and
employees a total outstanding balance of 3,490,500 options to acquire
Subordinate Voting Shares.  On November 14, 2007 we issued to five members
of the Board of Directors and two members of management 745,000 options to
acquire Subordinate Voting Shares.  The options vest from immediately to
three years.  In January 2008, the Company issued to certain of its
employees 372,000 options to acquire Subordinate Voting Shares. The options vest
from one to three years. As at August 31, 2008 a cumulative total of
240,750 options were cancelled (in accordance with the terms of the Plan) as a
result of the resignations or terminations of employment of certain employees
and officers.  The following chart sets out the number of options to
purchase Subordinate Voting Shares issued to the groups of individuals
identified below which are outstanding as at August 31, 2008.
  Group
                Number
      of
                  Persons
      Holding
                  Option
                Number
      of
                  Options
                Exercise
                  Price
                Market
      Value on
                  Date
      of Grant
                Expiration
                  DatesNamed
      Executive Officers and Former Executive Officers.
                3
                  3
                  1
                  4
                  1
                  1
                  1
                800,000
                  800,000
                  10,000
                  156,000
                  545,000
                  21,000
                  4,000
                $0.01
                  $16.00
                  $8.74
                  $5.38
                  $5.40
                  $5.28
                  $6.53
                N/A
                  $12,800,000
                  $87,400
                  $839,280
                  $2,943,000
                  $110,880
                  $26,120
                December 12,
      2012(1)
                  December 12,
      2012(1)
                  July 13,
      2013
                  November
      14, 2014
                  January
      2, 2015
                  January
      14, 2014
                  April
      16, 2014Directors
      and Former Directors who are not Named Executive Officers
                3
                  5
                75,000
                  200,000
                $16.00
                  $5.38
                $1,200,000
                  $1,076,000
                December 12,
      2012(1)
                  November
      14, 2012Current
      and Former Employees
                2
                  2
                  10
                  Greater
      than 10
                  Greater
      than 10
                275,000
                  275,000
                  130,000
                  36,000
                  163,500
                $0.01
                  $16.00
                  $8.74
                  $6.53
                  $5.38
                N/A
                  $4,400,000
                  $1,136,200
                  $235,080
                  $879,630
                December 12,
      2012(1)
                  December 12,
      2012(1)
                  July 13,
      2013
                  April
      16, 2014
                  November
      14, 2014Consultants
                -
                -
                -
                -
                -
  
 Notes:
  (1)The expiration date of these options is or will be, as applicable,
      seven years from the closing of our initial public
    offering.
  On
November 6, 2008 the Board of Directors approved a grant of 177,000 options
to acquire Subordinate Voting Shares to the Named Executive Officers and 169,500
options to senior members of management other than the Named Executive Officers
and senior level directors.
  As
at the date hereof, our directors and Named Executive Officers and former
Executive Officers hold options to acquire an aggregate of 2,788,000 of our
Subordinate Voting Shares, our employees and, in limited cases, former members
of management, hold options to acquire an aggregate of 1,048,000 of our
Subordinate Voting Shares, and no consultants hold
any options.
 
 Reference
is made to “Item 6  - Directors, Senior Management and Employees 
- Compensation  - Executive Compensation” above for information regarding
the number of options granted to each of the Named Executive Officers during the
fiscal year ended August 31, 2008.
 
 Restricted
Stock Unit Plan
 
 Following
approval by the majority of Shareholders present at the Company’s 2006 Annual
Shareholder Meeting we implemented a restricted stock unit plan (the “RSU Plan”) which allows for
the payment of performance bonuses to employees and/or directors of the Company
or any of its affiliates in the form of Subordinate Voting Shares. This
will provide such individuals with an additional incentive to further the growth
and development of the Company and will encourage them to remain in the
employment of the Company.
 
 The
Compensation Committee of the Board of Directors administers the RSU Plan and is
responsible for the selection of individual employees or directors to whom
grants of RSUs will be made, as well as determine the amounts and terms of such
grants. The selection of recipients will be based on the individual’s current
and potential contribution to the Company and the terms of the grants
may include non-competition provisions or the achievement of certain
individual or collective performance related criteria, such as the financial
performance of the Company. The terms of any particular grant need not be
identical to any other grant, and the Board of Directors of the Company
may amend, suspend or terminate the terms of any grant, or the terms of the
RSU Plan itself, without shareholder approval.
 
   87
  
 Each
RSU granted under the RSU Plan will entitle the recipient at the end of the
grant period to receive one Subordinate Voting Share of the Company at a future
date (the “Release Date”), provided (i) the Participant is continuously
employed by the Company or any of its affiliates from the date or the effective
date of such grant to the Release Date, or as otherwise determined by the Board
of Directors, and (ii) all other terms and conditions of the grant have
been satisfied. The grant of a RSU will not entitle the individual to exercise
any voting rights, receive any dividends or exercise any other right which
attaches to ownership of Subordinate Voting Shares. The maximum number of
Subordinate Voting Shares which may be issued from treasury under the RSU
Plan is 250,000.
 
 Unless
the Compensation Committee decides otherwise, in the event an individual’s
employment is terminated with the Company or any of its affiliates for any
reason other than death before the Release Date has occurred, such individual’s
RSUs will be forfeited and no Subordinate Voting Shares will be issued. If a
individual’s employment is terminated due to his/her death, the RSUs will not be
forfeited, but rather, the deceased Participant’s estate will be entitled to
receive an amount of Subordinate Voting Shares, which depends on the date of
death, at the Release Date.
 
 The
RSU Plan also includes certain protections for an individual in the event of a
change in control of the Company. In such a case, an individual will be
entitled, subject to certain conditions, to receive a Subordinate Voting Share
for each RSU granted prior to such change of control.
 
 As
of the date hereof, our directors and named Executive Officers hold an aggregate
of 16,051 RSUs which are not conditioned on continued employment with the
Company.
 
 Reference
is made to “Item 6 - Directors, Senior Management and Employees - Compensation -
Executive Compensation” above for information regarding the number of RSUs
granted to each of the Named Executive Officers during our fiscal year ended
August 31, 2008.
 
 Item 7 
- Major Shareholders And Related Party Transactions
 
 A.           MAJOR
SHAREHOLDERS
 
 The
following table shows the name of each person or company who, as at November 4,
2008, owned of record, or who, to our knowledge, owned beneficially, directly or
indirectly, more than 5% of our Subordinate Voting Shares, assuming conversion
of all Class B Voting Shares into Subordinate
Voting Shares.
 
 Principal Shareholder
              
              Type of
                Ownership
              
              Number of
                Subordinate
                Voting Shares
              
              Percentage of
                Subordinate
                Voting Shares
                OutstandingCSRI
      Inc.(1)
              
              Direct
              
              27,142,711
              
              56.43
              %XM Satellite
      Radio Holdings Inc.(2)
              
              Direct
              
              11,077,500
              
              23.03
              %General
      Motors of Canada Limited
              
              Direct
              
              3,323,250
              
              6.9
              %
 
 
 Notes:
 
 (1)
              CSRI
      Inc., formerly Canadian Satellite Radio Investments Inc., is controlled by
      John I. Bitove, our Executive Chairman. CSRI Inc. holds its interest in
      the form of 81,428,133 Class B Voting Shares which represents 79.54% of
      the voting rights attached to the securities of the
    Company.
 (2)
              XM
      is a wholly owned subsidiary of Sirius XM Radio
  Inc.
 
   88
  
 B.
              RELATED
      PARTY TRANSACTIONS
 
 The
Company, CSR Inc. and CSRI Inc., formerly Canadian Satellite Radio Investments
Inc., which is controlled by John I. Bitove, our Executive Chairman, have
entered into a shareholders agreement with XM (the “Shareholders’Agreement”). The
Shareholders’ Agreement provides for matters relating to the composition of our
board of directors and the board of directors of CSR Inc., and also contains
certain rights and restrictions with respect to the shareholders of each of XM
and CSRI Inc. In addition, the lease for our Toronto studio is with an affiliate
of CSRI Inc.
 
 In
addition, we have entered into a number of operational, credit and governance
agreements with XM, one of our principal shareholders, including a license
agreement, a programming agreement, a credit facility, a shareholders agreement
and a registration rights agreement providing for certain demand and piggyback
registration rights in connection with our Subordinate Voting Shares. See “Item
10 - C. Material Contracts”. Mr. Gary Parsons and Dr. Joseph
Verbrugge, who were each appointed as directors prior to the closing of our
initial public offering, are each officers and Mr. Parsons is a director of
Sirius XM.
 
 Mr. Marc
Comeau, one of our directors, is an officer of GMCL. We have agreed to a
distribution arrangement with GMCL.
 
 During
the year ended August 31, 2006, CSRI Inc. advanced $300,000 to the Company.
This loan is non-interest-bearing, has no fixed terms of repayment and was
repaid during the year ended August 31, 2007. In addition, during the year ended
August 31, 2008, CSRI Inc. incurred $225,395 (2007 - $204,905) of costs
related to the Company’s license application process. This amount has been
included in contributed surplus. (See our annual financial statements for the
fiscal year ended August 31, 2008 which are included in this annual report
beginning on page F-1.)
 
 During
the year ended August 31, 2008, the Company received printing services from
AMI Printing valued at approximately $136,165(2007 - $671,046). An affiliate of
CSRI Inc. holds an indirect minority interest in AMI Printing.
 
 During
the year ended August 31, 2008, the Company received payroll services from
Priszm LP in the amount of $30,000 (2007 - $27,723). In addition, the Company
sold approximately $184,393(2007 - $226,800) of advertising to Priszm LP during
the year. Priszm LP is owned, directly and indirectly, approximately 60% by
Priszm Canadian Income Fund and approximately 40% by a company controlled by the
Company’s Executive Chairman.
 
 During
the year ended August 31, 2008, the Company received field marketing
services from Vision Group of Companies (Vision), valued at approximately
$605,079 (2007 - $2,277,600). This amount consists of fees paid to Vision of
$197,500 (2007-$375,000) and amounts paid by Vision to vendors on the Company’s
behalf of $407,579 (2007-$1,902,600). The principal of Vision is related to the
Company’s Executive Chairman.
 
 During
the year ended August 31, 2008, the Company incurred consulting services
related to public relations from the Wilcox Group totalling $197,916 (2006 -
$388,226). Mat Wilcox, a director of the Company is the principal of the Wilcox
Group.
 
 During
the year ended August 31, 2008, the Company incurred $364,926 (2007
-$536,427) of expenses related to the reimbursement of operating and travel
expenses and the lease of its Toronto studio from a company controlled by the
Company’s Executive Chairman. The Company has leased this property for a 15-year
period for a total amount of approximately $2.5 million.
 
 During
the year ended August 31, 2008, the Company incurred costs on behalf of Data
Audio-Visual Enterprises Wireless Inc (DAVE) in the amount of $54,725 for which
the Company was reimbursed. The Company’s Executive Chairman is the Chairman and
controlling shareholder of DAVE.
 
 During
September 2007, the Company issued convertible notes. $4.0 million of the
convertible notes were issued to XM and $6.0 million were issued to shareholders
of CSRI, including the Executive Chairman. (A description of the Convertible
Notes is included in note 3 in the Notes to the Company’s annual financial
statements for the fiscal year ended August 31, 2008 included under Item 18 of
this report.
  The
related party transactions described above have been recorded at the exchange
amount, which is the consideration paid or received as established and agreed to
by the related parties.
 
 Other
than the foregoing, no director, executive officer or shareholder who
beneficially owns, directly or indirectly, or exercises control or direction
over more than 10% of the outstanding Subordinate Voting Shares or known
associate or affiliate of any such person, has or had any material interest,
direct or indirect, in any transaction within the last three years or in any
proposed transaction, that has materially affected or will materially affect
us.
 
   89
  
 C.           INTERESTS
OF EXPERTS AND COUNSEL
 
 Not
applicable.
 
 Item 8 
- Financial Information
 
 A.           CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION
 
 Our
consolidated balance sheets as at August 31, 2007 and 2008 and consolidated
statements of operations shareholder’s equity and cash flows for the years ended
August 31, 2006, 2007 and 2008, including the notes thereto and together
with the auditors’ report thereon, are presented at Item 18 of this
annual report.
 
 B.           SIGNIFICANT
CHANGES
 
 Except
as otherwise disclosed in this annual report, there have been no material
changes in our financial position, operations or cash flows since
August 31, 2008.
 
 Item 9 
- The Offer And Listing
 
 A.           OFFER
AND LISTING DETAILS
 
 Not
applicable.
 
 B.           PLAN
OF DISTRIBUTION
 
 Not
applicable.
 
 C.           MARKETS
 
 Not
applicable.
 
 D.           SELLING
SHAREHOLDERS
 
 Not
applicable.
 
 E.           DILUTION
 
 Not
applicable.
 
 F.           EXPENSES
OF THE ISSUER
 
 Not
applicable.
 
   90
  
 Item 10 
- Additional Information
 
 A.           SHARE
CAPITAL
 
 Not
applicable.
 
 B.           MEMORANDUM
AND ARTICLES OF ASSOCIATION
 
 The
Articles of Amalgamation of the Company have been previously filed by us as
Exhibit 3.1 of Canadian Satellite Radio Holdings Inc.’s Amendment No.1
to the Registration Statement on Form F-4 dated June 28 2006,
Registration Statement No. 333-134004. Our Articles of Amalgamation are
referred to as our “Articles”. A summary of certain provisions of our Articles
and bylaws has been previously filed by us under Item 10 B. of Canadian
Satellite Radio Holdings Inc.’s Form 20-F for the fiscal year ended
August 31, 2007, Registration Statement No. 333-134004.
 
   91
  
 
 C.           MATERIAL
CONTRACTS
 
 The
following is a summary of each material contract, other than contracts entered
into in the ordinary course of business, to which we or our subsidiary is
a party:
 
 (a)
              XM System
      License Agreement, effective as of November 17, 2005, by and among
      XM Satellite Radio Inc. and Canadian Satellite Radio
      Holdings Inc. and Canadian Satellite
  Radio Inc.
 
 Reference
is made to “Item 4  - Information on the Company  - Business
Overview  - Operational Agreements”.
 
 (b)
              Programming
      Agreement, effective as of November 17, 2005, by and among
      XM Satellite Radio Inc. and Canadian Satellite Radio
      Holdings Inc. and Canadian Satellite
  Radio Inc.
 
 Reference
is made to “Item 4  - Information on the Company  - Business
Overview  - Operational Agreements”.
 
 (c)
              Repeater
      Purchase Agreement, effective as of November 17, 2005, by and among
      XM Satellite Radio Inc. and Canadian Satellite Radio
      Holdings Inc. and Canadian Satellite
  Radio Inc.
 
 Reference
is made to “Item 4  - Information on the Company  - Business
Overview  - Other Agreements”.
 
 (d)
              Technical
      Services Agreement, effective as of November 17, 2005, by and among
      XM Satellite Radio Inc. and Canadian Satellite Radio
      Holdings Inc. and Canadian Satellite
  Radio Inc.
 
 Reference
is made to “Item 4  - Information on the Company  - Business
Overview  - Other Agreements”.
 
 (e)
              Trademark
      License Agreement, effective as of November 17, 2005, by and among
      XM Satellite Radio Inc. and Canadian Satellite Radio
      Holdings Inc. and Canadian Satellite
  Radio Inc.
 
 Reference
is made to “Item 4  - Information on the Company  - Business
Overview  - Other Agreements”.
 
 (f)
              Distribution
      Agreement, effective as of November 10, 2005, by and among General
      Motors of Canada Limited, Canadian Satellite Radio Inc. and
      XM Satellite Radio Inc.
 
 Reference
is made to “Item 4  - Information on the Company  - Business
Overview  - GMCL Distribution Arrangement”.
 
 (g)
              Credit
      Agreement, effective November 17, 2005, by and among Canadian
      Satellite Radio Inc., Canadian Satellite Radio Holdings Inc. and
      XM Satellite Radio Holdings Inc. (the ”XM Credit
      Facility”)
 
 We
have a commitment for a $45 million standby credit facility from XM for the
purchase of terrestrial repeaters and the payment of subscription royalties to
XM and interest on outstanding debt on the credit facility as these are
incurred. The following is a summary of certain material terms of the
XM Credit Facility, and is not intended to be complete.
 
 Interest
on amounts outstanding under the XM Credit Facility  accrue
quarterly at a rate of 9 % per annum on draws prior to September 1, 2008 and at
a rate of 17.75% per annum thereafter and are payable through additional
borrowings under the XM Credit Facility until availability under the
XM Credit Facility is exhausted, and thereafter in cash. We have also
guaranteed the obligations outstanding under the XM Credit
Facility.
 
   92
  
 XM
has the right to convert any amount outstanding under the XM Credit
Facility into our Subordinate Voting Shares at any time at the initial public
offering price. In addition, any amount outstanding under the XM Credit
Facility shall be automatically converted into Subordinate Voting Shares upon
the occurrence of: (i) our having three consecutive quarters of positive
EBITDA; (ii) our shares being listed on a major U.S. or Canadian stock
exchange following an initial public offering of our securities for gross
proceeds in excess of $25 million; and (iii) our publicly traded
shares having an average closing price over any ten consecutive trading days
that is greater than 250% of the price at which our securities were issued and
sold pursuant to our initial public offering. The conversion price shall be our
initial public offering price.
 
 The
XM Credit Facility permits us to incur up to US$125 million of
unsecured bond debt. For so long as any notes issued under the Indenture
(as defined below) are outstanding and unsecured (other than the lien on
the interest reserve account), the XM Credit Facility will not be secured.
As an alternative to unsecured bond debt, if in the future we cease to have
unsecured bond debt outstanding, the XM Credit Facility permits the
incurrence of senior bank indebtedness in an aggregate principal amount up to
$75 million and pari passu secured
indebtedness up to US$5 million (approximately $6 million). In that
event, the XM Credit Facility would become secured by a first priority lien
on any terrestrial repeaters purchased with funds from the credit facility and a
lien on all the remaining assets of CSR Inc. (excluding the CRTC license
and the stock of any subsidiary holding the CRTC license). The XM Credit
Facility liens on the remaining assets of CSR Inc. would be subordinated to
security for senior bank indebtedness.
 
 The
XM Credit Facility has a maturity date of December 31, 2012. The
XM Credit Facility contains customary covenants and financial condition
tests and periodic and episodic reporting obligations. The various covenants,
financial ratios and financial condition tests are not in effect until funds
have been drawn under the XM Credit Facility. These covenants include,
without limitation, restrictions on our ability to pay dividends. The breach of
any of these covenants could result in a breach under the XM Credit
Facility.
 
 (h)
              Indenture
      (the “Indenture”) relating to US$100 million aggregate principal
      amount of 12.75% Senior Notes due February 15, 2014, dated
      February 10, 2006, by and among Canadian Satellite Radio
      Holdings Inc., the guarantors party thereto and The Bank of Nova
      Scotia Trust Company of New York,
  as trustee.
 
 On
February 10, 2006, we issued US$100 million aggregate principal amount
of 12.75% Senior Notes with a 3 year interest reserve (as described
below), due February 15, 2014. Interest on these notes is payable in cash
on February 15 and August 15 of each year, beginning on
August 15, 2006.
 
 These
notes are jointly and severally and fully and unconditionally guaranteed on a
senior unsecured basis by all of our current restricted subsidiaries and each of
our future material restricted subsidiaries.
 
 These
notes are senior unsecured obligations. They rank equal in right of payment to
any future senior indebtedness, senior in right of payment with any future
subordinated indebtedness and effectively subordinated to any secured
indebtedness to the extent of any collateral securing such indebtedness. Before
February 15, 2009, we may, at our option, redeem up to 25% of the notes
with the proceeds of certain sales of our equity.
 
