**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM20-F**

 

| o      | ** ** | **Registration  Statement Pursuant to Section 12(b) or 12(g) of The Securities Exchange Act of 1934**                                        |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| **OR** |
| x      | ** ** | **Annual  Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934****For the fiscal year ended August 31,  2007** |
| **OR** |
| o      | ** ** | **Transition  Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934**                                                |
| **OR** |
| o      | ** ** | **Shell  Company Report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934**                                             |

 

**Commission File Number: 333-134004**

 

**CANADIANSATELLITE RADIO HOLDINGS INC.**

(Exact Name of Registrant as Specified in itsCharter)

 

**Not Applicable**

(Translation of Registrant’s Name intoEnglish)

 

**Province of Ontario, Canada**

(Jurisdiction of Incorporation orOrganization)

 

**590 King Street West**

**3rd Floor**

**Toronto, Ontario**

**Canada, M5V 1M3**

(Address of Principal Executive Offices)

 

Securities registered or to be registeredpursuant to Section 12(b) of the Act: None.

 

Securities registered or to be registeredpursuant to Section 12(g) of the Act: None

 

Securities for which there is a reportingobligation 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’sclasses of capital or common stock as of the close of the period covered by theannual report:

 

**20,541,916 Class A SubordinateVoting 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.

oYes x No

 

If this report is an annual or transition report, indicate by checkmark if the registrant is not required to file reports pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934.

oYes x No

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.

xYes o No

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler 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 registranthas elected to follow.

oItem 17 x Item 18

 

If this is an annual report, indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of theExchange Act)

oYes x No

 

 

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**CANADIAN SATELLITE RADIO HOLDINGS INC.**

**FORM 20-F**

 

 
| EXPLANATORY NOTES                                                                                      | 3      |
|--------------------------------------------------------------------------------------------------------|--------|
| FORWARD-LOOKING STATEMENTS                                                                             | 3      |
| INDUSTRY AND MARKET DATA                                                                               | 5      |
| PRESENTATION OF FINANCIAL INFORMATION                                                                  | 5      |
| EXCHANGE RATE INFORMATION                                                                              | 5      |
| **PART I**                                                                                             |   |
| ITEM 1 — IDENTITY OF DIRECTORS,  SENIOR MANAGEMENT AND ADVISERS                         | 6      |
| ITEM 2 — OFFER STATISTICS AND  EXPECTED TIMETABLE                                       | 6      |
| ITEM 3 — KEY INFORMATION                                                                | 7      |
| ITEM 4 — INFORMATION ON THE  COMPANY                                                    | 21     |
| ITEM 4A. —  UNRESOLVED STAFF COMMENTS                                                   | 44     |
| ITEM 5. — OPERATING  AND FINANCIAL REVIEW AND PROSPECTS                            | 44     |
| ITEM 6 — DIRECTORS, SENIOR MANAGEMENT  AND EMPLOYEES                                    | 72     |
| ITEM 7 — MAJOR SHAREHOLDERS AND  RELATED PARTY TRANSACTIONS                             | 84     |
| ITEM 8 — FINANCIAL INFORMATION                                                          | 86     |
| ITEM 9 — THE OFFER AND LISTING                                                          | 86     |
| ITEM 10 — ADDITIONAL INFORMATION                                                        | 87     |
| ITEM 11 — QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK              | 96     |
| ITEM 12 — DESCRIPTION OF  SECURITIES OTHER THAN EQUITY SECURITIES                       | 97     |
| **PART  II**                                                                                           |   |
| ITEM 13 — DEFAULTS, DIVIDEND  ARREARAGES AND DELINQUENCIES                              | 97     |
| ITEM 14 — MATERIAL MODIFICATIONS  TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 97     |
| ITEM 15 — CONTROLS AND PROCEDURES                                                       | 98     |
| ITEM 16 — **[RESERVED]**                                                                | 98     |
| ITEM 16A — AUDIT COMMITTEE  FINANCIAL EXPERT                                            | 98     |
| ITEM 16B — CODE OF ETHICS                                                               | 98     |
| ITEM 16C — PRINCIPAL ACCOUNTANT  FEES AND SERVICES                                      | 98     |
| ITEM 16D — EXEMPTIONS FROM THE  LISTING STANDARDS FOR AUDIT COMMITTEES                  | 99     |
| ITEM 16E — PURCHASES OF EQUITY  SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      | 99     |
| **PART  III**                                                                                          |   |
| ITEM 17 — FINANCIAL STATEMENTS                                                          | 99     |
| ITEM 18 — FINANCIAL STATEMENTS                                                          | 99     |
| ITEM 19 — EXHIBIT                                                                       | 100    |
| SIGNATURE                                                                                              | 102    |
| INDEX TO CONSOLIDATED  FINANCIAL STATEMENTS                                                       |   |

 

2

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**Explanatory Notes**

 

References in this annual report to “we”, “us”, “XM Canada” andthe “Company” refer to Canadian Satellite Radio Holdings Inc. and includeits subsidiary, Canadian Satellite Radio Inc., or CSR Inc., where thecontext requires.

 

XM Canada is our trade name, which has been licensed to us byXM Satellite Radio Holdings Inc., or XM. This annual report containscompany names, product names, trade names, trademarks and service marks of theCompany and other organizations, all of which are the property of theirrespective owners.

 

**Forward-Looking Statements**

 

This annual report contains “forward-looking statements” within themeaning of the United States Private Securities Litigation Reform Act of1995. All statements, other than statements of historical fact, included inthis annual report that address activities, events or developments that weexpect or anticipate will or may occur in the future, including, in particular,statements regarding the Company’s objectives, plans and goals, including itsfuture operating results, economic performance and subscriber recruitmentefforts are or involve forward-looking statements. These forward-lookingstatements are based on our current expectations and our projections aboutfuture events, including our current expectations regarding:

 

•                  ourexpenditures and losses;

 

•                  ourvariable expenses;

 

•                  ourcapital expenditures;

 

•                  thedemand for our services;

 

•                  increasesor decreases in the cost of conducting our business;

 

•                  ourfuture stability and growth prospects;

 

•                  ourability to work with Industry Canada and the CRTC in order to implementsolutions to any existing and future regulatory issues;

 

•                  ourbusiness strategies, the measures to implement those strategies and thebenefits to be derived therefrom; and

 

•                  theoutlook for and other future developments in our affairs or in the satelliteradio industry.

 

3

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These forward-looking statements can sometimes be identified by our useof forward-looking words such as “believe,” “may,” “will,” “anticipate,” “estimate,”“expect,” “plan,” “likely,” “forecast,” “intend” or other similar words orphrases. These forward-looking statements are subject to known and unknownrisks, uncertainties and other factors that could cause our actual results todiffer materially from those contemplated by the statements. Some of theserisks, uncertainties and other factors include:

 

•                  thelimited operating history of our business;

 

•                  ourcompetitive position versus SIRIUS Canada Inc., or SIRIUS Canada, theother licensed satellite radio service provider in Canada, which may havecertain competitive advantages, and versus other forms of audio and videoentertainment;

 

•                  ourreliance on our exclusive relationship with XM for the provision of thesatellite radio service;

 

•                  ourdependence upon third parties, including manufacturers of satellite radios,retailers, automakers and programming providers;

 

•                  thepotential need for additional financing;

 

•                  oursubstantial indebtedness;

 

•                  generaleconomic conditions in Canada;

 

•                  theimpact of any changes in government regulation;

 

•                  theproposed merger between XM and SIRIUS Satellite Radio Inc. or Sirius; and

 

•                  otherfactors as described in “Risk Factors.”

 

Any forward-looking statements are subject to these factors and otherfactors discussed elsewhere in this annual report, including under the section “RiskFactors.” Although the forward-looking statements contained in this annualreport are based on what management of the Company considers to be reasonableassumptions based on information currently available to it, there can be noassurance that actual events, performance or results will be consistent withthese forward-looking statements, and management’s assumptions may prove to beincorrect. The forward-looking statements included in this annual report aremade 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 newevents or circumstances, except as required by law. You are cautioned not toplace undue reliance on forward-looking statements.