 At
any time on or after February 15, 2010, we may redeem all or a
part of the notes at the redemption prices specified in the Indenture, plus
accrued and unpaid interest, liquidated damages, if any, and additional amounts,
if any, to the date of redemption. In addition, prior to February 15, 2009,
we may redeem up to 25% of the notes with the net proceeds of certain
equity offerings at 112.75% of the aggregate principal amount thereof, plus
accrued and unpaid interest, liquidated damages, if any, and additional amounts,
if any, to the date of redemption, provided at least 75% of the aggregate
principal amount of the notes remains outstanding after
the redemption.
 
 Subject
certain exceptions and qualifications, the Indenture, among other things, limits
our ability and the ability of our restricted subsidiaries to:
 
   93
  
 •
              incur
      additional indebtedness and issue preferred
  stock;
 
 •
              pay
      dividends and make distributions in respect of the capital
      stock;
 
 •
              repurchase
      stock or repay subordinated
indebtedness;
 
 •
              make
      certain investments;
 
 •
              transfer,
      sell or make certain dispositions of assets or engage in sale and
      leaseback transactions;
 
 •
              incur
      liens;
 
 •
              enter
      into transactions with affiliates;
 
 •
              create
      dividend or other payment restrictions affecting restricted
      subsidiaries; and
 
 •
              merge,
      consolidate, amalgamate or sell all or substantially all of our assets to
      another person.
 
 (i)
              Interest
      Reserve and Security Agreement, dated February 10, 2006, by and among
      Canadian Satellite Radio Holdings Inc., as guarantor, Canadian
      Satellite Radio Inc. and The Bank of Nova Scotia Trust Company of
      New York, as Interest Reserve Agent
  and Trustee.
 
 Approximately
US$35.5 million of the proceeds of our offering of notes was deposited into
an interest reserve account in the United States. Funds in this account are
invested in U.S. government securities, of which we are the beneficial
owners. Funds and other assets held in the interest reserve account have been
pledged to secure the payment and performance when due of our obligations under
the Indenture with respect to the notes and we have also granted to the trustee
for the benefit of itself and the holders of the notes, a first priority
security interest in the interest reserve account. These funds have been
designated for the first six payments of interest on the notes. Any funds
remaining in the interest reserve account after the sixth interest payment on
the notes has been made, in accordance with the Indenture, will be disbursed
from the interest reserve account to us.
 
 (j)
              Trust
      Indenture (the “Trust Indenture”) providing for the issuance of
      Convertible Unsecured Subordinated Debentures, dated September 12,
      2007, between Canadian Satellite Radio Holdings Inc. and CIBC Mellon Trust
      Company, as Debenture Trustee.
 
 The
aggregate principal amount of all debentures authorized to be issued under the
Trust Indenture is unlimited. The debentures may be issued in one or more
series.
 
 On
September 12, 2007, the Company completed an offering of $20 million
aggregate principal amount of debentures (the “Initial Debentures”) due
September 12, 2014 on a private placement basis. The Initial Debentures
bear interest at a rate of 8.0 per cent per annum payable semi-annually in
arrears on December 31 and June 30, with the initial interest payment
due on December 31, 2007. Each debentureholder has the option to receive
such interest either in the form of cash or Subordinate Voting Shares. At
any time prior to September 12, 2014, the Initial Debentures will be
convertible at a conversion price of $5.92 (the “Conversion Price”) at the
holders’ option into Subordinate Voting Shares which is equal to a conversion
ratio of 168.919 Subordinate Voting Share per $1,000 principal amount of
debentures, subject to adjustment in certain circumstances.
 
 The
Initial Debentures are not redeemable before September 12, 2010, except in
the event of the satisfaction of certain conditions after a change of control
has occurred. At any time on and after September 12, 2010, the Initial
Debentures may be redeemed in whole or in part from time to time at
the option of the Company
 
   94
  
 on
not more than 60 days’ and not less than 30 days’ prior notice at a price equal
to the their principal amount plus accrued and unpaid interest thereon up to but
excluding the redemption date, provided that the Current Market Price (as
defined in the Trust Indenture) of the Subordinate Voting Shares on the date on
which the notice of redemption is given is in excess of 150% of the Conversion
Price. On redemption or on maturity of the Initial Debentures, the Company may,
at its option and subject to any applicable regulatory or shareholder approvals,
elect to satisfy its obligation to pay all or a portion of the aggregate
principal amount of the Initial Debentures by issuing and delivering Subordinate
Voting Shares to such holders of Initial Debentures.
 
 The
Initial Debentures are direct unsecured obligations of the Company and are
subordinated to the Senior Indebtedness (as defined in the Trust Indenture) of
the Company. The Initial Debentures rank pari passuwith each other
series of debentures except for sinking Company provisions (if any)
applicable to different series of debentures. The Trust Indenture does not
restrict the Company from incurring additional indebtedness for borrowed money
or from mortgaging, pledging or charging its properties to secure any
indebtedness.
 
 D.           EXCHANGE
CONTROLS
 
 None.
 
 E.           TAXATION
 
 ANY
DISCUSSION OF U.S. FEDERAL TAX ISSUES SET FORTH IS INTENDED OR WRITTEN TO
BE USED, AND IT CANNOT BE USED, BY ANY PERSON FOR THE PURPOSE OF AVOIDING ANY
U.S. FEDERAL TAX PENALTIES THAT MAY BE IMPOSED ON SUCH PERSON. EACH
U.S. HOLDER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM
AN INDEPENDENT TAX ADVISOR.
 
 Certain
U.S. Federal Income Tax Considerations
 
 The
following summary describes certain U.S. federal income tax consequences to U.S.
persons (as defined below) of the ownership and disposition of notes acquired in
the exchange offer which expired on August 1, 2006 (the “Exchange Offer”).
Subject to the exceptions, assumptions and qualifications set forth below, the
discussion accurately reflects the material U.S. federal income tax consequences
to U.S. Holders (as defined below) of the ownership and disposition of notes
acquired in the Exchange Offer. This discussion is based on currently existing
provisions of the Internal Revenue Code of 1986, as amended (the “Code”),
existing, temporary and proposed Treasury regulations promulgated thereunder,
and administrative and judicial interpretations thereof, all as in effect or
proposed on the date hereof and all of which are subject to change, possibly
with retroactive effect, or different interpretations. This discussion assumes
that U.S. persons holds the notes as capital assets (“U.S. Holders”) within the
meaning of Section 1221 of the Code. Moreover, this discussion is for general
information only and does not address the tax consequences to holders that are
not U.S. Holders or the tax consequences that may be relevant to particular
initial investors in light of their personal circumstances or to certain types
of initial investors subject to special tax rules (such as for example brokers,
banks and other financial institutions, insurance companies, tax-exempt
entities, dealers in securities or currencies, traders in securities that elect
to use a mark-to-market method of accounting for their securities holdings,
regulated investment companies, real estate investment trusts, U.S. expatriates
or former long-term residents of the U.S., investors liable for the alternative
minimum tax, individual retirement accounts and other tax-deferred accounts,
investors that hold notes as part of straddles, hedging transactions or
conversion transactions for U.S. federal income tax purposes or investors whose
functional currency is not the U.S. dollar). In addition, this discussion does
not include any description of estate and gift tax consequences, or the tax laws
of any state, local or foreign government that may he applicable to the
notes.
 
   95
  
 No
rulings from the U.S. Internal Revenue Service (the “IRS”) have been
or will be sought with respect to the matters discussed below. There can be no
assurance that the IRS will not disagree with or challenge any position taken
herein regarding the tax consequences of the ownership or disposition of the
notes, or that any such position, if challenged, would
be sustained.
 
 EACH
U.S. HOLDER SHOULD CONSULT ITS TAX ADVISOR REGARDING THE U.S. FEDERAL
INCOME TAX CONSEQUENCES APPLICABLE TO SUCH HOLDER IN LIGHT OF ITS PARTICULAR
SITUATION WITH RESPECT TO THE OWNERSHIP AND DISPOSITION OF THE NOTES, AS WELL AS
ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY OTHER RELEVANT
FOREIGN, STATE, LOCAL, OR OTHER TAXING JURISDICTION.
 
 As
used herein, the term “U.S. person” means a beneficial owner of a note that
is, for U.S. federal income tax purposes, (i) an individual who is a
citizen or resident of the U.S., (ii) a corporation or other entity taxable
as a corporation created or organized in the U.S. or under the laws of the U.S.
or of any state thereof (including the District of Columbia), (iii) an
estate the income of which is subject to U.S. federal income tax regardless
of its source, or (iv) a trust (A) if a U.S. court is able to
exercise primary supervision over the trust’s administration and one or more
“United States persons” (within the meaning of the Code) have authority to
control all substantial decisions of such trust, or (B) that was in
existence on August 20, 1996, was treated as a U.S. person under the
Code on the previous day, and has a valid election in effect to continue to be
so treated.
 
 If
a partnership or other pass-through entity holds the notes, the tax treatment of
a partner in or owner of the partnership or pass-through entity will generally
depend upon the status of the partner or owner and the activities of the entity.
If you are a partner in or owner of a partnership or other pass-through entity
that holds notes, you should consult your tax advisor.
 
 Taxation
of Interest on Notes
 
 Stated
interest on a note will generally be taxable to a U.S. Holder as ordinary income
at the time it is paid or accrued in accordance with the U.S. Holder’s method of
accounting for tax purposes. In addition to interest on the notes, a U.S. Holder
will be required to include as income any Additional Amounts paid as a result of
the imposition of foreign withholding taxes (see “Description of
Notes-Additional Amounts”). As a result, a U.S. Holder may be required to
include more interest in gross income than the amount of cash it actually
receives.
 
 Market
Discount
 
 If
a U.S. holder acquired a note for an amount that is less than its principal
amount, then subject to a statutory de minimus rule, the difference will be
treated as market discount. Market discount generally accrues on a straight-line
basis over the remaining term of the note. Upon an irrevocable election,
however, market discount will accrue on a constant yield basis. A U.S. Holder
might be required to defer all or a portion of the interest expense on
indebtedness incurred or continued to purchase or carry a note. If a U.S. Holder
elects to include market discount in gross income currently as it accrues, the
preceding rules relating to the recognition of market discount and deferral of
interest expense will not apply. An election made to include market discount in
gross income as it accrues will apply to all debt instruments acquired by the
U.S. Holder on or after the first day of the taxable year to which the election
applies and may be revoked only with the consent of the IRS.
 
   96
  
 Sale,
Redemption or Retirement of the Notes
 
 Upon
the sale, redemption, retirement at maturity or other taxable disposition of a
note, a U.S. Holder generally will recognize gain or loss equal to the
difference between the sum of cash plus the fair market value of all other
property received on such disposition (except to the extent such cash or
property is attributable to accrued but unpaid interest, which will be taxable
as ordinary income) and such U.S. Holder’s adjusted tax basis in a note. A U.S.
Holder’s adjusted tax basis in an exchange note generally will be its cost for
the note increased by any accrued market discount previously included in income
through the date of disposition. A gain or loss recognized on the disposition of
a note generally will be capital gain or loss and will be long-term capital gain
or loss if, at the time of such disposition, the note is treated as having been
held for more than one year. In the case of a U.S. Holder who is a non-corporate
taxpayer, including an individual, the maximum US federal income tax rate on net
long-term capital gain is 15%. The deductibility of capital losses is subject to
limitations.
 
 Foreign
Tax Credit Considerations
 
 If
interest payments on the notes become subject to Canadian withholding taxes, a
U.S. Holder may be able, subject to generally applicable limitations, to claim a
foreign tax credit or take a deduction for such withholding taxes imposed on
interest payments (including any Additional Amounts). Interest (including any
Additional Amounts) will constitute income from sources without the U.S. for
U.S. foreign tax credit limitation purposes. For taxable years beginning after
December 31, 2006, interest income (including any Additional Amounts) generally
will constitute “passive income” for U.S. foreign tax credit limitation
purposes. The rules governing the U.S. foreign tax credit are complex, and U.S.
Holders are urged to consult their tax advisors regarding the application of
such rules to their particular circumstances.
 
 If
the U.S. Holder is a U.S. resident (as defined in section 865 of the Code),
gains realized upon disposition of a note by such U.S. Holder generally will be
U.S. source income, and disposition losses generally will be allocated to reduce
U.S. source income.
 
 Backup
Withholding and Information Reporting
 
 Backup
withholding currently at a rate of 28% and information reporting requirements
may apply to certain payments of principal of, and interest on, a note and to
proceeds of the sale or other disposition of a note before maturity, if a U.S.
Holder:
 
 •
              fails
      to furnish its taxpayer identification
number,
 
 •
              fails
      to certify that such number is
correct,
 
 •
              fails
      to certify that such U.S. Holder is not subject to backup
      withholding, or
 
 •
              otherwise
      fails to comply with the applicable requirements of the backup withholding
      rules.
 
 Certain
U.S. Holders, including corporations, are generally not subject to backup
withholding and information reporting requirements provided their exemptions
from backup withholding and information reporting are properly established. Any
amounts withheld under the backup withholding rules from a payment to a
U.S. Holder will be allowed as a credit against such holder’s
U.S. federal income tax and may entitle the holder to a refund,
provided that the required information is timely furnished to
the IRS.
 
   97
  
 Canadian
Material Federal Income Tax Considerations for Non-Residents of
Canada
 
 The
following summary fairly describes the main Canadian federal income tax
consequences applicable to you if you exchanged old notes for new notes pursuant
to any of our exchange offers or invested, as initial purchaser, in the notes,
and if, for purposes of the Income Tax Act (Canada) (which we refer to as
the Act) you are not resident in Canada and do not use or hold the notes in
carrying on business in Canada. This summary does not apply to you if you are an
insurer who carries on business in Canada and elsewhere or an “authorized
foreign bank” (as defined in the Act). This summary is based on the
relevant provisions of the Act and the Regulations thereunder as in force on the
date hereof, and our understanding of the administrative practices of the Canada
Revenue Agency. It also assumes that specific proposals to amend the Act and the
Regulations publicly announced by the Minister of Finance of Canada prior to the
date of this annual report are enacted in their present form. This summary does
not address provincial, territorial or foreign income tax considerations.
Changes in the law or administrative practices or future court decisions
may affect your tax treatment.
 
 Based
on the foregoing, amounts that we pay to you as interest, principal or premium
on the notes will not be subject toCanadian withholding tax provided that you
deal at arm’s length with us at the time we make the payments, and no other
taxes on income (including taxable capital gains) will be payable under the Act
in respect of the holding, redemption or disposition of notes.
 
 F.           DIVIDENDS
AND PAYING AGENTS
 
 Not
applicable.
 
 G.           STATEMENT
BY EXPERTS
 
 Not
applicable.
 
 H.           DOCUMENTS
ON DISPLAY
 
 We
file periodic reports and other information with the SEC. These reports include
certain financial and statistical information about us and may be
accompanied by exhibits. You may read and copy this information at the
SEC’s Public Reference Room at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549, or obtain copies of this information by mail
from the public reference room at the prescribed rates. You may call
the SEC at 1-800-SEC-0330 for further information on the SEC’s Public
Reference Room. The SEC also maintains an Internet website that contains reports
and other information about issuers like us who file electronically with the
SEC. The URL of that website is http://www.sec.gov. Any documents referred to in
this annual report may also be inspected at our offices at 590 King
Street West, 3rd Floor,
Toronto, Ontario, M5V 1M3.
 
 I.           SUBSIDIARY
INFORMATION
 
 Not
applicable.
 
 Item 11 
- Quantitative and Qualitative Disclosures About Market Risk
 
 The
Company has formed an Investment Committee, consisting of directors and senior
officers of the Company, in order monitor and account for the risks associated
with fluctuations in interest rates, foreign currency exchange rates and other
credit risk factors.
 
   98
  
 To
perform sensitivity analysis, we assess the risk of loss in fair values due
to the impact of hypothetical changes in interest rates and foreign currency
exchange rates on market-sensitive instruments. Information provided by the
analysis does not represent our view of future market changes, nor does it
necessarily represent the actual changes in fair value that we would incur under
normal market conditions because, of necessity, all variables other than the
specific market risk factor are held constant. In reality, changes in one factor
may result in change in another, which may magnify or counteract the
sensitivities. The results of sensitivity analysis at August 31,
2008 follow.
 
 Foreign
Currency Exchange Rate Risk
 
 Most
of our revenues and expenses are received or denominated in Canadian dollars.
Under the XM License Agreement, we are not exposed to material foreign
currency exchange rate risk as the monthly fees due under this agreement are
payable in Canadian dollars. We are exposed to material foreign currency
exchange rate risk only with respect to payments due to XM under the
broadcasting agreement with the NHL and with respect to the interest payments on
our U.S. dollar-denominated notes. However, until August 2009, our
foreign currency exchange rate risk is reduced because the first six interest
payments on our notes will be drawn from our interest reserve account, which is
held in the United States in a U.S. dollar account.
 
 At
August 31, 2008, a 10% change in the exchange rate of the U.S. dollar
against the Canadian dollar, with all other variables remaining constant, would
result in a $10.6 million change in the fair market value of our notes and
a $6.5 million change in the value of our obligations due under the
broadcasting agreement with the NHL.
 
 Interest
Rate Risk
 
 We
are not exposed to material interest rate risk from changes in interest rates as
the interest payments on our notes and convertible debentures are fixed
payments. We do however 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.
 
 Equity
Price Risk
 
 As
of August 31, 2008, we were not exposed to material market risk from
changes in the market value of long-term investments, as we did not hold any
significant publicly traded long-term investments.
 
 Item 12 
- Description of Securities Other Than Equity Securities
 
 Not
applicable.
 
 PART II
 
 Item 13 
- Defaults, Dividend Arrearages and Delinquencies
 
 None.
 
 Item 14 
- Material Modifications to The Rights Of Security Holders And Use
Of Proceeds
 
 MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
 
 There
have been no modifications to the rights of security holders.
 
   99
  
 USE
OF PROCEEDS
 
 Not
applicable.
 
 Item 15 
- Controls and Procedures
 
 
 Disclosure
Controls and Procedures
 
 Management has designed disclosure
controls and procedures to provide reasonable assurance that material
information related to the Company is made known to them by others. As at August
31, 2008, the Chief Executive Officer and the Chief Financial Officer, with
participation of the Company’s management, have concluded that the design and
operation of the Company’s disclosure controls and procedures were effective to
ensure the information required to be disclosed by the Company in reports that
it files or submits under the United States Securities Exchange Act of 1934and
applicable Canadian securities laws is (i) recorded, processed, summarized and
reported within the time periods specified in applicable rules and forms and
(ii) accumulated and communicated to our management, including its Chief
Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure. Due to the inherent limitations in control
systems and procedures, their evaluation can provide only reasonable, not
absolute, assurance that such disclosure controls and procedures are operating
effectively. A control system, no matter how well conceived or operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met.
 
 Management’s
Report on Internal Control over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
controls over financial reporting. Internal control over financial reporting is
a process designed by, or under supervision of, the President and Chief
Executive Officer and the Chief Financial Officer and effected by the Board of
Directors, management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
financial statements for external purposes in accordance with Canadian generally
accepted accounting principles. It includes those policies and procedures
that:
 
 •
              provide
      reasonable assurance providing prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the Company’s financial
      statements.
 •
              pertain
      to the maintenance of records that accurately and fairly reflect, in
      reasonable detail, the transactions related to and dispositions of the
      Company’s assets;
 •
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of consolidated financial statements in accordance with
      Canadian generally accepted accounting principles, and that the Company’s
      receipts and expenditures are made only in accordance with authorizations
      of management and the Company’s
directors.
 
 Due to its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of the effectiveness of
internal controls over financial reporting to future periods is subject to the
risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies and procedures may
deteriorate.
 
 During
the year the Company documented and assessed its systems of internal controls
over financial reporting as contemplated pursuant to Rule 404 of the Sarbanes
Oxley Act of 2002.  Management has used the criteria set forth in Internal
Controls - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) framework to evaluate the
effectiveness of the Company’s internal control over financial reporting.
 Based on this assessment, management has concluded that as at August 31,
2008, the Company’s internal control over financial reporting was
effective.
 
 Item 16 
- [RESERVED]
 
 Item 16A 
- Audit Committee Financial Expert
 
 Our
Board of Directors has determined that Pierre Boivin is an “audit committee
financial expert” (as defined in Item 16A of Form 20-F) serving
on our Audit Committee. Our Board of Directors has determined that Pierre Boivin
is an “independent” director, as defined under SEC rules.
 
 Item 16B 
- Code of Ethics
 
 We
have adopted a code of ethics (as defined in Item 16B of
Form 20-F) that applies to all our directors, officers and employees,
including our principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions. We have filed a copy of this code of ethics as Exhibit 11.1
to this annual report. Any person who would like a copy of our code of
ethics may request so, without charge, by contacting us at 590 King
Street West, 3rd Floor,
Toronto, Ontario, M5V 1M3.
 
 We
have not made any amendments to or granted a waiver from a provision of the code
of ethics with respect to any of our director, officer
or employees.
 
 PricewaterhouseCoopers LLP
has served as our independent public accountant for the fiscal year ending
August 31, 2008, for which audited consolidated financial statements appear
in this annual report on Form 20-F.
 
 Item 16C 
- Principal Accountant Fees and Services
 
 PricewaterhouseCoopers
LLP has served as our independent public accountant for the fiscal year ending
August 31, 2008, for which audited consolidated financial statements appear
in this annual report on Form 20-F.
 
 The
Audit Committee of our Board of Directors establishes the external auditors’
compensation. In 2006, our Audit Committee also established policies and
procedures to pre-approve all audit and non-audit services to be performed by
the external auditors, but only to the extent those services are permitted by
the Sarbanes-Oxley Act of 2002 and Canadian law.
 
   100
  
 Our
audit committee approved all audit services provided to the Company for the
periods listed below.
 
 For
the fiscal year ended August 31, 2008, all of the non-audit services
described below were approved by the Audit Committee of our Board of Directors
pursuant to this “de minimis exception” under the Sarbanes-Oxley Act of 2002.
The following table presents the aggregate fees for professional services and
other services rendered by our independent auditor, PricewaterhouseCoopers LLP,
for the fiscal years ended August 31, 2008 and 2007.
 
 2008
              
              
              2007Audit
      Fees
              
              $
              223,500
              
              
              $
              221,000Audit-Related
      Fees
              
              
              -
              
              
              
              -Tax
      Fees
              
              
              43,204
              
              
              
              77,880All
      Other Fees
              
              
              143,054
              
              
              
              12,500Total
      Fees
              
              
              409,758
              
              
              
              311,380
 
 Audit
      Fees -
              these
      fees include professional services rendered by the external auditors for
      the review of interim financial statements audits of annual financial
      statements, consultations about financial and reporting standards and
      other regulatory audits and
filings.
 
 Tax
      Fees -
              these
      fees include services for tax compliance, tax advice, tax planning and
      advisory services relating to the preparation of corporate tax
      returns.
 
 Other
      Fees -
              these
      fees include professional services for assistance provided related to the
      company’s compliance with requirements under
    Sarbanes-Oxley.
 
 Item 16D 
- Exemptions from the Listing Standards for Audit Committees
 
 Not
applicable.
 
 Item 16E 
- Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
 Not
applicable.
 
 PART III
 
 Item 17 
- Financial Statements
 
 Not
applicable.
 
 Item 18 
- Financial Statements
 
 Our
audited balance sheets as at August 31, 2008 and our audited statement of
operations and deficit and cash flows for the fiscal period ending
August 31, 2008, including the notes thereto and together with auditor’s
report thereon, are included in this annual report beginning on
page F-1.
 
   101
  
 Item 19 
- Exhibit
 
 Exhibit
                Number
              
              Description1.1
              
              Articles
      of Amalgamation of Canadian Satellite Radio Holdings Inc.
      (incorporated by reference to Exhibit 3.1 of Canadian Satellite Radio
      Holdings Inc.’s Post-Effective Amendment No.1 to the Registration
      Statement on Form F-4 dated July 14, 2006, Registration
      Statement No. 333-134004).1.2
              
              Articles
      of Incorporation of Canadian Satellite Radio Inc. (incorporated by
      reference to Exhibit 3.2 of Canadian Satellite Radio
      Holdings Inc.’s Post-Effective Amendment No.1 to the Registration
      Statement on Form F-4 dated July 14, 2006, Registration
      Statement No. 333-134004).1.3
              
              By-laws
      of Canadian Satellite Radio Holdings Inc. (incorporated by reference
      to Exhibit 3.3 of Canadian Satellite Radio Holdings Inc.’s
      Post-Effective Amendment No.1 to the Registration Statement on
      Form F-4 dated July 14, 2006, Registration Statement
      No. 333-134004).1.4
              
              By-laws
      of Canadian Satellite Radio Inc. (incorporated by reference to
      Exhibit 3.4 of Canadian Satellite Radio Holdings Inc.’s
      Post-Effective Amendment No.1 to the Registration Statement on
      Form F-4 dated July 14, 2006, Registration Statement
      No. 333-134004).2.1
              
              Indenture,
      dated February 10, 2006, among Canadian Satellite Radio
      Holdings Inc., Canadian Satellite Radio Inc. and The Bank of
      Nova Scotia Trust Company of New York, as Trustee, relating to the
      12.75% Senior Notes due 2014 (incorporated by reference to
      Exhibit 4.1 of Canadian Satellite Radio Holdings Inc.’s
      Registration Statement on Form F-4 dated May 11, 2006,
      Registration Statement No. 333-134004).2.2
              
              Form of
      12.75% Senior Notes due 2014 and Guarantee (incorporated by reference to
      Exhibit 4.2 of Canadian Satellite Radio Holdings Inc.’s
      Registration Statement on Form F-4 dated May 11, 2006,
      Registration Statement No. 333-134004).2.3
              
              Interest
      Reserve and Security Agreement, dated February 10, 2006 among
      Canadian Satellite Radio Holdings Inc., Canadian Satellite
      Radio Inc. and The Bank of Nova Scotia Trust Company of
      New York, as Interest Reserve Agent and Trustee (incorporated by
      reference to Exhibit 4.3 of Canadian Satellite Radio
      Holdings Inc.’s Registration Statement on Form F-4 dated
      May 11, 2006, Registration Statement
      No. 333-134004).2.4
              
              Trust
      Indenture, dated September 12, 2007, between Canadian Satellite Radio
      Holdings Inc. and CIBC Mellon Trust Company, as Debenture Trustee,
      providing for the issuance of Convertible Unsecured Subordinated
      Debentures. (incorporated by reference to Exhibit 2.4 of Canadian
      Satellite Radio Holdings Inc.’s Form 20-F for the fiscal year ended
      August 31, 2007, Registration Statement
      No. 333-134004).4.1
              
              Credit
      Agreement, dated November 17, 2005 among Canadian Satellite Radio
      Holdings Inc., Canadian Satellite Radio Inc. and
      XM Satellite Radio Holdings Inc. (incorporated by reference to
      Exhibit 10.1 of Canadian Satellite Radio Holdings Inc.’s
      Amendment No.1 to the Registration Statement on Form F-4 dated
      June 28, 2006, Registration Statement
      No. 333-134004).
 
   102
  
 4.2
              
              XM System
      License Agreement, dated November 17, 2005 among Canadian Satellite
      Radio Holdings Inc., Canadian Satellite Radio Inc. and
      XM Satellite Radio Inc. (incorporated by reference to
      Exhibit 10.2 of Canadian Satellite Radio Holdings Inc.’s
      Amendment No.1 to the Registration Statement on Form F-4 dated
      June 28, 2006, Registration Statement
      No. 333-134004).4.3
              
              Programming
      Agreement, dated November 17, 2005 among Canadian Satellite Radio
      Holdings Inc., Canadian Satellite Radio Inc. and
      XM Satellite Radio Inc. (incorporated by reference to
      Exhibit 10.3 of Canadian Satellite Radio Holdings Inc.’s
      Amendment No.1 to the Registration Statement on Form F-4 dated
      June 28, 2006, Registration Statement
      No. 333-134004).4.4
              
              Distribution
      Agreement, dated November 10, 2005 among Canadian Satellite
      Radio Inc., General Motors Of Canada Limited and XM Satellite
      Radio Inc. (incorporated by reference to Exhibit 10.4 of
      Canadian Satellite Radio Holdings Inc.’s Amendment No.1 to the
      Registration Statement on Form F-4 dated June 28, 2006,
      Registration Statement No. 333-134004).8.1
              
              List
      of subsidiaries (incorporated by reference to Exhibit 21.1 of
      Canadian Satellite Radio Holdings Inc.’s Amendment No. 1 to the
      Registration Statement on Form F-4 dated June 28, 2006,
      Registration Statement No. 333-134004).11.1
              
              Code
      of Ethics (incorporated by reference to Exhibit 11.1 of Canadian
      Satellite Radio Holdings Inc.’s Form 20-F for the fiscal year ended
      August 31, 2006, Registration Statement
      No. 333-134004).12.1
              
              Certification
      of Michael Moskowitz, President and Chief Executive Officer of Canadian
      Satellite Radio Holdings Inc., pursuant to 15 U.S.C.
      Section 78(m)(a), as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.12.2
              
              Certification
      of Michael Washinushi, Chief Financial Officer of Canadian Satellite Radio
      Holdings Inc., pursuant to 15 U.S.C. Section 78(m)(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.13.1
              
              Certification
      of Michael Moskowitz, President and Chief Executive Officer of Canadian
      Satellite Radio Holdings Inc., pursuant to 18 U.S.C.
      Section 1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.13.2
              
              Certification
      of Michael Washinushi, Chief Financial Officer of Canadian Satellite Radio
      Holdings Inc. pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.
 
   103
  
 Signature
 
 The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
 
 Canadian
      Satellite Radio Holdings Inc.By:
              /s/
      MICHAEL WASHINUSHIMichael
      WashinushiChief
      Financial Officer, Treasurer and
Secretary
 
 Dated:
November 6, 2008
 
   104
  
 
 
 Index
to Consolidated Financial Statements
 Canadian
Satellite Radio Holdings Inc.
 
 Annual
      Consolidated Financial Information as at August 31, 2008 and 2007, and for
      the Years Ended August 31, 2008, 2007, and 2006Report
      of Independent Auditors
              F-2Consolidated
      Balance Sheets as at August 31, 2008 and 2007
              F-3Consolidated
      Statements of Operations and Deficit for the years ended August 31, 2008,
      2007 and 2006
              F-4Consolidated
      Statements of Cash Flows For the years ended August 31, 2008, 2007 and
      2006
              F-5Notes
      to Consolidated Financial Statements August 31, 2008, 2007 and
      2006
              F-6
 
 
 F-1


graphicPricewaterhouseCoopers
      LLP
                  Chartered
      Accountants
                  PO
      Box 82
                  Royal
      Trust Tower, Suite 3000
                  Toronto
      Dominion Centre
                  Toronto,
      Ontario
                  Canada
      M5K 1G8
                  Telephone
      +1 416 863 1133
                Facsimile +1 416 365 8215
 
  
  November
6, 2008
  
  INDEPENDENT
AUDITORS’ REPORT
  
 
 To
the Shareholders of
 Canadian
Satellite Radio Holdings Inc.
 
 We
have audited the consolidated balance sheets of Canadian Satellite Radio
Holdings Inc. as at August 31, 2008 and 2007 and the consolidated statements of
operations and deficit and cash flows for each of the years in the three-year
period ended August 31, 2008. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
 We
conducted our audits in accordance with both the standards of the Public Company
Accounting Oversight Board (United States) and Canadian generally accepted
auditing standards. Both standards require that we plan and perform an audit to
obtain reasonable assurance 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 audit provides a reasonable basis for our
opinion.
 
 In
our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at August 31, 2008
and 2007 and the results of its operations and its cash flows for each of the
years in the three-year period ended August 31, 2008 in accordance with Canadian
generally accepted accounting principles.
 
 As
discussed in Note 2 of the financial statements, the Company changed its
accounting policies related to financial instruments.
 
 (signed)
PricewaterhouseCoopers LLP
 
 Chartered
Accountants, Licensed Public Accountants
 Toronto
  “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, an
Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers
global network or other member firms of the network, each of which is a separate
and independent legal entity.
 F-2
  Canadian
Satellite Radio Holdings Inc.
 Consolidated
Balance Sheets
 As
at August 31, 2008 and 2007
 
 2008
                
                
                
                2007$
                
                
                
                $AssetsCurrent
      assetsCash
                
                
                6,344,793
                
                
                
                9,524,931Short
      term investments
                
                
                11,282,146
                
                
                
                5,281,000Restricted
      investment - letter of credit (note 14)
                
                
                4,000,000
                
                
                
                -Accounts
      receivable
                
                
                5,538,348
                
                
                
                4,904,803Inventory
                
                
                229,597
                
                
                
                2,462,975Prepaid
      expenses and other assets
                
                
                2,410,579
                
                
                
                1,292,335Restricted
      investments (note 3)
                
                
                6,630,744
                
                
                
                13,043,10936,436,207
                
                
                
                36,509,153Long
      term prepaids
                
                
                1,381,685
                
                
                
                1,108,980Restricted investments
      (note 3)
                
                
                -
                
                
                
                6,301,677Deferred financing costs
      (note 3)
                
                
                -
                
                
                
                4,456,280Property and equipment
      (note 4)
                
                
                17,748,597
                
                
                
                20,878,489Contract rights, distribution
      rights and computer software (note 5)
                
                
                200,718,239
                
                
                
                219,897,424Total
      assets
                
                
                256,284,728
                
                
                
                289,152,003Liabilities
      and Shareholders’ EquityCurrent
      liabilitiesAccounts
      payable and accrued liabilities (notes 6 and 12)
                
                
                20,618,164
                
                
                
                19,822,541Interest
      payable
                
                
                849,059
                
                
                
                590,315Deferred
      revenue
                
                
                19,926,157
                
                
                
                10,445,78841,393,380
                
                
                
                30,858,644Long-term debt(note
      3)
                
                
                124,856,195
                
                
                
                107,434,473Deferred
      revenue
                
                
                3,588,033
                
                
                
                3,626,134Other long-term liabilities(note 14)
                
                
                2,435,481
                
                
                
                376,316Total
      liabilities
                
                
                172,273,089
                
                
                
                142,295,567Shareholders’
      EquityShare
      capital (note 7)
                
                
                314,834,565
                
                
                
                312,948,883Contributed
      surplus (notes 6 and 7)
                
                
                39,723,905
                
                
                
                30,129,704Deficit
                
                
                (270,546,831
                )
                
                
                (196,222,151
                )Total
      shareholders’ equity
                
                
                84,011,639
                
                
                
                146,856,436Total
      liabilities and shareholders’ equity
                
                
                256,284,728
                
                
                
                289,152,003Contracts, contingencies and
      commitments(note 14)
  Approved
      by Board of Directors(signed)
      John I. Bitove
                  
                  (signed)
      Pierre BoivinJohn
      I. Bitove, Director
                  
                  Pierre
      Boivin, Director
 
  F-3
  Canadian
Satellite Radio Holdings Inc.
 Consolidated
Statements of Operations and Deficit
 For
the years ended August 31, 2008, 2007 and 2006
 
 2008
                
                
                
                2007
                
                
                
                2006$
                
                
                
                $
                
                
                
                $Revenue
                
                
                39,457,043
                
                
                
                21,244,380
                
                
                
                6,949,282Operating
      expensesCost
      of revenue
                
                
                29,085,275
                
                
                
                25,313,304
                
                
                
                19,050,684Indirect
      costs (note 6)
                
                
                -
                
                
                
                -
                
                
                
                827,125General
      and administrative (note 6)
                
                
                14,921,996
                
                
                
                16,201,717
                
                
                
                18,465,217Special
      charges (note 9)
                
                
                -
                
                
                
                2,024,080
                
                
                
                -Stock-based
      compensation (notes 6 and 7)
                
                
                3,388,354
                
                
                
                3,143,643
                
                
                
                23,694,846Marketing
                
                
                26,405,645
                
                
                
                28,509,494
                
                
                
                28,021,159Amortization
      of intangible assets and property and equipment
                
                
                22,283,112
                
                
                
                22,409,443
                
                
                
                15,914,23996,084,382
                
                
                
                97,601,681
                
                
                
                105,973,270Loss
      before the undernoted
                
                
                (56,627,339
                )
                
                
                (76,357,301
                )
                
                
                (99,023,988
                )Interest
      revenue
                
                
                1,741,037
                
                
                
                2,491,256
                
                
                
                2,619,481Interest
      expenses
                
                
                (16,858,559
                )
                
                
                (15,287,703
                )
                
                
                (8,279,303
                )Revaluation
      of derivative
                
                
                (1,034,600
                )
                
                
                -
                
                
                
                -Foreign
      exchange gains(losses)
                
                
                (1,545,219
                )
                
                
                4,513,905
                
                
                
                1,980,232Net
      loss for the year
                
                
                (74,324,680
                )
                
                
                (84,639,843
                )
                
                
                (102,703,578
                )Deficit
      - Beginning of year
                
                
                (196,222,151
                )
                
                
                (111,582,308
                )
                
                
                (8,878,730
                )Deficit
      - End of year
                
                
                (270,546,831
                )
                
                
                (196,222,151
                )
                
                
                (111,582,308
                )Basic and fully diluted loss
      per share(note 8)
                
                
                (1.55
                )
                
                
                (1.78
                )
                
                
                (2.99
                )
 
  F-4
  Canadian
Satellite Radio Holdings Inc.
 Consolidated
Statements of Cash Flows
 For
the years ended August 31, 2008, 2007 and 2006
  
 2008
                
                
                
                2007
                
                
                
                2006$
                
                
                
                $
                
                
                
                $Cash
      provided by (used in)Operating
      activitiesNet
      loss for the year
                
                
                (74,324,680
                )
                
                
                (84,639,843
                )
                
                
                (102,703,578
                )Add
      (deduct): Non-cash itemsCosts
      paid by parent company
                
                
                225,395
                
                
                
                204,905
                
                
                
                3,049,041Stock-based
      compensation expense
                
                
                3,388,354
                
                
                
                3,143,643
                
                
                
                23,694,846Amortization of
      intangible assets
                
                
                19,198,931
                
                
                
                19,278,227
                
                
                
                14,075,636Amortization of
      property and equipment
                
                
                3,062,110
                
                
                
                3,131,216
                
                
                
                1,838,603Accrued
      interest - debt
                
                
                258,744
                
                
                
                71,154
                
                
                
                519,161Accrued
      interest receivable
                
                
                (678,181
                )
                
                
                (1,266,730
                )
                
                
                (814,774
                )Interest
      accretion expense
                
                
                814,891
                
                
                
                690,000
                
                
                
                373,752Increase in
      other long term liabilities
                
                
                2,062,022
                
                
                
                35,079
                
                
                
                25,299Revaluation of
      derivative
                
                
                1,034,600
                
                
                
                -
                
                
                
                -Writeoff of
      prepaid advertising
                
                
                -
                
                
                
                2,000,000Unrealized
      foreign exchange gains
                
                
                540,111
                
                
                
                (3,634,039
                )
                
                
                (2,098,253
                )Loss
      on disposal of property and equipment
                
                
                388,002
                
                
                
                -
                
                
                
                -Net
      change in non-cash working capital related to operations (note
      10)
                
                
                18,360,027
                
                
                