 

4

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**Industry and Market Data**

 

This annual report includes market share information and industry dataand forecasts, which we obtained from independent industry publications andsurveys, surveys that we commissioned and internal company surveys. Although webelieve these sources to be reliable, we have not independently verified any ofthe data nor ascertained the underlying economic assumptions relied upontherein. Some data is also based on our estimates, which are derived from ourreview of internal surveys, as well as independent sources. We cannot and donot provide any assurance as to the accuracy or completeness of thisinformation. 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. satelliteradio market, which was obtained from publicly available sources, including thecorporate filings of XM, and SIRIUS Satellite Radio Inc., or SIRIUS, withthe U.S. Securities and Exchange Commission, or SEC, as well as press releasesand corporate websites. XM and SIRIUS do not take any responsibility for thecompleteness or accuracy of such information. In compiling information relatingto XM and SIRIUS, we have relied upon the accuracy of the informationpublicly filed.

 

Information contained on the Company’s website is not part of thisannual report and is not incorporated herein by reference and may not be reliedupon by you.

 

**Presentation of Financial Information**

 

The financial statements included in this annual report are presentedin Canadian dollars. In this annual report, references to “$” or “dollars” areto Canadian dollars and references to “US$” or “U.S. dollars” are toUnited States dollars. See “Exchange Rate Information” below.

 

The financial statements included in this annual report have beenprepared in accordance with generally accepted accounting principles in Canada,or Canadian GAAP. Canadian GAAP differs in some respects fromU.S. generally accepted accounting principles, or U.S. GAAP, and sothese financial statements may not be comparable to the financial statements ofU.S. companies. For a discussion of the principal differences betweenCanadian GAAP and U.S. GAAP as they relate to us, see note 16to our annual audited financial statements which are included elsewhere inthis annual report.

 

**Exchange Rate Information**

 

In this annual report, unless otherwise specified or the contextotherwise requires, all dollar amounts are expressed in Canadian dollars. Forconvenience, in certain places in this annual report, unless otherwiseindicated, we have translated Canadian dollar values to U.S. dollars(or vice versa) using an assumed rate of US$1.00 = $1.06.

 

5

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Thefollowing table sets forth, for each period indicated, the high and lowexchange rates for Canadian dollars expressed in U.S. dollars, theexchange rate at the end of such period and, the average of such exchange rateson each business day during such period, based upon the inverse of the noonspot rate on each business day as reported by the Bank of Canada.

 
| ** **   | ** ** | **12-month period ended August 31,** | ** ** |
|--------------|------------|----------------------------------------------------------|------------|
| ** **   | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|         |       |                                                     |       |   |   |   |   |   |   |   |   |
| Low          |       | 0.8437                                                   |       | 0.8361 |   | 0.7652 |   | 0.7159 |   | 0.6273 |   |
| High         |       | 0.9641                                                   |       | 0.9099 |   | 0.8493 |   | 0.7879 |   | 0.7495 |   |
| Period end   |       | 0.9466                                                   |       | 0.9037 |   | 0.8411 |   | 0.7595 |   | 0.7220 |   |
| Average rate |       | 0.8924                                                   |       | 0.8713 |   | 0.8113 |   | 0.7510 |   | 0.6748 |   |

 

Listedbelow, for each month during the previous six months, are the low and highexchange rates for Canadian dollars expressed in U.S. dollars, based uponthe inverse of the noon spot rate on each business day as reported by the Bankof Canada. On November 23, 2007, the noon spot rate published by the Bank ofCanada was $1.00 per U.S.$1.0117.

 
| ** ** | ** ** | **One month period ended,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **May 31,  2007**                     | ** ** | **June 29,  2007** | ** ** | **July 31,  2007** | ** ** | **August 31,  2007** | ** ** | **September 30,   2007** | ** ** | **October 31,  2007** | ** ** |
|       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| High       |       | 0.9347                                     |       | 0.9452 |   | 0.9641 |   | 0.9525 |   | 1.0069 |   | 1.0527 |   |
| Low        |       | 0.8981                                     |       | 0.9320 |   | 0.9358 |   | 0.9298 |   | 0. 9466 |   | 0.9996 |   |

** **

**PART I**

 

**Item 1 — Identity Of Directors,Senior Management And Advisers**

 

Not applicable.

 

**Item 2 — Offer Statistics AndExpected Timetable**

 

Not applicable.