                18,229,966
                
                
                
                (206,745
                )Net
      cash used in operating activities
                
                
                (25,669,674
                )
                
                
                (42,756,422
                )
                
                
                (62,247,012
                )Investing
      activitiesPayment
      of interest expense from restricted investments
                
                
                12,927,225
                
                
                
                14,270,438
                
                
                
                7,396,855Sale
      of short-term investments and restricted investments
                
                
                19,712,324
                
                
                
                -
                
                
                
                -Purchase
      of short-term investment and restricted investments
                
                
                (29,181,793
                )
                
                
                (5,850,000
                )
                
                
                (41,015,595
                )Purchase
      of property and equipment
                
                
                (399,380
                )
                
                
                (1,524,723
                )
                
                
                (24,055,466
                )Proceeds
      on sale of property and equipment
                
                
                49,022
                
                
                
                -
                
                
                
                -Rebate
      received on prior year purchase of computer software
                
                
                -
                
                
                
                432,157
                
                
                
                -Purchase
      of computer software
                
                
                (14,917
                )
                
                
                (83,240
                )
                
                
                (8,570,715
                )Net
      cash provided by (used in) investing activities
                
                
                3,092,481
                
                
                
                7,244,632
                
                
                
                (66,244,921
                )Financing
      activitiesInitial
      public offering - net of issuance costs
                
                
                -
                
                
                
                -
                
                
                
                50,042,354Shares
      issued to CSR Investments
                
                
                -
                
                
                
                -
                
                
                
                15,000,000Proceeds
      from convertible notes
                
                
                19,396,445
                
                
                
                -
                
                
                
                -Deferred
      financing costs
                
                
                -
                
                
                
                -
                
                
                
                (5,520,032
                )Proceeds
      from long-term debt
                
                
                -
                
                
                
                -
                
                
                
                115,420,000Proceeds
      from XM credit facility
                
                
                3,062,488
                
                
                
                -
                
                
                
                -Repayment
      of XM credit facility
                
                
                (3,062,488
                )
                
                
                -
                
                
                
                -Net
      cash provided by financing activities
                
                
                19,396,445
                
                
                
                -
                
                
                
                174,942,322Foreign
      exchange gain(loss) on cash held in foreign currency
                
                
                610
                
                
                
                (151,493
                )
                
                
                (1,262,195
                )Change
      in cash and cash equivalents during the year
                
                
                (3,180,138
                )
                
                
                (35,663,283
                )
                
                
                45,188,194Cash
      and cash equivalents - Beginning of year
                
                
                9,524,931
                
                
                
                45,188,214
                
                
                
                20Cash
      and cash equivalents - End of year
                
                
                6,344,793
                
                
                
                9,524,931
                
                
                
                45,188,214Supplemental
      cash flow disclosuresRights
      acquired through issuance of shares
                
                
                
                
                
                
                
                
                
                
                245,152,988Prepaid
      advertising purchased through issuance of equity
                
                
                
                
                
                
                
                
                
                
                2,000,000Utilization
      of XM credit facility (note 3)
                
                
                5,493,419
                
                
                
                2,136,400Convertible
      notes interest settled in shares
                
                
                960,478
  F-5
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
   1
                Organization
      and nature of business
  Canadian
Satellite Radio Holdings Inc. (the Company) was incorporated on July 31, 2002
for the purpose of establishing and operating a Canadian satellite radio
service. On June 16, 2005, the Canadian Radio-television and Telecommunications
Commission (CRTC) approved the application for a licence to the Company’s wholly
owned subsidiary, Canadian Satellite Radio Inc. (CSR). The decision granted a
broadcast licence to CSR to carry on a satellite subscription undertaking,
subject to certain conditions. The initial form of the broadcasting licence will
expire on August 31, 2011.
  The
Company has certain exclusive arrangements with XM Satellite Radio Holdings Inc.
(XM) to provide the Company’s services in Canada, as further explained in
note 13. The Company’s operations depend on XM’s programming content,
satellite network and underlying technology, as well as XM’s operational and
marketing efficiency. As a result of this dependency, should XM’s business
suffer as a result of increased competition, increased costs of programming,
satellite malfunctions, regulatory changes, adverse effects of litigation or
other factors, the Company’s business may suffer as well.
  The
Company has a single operating segment and all of the Company’s property and
equipment and intangible assets are located in Canada.
  2
                Summary
      of significant accounting policies
  The
consolidated financial statements of the Company have been prepared in
accordance with Canadian generally accepted accounting principles (GAAP) and
include the following significant accounting policies:
  Principles
of consolidation
  The
consolidated financial statements include the accounts of the Company and its
subsidiary, CSR. All material intercompany transactions and balances have been
eliminated.
  Short-term
investments
  Short-term
investments consist of Canadian dollar bank acceptances with original maturities
of two to twelve months, which are measured at amortized cost using the
effective interest method.
  Restricted
investments
  As
at August 31, 2008, restricted investments represent securities held in trust as
security against the next interest payment with respect to the debt offering
described in note 3. Restricted investments consist of US dollar denominated
certificates of deposits totalling approximately US$6.2 million. These
investments are recorded at amortized cost using the effective interest
method.
  Inventory
  Inventory
is valued at the lower of weighted average cost and market value and consists of
finished goods.
   F-6
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
   Property
and equipment
  Property
and equipment are recorded at cost less accumulated amortization.
  Repairs
and maintenance that do not enhance the service potential of the related assets
are charged to expenses as incurred. Renewals and betterments, which materially
prolong the useful lives of the assets, are capitalized. The cost and related
accumulated amortization of property sold are removed from the accounts, and
gains and losses are recognized in the consolidated statements of operations and
deficit.
  Amortization
of property and equipment
  Amortization
is computed on a straight-line basis at rates sufficient to amortize the cost of
the assets over their estimated useful lives.
  Terrestrial
      repeater network
                
                5
      to 10 yearsLeaseholds
                
                initial
      lease termBroadcast
      studio equipment
                
                3
      to 10 yearsComputer
      hardware
                
                3
      to 5 yearsFurnishings
      and equipment
                
                3
      to 10 years
  Amortization
related to the terrestrial repeater network and broadcast studio equipment has
been excluded from cost of revenue and included in amortization of intangible
assets and property and equipment on the consolidated statements of operations
and deficit.
  Asset
retirement obligations
  The
Company has obligations with respect to the retirement of terrestrial repeater
equipment and restoration of facilities back to their original state at the end
of the lease term. Accruals are made based on management’s estimates of current
market restoration costs, inflation rates and discount rates. At the inception
of a lease, the present value of the expected cash payments is recognized as an
asset retirement obligation with a corresponding amount recognized in property
assets. The property asset amount is amortized and the liability is accreted
over the period from the lease inception to the time the Company expects to
remove the terrestrial repeater equipment and vacate the premises, resulting in
both amortization and accretion charges in the consolidated statements of
operations and deficit. The Company reviews its asset retirement obligations on
a periodic basis and adjusts the liability as necessary to reflect any changes
in the estimates. Such changes will be recorded in the accounts of the Company
as they occur.
  During
the year ended August 31, 2008, the Company incurred an asset retirement
obligation of $14,026 (2007 - $30,832), which is included in other
long-term liabilities, recorded accretion expense of $36,682 (2007 -
$35,079) and withdrew $16,872 for the closure of an existing site.
  Contract
rights, distribution rights and computer software
  Contract
rights, distribution rights and computer software consist of: XM rights; General
Motors of Canada Limited (GMCL), Honda Canada Inc. (Honda) and Nissan Canada
Inc. (Nissan) distribution rights; and computer software. These assets are
recorded at cost and amortized as follows:
   F-7
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
  XM
      rights
                
                15
      yearsGMCL
      distribution rights
                
                13
      yearsHonda
      distribution rights
                
                8
      yearsNissan
      distribution rights
                
                10
      yearsComputer
      software
                
                5
      years
 Impairment
of long-lived assets
  Property
and equipment and contract rights, distribution rights and computer software are
tested for impairment whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. If it is determined that the carrying
value of the asset or group of assets is not recoverable, a writedown to fair
value is charged to the consolidated statements of operations and deficit in the
year that such a determination is made.
  Foreign
currency translation
  Monetary
assets and liabilities denominated in foreign currencies are translated at the
exchange rate in effect at the consolidated balance sheet dates and non-monetary
items are translated at historical exchange rates.
  Operating
revenue and expenses are translated at average exchange rates prevailing during
the year. Gains or losses arising from these transactions are included in the
consolidated statements of operations and deficit.
  Income
taxes
  Income
taxes are accounted for under the liability method, whereby future income tax
assets and liabilities are recognized for temporary differences between the
income tax and accounting bases of assets and liabilities, as well as for the
benefit of losses available to be carried forward to future years for income tax
purposes. A valuation allowance is provided for the portion of future income tax
assets that is more likely than not to remain unrealized. Significant judgment
is involved in determining the realizability of temporary differences and tax
loss carry-forwards. Future income tax assets and liabilities are measured using
substantively enacted income tax rates applicable to taxable income in the years
in which those temporary differences are expected to be recovered or settled.
Future income tax assets and liabilities are adjusted for the effects of changes
in income tax laws in the year in which the change occurs.
  Stock-based
compensation
  The
Company expenses the fair value of share options and other stock-based awards
when granted to employees, directors and senior officers over the related
vesting period.
  Revenue
recognition
  The
Company recognizes revenue when it is realized or realizable and earned. The
Company considers revenue realized or realizable and earned when it has
persuasive evidence of an arrangement, the product has been delivered or the
services have been provided, the sales price is fixed or determinable and
collectability is reasonably assured. In addition to this general policy, the
following paragraphs describe revenue recognition policies from our major
categories: subscriber and activation fees, advertising and equipment
sales.
   F-8
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
  a)
Subscriber and activation fees
  Subscriber
fees, which generally are billed in advance, are recognized as the service is
provided over the expected term of the subscriber contract, once a customer
enters into a subscription agreement. Sales incentives consisting of rebates to
customers are accounted for as reductions of revenue when the revenue is
recognized or the incentive is offered. Fees billed to automakers for services
offered to automobile purchasers during the promotional periods are offset by
amounts owed to the automakers for subsidies related to the sale of the
automobiles with our product in accordance with Emerging Issues Committee
abstract No.156, Accounting by
a Vendor for Consideration given to a Customer (including a Reseller of the
Vendor’s Products).
  Activation
fees are recognized over the estimated 40-month life of the customer
relationship. Consideration received in advance of revenue recognition is
recorded as deferred revenue.
  b)
Equipment
  Equipment
revenue is recognized at the time of shipment or delivery of the
equipment.
  Bundled
Service Offerings
  The
Company recognizes revenue for sales of bundled packages, which might include a
radio, activation and/or service component, pursuant to Emerging Issues
Committee Abstract No. 142, Revenue Arrangements with Multiple
Deliverables (EIC142). Pursuant to EIC142, the Company allocates the
consideration received based on the relative fair values of the individual
components. Given objective and reliable evidence of fair value exists for all
units of accounting in the arrangement, revenue is allocated to each unit of
accounting or element based on relative fair values.
  c)
Advertising
  The
Company recognizes advertising revenue from the sales of advertisements in the
period in which the advertising is broadcast.
  Non-Monetary
Transactions
  Non-monetary
transactions involve the exchange of advertising and satellite radio services
for advertising and other services.
  All
non-monetary transactions are measured at the fair value of the goods and
services received or provided, whichever is more reliably determined, except
when: (a) the transaction lacks commercial substance; (b) the transaction is an
exchange of product or property held for sale in the ordinary course of business
for a product or property to be sold in the same line of business to facilitate
sales to customers other than the parties to the exchange; (c) neither the fair
value of the asset received nor the fair value of the asset given up is reliably
measurable; or (d) the transaction is a non-monetary, non-reciprocal transfer to
owners that represent a spin-off or other form of restructuring or liquidation.
In these cases, the transaction is measured at the carrying value.
   F-9
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
  Marketing
  Advertising
and marketing includes advertising and costs for media and events which are
expensed as incurred.
  Marketing
also includes incentives and subsidies to retailers and manufacturers to promote
the distribution of radios with the capacity to receive XM satellite digital
radio programming (XM Radios). These costs are generally expensed upon sale or
activation of the XM Radios.
  Subscriber
service costs
  The
activation fee paid to XM as part of the licence agreement (note 13) is deferred
and amortized to cost of revenue over the estimated 40-month life of the
customer relationship. The XM subscription fees are expensed as a cost of
revenue as the related subscription revenue is recognized into
income.
  Broadcast
licence acquisition costs
  All
costs related to obtaining and maintaining the broadcast licence are expensed as
incurred.
  Programming
royalty arrangements
  The
Company negotiates music programming royalty arrangements with a number of
Canadian copyright collectives. The cost of these royalty arrangements is
expensed as a cost of revenue. Until these arrangements are finalized, the
Company recognizes the cost based on management’s best estimate.
  Loss
per share
  Loss
per share is computed by dividing the net loss for the year by the weighted
average number of common shares outstanding during the year. Diluted net loss
per common share is computed by dividing the net loss for the year by the
weighted average number of common and dilutive equivalent shares outstanding
during the year.
  Use
of estimates
  The
preparation of consolidated financial statements in accordance with Canadian
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosures of contingent
assets and liabilities at the dates of the financial statements and expenses for
the periods reported. Actual amounts could differ from those
estimates.
  Accounting
changes
  As
required by the Canadian Institute of Chartered Accountants (CICA), on September
1, 2007, the Company adopted CICA Handbook Sections 1530, Comprehensive Income; Section
3251, Equity; Section
3855, Financial Instruments -
Recognition and Measurement;Section 3861, Financial Instruments - Disclosure
and Presentationand 3865, Hedges. The principal changes
in the accounting for financial instruments due to the adoption of these
accounting standards are described below.
   F-10
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
   In
December 2006, the CICA issued Section 3862, “Financial Instruments -
Disclosures,” and Section 3863 “Financial Instruments - Presentation”. These
standards enhance existing disclosures in previously issued Section 3861
“Financial Instruments - Disclosure and Presentation”.  Section 3862
places greater emphasis on disclosures about risks related to recognized and
unrecognized financial instruments and how those risks are managed. Section 3863
carries forward the same presentation standards as Section
3861.  These new standards are effective for interim and annual
financial statements relating to fiscal years commencing on or after October 1,
2007 on a prospective basis.  The Company adopted these new standards
early, effective August 31, 2008.  This standard impacts note
disclosures provided by the Company (see note 16) but does not impact the
consolidated financial position, results of operations or cash
flows.
  a)
                Section
      1530 Comprehensive Income
  Section
1530 requires a statement of comprehensive income, which consists of net income
and other comprehensive income (OCI).  OCI is a new requirement to
temporarily present certain gains and losses outside of net income until
realized. The Company did not have OCI during the year ended August 31, 2008,
2007 or 2006 and its comprehensive loss consisted of its loss.
  b)
                Section
      3251, Equity
  Section
3251establishes standards for the presentation of equity and changes in equity
by category during the period. Cumulative changes in OCI are included in
accumulated other comprehensive income (“AOCI”), which is presented as a new
category of equity on the consolidated balance sheet.   The
Company did not have a balance of AOCI at August 31, 2008 or 2007.
 
 c)      
Section 3855, Financial Instruments - Recognition and Measurement
 Section 3861, Financial Instruments - Disclosure and Presentation
 
 The
Company adopted CICA 3855 and CICA 3861 on September 1, 2007 in accordance with
the transitionprovisions of the respective standards. CICA 3855 was adopted
retroactively; however prior years’ financialstatements were not
restated.
 
 Under
the new standards, all financial instruments are classified into the following
categories: held for trading held to maturity investments, loans and
receivables, available for sale financial assets or other
liabilities.  All financial instruments within the scope of the
standard are included in the consolidated financial statements and are initially
measured at fair value.  Subsequently, all financial instruments are
re-measured to fair value at each reporting period except for loans and
receivables, held to maturity investments and other financial liabilities which
are measured at amortized cost using the effective interest
method.  Held for trading financial investments are subsequently
measured at fair value and all gains and losses as a result of measurement are
included in net income in the period in which they arise.  Available
for sale financial instruments are subsequently measured at fair value with
revaluation gains and losses included in other comprehensive income until the
instrument is derecognized or an impairment loss is recognized.
 
 Classification
of financial instruments
 
 The
Company has adopted the following classification for financial assets and
financial liabilities:
 
  F-11
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
  Cash
is classified as held-for-trading with a total carrying value of
$6,344,793.  Changes in fair value for the period are recorded in
earnings as interest income. Interest income of $81,926 was recognized on the
financial statements for the year ended August 31, 2008.
 
 Short-term
and restricted investments are classified as held-to-maturity investments, which
are measured at amortized cost using the effective interest rate
method.  The Company has the intention and ability to hold these
securities to maturity. Interest income of $1,659,111 was recognized on the
financial statements for the year ended August 31, 2008.
 
 Cash,
short-term and restricted investments are the only interest-bearing assets on
the financial statements.
 
 Accounts
receivable are classified as loans and receivables, which are measured at
amortized cost using theeffective interest rate method. No interest was
recognized on the financial statements as at August 31, 2008.
 
 Accounts
payable and accrued liabilities are classified as other financial liabilities,
which are measured at amortized cost using the effective interest rate method.
No interest was recognized on the financial statements as at August 31,
2008.
 
 Senior
debt, the liability component of borrowings under the credit facility and the
liability component of convertible debt are classified as other financial
liabilities and recorded at amortized cost using the effective interest method.
Debt issuance and transaction costs related to other financial liabilities are
included in the carrying value of the debt. In prior periods, debt issuance and
transaction costs were carried as deferred financing costs on the consolidated
balance sheet. As a result of adopting CICA 3855 on September 1, 2007, the
Company reclassified $4,456,280 of unamortized transaction costs from deferred
financing costs to long-term debt.
  Carrying
      Values at August 31, 2008Held
      for
                  Trading
                
                
                Held
      to
                  Maturity
                
                
                Loans
      and
                  Receivables
                
                
                Other
      Financial LiabilitiesFinancial
      AssetsCash
                
                
                6,344,793
                
                
                
                -
                
                
                
                -
                
                
                
                -Short
      term investments
                
                
                -
                
                
                
                11,282,146
                
                
                
                -
                
                
                
                -Restricted
      investments
                
                
                -
                
                
                
                4,000,000
                
                
                
                -
                
                
                
                -Accounts
      receivable
                
                
                -
                
                
                
                -
                
                
                
                5,538,348
                
                
                
                -6,344,793
                
                
                
                15,282,146
                
                
                
                5,538,348
                
                
                
                -Financial
      LiabilitiesAccounts
      payable and accrued liabilities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                20,618,164Senior
      debt
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                103,400,012Interest
      payable on senior debt
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                582,388Liability
      component of convertible debt
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                15,276,172Interest
      payable on convertible debt
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                266,672Liability
      component of borrowings under the credit facility
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6,180,011-
                
                
                
                -
                
                
                
                -
                
                
                
                146,323,419
 
 
  F-12
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
  
 Derivatives
 
 Under
Section 3855, derivatives are carried at fair value and are reported as
financial assets when the Company has a contractual right to receive cash or
another financial asset from a counterparty or exchange financial instruments
with a counterparty under conditions that are potentially favourable to the
Company and as financial liabilities where the Company has a contractual
obligation to deliver cash or another financial asset to a counterparty or to
exchange financial instruments with a counterparty that are potentially
unfavourable to the Company.  The changes in fair value during the
period are recorded in earnings.  At August 31, 2008, the Company does
not have any derivatives outstanding.
 
 Embedded
derivatives
 
 Under
Section 3855, derivatives embedded in other financial instruments or contracts
are separated from their host contracts and accounted for as derivatives when
their economic characteristics and risks are not closely related to those of the
host contract; the terms of the embedded derivative are the same as those of a
free-standing derivative; and the combined instrument or contract is not
measured at fair value, with changes in fair value recognized in
income.  These embedded derivatives are measured at fair value with
changes therein recognized in the statement of earnings.
 
 The
Senior notes of the Company include the right to redeem the notes at the option
of the Company. This redemption right has been determined to be an embedded
derivative that is required to be bifurcated from the underlying debt, or host
contract and accounted for as a derivative at fair value with changes in fair
value recorded in earnings. As at September 1, 2007 and August 31, 2008, the
amortized cost of the host contract, excluding transaction costs, was US $101
million and the fair value of the derivative was approximately US$1 million and
US$0 million respectively. The value of the derivative has been netted against
the senior notes on the balance sheet.
 
 d)
                Section
      3865, Hedges
  Section
3865 specifies the criteria that must be satisfied in order for hedge accounting
to be applied and the accounting for each of the permitted hedging strategies:
fair value hedges and cash flow hedges.  Hedge accounting is
discontinued prospectively when the derivative no longer qualifies as an
effective hedge, or the derivative is terminated or sold, or upon the sale of
early termination of the hedged item.  The Company did not apply hedge
accounting during the year ended August 31, 2008.
 
 Recent
accounting pronouncements
 In
March 2007, the CICA issued Section 3031, “Inventories”, which has replaced
Section 3030 with the same title. The new Section establishes that inventories
should be measured at the lower of cost and net realizable value, with guidance
on the determination of cost and net realizable value. The final standard is
effective for interim and annual financial statements relating to fiscal years
beginning on or after January 1, 2008 and is applicable for the Company’s first
quarter of fiscal 2009. The Company does not expect the new standard to have a
material impact on its financial statements.
   F-13
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
  In
December 2006, CICA issued Section 1535 “Capital Disclosures,” which establishes
the standards for disclosing information about an entity’s capital and how it is
managed.  CICA Section 1535 applies to interim and annual financial
statements relating to fiscal years beginning on or after October 1,
2007.  The Company will adopt this new standard effective September 1,
2008. This standard will impact disclosure provided by the Company but will not
impact the consolidated financial position, results of operations or cash
flows.
  In
May 2007, the Accounting Standards Board (“AcSB”) amended Section 1400, General
Standards of Financial Statement Presentation, to change the guidance related to
management's responsibility to assess the ability of the entity to continue as a
going concern. Management is required to make an assessment of an entity's
ability to continue as a going concern and should take into account all
available information about the future, which is at least, but is not limited
to, 12 months from the balance sheet dates. Disclosure is required of material
uncertainties related to events or conditions that may cast significant doubt
upon the entity's ability to continue as a going concern. These amendments are
effective for the Corporation for annual periods beginning after January 1,
2008. The Company plans to adopt this new guidance effective September 1, 2008.
These standards could impact disclosure provided by the Company, but the Company
does not expect the adoption of this guidance to have a material impact on its
financial position, results of operations or cash flows.
  In
February 2008, The CICA has the issued Handbook Section 3064 “Goodwill and
Intangible Assets”, which replaces the existing Sections 3062 “Goodwill and
Other Intangible Assets” and 3450 “Research and Development Costs.” The new
standard introduces changes to the recognition, measurement and disclosure of
goodwill and intangible assets. The provisions relating to the definition and
initial recognition of intangible assets are equivalent to the corresponding
provisions of International Financial Reporting Standard IAS 38, "Intangible
Assets."  The new standard also provides guidance for the recognition
of internally developed intangible assets, including assets developed from
research and development activities, ensuring consistent treatment of all
intangible assets, whether separately acquired or internally
developed.  The Section applies to interim and annual financial
statements relating to fiscal years beginning on or after October 1, 2008 with
earlier adoption encouraged and will be adopted by the Corporation effective
September 1, 2009 .  The Corporation is currently assessing the impact
of this standard may have on its financial positions, results of operations or
cash flow.
  3
                Long
      term debt
  2008
                
                
                2007Senior
      notes
                
                
                103,400,012
                
                
                
                105,619,999Convertible
      Notes
                
                
                15,276,172
                
                
                
                -XM
      credit facility
                
                
                6,180,011
                
                
                
                1,814,474124,856,195
                
                
                
                107,434,473
  Senior
Notes
  Senior
notes consist of US$100.0 million aggregate principal amount of 12.75% senior
notes, due in 2014 (the notes). Interest payments on the notes are due
semi-annually, on February 15 and August 15. The notes are redeemable at the
option of the Company on or after February 15, 2010. Prior to February 15,
2009, the Company may redeem up to 25% of the notes with the proceeds of sales
of its share capital. As at August 31, 2008, the principal amount of the notes
outstanding is $ 107.0 million (US$100.0 million). The Senior notes included an
embedded derivative (see note 2).
   F-14
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
  
  The
indenture governing the notes required the Company to establish an interest
reserve account to cover the first six interest payments due under the notes.
The remaining balance of the interest reserve account is disclosed as restricted
investments on the consolidated balance sheets. The indenture also contains
certain provisions which restrict or limit the Company’s ability to, among other
things, incur more debt, pay dividends, redeem shares or make other
distributions, enter into transactions with affiliates, transfer or sell
assets.
  The
notes issued by the Company are guaranteed by its wholly owned subsidiary, CSR,
the Company’s only subsidiary. The guarantee is full and unconditional. The
Company has no independent assets or operations. As permitted by the regulations
of the U.S. Securities Exchange Commission, the consolidating financial
information has not been provided.
  As
part of the issuance of the above-mentioned notes, the Company incurred costs
amounting to $5,520,032, which were applied against the notes.
  Convertible
notes
  On
September 12, 2007, the Company issued $20 million aggregate principal amount of
8.0% unsecured subordinated convertible notes, due September 12, 2014 (the
convertible notes) in a private placement. Interest payments on the convertible
notes are due semi-annually, on June 30 and December 31, commencing on December
31, 2007. $4.0 million of the convertible notes were issued to XM Satellite
Radio Holdings Inc (XM) and $6.0 million were issued to shareholders of CSRI,
including John I. Bitove, the Executive Chairman of the Company. CSRI is the
controlling shareholder of the Company. The debenture holders may elect to
receive interest payments in the form of Class A Subordinate Voting Shares of
the Company based on the market price of the Class A Subordinate Voting Shares
at the time of the payment. During the year ended August 31, 2008, 234,844 Class
A Subordinate Voting Shares were issued to debenture holders who elected to
receive the December 31, 2007 and June 30, 2008 interest payment in
shares.
  The
convertible notes are convertible at the option of the debenture holders at any
time at a conversion price of $5.92 per share. The notes are redeemable at the
option of the Company on or after September 12, 2010. The Company may elect to
pay the amount due on the maturity of the debentures in Class A Subordinate
Voting Shares. The number of shares to be issued would be determined based on
dividing the principal amounts of the debentures due by 95% of the market price
of the Class A Subordinate Voting Shares on the maturity date, provided the
market price of the Class A Subordinate Voting Shares exceeds
$3.00.
  This
financial instrument contains both a liability and an equity element. The
Company determined the value of the liability, the most easily measurable
component to be $14,806,520 and assigned the residual amount of $5,193,480 to
the equity component as allowed under the CICA Handbook Section 3863, “Financial
Instruments -Presentation” (CICA 3863). As part of the issuance of the
convertible notes, costs were incurred amounting to $603,555.  These
costs are netted against both the liability and equity elements. The liability
element is carried at amortized cost using the effective interest rate method.
During the year ended August 31, 2008, $220,599 of interest accretion expense
was included in the consolidated statements of operations. The accrued interest
payable balance at August 31, 2008 included $266,672 for the convertible notes.
The effective interest rate based on the liability element is 15%.
   F-15
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
  XM
Credit Facility
  In
fiscal 2006, XM provided to the Company a $45 million credit facility to be
utilized to finance the purchase of terrestrial repeater equipment and to pay
license fees. During the year ended August 31, 2008, the Company utilized
$5,493,419 (2007 - $2,136,400) under the facility to pay fees due to XM of
$5,085,312 and interest accrued thereon of $408,107. The facility matures on
December 31, 2012 and bears an interest rate of 9% per year. The interest can be
satisfied through additional borrowings under the facility. XM has the right to
convert the unpaid principal amounts into Class A Subordinate Voting Shares of
the Company at the Offering price of $16.00 per share at any time and any unpaid
principal amounts are automatically converted upon the occurrence of certain
conditions. The amount available under the credit agreement is permanently
reduced by the aggregate principal borrowed under the facility prior to its
maturity. Availability of remaining amounts of the credit facility is dependent
on the Company meeting certain annual covenants. During the year ended August
31, 2008, an amendment to the credit facility was signed which will be effective
for draws on the credit facility made after August 31, 2008. The amendment
revised the condition to be met prior to drawing on the credit facility and
amended the interest rate. The amended interest rate has been set at 17.75%
based on XM’s and the Company’s effective cost of borrowing, plus 1.75%. As at
August 31, 2008, the Company had $37.4 million available under the
facility.
  This
financial instrument contains both a liability and an equity element. The
Company determined the value of the liability, the most easily measureable
component to be $6,064,889 and assigned the residual amount of $1,564,930 to the
equity component as provided in CICA 3863. Over the term of the facility, the
liability value must be accreted to its maturity value of $7,629,819, with the
increase in liability value recorded as interest expense over the period the
liability is outstanding. During the year ended August 31, 2008, the Company
recognized $516,146 of interest expense related to the credit facility at an
effective interest rate of 15.0%.
  An
amendment to the credit facility allowed the Company to draw on the credit
facility for payments due on a specific purchase of radio inventory totalling
$3.0 million during the year ended August 31, 2008. This draw did not accrue
interest and was repaid on June 18, 2008. The balance was recorded at its
exchange amount.
  4
                Property
      and equipment
  Property
and equipment consist of the following:
  2008Cost
                  $
                
                
                Accumulated
                  amortization
                  $
                
                
                Net
                  $Terrestrial
      repeater network
                
                
                14,577,544
                
                
                
                4,353,530
                
                
                
                10,224,014Leaseholds
                
                
                7,375,367
                
                
                
                1,738,720
                
                
                
                5,636,647Broadcast
      studio equipment
                
                
                1,625,576
                
                
                
                785,321
                
                
                
                840,255Computer
      hardware
                
                
                902,792
                
                
                
                467,777
                
                
                
                435,015Furnishings
      and equipment
                
                
                1,028,413
                
                
                
                415,747
                
                
                
                612,66625,509,692
                
                
                
                7,761,095
                
                
                
                17,748,597
 
  F-16
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
  
 
 2007Cost
                  $
                
                
                Accumulated
                  amortization
                  $
                
                
                Net
                  $Terrestrial
      repeater network
                
                
                14,455,042
                
                
                
                2,660,466
                
                
                
                11,794,576Leaseholds
                
                
                7,494,877
                
                
                
                1,161,223
                
                
                
                6,333,654Broadcast
      studio equipment
                
                
                1,571,556
                
                
                
                506,124
                
                
                
                1,065,432Computer
      hardware
                
                
                850,582
                
                
                
                283,144
                
                
                
                567,438Furnishings
      and equipment
                
                
                1,475,684
                
                
                
                358,295
                
                
                
                1,117,38925,847,741
                
                
                
                4,969,252
                
                
                
                20,878,489
   5
                Contract
      rights, distribution rights and computer
  software
  Contract
rights, distribution rights and computer software consist of the
following:
  2008Cost
                  $
                
                Accumulated
                  amortization
                  $
                
                Net
                  $XM
      rights (notes 7 and 13)
                
                
                177,610,410
                
                32,976,227
                
                
                144,634,183GMCL
      distribution rights (notes 7 and 14)
                
                
                53,172,000
                
                11,247,923
                
                
                41,924,077Honda
      distribution rights (notes 7 and 14)
                
                
                9,827,325
                
                2,968,672
                
                
                6,858,653Nissan
      distribution rights (notes 7 and 14)
                
                
                4,913,663
                
                1,187,463
                
                
                3,726,200Computer
      software
                
                
                7,747,636
                
                4,172,510
                
                
                3,575,126253,271,034
                
                52,552,795
                
                
                200,718,239
  2007Cost
                  $
                
                
                Accumulated
                  amortization
                  $
                
                
                Net
                  $XM
      rights (notes 7 and 13)
                
                
                177,610,410
                
                
                
                21,134,594
                
                
                
                156,475,816GMCL
      distribution rights (notes 7 and 14)
                
                
                53,172,000
                
                
                
                7,157,769
                
                
                
                46,014,231Honda
      distribution rights (notes 7 and 14)
                
                
                9,827,325
                
                
                
                1,740,256
                
                
                
                8,087,069Nissan
      distribution rights (notes 7 and 14)
                
                
                4,913,663
                
                
                
                696,099
                
                
                
                4,217,564Computer
      software
                
                
                7,727,889
                
                
                
                2,625,145
                
                
                
                5,102,744253,251,287
                
                
                
                33,353,863
                
                
                
                219,897,424
 
  F-17
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
  During
year ended August 31, 2008, $19,198,931 (2007 - $19,278,227) of amortization was
recorded on these intangible assets.
  6
                Related
      party accounts and transactions
  John
I. Bitove is the Executive Chairman of the Company and the controlling
shareholder of CSRI Inc. (CSRI), the controlling shareholder of the
Company.
  In
June 2005, CSRI granted 21,868 options to acquire shares of CSRI at $7.54 per
share to certain consultants who provided services to the Company, employees of
a company related to CSRI and an officer of the Company. These options had a
grant date fair value of $152 per option and a total estimated fair value of
$3.3 million. Approximately 75% of these options were vested and exercisable
immediately and, accordingly, the compensation cost was included in indirect
costs in fiscal 2005. These options were to expire in June 2008. The remaining
options vest in June 2008, expire in December 2008 and compensation costs are
being expensed as stock-based compensation over the three-year vesting period.
The estimated fair market value of the options was determined using the
Black-Scholes valuation model using the following assumptions: estimated fair
value of CSRI of $152 per share; risk-free interest rate of 5%; expected life of
3 years; dividend yield of nil%; and volatility of 82.5%. Stock-based
compensation includes $180,000 (2007 - $180,000; 2006 - $90,000) related to
these options.
  In
December 2005, through a series of steps, including the amalgamation of the
Company with 2087609 Ontario Inc., the existing option holders exercised half of
their options and received 1,007,289 Class A Subordinate Voting Shares. This
series of steps represented a modification of the options and resulted in an
additional stock-based compensatory expense of approximately $3 million during
fiscal 2006. The Company did not receive any consideration on the exercise of
these options.
  During
fiscal 2008, the term of the unexercised options granted by CSRI were extended
to December 31, 2010. This modification did not result in a significant amount
of additional stock-based compensation expense.
  In
December 2005, 2,403 options of CSRI were granted to an officer of the Company
with a nominal exercise price. These options vest over three years but may be
accelerated if the officer ceases to be employed by the Company. Accordingly, an
additional stock-based compensatory expense of approximately $1 million was
recorded in the year ended August 31, 2006. These options were valued using the
Black-Scholes valuation model using the following assumptions: fair value of
CSRI of $416 per share; risk-free interest rate of 5%; expected life of 3 years;
dividend yield of nil%; and volatility of 82.5%. The officer ceased his
employment with the Company during fiscal 2007.
  As
described in note 7, XM has a 23.30% interest in the Company. See note 13 and
note 14 for transactions with and amounts owed to XM.
   F-18
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
  During
the year ended August 31, 2008, CSRI incurred $225,395 (2007 - $204,905; 2006 -
$3,049,041) of costs related to the Company’s licence application process. This
amount has been included in contributed surplus.
  During
the year ended August 31, 2008, the Company incurred $364,926 (2007 - $536,427;
2006 - $599,969) of expenses related to the reimbursement of operating and
travel expenses and the lease of its Toronto studio from a company controlled by
the Executive Chairman of the Company. The Company has leased this property for
a 15-year period for a total amount of approximately $2.5 million. As at August
31, 2007 and 2008, no balance was included in accounts payable and accrued
liabilities.
  During
the year ended August 31, 2008, the Company received printing services from AMI
Printing valued at approximately $136,165 (2007 - $671,046; 2006 - $1,776,926).
An affiliate of CSR Investments holds an indirect minority interest in AMI
Printing. As at August 31, 2008, $3,352 (2007- $0) was included in accounts
payable and accrued liabilities.
  During
the year ended August 31, 2008, the Company received payroll services from
Priszm LP for an amount of $30,000 (2007 - $27,723). In addition, the Company
sold approximately $184,393 (2007 - $226,800; 2006 - $55,000)) of advertising to
Priszm LP during the year. Priszm LP is owned, directly and indirectly,
approximately 60% by Priszm Canadian Income Fund and approximately 40% by a
company controlled by the Executive Chairman of the Company. As at August 31,
2008, $0 (2007 - $3,180) was included in accounts payable and accrued
liabilities.
  During
the year ended August 31, 2008, the Company received field marketing services
from Vision Group of Companies (Vision) valued at approximately $605,079 (2007 -
$2,277,600; 2006 - $1,965,735)). This amount consists of fees paid to Vision of
$197,500 (2007 - $375,000) and amounts paid by Vision to vendors on the
Company’s behalf of $407,579 (2007 - $1,902,600). The principal of Vision is
related to the Executive Chairman of the Company. As at August 31, 2008, $16,313
(2007 - $0) was included in accounts payable and accrued
liabilities.
  During
the year ended August 31, 2008, the Company incurred consulting services related
to public relations from the Wilcox Group totalling $196,917 (2007 - $388,226;
2006 - $725,015). A director of the Company is the principal of the Wilcox
Group. As at August 31, 2008, there was $0 (2007 - $7,755) included in accounts
payable and accrued liabilities.
  During
the year ended August 31, 2008, the Company incurred costs on behalf of Data
Audio-Visual Enterprises Wireless Inc in the amount of $52,725 for which the
Company was reimbursed. The Company’s Executive Chairman is the Chairman and
controlling shareholder of Data Audio-Visual Enterprises Wireless
Inc.
  The
related party transactions described above have been recorded at the exchange
amount, which is the consideration paid or received as established and agreed to
by the related parties.
  7
                Share
      capital and other activity
  The
authorized share capital of the Company as at August 31, 2008 consisted of the
following shares:
   F-19
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
   Class
      A Subordinate Voting Shares
                
                unlimitedClass
      B Voting Shares
                
                unlimitedClass
      C Non-Voting Shares
                
                unlimited
 The
Class B Voting Shares are convertible at any time at the holder’s option into
fully paid and non-assessable Class A Subordinate Voting Shares upon the basis
of one Class A Subordinate Voting Share for three Class B Voting Shares. The
Class A Subordinate Voting Shares and the Class C Non-Voting Shares participate
in the equity of the Company on a per share rate equal to one third of the rate
of participation of the Class A Subordinate Voting Shares and the Class C
Non-Voting Shares.
  Share
capital and other activity are summarized as follows:
 
 Number
      of shares
                      
                      
                      Value
      of sharesCommon
                        shares
                      
                      
                      Class
      A Subordinate Voting Shares
                      
                      
                      Class
      B
                        Voting
      Shares
                      
                      
                      Common
                        shares
                        $
                      
                      
                      Class
      A Subordinate Voting Shares
                        $
                      
                      
                      Class
      B Voting Shares
                        $
                      
                      
                      Contributed
      surplus
                        $
                      
                      
                      Total
                        $Balance
      as atAugust
      31, 2005
                      
                      
                      200
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      20
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      20Costs
      incurred by CSR Investments (note 6)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,049,041
                      
                      
                      
                      3,049,041Issuance
      of Common shares to CSRI Inc
                      
                      
                      15,000,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      15,000,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      15,000,000Issuance
      of Class A Subordinate Voting Shares to XM
                      