 

6

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**Item 3 — Key Information**

 

**A.****            SELECTED FINANCIALDATA**

 

The following table presents selected historical financial informationas at August 31, 2007 and 2006, and for the years ending August 31,2007 and 2006 derived from our audited consolidated financial statementsincluded in this annual report, which are comprised of consolidated balancesheets as at August 31, 2007 and 2006 and the consolidated statements ofoperations and deficit and cash flows for each of the years in the three-yearperiod ended August 31, 2007 included in this annual report. Theseconsolidated financial statements have been audited by PricewaterhouseCoopers LLP,an independent registered public accounting firm.PricewaterhouseCoopers LLP’s report on our consolidated financialstatements is included in this annual report. Selected data presented below forthe years ended August 31, 2003, 2004 and 2005 is derived from ourconsolidated financial statements not included in this annual report. Allinformation contained in the following table should be read in conjunction withour consolidated financial statements, the notes related to those financialstatements and the section entitled “Item 5 — Operatingand Financial Review and Prospects.”

 

Our consolidated financial statements have been prepared in accordancewith Canadian GAAP. For a discussion of the principal differences betweenCanadian GAAP and U.S. GAAP, see note 16 to our auditedconsolidated financial statements for the years ended August 31, 2007 and2006 included elsewhere in this annual report.

 
| ** **                                                                     | ** ** | **Year Ended August 31,  (in thousands, except per share amounts)** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2007**                                                                                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                           |       |                                                                                                        |       |   |   |   |   |   |   |   |   |
| **Net Sales**                                                                  |       | $                                                                                                           | 21,244     |   | $ | 6,949 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| **Loss before interest revenue, interest  expense and foreign exchange gains** |       | (76,357                                                                                                     | )          | (99,024 | ) | (6,705 | ) | (1,688 | ) | (315 | ) |
| **Net Loss**                                                                   |       | (85,640                                                                                                     | )          | (102,704 | ) | (6,705 | ) | (1,688 | ) | (315 | ) |
| **Loss per Share**                                                             |       | 2                                                                                                           |       | 3 |   | 17,832 |   | 4,489 |   | 838 |   |
| **Total Assets**                                                               |       | 289,152                                                                                                     |       | 355,846 |   | 3,003 |   | 254 |   | 20 |   |
| **Net Assets**                                                                 |       | 146,856                                                                                                     |       | 227,357 |   | (8,879 | ) | (2,174 | ) | (465 | ) |
| **Capital Stock**                                                              |       | 312,949                                                                                                     |       | 312,595 |   | 20 |   | 20 |   | 20 |   |
| **Number of Shares(1)(2)**                                                     |       | 47,684                                                                                                      |       | 47,625 |   | 0 |   | 0 |   | 0 |   |
| **Dividends declared per share**                                               |       | 0                                                                                                           |       | 0 |   | 0 |   | 0 |   | 0 |   |
| **Net loss per share**                                                         |       | 2                                                                                                           |       | 3 |   | 17,832 |   | 4,489 |   | 838 |   |
|                                                                                |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Notes

 

(1)           Class B Voting Shares adjusted to equivalent Class ASubordinate Voting Shares. (2)           Prior to our initial public offering on December 12, 2005, there were200 common shares issued and outstanding.

 

7

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**B.****                                    CAPITALIZATIONAND INDEBTEDNESS**

 

Not applicable.

 

**C.****            REASONS FOR THE OFFERAND USE OF PROCEEDS**

 

Not applicable.

 

**D.****            RISK FACTORS**

 

*This section describes some of the risks thatcould affect our business, financial condition and results of operation. Thefactors below should be considered in connection with any forward-lookingstatements in this document and with the cautionary statements contained in “Forward-LookingStatements” at the beginning of this document.*

 

*If any of the risks described belowmaterialize, our business, financial condition or results of operation could bematerially and adversely affected. The risks described below are not the onlyrisks facing us and our business. Additional risks and uncertainties notpresently known to us or that we currently consider immaterial may alsomaterially affect our business operations and financial condition.*

 

**Risks Related to Our Business**

 

***Ourcumulative expenditures and losses have been significant and are expected togrow.***

 

We have limited operating history. From our inception, we have incurredcumulative net losses and we expect such losses to increase. We have expendedand will continue to expend significant funds for marketing, developing oursubscriber management systems, maintaining and enhancing our terrestrialrepeater network, programming and distribution contracts, royalty fees and themaintenance of our broadcast and office facilities. In addition, our cumulativelosses and cumulative negative cash flow may continue, and possibly increase,as we incur expenses to grow our subscriber base. If we are ultimately unableto generate sufficient revenues to become profitable and have positive cashflow, you could lose your investment.