                      
                      -
                      
                      
                      
                      11,077,500
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      177,240,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      177,240.000Issuance
      of Class A Subordinate Voting Shares to GMCL
                      
                      
                      -
                      
                      
                      
                      3,323,250
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      53,172,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      53,172,000Conversion
      of common shares to 81,615,633 Class B Voting Shares
                      
                      
                      (15,000,200
                      )
                      
                      
                      -
                      
                      
                      
                      81,615,633
                      
                      
                      
                      (15,000,020
                      )
                      
                      
                      -
                      
                      
                      
                      15,000,020
                      
                      
                      
                      -
                      
                      
                      
                      -Issuance
      of Class A Subordinate Voting Shares as part of the amalgamation with
      2087609 Ontario Inc
                      
                      
                      -
                      
                      
                      
                      1,007,289
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Issuance
      of Class A Subordinate Voting Shares in exchange for the purchase of
      radio advertising services
                      
                      
                      -
                      
                      
                      
                      125,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,000,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,000,000Stock
      based compensation expense
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      23,694,846
                      
                      
                      
                      23,694,846Issuance
      of Class A Subordinate Voting Shares in an initial public offering
      (less issuance costs of $4,957,646)
                      
                      
                      -
                      
                      
                      
                      3,437,500
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      50,042,354
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      50.042,354Issuance
      of Class A Subordinate Voting Shares to Honda
                      
                      
                      -
                      
                      
                      
                      949,500
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9,827,325
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9,827,325Issuance
      of Class A Subordinate Voting Shares to Nissan
                      
                      
                      -
                      
                      
                      
                      474,750
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,913,663
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,913,663Exercise
      of stock options
                      
                      
                      -
                      
                      
                      
                      25,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      400,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      400,000
  F-20
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
 Number
      of shares
                  
                  
                  Value
      of sharesCommon
                    shares
                  
                  
                  Class
      A Subordinate Voting Shares
                  
                  
                  Class
      B
                    Voting
      Shares
                  
                  
                  Common
                    shares
                    $
                  
                  
                  Class
      A Subordinate Voting Shares
                    $
                  
                  
                  Class
      B Voting Shares
                    $
                  
                  
                  Contributed
      surplus
                    $
                  
                  
                  Total
                    $Conversion
      of Class B Voting Shares to Class A Subordinate Voting
    Shares
                  
                  
                  -
                  
                  
                  
                  62,500
                  
                  
                  
                  (187,500
                  )
                  
                  
                  -
                  
                  
                  
                  34,460
                  
                  
                  
                  (34,460
                  )
                  
                  
                  -
                  
                  
                  
                  -Balance
      as atAugust
      31, 2006
                  
                  
                  
                  
                  
                  
                  20,482,289
                  
                  
                  
                  81,428,133
                  
                  
                  
                  
                  
                  
                  
                  297,629,802
                  
                  
                  
                  14,965,560
                  
                  
                  
                  26,344,137
                  
                  
                  
                  338,939,499Costs
      incurred by CSR Investments (note 6)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  204,904
                  
                  
                  
                  204,904Stock-based
      compensation expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,058,171
                  
                  
                  
                  3,058,171Issuance
      of Class A Subordinate Voting Shares to 2  employees and 2
      contractors
                  
                  
                  -
                  
                  
                  
                  12,500
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  85,500
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  85,500Restricted
      Stock Units issued
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  412,059
                  
                  
                  
                  412,059Restricted
      Stock Units converted to shares
                  
                  
                  -
                  
                  
                  
                  47,127
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  268,020
                  
                  
                  
                  -
                  
                  
                  
                  (218,575
                  )
                  
                  
                  49,445Equity
      portion of XM credit facility
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  329,009
                  
                  
                  
                  329,009Balance
      as atAugust
      31, 2007
                  
                  
                  -
                  
                  
                  
                  20,541,916
                  
                  
                  
                  81,428,133
                  
                  
                  
                  -
                  
                  
                  
                  297,983,322
                  
                  
                  
                  14,965,560
                  
                  
                  
                  30,129,705
                  
                  
                  
                  343,078,587Costs
      incurred by CSR Investments (note 6)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  225,395
                  
                  
                  
                  225,395Stock-based
      compensation expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,388,354
                  
                  
                  
                  3,388,354Issuance
      of Class A Subordinate Voting Shares to NHL
                  
                  
                  -
                  
                  
                  
                  102,150
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  500,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  500,000Issuance
      of Class A Subordinate Voting Shares to satisfy interest payments on
      Convertible Notes
                  
                  
                  -
                  
                  
                  
                  234,844
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  960,478
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  960,478Restricted
      Stock Units issued
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  101,609
                  
                  
                  
                  101,609Restricted
      Stock Units converted to shares
                  
                  
                  -
                  
                  
                  
                  72,157
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  425,205
                  
                  
                  
                  -
                  
                  
                  
                  (393,830
                  )
                  
                  
                  31,375Equity
      portion of $20 million convertible notes
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,036,752
                  
                  
                  
                  5,036,752Equity
      portion of XM credit facility
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,235,920
                  
                  
                  
                  1,235,920Balance
      as atAugust
      31, 2008
                  
                  
                  -
                  
                  
                  
                  20,951,067
                  
                  
                  
                  81,428,133
                  
                  
                  
                  -
                  
                  
                  
                  299,869,005
                  
                  
                  
                  14,965,560
                  
                  
                  
                  39,723,905
                  
                  
                  
                  354,558,470
  As
a result of a reorganization of the Company on December 8, 2005, the Company’s
existing 15,000,200 common shares were converted to 81,615,633 Class B Voting
Shares and 1,007,289 Class A Subordinate Voting Shares were issued. As three
Class B Voting Shares are economically equivalent to one Class A Subordinate
Voting Share, the conversion resulted in the issuance of 28,212,500 common share
equivalents. The conversion has been accounted for as a share split, resulting
in 1.88 common share equivalents being issued for each pre-existing common
share. The per share information in these consolidated financial statements has
been restated to reflect the impact of the share split.
   F-21
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
  On
November 17, 2005, the Company entered into a Share Issuance Agreement and
provided XM its rights to a 23.30% ownership interest in the Company, as
contemplated in the 2003 MOA and as reflected in documents filed with the CRTC.
Immediately prior to the closing of the Offering, the Company issued 11,077,500
Class A Subordinate Voting Shares of the Company to XM. The Class A Subordinate
Voting Shares were determined to have a value of $177,240,000, based on the
Offering price of $16.00 per share. Rights with a value of $177,240,000 have
been recorded as an intangible asset to be amortized over the initial term of
the XM agreements of ten years, plus the additional renewal period of five
years.
  As
part of the distribution agreement with GMCL (note 14), the Company agreed to
provide GMCL with a 7% equity interest in the Company. Immediately prior to the
closing of the Offering in December 2005, the Company issued 3,323,250 Class A
Subordinate Voting Shares to GMCL. The Class A Subordinate Voting Shares were
determined to have a value of $53,172,000, based on the Offering price of $16.00
per share. Distribution rights with a value of $53,172,000 have been recorded as
an intangible asset to be amortized over the 13-year term of the GMCL
distribution agreement.
  In
December 2005, the Company issued 125,000 Class A Subordinate Voting Shares in
exchange for the purchase of radio advertising services to be received by the
Company in an aggregate amount of $2 million. A corresponding amount was
recorded as prepaid expenses. This balance was written off during the year ended
August 31, 2007 and the expense was included in marketing as the Company was
unable to reach an agreement to appropriately utilize the balance to promote its
satellite radio services.
  As
part of the distribution agreement with Honda (note 14), the Company provided
949,500 Class A Subordinate Voting Shares, which were determined to have a value
of $9,827,325, based on the market price of the shares at the date the shares
were provided of $10.35 per share. Distribution rights with a value of
$9,827,325 have been recorded as an intangible asset to be amortized over the
eight-year term of the Honda distribution agreement. As part of the distribution
agreement with Nissan (note 14), the Company provided 474,750 Class A
Subordinate Voting Shares, which were determined to have a value of $4,913,663,
based on the market price of the shares at the date the shares were provided.
Distribution rights with a value of $4,913,663 have been recorded as an
intangible asset to be amortized over the ten-year term of the Nissan
distribution agreement.
  Stock
options
  In
November 2005, the Board of Directors of the Company approved a stock option
plan for the purpose of providing additional incentives to attract and retain
employees, directors and senior officers of the Company and its affiliates. The
stock option plan permits the Board of Directors of the Company to grant
employees, directors and senior officers stock options to purchase common shares
equal to 10% of the number of shares outstanding from time to time. Under the
plan, options expire on the seventh anniversary of the grant date. Any option
not exercised prior to the expiry date will become null and void.
  Under
this plan, the Company has granted options to certain of its employees and
senior officers, for 1,100,000 Class A Subordinate Voting Shares with an
exercise price of $0.01. The options were conditional on the closing of the
initial public offering (the Offering). 1,075,000 options will vest in equal
one-fourth annual amounts beginning on the date of the closing of the Offering
and ending on the third anniversary thereof. Vesting may be accelerated if the
employee ceases to be employed by the Company. The remaining 25,000 options were
vested on the closing of the Offering. The options were valued at $16.00 each,
based on Offering price of the shares. An expense of $17.6 million has been
recorded during the year ended August 31, 2006.
   F-22
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
  During
the year ended August 31, 2006, the Company granted options to certain of its
directors, employees and senior officers for 1,225,000 Class A Subordinate
Voting Shares with exercise prices of $8.74 and $16.00. The options vest over
three to five years. The weighted average grant date fair value of these options
was $10.67. The total fair value of these options was $13.1
million.
  In
September 2006, the Company granted options to certain of its employees for
241,250 Class A Subordinate Voting Shares with an exercise price of $8.74. The
options vest from immediately to four years. The weighted average grant date
fair value of the options was $2.80.
  During
April 2007, the Company granted stock options to all of its employees, excluding
certain executives, for 73,000 Class A Subordinate Voting Shares with an
exercise price of $6.53. The fair value of the stock options granted was $0.1
million. The options vest equally over two years. The weighted average grant
date fair value of these options was $2.09.
  During
November 2007, the Company granted stock options to five members of the Board of
Directors and two members of management for a total of 745,000 Class A
Subordinate Voting Shares with a weighted average exercise price of $5.38. The
fair value of the stock options granted was $1.0 million. The options vest from
immediately to three years. The amount of $0.7 million was recorded in the
consolidated statement of operations and deficit during the year ended August
31, 2008 related to these options.
  In
January 2008, the Company granted stock options to certain of its employees for
372,000 Class A Subordinate Voting Shares with an exercise price of $5.38. The
options vest from one to three years. The fair value of the stock options
granted was $0.7 million and an amount of $0.2 million was recorded in the
consolidated statement of operations and deficit during the year ended August
31, 2008.
  The
fair value of the options was estimated on the date of the grant using the
Black-Scholes option pricing model. The following assumptions were used for the
options: risk-free interest rate of 4.00% (2007 - 5.00%); expected life of 1 to
3 years (2007 - 1 to 4 years); expected dividend yield of nil% (2007 - nil%);
and expected volatility of 50.00% to 52.00% (2007 - 52.00% to
62.88%).
  Number
      of
                  options
                
                
                Weighted
                  average
                  exercise
      price
                  $Balance
      as at August 31, 2005
                
                
                -
                
                
                
                -Granted
                
                
                2,325,000
                
                
                
                8.20Exercised
                
                
                (25,000
                )
                
                
                0.01Forfeited
                
                
                (25,000
                )
                
                
                16.00Balance
      as at August 31, 2006
                
                
                2,275,000
                
                
                
                8.20Granted
                
                
                314,250
                
                
                
                8.23Forfeited
                
                
                (59,750
                )
                
                
                8.60Balance
      as at August 31, 2007
                
                
                2,529,500
                
                
                
                8.19Granted
                
                
                1,117,000
                
                
                
                5.38Forfeited
                
                
                (156,000
                )
                
                
                7.64Balance
      as at August 31, 2008
                
                
                3,490,500
                
                
                
                7.32
 
   F-23
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
   Outstanding
options as at August 31, 2008 are as follows:
  Exercise
      price
                  $
                
                
                Number
                  outstanding
                
                
                Remaining
      contractual life (years)
                
                
                Number
                  exercisable16.00
                
                
                
                1,150,000
                
                
                
                4.3
                
                
                
                851,2508.74
                
                
                
                140,000
                
                
                
                1.8
                
                
                
                62,2206.53
                
                
                
                40,000
                
                
                
                0.5
                
                
                
                20,0005.38
                
                
                
                1,085,500
                
                
                
                2.0
                
                
                
                482,8330.01
                
                
                
                1,075,000
                
                
                
                4.3
                
                
                
                998,4387.32
                
                
                
                3,490,500
                
                
                
                3.4
 Restricted
stock units
  In
January 2007, the Board of Directors of the Company approved a restricted stock
unit plan to promote the long term success of the Company by providing for the
payment of performance bonuses in the form of shares to designated employees.
The restricted stock unit plan permits the Compensation Committee of the Board
of Directors of the Company to determine the designated employees to whom it
recommends that Grants be made based on their current and potential contribution
to the success of the Company. The Compensation Committee will determine the
effective date of the grant, the vesting terms, the performance criteria and
other terms and conditions. Under the plan, the maximum number of shares that
may be issued is 250,000.
  Number
      of
                  Restricted
                  share
      units
                
                
                Price
      at
                  Grant
      DateBalance
      as at August 31, 2005
                
                
                -Granted
                
                
                15,000
                
                
                
                8.80Balance
      as at August 31, 2006
                
                
                15,000
                
                
                
                8.80Granted
                
                
                60,674
                
                
                
                6.84Released
                
                
                (47,127
                )
                
                
                7.46Balance
      as at August 31, 2007
                
                
                28,547
                
                
                
                6.84Granted
                
                
                59,661
                
                
                
                5.25Released
                
                
                (72,157
                )
                
                
                5.87Balance
      as at August 31, 2008
                
                
                16,051
                
                
                
                5.28
 
   F-24
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
   During
the year ended August 31, 2008, 72,157 previously issued Restricted Share Units
(Units) were exercised and 72,157 Class A Subordinate Voting Shares of the
Company were issued. These Units had been issued in fiscal 2007 to employees of
the Company. The Units vested immediately or over a 1 year period and were to be
settled in Class A Subordinate Voting Shares of the Company. An amount of
$393,830 was transferred from contributed surplus to share capital.
  On
February 28, 2007, certain employees of the Company agreed to receive
compensation related to their fiscal 2007 bonus in the form of Restricted Share
Units (Units). Each unit allows the participant to receive one Class A
Subordinate Voting Share and can be exercised immediately. During the year ended
August 31, 2008, 19,354 Units were issued to employees to satisfy $101,609 in
2007 bonus entitlement. This amount was recorded as an increase in contributed
surplus in the consolidated balance sheet
  During
the year ended August 31, 2007, 15,000 previously issued Restricted Share Units
(Units) were exercised and 15,000 Class A Subordinate Voting Shares of the
Company were issued. These Units had been issued in fiscal 2006 to an employee
of the Company. The Units vested over a six month period and could be settled,
at the option of the Company, in either Class A Subordinate Voting Shares of the
Company or for a cash amount equal to the market value of the Class A
Subordinate Voting Shares. An amount of $105,000 was transferred from
contributed surplus to share capital.
  During
the year ended August 31, 2007, the Company’s Board of Directors approved the
issuance of 46,091 Restricted Share Units (Units) to three senior executives and
two members of the Board of Directors to satisfy approximately $315,000 related
to 2006 bonus and directors fees. Each unit allows the participant to receive
one Class A Subordinate Voting Share in January 2008. Class A Subordinate Voting
Shares will be issued immediately if the participant ceases to be employed by
the Company prior to January 2008. During the year ended August 31, 2007, 17,544
Units were released and 17,544 Class A Subordinate Voting Shares were issued
upon the termination of a senior executive.
  Outstanding
restricted share units as at August 31, 2008 are as follows:
  Exercise
      price
                  $
                
                
                Number
                  outstanding
                
                
                Number
                  exercisable5.28
                
                
                
                16,051
                
                
                
                16,051
  8
                Loss
      per share
  The
weighted average number of shares outstanding used to compute basic loss per
share was 47,851,755
  (2007
- 47,645,534; 2006 - 34,315,416).
  For
purposes of the weighted average number of shares outstanding, the Class B
Voting Shares were converted into the equivalent number of Class A Subordinate
Voting Shares. Class B Voting Shares participate in the dividends and
distributions at a rate of one third of each Class A Subordinate Voting Share
and are convertible into Class A Subordinate Voting Shares on the basis of one
Class A Subordinate Voting Share for three Class B Voting
Shares.
   F-25
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
   The
stock options (note 7), restricted share units (note 7) and convertible debt
were not included in the computation of diluted loss per share, as they would
have been anti-dilutive for the years presented.
  9
                Special
      charges
  During
the year ended August 31, 2007, management implemented actions designed to
improve the Company’s efficiencies, improve the content on talk and music
channels produced by the Company and allocate resources to high growth
subscriber channels. The Company’s actions primarily included workforce
reductions, with the majority resulting from the format change on talk and music
channels produced by the Company. The total charges incurred in connection with
these initiatives is approximately $2,024,080. Included in the balance are
49,583 Restricted Share Units (Units) granted to a former senior executive of
the Company. Each of the Units allow the participant to receive one Class A
Subordinate Voting Share. During the year ended August 31, 2008, 17,500 Units
(2007 - 14,583 Units) were exchanged for 17,500 Class A Subordinate Voting
Shares. The remaining Units can be exchanged by the participant for 17,500 Class
A Subordinate Voting Shares in June 2009.
  At
August 31, 2008, a balance of $288,549 (2007 - $1,043,357) related to the
special charges remains in accounts payable and accrued liabilities. No further
charges are expected.
  10
                Supplemental
      cash flow disclosures
  Changes
in non-cash working capital related to operations for the years ended August 31
are as follows:
  2008
                
                
                
                2007
                
                
                
                2006$
                
                
                
                $
                
                
                
                $Increase
      in current assetsAccounts
      receivable
                
                
                (633,545
                )
                
                
                (2,779,436
                )
                
                
                (2,125,367
                )Inventory
                
                
                2,233,378
                
                
                
                (1,862,851
                )
                
                
                (600,124
                )Prepaid
      expenses and other assets
                
                
                (1,390,949
                )
                
                
                4,480,932
                
                
                
                (4,882,247
                )Increase
      in current liabilitiesAccounts
      payable and accrued liabilities
                
                
                8,708,875
                
                
                
                8,321,054
                
                
                
                3,399,338Deferred
      revenue
                
                
                9,442,268
                
                
                
                10,070,267
                
                
                
                4,001,655Net
      change in non-cash working capital related to operations
                
                
                18,360,027
                
                
                
                18,229,966
                
                
                
                (206,745
                )
 11
                Income
      taxes
  As
at August 31, 2008, the Company has available income tax loss carry-forwards of
approximately $373,000,000 (2007 - $171,927,000) that may be used to reduce
taxable income in future years. These losses expire as follows:
   F-26
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
   2014
                
                $2,000,0002015
                
                6,000,0002026
                
                257,000,0002027
                
                62,000,0002028
                
                46,000,000$373,000,000
 
  The
Company has not recorded a provision for income taxes. The difference between
the amount computed by multiplying the net loss by the combined statutory
Canadian federal and provincial income tax rate and the $nil provision for
income taxes is reconciled as follows:
  2008
                
                
                
                2007
                
                
                
                2006$
                
                
                
                $
                
                
                
                $Net
      loss for the year
                
                
                74,324,680
                
                
                
                84,639,843
                
                
                
                102,703,578Combined
      federal and provincial income taxes at statutory rates - 2008 - 33.57%;
      2007 - 35.53%; 2006 - 35.22%
                
                
                (24,950,795
                )
                
                
                (30,072,536
                )
                
                
                (36,172,200
                )Differences
      in income taxes resulting fromChange
      in valuation allowance
                
                
                5,676,828
                
                
                
                28,299,922
                
                
                
                27,444,937Effect
      of income tax rate changes on future income taxes
                
                
                17,832,022
                
                
                
                -
                
                
                
                -Non-deductible
      items
                
                
                1,441,945
                
                
                
                1,772,614
                
                
                
                8,727,263Provision
      for income taxes
                
                
                -
                
                
                
                -
                
                
                
                -
  Future
income taxes reflect the net income tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Future income tax assets and
liabilities consist of the following temporary differences:
  2008
                
                
                
                2007
                
                
                
                2006$
                
                
                
                $
                
                
                
                $Future
      income tax assetsNon-capital
      losses
                
                
                106,569,445
                
                
                
                61,085,584
                
                
                
                25,573,254Property and
      equipment
                
                
                2,550,978
                
                
                
                1,900,810
                
                
                
                783,190Intangible
      assets
                
                
                -
                
                
                
                -
                
                
                
                4,960,499Other
                
                
                109,457
                
                
                
                41,198
                
                
                
                809,192Future
      income tax liabilitiesIntangible
      assets
                
                
                (43,126,996
                )
                
                
                (2,601,536
                )
                
                
                -Valuation
      allowance
                
                
                (66,102,884
                )
                
                
                (60,426,056
                )
                
                
                (32,126,135
                )Net
      future income tax asset
                
                
                -
                
                
                
                -
                
                
                
                -
  During
the current year, CSR revised its estimated period of allocation of certain
intangible assets acquired in fiscal 2006. This resulted in an increase in
non-capital losses of approximately $150 million and increased future tax assets
related to non-capital losses and future tax liabilities related to intangible
assets by $55,845,063.
   F-27
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
 A
full valuation allowance has been provided to fully offset the future income tax
assets, as the Company is not certain that such benefits can be utilized in the
near future.
  12
                XM
      agreements
  On
November 17, 2005, and as contemplated by the MOA with XM, the Company entered
into a number of agreements with XM, which provide the Company with exclusive
rights to offer XM satellite digital radio service in Canada. These agreements
include a Licence Agreement, a Programming Agreement and a Trademark Agreement,
which include the following rights:
 
 •
                exclusive
      non-transferable rights and licence to sell the XM basic channels package
      to Canadian subscribers;
 •
                access
      to the programming on the XM
channels;
 •
                rights
      to the use of the XM-related trademarks;
and
 •
                information
      and expertise regarding the
following:
 •
                acquisition
      of content distribution rights;
 •
                promotion,
      marketing and distribution;
 •
                construction,
      maintenance and operation of a terrestrial repeater network and broadcast
      facilities;
 •
                computer
      software and system support; and
 •
                sharing
      of technology licences.
 