 

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***Werely on our exclusive relationship with XM for the provision of the satelliteradio service.***

 

We have an exclusive agreement with XM to provide XM’s satellitedigital audio radio services, or SDARS, in Canada. Our success as a businessdepends on XM’s cooperation and its programming content, satellite network andunderlying technology, as well as XM’s operational and marketing efficacy,competitiveness, finances, regulatory status and overall success in theU.S. Because of our dependency on XM, should XM’s business suffer as aresult of increased competition, increased costs of programming, satellitemalfunctions, regulatory changes, adverse effects of litigation or otherfactors, our business may suffer as well. Furthermore, a breach of ouragreement with XM or a failure by XM to perform its part of the agreement wouldhave detrimental financial consequences to our business. Our agreement with XM,which became effective November 17, 2005, is only for an initial term often years and we have a right to extend this exclusive agreement for anadditional five years only if certain preconditions are satisfied. If we areunable to renew or extend our agreement with XM at the conclusion of theten-year term, it could be impossible to operate our business. Please see belowfor additional risks related to our relationship with XM.

 

***Damageto XM’s satellite network or failure by XM to timely replace its existingsatellites could damage our business.***

 

We rely on XM’s satellite network for the delivery of our service. XMplaced two new satellites into service during the second quarter of 2005 andfourth quarter of 2006, respectively. Its prior two satellites experiencedprogressive degradation problems and now serve as in-orbit spares. During 2007,XM entered into a sale leaseback transaction with respect to the transponderson its fourth satellite. If XM fails to make the required payments under thisarrangement, it could lose the right to use its fourth satellite to broadcastits service. The terms of this arrangement also require that upon theoccurrence of specified events, including an operational failure or loss of itsfourth satellite, then XM will have to repurchase the satellite and it may notreceive sufficient insurance proceeds to do so. An operational failure or lossof its two operational satellites would, at least temporarily, affect thequality of our service, and could interrupt the continuation of our service andharm our business. XM would likely not be able to complete and launch its fifthsatellite before the second half of 2008. In the event of any satellite failureprior to that time, XM would need to rely on its back-up satellites. We cannot assureyou that XM restoring service through either of its backup satellites wouldallow us to maintain adequate broadcast signal strength through the in-servicedate of XM’s fifth satellite, particularly if either of XM’s backup satelliteswere to suffer unanticipated additional performance degradation or experiencean operational failure.

 

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

 

•                  defects indesign or construction;

 

•                  loss of on boardstation-keeping system;

 

•                  failure ofsatellite components that are not protected by back-up units;

 

•                  electrostaticstorms; and

 

•                  collisions withother objects in space.

 

9

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Our network of terrestrial repeaters communicates principally with oneof XM’s satellites. If a satellite fails, we would have to repoint all of ourrepeaters to communicate with another of XM’s satellites. This would result ina degradation of service that could last several days and could harmour business.

 

***Demandfor our service may be insufficient for us to become profitable.***

 

Because we offer a relatively new service, we cannot estimate with anycertainty whether consumer demand for our service will be sufficient for us tocontinue to increase the number of subscribers at projected rates or the degreeto which we will meet that demand. Among other things, continuing and increasedconsumer acceptance of our satellite radio service in Canada willdepend upon:

 

•                  whetherwe obtain, produce and market high quality programming consistent withconsumers’ tastes;

 

•                  thewillingness of consumers, on a mass-market basis, to pay subscription fees toobtain satellite radio service;

 

•                  thecost and availability of XM radios;

 

•                  theacceptance of our subscriber management systems; and

 

•                  themarketing and pricing strategies that we employ and that are employed by ourcompetitors.

 

Any success experienced by satellite radio companies in theU.S. does not guarantee that we will attract and retain customers inCanada. Canadian subscribers will have diverse preferences that may not besufficiently addressed by our originally produced Canadian channels. If demandfor our service does not continue to increase as expected, we may not be ableto generate enough revenues to generate positive cash flow or becomeprofitable.