 The
agreements have an initial term of ten years. The Company may, at its option,
extend the term for an additional five years.
  The
Licence Agreement requires the payment of a fee of 15% on recognized subscriber
revenues for the basic service, an activation charge for each subscriber and an
additional fee for any premium services.
  In
addition, XM has agreed to provide certain technical and consulting services to
the Company to assist with the installation and rollout of the terrestrial
repeater equipment and other services, including technical assistance with
equipment interfaces between the Company’s and XM’s systems and operational
support. The Company paid XM US$26,600 per month from January 2008 to August
2008 and US$25,000 per month from January 2007 to December 2007 for these
services.
  The
following amount, included as part of accounts payable and accrued liabilities,
is due to XM in respect of fees under the Licence Agreement related to
subscriber revenues and activation charges, fees under the Technical Services
Agreement, reimbursement of call centre charges paid on CSR’s behalf and the
purchase of terrestrial repeaters.
  2008
                  $
                
                2007
                  $
                
                2006
                  $Accounts
      payable to XM
                2,244,960
                
                3,466,953
                
                628,234
 
   F-28
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
   13
                Agreements
      with original equipment manufacturers
(OEM)
  On
November 30, 2005, the Company entered into a 13-year distribution agreement
with GMCL to install satellite radio receivers in certain GMCL vehicles and to
market the Company’s services. In exchange, the Company will pay consideration
to GMCL that includes installation commissions, subscriber commissions, a share
of subscription fees for GMCL subscribers and funds to be used on joint
advertising opportunities.
  In
addition, the Company agreed to issue in escrow a 3% equity interest in the
Company to other automobile OEMs that enter into a distribution agreement with
the Company on certain specific terms. In December 2005, 1,424,250 Class A
Subordinate Voting Shares of the Company were placed in escrow. In March 2006,
the Company entered into agreements with Honda and Nissan for eight and ten
years, respectively. The distribution agreements include installation
commissions, subscriber commissions and a share of subscription fees. The shares
released from escrow and issued to Honda and Nissan are described further in
note 8.
  In
May 2006, the Company entered into a five-year agreement with Toyota Canada Inc.
(Toyota) to install satellite receivers in certain Toyota vehicles. This
distribution agreement includes the right to installation commissions.
Currently, installation commissions have been exchanged for
an  extended trial period Toyota customers currently
receive.
  In
December 2006, the Company entered into a five year agreement with Hyundai Auto
Canada (Hyundai) to factory-install satellite receivers in certain Hyundai
models. This agreement includes installation commissions to be paid to
Hyundai.
  14
                Contracts
      and commitments
  Lease
obligations
  The
Company has non-cancellable operating leases for office space and terrestrial
repeater sites committed as at August 31, 2008. The annual minimum lease
payments in the following table include rents payable to a related party of
approximately $170,000 per year, as described in note 6, but do not include any
common costs, such as property taxes and utilities, which cannot be determined
in advance.
  $2009
                
                
                1,192,1502010
                
                
                1,191,4532011
                
                
                817,2712012
                
                
                236,9812013
                
                
                204,085Thereafter
                
                
                1,303,5924,945,532
 
   F-29
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
  National
Hockey League
  On
September 9, 2005, XM and the National Hockey League signed a term sheet to
secure satellite radio National Hockey League broadcast and marketing rights.
The agreement between XM and the National Hockey League is a ten-year agreement,
with satellite radio exclusivity over the last eight years, for which XM’s total
cost is approximately US$100 million. The Company’s commitment to reimburse XM
for a portion of its obligations under this term sheet totalled US$69.1
million.
  During
the year ended August 31, 2008, the Company, XM and the NHL agreed to an
amendment to the NHL agreement which will defer a portion of the license fee
payable in the next two years to years seven to nine of the original
agreement.  The Company also issued to the NHL 102,150 Class A
Subordinate Voting Shares with a market value at the date of issuance in
December equal to US$500,000. In addition, XM and the Company agreed to increase
the total of the Company’s portion of the commitment to US$71.8 million over the
term of the agreement. The Company accounts for the difference between the
periodic cost of the services (determined on a straight line basis) and the
amount paid in each period as an other financial liability. The periodic service
cost reflects the fees over the term of the arrangement less the interest
component determined using the effective interest rate method. As at August 31,
2008, US$1,908,226 is included in other long term liabilities.
  $2009
                
                
                5,209,0002010
                
                
                7,436,0002011
                
                
                7,700,0002012
                
                
                9,824,0002013
                
                
                10,088,000Thereafter
                
                
                20,920,00061,177,000
  Service
provider agreement
  On
February 28, 2006, the Company entered into a three-year agreement with
Accenture Inc. (Accenture) for maintenance and development services for the
Company’s customer care and billing system. Under the agreement, the Company
committed to pay a minimum of $12.3 million over the three-year period. In
December 2006, the Company signed an amendment to the Accenture agreement to
extend the term of the agreement an additional three years to December 31, 2011.
Under this amendment, the Company was committed to pay $24 million over the six
year term of the agreement. In January 2008, the Company and Accenture agreed to
an amendment to the agreement dated February 28, 2006 for maintenance and
development of the Company’s customer care and billing system. This second
amendment to the agreement will extend the term by one year to December 31, 2012
and will commit the Company to pay a total of $27.4 million over the seven year
term of the agreement. The Company accounts for the difference between the
periodic cost of the services (determined on a straight line basis) and the
amount paid in each period as an other financial liability. The periodic service
cost reflects the fees over the term of the arrangement less the interest
component determined using the effective interest rate method.
   F-30
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
 In
July 2008, the Company served Accenture with a termination of services notice.
The Company and Accenture have preliminarily agreed to new terms and conditions
and are currently finalizing the terms of the new contract. Accordingly, the
Company has not accounted for this as a termination in the current
period.
  $2009
                
                
                2,975,0002010
                
                
                5,180,0002011
                
                
                5,100,0002012
                
                
                4,850,00018,105,000
  Advertising
and marketing commitments
  The
Company has committed to $24.6 million of expenditures related to advertising
and marketing and joint advertising with commercial partners. These commitments
include the purchase of $10 million of total advertising from an entity over the
three-year period commencing in December 2005, with $3 million to be paid
through the issuance of the Company’s Class A Subordinate Voting Shares at the
Offering price of $16.00 per share. Total commitments under all arrangements are
as follows:
  $2009
                
                
                7,530,0002010
                
                
                1,626,0002011
                
                
                1,675,0002012
                
                
                1,725,0002013
                
                
                1,777,000Thereafter
                
                
                10,235,00024,568,000
  Restricted
investment - letter of credit
  During
the year ended August 31, 2008, the Company set up a standby letter of credit to
the benefit of the Company’s credit card processor in the amount of $4 million.
This standby letter of credit replaces a cash reserve which had been established
since November 2005. The $4 million is invested in Canadian dollar bank
acceptances with maturities of thirty to ninety days.
  Broadcast
license
  As
part of the broadcast licence from the CRTC, the Company must contribute a
minimum of 5% of gross revenues of the satellite radio undertaking to eligible
third parties directly connected to the development of Canadian musical and
artistic talent during each broadcast year.
   F-31
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
 Contingencies
  From
time to time, the Company is a defendant of lawsuits and party to other claims
or potential claims that have arisen in the normal course of its business. The
Company recognizes a provision for estimated loss contingencies when it is
probable that a liability has been incurred and the amount of the loss can be
reasonably estimated. In the opinion of the Company, any monetary liabilities or
financial impacts of such lawsuits and claims or potential claims would not be
material to the consolidated financial position of the Company or the
consolidated results of its operations.
  15
                Canadian
      and United States accounting policy
differences
  The
consolidated financial statements of the Company have been prepared in
accordance with GAAP as applied in Canada. In certain aspects, GAAP, as applied
in the United States (U.S.), differs from Canadian GAAP.  The
following tables and disclosures represent the principal reconciling items
between US GAAP and Canadian GAAP affecting the consolidated statement of
operations and deficit, the balance sheet, as well as additional disclosures
required by US GAAP.
 
 The
Canadian accounting standard for the preparation of cash flow statements is
consistent with the principles for cash flow statements in International
Accounting Standard No. 7, and accordingly, the cash flow statements presented
here have not been reconciled to US GAAP under the accommodation provided by the
SEC.
 
 2008
                
                
                
                2007
                
                
                
                2006$
                
                
                
                $
                
                
                
                $Net
      loss for the year in accordance with Canadian GAAP
                
                
                (74,324,680
                )
                
                
                (84,639,843
                )
                
                
                (102,703,578
                )XM
      credit facility (i)
                
                
                108,040
                
                
                
                7,082
                
                
                
                -Convertible
      note (ii)
                
                
                695,880
                
                
                
                -
                
                
                
                -Revaluation
      of derivative (iii)
                
                
                1,034,600
                
                
                
                -
                
                
                
                -Senior
      notes (iii)
                
                
                (233,640
                )
                
                
                -
                
                
                
                -Net
      loss for the year in accordance with US GAAP
                
                
                (72,719,800
                )
                
                
                (84,632,761
                )
                
                
                (102,703,578
                )
 
 2008
                
                
                
                2007
                
                
                
                2006$
                
                
                
                $
                
                
                
                $Long-term
      debtBalance
      under Canadian GAAP
                
                
                124,856,195
                
                
                
                107,434,473
                
                
                
                110,660,000XM
      credit facility (i)
                
                
                1,564,929
                
                
                
                329,009
                
                
                
                -Convertible
      notes, net of allocated issuance costs (ii)
                
                
                5,036,752
                
                
                
                -
                
                
                
                -Senior
      notes (iii)
                
                
                (829,460
                )
                
                
                -
                
                
                
                -Balance
      under US GAAP
                
                
                130,628,416
                
                
                
                107,763,482
                
                
                
                110,660,000Shareholders’
      equityBalance
      under Canadian GAAP
                
                
                84,011,639
                
                
                
                146,856,436
                
                
                
                227,357,191Interest
      - XM credit facility (i)
                
                
                115,122
                
                
                
                7,082
                
                
                
                -Interest
      - Convertible note (ii)
                
                
                695,880
                
                
                
                -
                
                
                
                -Interest
      - Senior notes (iii)
                
                
                (233,640
                )
                
                
                -
                
                
                
                -XM
      credit facility (i)
                
                
                (1,564,929
                )
                
                
                (329,009
                )
                
                
                -Convertible
      note, net of allocated issuance costs (ii)
                
                
                (5,036,752
                )
                
                
                -
                
                
                
                -Revaluation
      of derivative (iii)
                
                
                1,034,600
                
                
                
                -
                
                
                
                -Balance
      under US GAAP
                
                
                79,021,920
                
                
                
                146,534,509
                
                
                
                227,357,191
 
  F-32
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
 
 The
following table indicates the changes to the Company’s shareholders’
equity:
  2008
                
                
                
                2007
                
                
                
                2006$
                
                
                
                $
                
                
                
                $Shareholders’
      equity - beginning of year
                
                
                146,534,509
                
                
                
                227,357,191
                
                
                
                (8,878,710
                )Net
      loss for the year - U.S. GAAP
                
                
                (72,719,800
                )
                
                
                (84,632,761
                )
                
                
                (102,703,578
                )Costs
      incurred by CSR Investments
                
                
                225,395
                
                
                
                204,904
                
                
                
                3,049,041Issuance
      of common shares to CSR Investments
                
                
                -
                
                
                
                -
                
                
                
                15,000,000Issuance
      of Class A Subordinate Voting Shares
                
                
                1,460,478
                
                
                
                85,500
                
                
                
                297,195,342Stock-based
      compensation
                
                
                3,388,354
                
                
                
                3,058,171
                
                
                
                23,694,846Exercise
      of stock options
                
                
                -
                
                
                
                -
                
                
                
                250Issuance
      of Restricted Share Units
                
                
                101,609
                
                
                
                412,059
                
                
                
                -Restricted
      Share Units converted to shares
                
                
                31,375
                
                
                
                49,445
                
                
                
                -Shareholders’
      equity - end of year
                
                
                79,021,920
                
                
                
                146,534,509
                
                
                
                227,357,191
  (i) XM credit facility
 
 Under
Canadian GAAP, as described in Note 3, the XM credit facility contains both a
liability and an equity element.  As of August 31, 2008, the value
ascribed to XM’s conversion option, which is presented in Share capital, was
$1,564,930 (2007 - $329,009); the value ascribed to debt was $6,064,889 (2007 -
$1,807,391).  Under US GAAP, the total value of the proceeds received
as of August 31, 2008 of $7,629,819 (2007 - $2,136,400) was treated as debt and
measured at amortized cost under the effective interest rate
method.
  (ii)
Convertible notes
 
 Under
Canadian GAAP, as described in Note 3, the convertible notes contain both a
liability and an equity element.  As of August 31, 2008, the value
ascribed to convertible notes conversion option, which is presented in Share
capital, was $5,193,480; the value ascribed to debt was
$14,806,520.  Under US GAAP, the total value of the proceeds received
as of August 31, 2008 of $20,000,000 was treated as debt. At August 31, 2008,
$0.2 million in transaction costs have been included in the debt balance under
Canadian GAAP. These amounts would be classified as assets under U.S.
GAAP.
  F-33
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
 (iii) Senior
notes
 
 Under
Canadian GAAP, as described in Note 2, the prepayment option included in the
Senior notes is an embedded derivative asset that is required to be bifurcated
from the underlying debt and accounted for an a derivative at fair value with
changes in fair value recorded in earnings. Upon the adoption of Section 3855 on
September 1, 2007, this resulted in the recording of an embedded derivative with
a value of US $1 million and an additional balance to the Senior notes of US $1
million. At August 31, 2008, the derivation was revalued at $0. During the year,
amortization of the US$1 million increase to the Senior notes totalled $
233,640. Under U.S. GAAP, the prepayment option is not required to be treated as
an embedded derivative and bifurcated from the underlying debt. At August 31,
2008, $3.6 million in transaction costs have been included in the debt balance
under Canadian GAAP. These amounts would be classified as assets under U.S.
GAAP.
 
 
 Other
disclosures
  Intangible
assets:
  Estimated
amortization expense for intangible assets for subsequent years is as
follows:
  2009
                
                19,202,5222010
                
                19,202,5222011
                
                18,124,7832012
                
                17,651,5672013
                
                17,651,567Thereafter
                
                108,885,278
  Revenue:
  Sales
taxes collected are excluded from revenue.
  Stock-based
compensation:
  The
Company follows the provisions of FAS 123R “Share Based Payments” for U.S.
GAAP.  Shares are issued from treasury upon exercise.  No
income tax benefit is recorded in the consolidated statement of operations for
these costs.
  The
total intrinsic value of options exercised during the years ended August 31,
2008, 2007 and 2006 was approximately nil, nil and $300,000.  As at
August 31, 2008, there was approximately $3.1 million of unrecognized
compensation cost related to stock option awards that is expected to be
recognized as expense over a weighted average period of 2.5
years.  The total fair value of stock options that vested during the
years ended August 31, 2008, 2007 and 2006 was approximately $9.3 million, $13.3
million and $7.4 million, respectively.
   F-34
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
   The
total intrinsic value of options outstanding as at August 31, 2008 was $4.1
million.  The total intrinsic value of options exercisable as at
August 31, 2008 was $4.1 million.  The total number of options fully
vested at August 31, 2008 was approximately 2.4 million.  The total
number of options expected to vest beyond August 31, 2008 was approximately
860,000.  The total intrinsic value of these options was approximately
$287,000 at August 31, 2008 with a weighted average contractual term of 2.7
years and a weighted average exercise price of $2.53.
  The
Company’s estimate of an expected option term is based on the exercise behaviour
of the Company’s employees.  The stock price volatility was derived
based on the Company’s actual historic stock prices over the past three years,
which represents the Company’s best estimate of expected
volatility.  The risk free interest rate for periods within the
contractual life of the award is based on interest rates of government bonds
with similar contractual lives.
  RSU’s
granted during 2008, 2007 and 2006 are valued using the Black-Scholes option
pricing model with assumptions materially consistent with those used to value
stock options.
  Income
Taxes:
  The
Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement No. 109” in September 1,
2007.  At August 31, 2008, the Company does not have any uncertain tax
filing positions.  As a result, the Company has included all of its
tax benefits in its disclosure of future income tax assets.  There are
no significant changes to this assessment of uncertain filing positions
anticipated within the next 12 months.
  During
the year ended August 31, 2008, the Company recognized $nil in interest and
penalties.  The Company has $nil of interest and penalties accrued at
August 31, 2008.
  The
Company files income tax returns in the Canadian and federal jurisdiction and
various provincial jurisdictions.  In the normal course of business,
the Company is subject to examination by taxing authorities.  Open tax
years in Canada range from 2003-2008.  As of August 31, 2008, the
Company was not under audit in Canada.
  The
following amounts are included in accounts payable and accrued
liabilities:
  2008
                
                
                
                2007
                
                
                
                2006$
                
                
                
                $
                
                
                
                $Trade
      creditors
                
                
                17,274,735
                
                
                
                15,526,830
                
                
                
                10,123,578Amounts
      due to related parties
                
                
                2,261,273
                
                
                
                3,477,888
                
                
                
                2,003,528Amounts
      related to employees
                
                
                1,082,156
                
                
                
                817,823
                
                
                
                870,503Interest
      accrual on long-term debt
                
                
                849,059
                
                
                
                590,315
                
                
                
                519,16121,467,223
                
                
                
                20,412,856
                
                
                
                13,516,770
 
   F-35
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
  Recent
U.S. accounting pronouncements
  In
February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 (Accounting
for Derivative Instruments and Hedging Activities) and No. 140 (Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities), which permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. In addition, SFAS No. 155 establishes a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation under the requirements of
Statement No. 133. This Statement shall be effective for all financial
instruments acquired or issued after the beginning of an entity’s first fiscal
year that begins after September 15, 2006. The Company adopted this
Statement effective September 1, 2007. The adoption of this standard did not
have a significant impact on its consolidated results of operations or financial
position.
 
 In
June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109, which clarifies
the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.
This Interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. This Interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. This Statement is effective as of
the beginning of an entity’s first fiscal year that begins after
December 15, 2006. The Company adopted this Interpretation effective
September 1, 2007. The adoption of this Interpretation did not have a
significant impact on its consolidated results of operations or financial
position.
 
 The
Company’s policy is to recognize interest and penalties accrued on any uncertain
tax benefits as a component of income tax expense. As of the date of adoption of
FIN 48, the Company did not have any accrued interest or penalties associated
with any uncertain tax benefits, nor was any interest expense recognized during
the year.
 
 The
Company files tax returns in Canada and in the provinces of Ontario, Quebec and
Alberta. The tax years 2002 through 2007 remain open to examination by the major
taxing jurisdictions to which the Company is subject.
  In
September 2006, the FASB Emerging Issues Task Force issued EITF
No. 06-1,Accounting for
Consideration Given by a Service Provider to Manufacturers or Resellers of
Equipment Necessary for an End-Customer to Receive Service from the Service
Provider, which states how a service provider company that depends on
specialized equipment should account for consideration paid to the manufacturers
and resellers of such equipment. EITF No. 06-1 requires that the service
provider recognize payments based on the form of benefit the end-customer
receives from the manufacturer or reseller. If the form of benefit is “other
than cash” or the service provider does not control the form of benefit provided
to the customer, the consideration would be classified as an expense. If the
form of benefit is cash, the consideration would be classified as an offset to
revenue. The consensus required retrospective application to all prior periods
as of the beginning of the first annual reporting period beginning after
June 15, 2007. The adoption of this consensus did not have a significant
impact on the Company’s consolidated results of operations or financial
position.
   F-36
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
  In
September 2006, the FASB issued SFAS No. 157,Fair Value Measurements.
This Statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007. The
Company will adopt this Statement effective September 1, 2008. Based on the
Company’s current evaluation of this Statement, the Company does not expect the
adoption of SFAS No. 157 to have a significant impact on its consolidated
results of operations or financial position.
  In
February 2008, the FASB issued FASB Staff Position (“FSP”) 157-1, Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13 and FSP 157-2, Effective Date of FASB Statement
No. 157. FSP 157-1 amends SFAS No. 157 to remove certain
leasing transactions from its scope. FSP 157-2, Effective Date of FASB Statement
No. 157 delays the effective date of SFAS No. 157 for all
nonfinancial assets and liabilities except those that are recognized or
disclosed at fair value in the financial statements on at least an annual basis,
until September 1, 2009 for the Company.  The Company has not
determined the impact, if any, that the adoption of SFAS No. 157, as it
relates to nonfinancial assets, will have on its consolidated results of
operations or financial position.
 
 In
February 2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (SAFS 159”). SFAS 159 permits entities the
option, at specified election dates, to measure eligible financial instruments
at fair value (“fair value option”), thereby mitigating volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply hedge accounting provisions. The fair value option is
irrevocable. SFAS 159 is effective for fiscal years beginning after November 15,
2007. The Company does not expect the adoption of SFAS No, 159 to have a
significant impact on its consolidated results of operations or financial
position.
  In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - An amendment of FASB Statement
No. 133, which requires enhanced qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2008, with early adoption
permitted. The Company will adopt this Statement effective September 1, 2009.
Based on the Company’s current evaluation of this Statement, the Company does
not expect the adoption of SFAS No. 161 to have a significant impact on its
consolidated results of operations or financial position.
  In
December 2007, the FASB ratified EITF No. 07-1, Accounting for Collaborative
Agreements, which provides guidance on how the parties to a collaborative
agreement should account for costs incurred and revenue generated on sales to
third parties, how sharing payments pursuant to a collaboration agreement should
be presented in the income statement and certain related disclosure
requirements. This Issue is effective for the first annual or interim reporting
period beginning after December 15, 2008, and should be applied
retrospectively to all prior periods presented for all collaborative
arrangements existing as of the effective date.
  F-37
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
 The
Company will adopt the provisions of EITF No. 07-1 effective September 1,
2010. The Company is currently evaluating the impact, if any, that the adoption
of EITF No. 07-1 will have on its consolidated results of operations and
financial position.
 
 16
                Financial
      instruments
  In
December 2006, the CICA issued Section 3862, “Financial Instruments -
Disclosures” which places greater emphasis on disclosures about risks related to
recognized and unrecognized financial instruments and how these risks are
managed by the Company. Section 3862 is effective for interim and annual
financial statements relating to fiscal years commencing on or after October 1,
2007. The Company has elected to adopt Section 3862 earlier than required,
effective August 31, 2008.
  The
Company, through its financial assets and liabilities, is exposed to various
risks.  The following analysis provides a measurement of risks as at
August 31, 2008:
  Liquidity
Risk
  Liquidity
risk is the risk that the Company will not be able to meet its financial
obligations as they fall due. The Company’s approach to managing liquidity risk
is to ensure that it will have sufficient liquidity to meet liabilities when
due. The Company achieves this by maintaining sufficient cash and short-term
investments and the availability of funding through a committed credit facility
to reduce the risk that the Company will not be able to meet its financial
commitments.  The Company’s management monitors its financial
projections on a monthly basis and updates and adjusts its expected use of cash
resources based on the latest available data.
  The
Company has expended and will continue to expend funds for marketing to grow the
business,  maintaining its terrestrial repeater network, programming
and distribution contracts, royalty fees and the maintenance of its broadcast
and office facilities. While the Company’s losses have significantly been
reduced, the Company's cumulative losses and cumulative negative cash flow may
continue, and possibly increase, as the Company incurs expenses to grow its
subscriber base. There are uncertainties related to the timing and use of the
Company’s cash resources.  These uncertainties include the growth in
subscribers to CSR’s satellite radio service, the ability to retain current
subscribers and the ability to control costs related to providing broadcast
services, customer care and carrying out promotional and marketing
activities.  If the Company’s cash resources decrease more quickly
than expected, the Company may need to seek additional equity or debt financing.
There is also no assurance that the Company will be successful in its financing
efforts or whether sufficient funding will be available. While the Company
believes that the current liquidity and cash resources will be sufficient to
cover the funding needs, there is the risk that the Company may ultimately be
unable to generate sufficient revenues to become profitable and have positive
cash flow.
 
 The
Company’s operations depend on XM’s programming content, satellite network and
underlying technology, as well as XM’s operational and marketing
efficiency.  As a result of this dependency, should XM’s business
suffer as a result of increased competition, increased costs of programming,
satellite malfunctions, regulatory changes, adverse effects of litigation or
other factors, the Company’s business may suffer as well.
 
  F-38
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
  At
August 31, 2008, the Company has a cash balance of $6,344,793, unrestricted
short term investments of $11,282,146 and restricted investment - letter of
credit of $4,000,000.  Short-term investments are maintained in
investments where there is a ready liquid market and have maturities of two to
twelve months.
  While
the Company continued to use cash in its operating activities of $25,669,674 for
the year ended August 31, 2008, the Company has implemented a number of
strategies to improve operating cash flows including:
  •
                Utilizing
      the XM credit facility.  The Company has access to a $45 million
      credit facility from XM (note 3) that can be used only to finance the
      purchase of terrestrial repeater equipment from XM, to pay license fees to
      XM and to pay interest due on the drawn facility.   At
      August 31, 2008, the Company had utilized $7.6 million of the facility and
      $37.4 million was available for future use.  The Company has
      used the facility during the year to pay all of the license fees due to XM
      and to pay the interest due on the facility.  The Company
      expects to fully use the facility to pay future license fees and interest
      due to XM and management expects to fully utilize the facility by the end
      of fiscal 2011. The facility requires an annual financial covenant to be
      met prior to further drawings under the facility.  The covenant
      was met at August 31, 2008.
  •
                Settlement
      of interest payments through the issuance of
      shares.    As permitted under the convertible debt
      arrangement, the Company has settled and expects to continue to settle a
      portion of the interest payments on the convertible notes outstanding
      through the issuance of shares rather than paying cash
      interest.
  •
                Deferral
      of payment of operating expenses.  The Company has entered into
      deferred payment terms for payments related to the NHL programming
      and  the services provided by Accenture.  The
      deferrals resulted in the recognition of additional financial liabilities
      at August 31, 2008 of approximately $4.9
  million.
  •
                Deferred
      revenue. The Company has actively marketed longer term arrangements with
      its subscribers resulting in an increase in deferred revenue by $9.4
      million for the year-ended August 31, 2008.  The Company expects
      to continue to actively promote and obtain prepaid annual subscription
      arrangements with its customers. While the Company has such arrangement,
      these are cancellable by the
customer.
  In
addition, the Company continually reviews and updates the business plan. This
review process may result in changes to the business plan which may include a
reduction in cash expenditures.
  In
conjunction with the senior notes, the Company was required to deposit
sufficient proceeds from the senior notes in a restricted account to be used
solely to fund the interest payments for 3 years.  As at August 31,
2008, the funds set aside for future interest payments under the senior notes
will only cover the next interest payment due in February 2009.
  At
this time, the Company is unable to predict how current financial market
conditions may affect its financial results and cash flows from operations. The
prevailing financial market conditions may affect the Company’s ability to
continue to generate significant revenue growth in its OEM business should
Canadian demand for automobiles equipped with the XM receiver decline in a
significant manner.  While the Company believes that its current
liquidity position is adequate to sustain the Company through the current
economic climate, management is unable to predict the length and severity of the
current economic downturn and how it may ultimately affect the Company’s ability
to raise additional capital resources should the need arise.
  F-39
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
  The
table below summarizes the Company’s financial liabilities into relevant
maturity groups based on the remaining period at the balance sheet date to the
contractual maturity date.  The amounts disclosed in the table are the
contractual undiscounted cash flows (in $000’s):
 Total
                
                Less
      than
                  1
      Year
                
                1
      - 3 Years
                
                4
      - 5 Years
                
                More
      than
                  5
      YearsAccounts
      payable and accrued liabilities
                20,618
                
                20,618
                
                -
                
                -
                
                -Principal
      on 12.75% Senior Notes
                106,200
                
                -
                
                -
                
                -
                
                106,200Interest
      on 12.75% Senior Notes
                74,473
                
                13,541
                
                27,081
                
                27,081
                
                6,770Principal
      on 8.0% Convertible Notes
                20,000
                
                -
                
                -
                
                -
                
                20,000Interest
      on 8.0% Convertible Notes
                9,933
                
                1,600
                
                3,200
                
                3,200
                
                1,933Accenture
      agreement
                1,592
                
                -
                
                1,592
                
                -
                
                -NHL
      Agreement
                2,031
                
                -
                
                2,031
                
                -
                
                -XM
      Credit Facility
                7,630
                
                -
                
                -
                
                7,630
                
                -Total
                242,477
                
                35,759
                
                33,904
                
                37,911
                
                134,903
  The
Company is in the process of revising the terms of its arrangement with
Accenture (note 14) and expectsthe amounts payable listed above to be reduced
under the new agreement.
 
 Market
Risk
  Market
risk is the risk that changes in market prices, such as foreign exchange rates
and interest rates, will affect the Company’s income or the value of its
holdings of financial instruments.
  To
perform sensitivity analysis, the Company assesses the risk of loss in fair
values due to the impact of hypothetical changes in interest rates and foreign
currency exchange rates on market-sensitive instruments. Information provided by
the analysis does not represent the Company’s view of future market changes, nor
does it necessarily represent the actual changes in fair value that would incur
under normal market conditions because, of necessity, all variables other than
the specific market risk factor are held constant. In reality, changes in one
factor may result in change in another, which may magnify or
counteract the sensitivities.
  Foreign
currency risk
  The
Company is exposed to fluctuations of the Canadian dollar in relation to the US
dollar, resulting from the issuance of debt denominated in US dollars and the
purchase of US dollar investments.   The Company does not
currently use foreign currency derivatives.
  F-40
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
  Most
of the Company’s revenues and expenses are received or denominated in Canadian
dollars. Specifically under the XM License Agreement, the Company is not
exposed to material foreign currency exchange rate risk as the monthly fees due
under this agreement are payable in Canadian dollars. The Company is exposed to
material foreign currency exchange rate risk only with respect to payments due
to XM under the broadcasting agreement with the NHL and with respect to the
interest payments on the Company’s U.S. dollar-denominated notes. However,
until February 2009, the Company’s foreign currency exchange rate risk is
reduced because the first six interest payments on the Company’s notes will be
drawn from the Company’s interest reserve account, which is held in the
United States in a U.S. dollar account.
 
 Given
the Company is not exposed to material foreign currency exchange rate risk as
discussed above, management does not actively manage this risk, however, the
Company still monitors the fluctuations in the foreign exchange rates in order
to prevent material losses from foreign exchange.
 
 At
August 31, 2008, the Canadian/U.S. foreign exchange rate was 0.9416. Assuming
that all other variables remain constant, a decrease of 10% (with opposite
impacts on an increase of similar proportion) in the Canadian dollar would have
the following impact on the ending balances of certain balance sheet items at
August 31, 2008:
 
 Financial
      AssetsCash
                
                
                12,408Restricted
      investments
                
                
                736,765Financial
      LiabilitiesAccounts
      payable and accrued liabilities
                
                
                (153,213
                )Long
      term debt
                
                
                (11,800,245
                )Other
      long term liabilities
                
                
                (225,041
                )Net
      foreign exchange loss
                
                
                (11,429,327
                )
 
 The
impact on the net loss is equivalent to the net foreign exchange loss presented
in the table above.  There is no impact on other comprehensive
income.
 Interest
rate risk
 
 The
Company is not exposed to material interest rate risk from changes in interest
rates as the interest payments on the Company’s notes and convertible debentures
are fixed payments. Currently, the Company does not use interest rate derivative
instruments to manage exposure to interest rate fluctuations.
 
 Credit
Risk
 
 The
Company is exposed to credit risk, primarily in relation to cash and cash
equivalents, short-term investments, restricted investments and accounts
receivable, all of which are uncollateralized. The Company’s objective is to
minimize its exposure to credit risk in order to prevent losses on financial
assets by placing its cash and cash equivalents with major chartered Canadian
banks, placing its investments in lower-risk bank acceptances of these chartered
Canadian banks and performing regular monitoring of overdue customer balances
and provides allowances for potentially uncollectible accounts
receivables.  All of thesechartered Canadian banks have a risk rating
of B or higher per Moody’s.
   F-41
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
 
 Due
to their short-term nature and placement in lower-risk bank acceptances with
major chartered Canadian banks, cash and cash equivalents, short-term
investments and restricted investments are not exposed to material credit
risk.
  With
respect to accounts receivable, exposure to credit risk varies due to the
composition of individual customer balances.  The Company does not put
credit limits on subscribers; however, since the Company is providing a service,
when a customer’s balance becomes past due, it is easy for the Company to
discontinue a customer’s service as there is no equipment to collect
back.  The Company does monitor customer balances and provides
allowances for potentially uncollectible accounts receivables. The amounts
disclosed in the consolidated balance sheet are net of allowances for doubtful
accounts, estimated by the Company’s management based on prior experience and
their assessment of the current economic environment. The allowance for doubtful
accounts represents the Company’s estimate of incurred losses with respect to
accounts receivable. The main components of this allowance are a specific loss
component related to individual customer exposures and an overall loss component
based on historical trends and the aging of past due balances outside of the
normal course of operations.
 
 The
carrying amount of these financial assets represents the maximum credit
exposure, which at the reporting date was:
  2008
                
                
                
                2007$
                
                
                
                $Cash
                
                
                6,344,793
                
                
                
                9,524,931Short
      term investments
                
                
                11,282,146
                
                
                
                5,281,000Restricted
      investment - letter of credit (note 14)
                
                
                4,000,000
                
                
                
                -Accounts
      receivable
                
                
                5,538,348
                
                
                
                4,904,80327,165,287
                
                
                
                19,710,734
  The
breakdown of the accounts receivable balance at the reporting date
was:
  2008
                
                
                
                2007$
                
                
                
                $Neither
      past due nor impaired
                
                
                4,362,480
                
                
                
                4,262,287Past
      due, not impaired
                
                
                2,123,706
                
                
                
                1,090,493Allowance
      for doubtful accounts
                
                
                (947,838
                )
                
                
                (447,978
                )5,538,348
                
                
                
                4,904,803
  The
allowance for doubtful accounts relates to the impaired accounts receivable. The
Company believes that its allowance for doubtful accounts is sufficient to
reflect the related credit risk.
  The
aging of accounts receivable considered past due, but not impaired, at the
reporting date was:
  2008
                
                
                
                2007$
                
                
                
                $31
      - 60 days
                
                
                346,423
                
                
                
                437,68861
      - 90 days
                
                
                404,070
                
                
                
                103,586Over
      90 days
                
                
                1,373,213
                
                
                
                549,219Allowance
      for doubtful accounts
                
                
                (947,838
                )
                
                
                (447,978
                )1,175,868
                
                
                
                642,515
  No
past due accounts (outside of the normal course of operations) have been
renegotiated with different terms.
  F-42
  Canadian
Satellite Radio Holdings Inc.
 Notes
to Consolidated Financial Statements
 August
31, 2008, 2007 and 2006
  The
activity of the allowance for doubtful accounts for the period is as
follows:
  2008
                
                
                
                2007$
                
                
                
                $Allowance
      for doubtful accounts - beginning of period
                
                
                447,978
                
                
                
                244,426Bad
      debt expense
                
                
                499,860
                
                
                
                203,552Allowance
      for doubtful accounts - end of period
                
                
                947,838
                
                
                
                447,978
 
 The
Company believes that the concentration of credit risk of accounts receivable is
limited as accounts receivable are widely distributed among many subscribers
across Canada.
 
 Fair
Value
  The
carrying value of short-term investments, restricted investments, accounts
payable and accrued liabilities approximates their fair value given their
short-term nature. The carrying value of the senior notes is $103.4 million. The
face value of the senior notes is $107.0 million while its fair value is
approximately $91.0 million. The fair value is determined using the market
prices of the publicly traded senior notes.
 
 The
carrying value of the credit facility is approximately $6.2 million. The face
value of the credit facility is approximately $7.6 million while its fair value
is approximately $6.4 million. The carrying value of the convertible debt is
$15.3 million.  The face value of the convertible debt is $20.0
million while its fair value is approximately $18.0 million. The fair values of
the credit facility and convertible debt is estimated by discounting future cash
flows, including interest payments, and using rates currently available for debt
of similar terms and maturity.
 
 17
                Comparative
      information
  Certain
of the 2007 and 2006 comparative figures have been reclassified to conform to
the classification adopted in the current year.
  F-43