 

***Wewill be required to pay royalty fees, which may be more costly than expected.***

 

We must maintain music programming royalty arrangements with theSociety of Composers, Authors and Music Publishers of Canada/Société canadiennedes auteurs, compositeurs et éditeurs de musique (SOCAN), The Society for theReproduction Rights of Authors, Composers and Publishers inCanada Inc./Société du droit de reproduction des auteurs, compositeurs, etéditeurs au Canada (SODRAC) Inc. and The Canadian Musical ReproductionRights Agency Ltd. (CMRRA). We anticipate that as our number ofsubscribers increases, these agencies may seek to increase the percentage ofroyalty fees we are required to pay. Royalty fees payable under these agreementsmay be more costly than anticipated and may be significant. As well, we willhave to re-negotiate these arrangements once they come up for renewal.Re-negotiated fees may also be more expensive than current levels.

 

Pursuant to our licensing arrangements, we must contribute based on aprescribed percentage of our revenue each year to the development of Canadiantalent and capabilities. We may not be able to meet these contributionrequirements and, consequently our license may be revoked and we would lose ourability to continue to legally operate in Canada.

 

We are responsible for the negotiation of music programming royaltyarrangements with a number of Canadian copyright collectives. The royaltiespayable to Canadian copyright collectives for the public performance of musicand transfer of music to digital form, will be certified by the Copyright Boardof Canada, or adjudicated by the Copyright Board in the event that we are notable to come to a negotiated arrangement with the Canadian collectives. Thereare no pre-existing tariffs in Canada that govern our consumer subscriptionsatellite radio services. The Copyright Board generally adjudicates copyrightroyalties in arrears. This means that a decision could be issued by theCopyright Board, one or more years after we commenced broadcasting, and suchfees would be retroactive to the commencement of the service in Canada. Ahearing before the Copyright Board regarding proposed tariffs for SOCAN, NRCCand CMRRA/SODRAC has been rescheduled for November 27, 2007. It is unknownhow long after this hearing a written decision of the Copyright Board will berendered. Copyright royalties in Canada are generally payable on the basis of apercentage of gross revenue of the broadcasting service, or might be negotiatedas a “per subscriber” fee. Decisions of the Copyright Board are subject toappeal in the Federal Court of Canada, which could further delay finalizationof copyright fees. In Canada, copyright tariffs are filed with the CopyrightBoard before March 31 of each year, and become effective the January ofthe following calendar year.

 

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***Weneed to obtain rights to programming, which could be more costly thananticipated.***

 

Third-party content is an important part of the marketing of oursatellite radio service. In addition to the content provided to us by XM, wemust develop or acquire content for all Canadian-produced channels on ourservice. Obtaining third-party content can be expensive. We may not be able toobtain and retain the third-party content we need at all or within the costscontemplated by our business plan. In addition, XM may be unable toconsistently obtain third-party content at a reasonable cost or renegotiateprogramming agreements successfully, which may adversely affect our marketingefforts, our reputation and brand, our revenues and our business.

 

***Higherthan expected subscriber acquisition costs could adversely affect our financialperformance.***

 

We are still spending substantial funds on advertising, marketing andsubsidizing costs of radio devices in transactions with car and radiomanufacturers, retailers and other parties to obtain or as part of the expenseof attracting new subscribers. Our ability to achieve cash flow breakeven andprofitability within the expected timeframe or at all depends on our ability tocontinue to maintain or lower these acquisition costs. If the costs ofattracting new subscribers and retaining subscribers are greater than expected,our financial performance and results of operations could be adverselyaffected.

 

***Our inability toretain customers, including those who purchase or lease vehicles that include asubscription 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 oftime, we cannot reliably predict the amount of churn we will experience overthe long term. As such, we have used the experiences of XM as a generalguideline, although our experience in this regard may be different. To theextent our churn is greater than we currently experience and anticipate, it maybe more costly for us to acquire a sufficient customer base to generaterevenues that will enable us to become profitable and reach positivecash flow.

 

In particular, we cannot predict how successful we will be at retainingcustomers who purchase or lease vehicles that include a subscription to ourservice, beyond the promotional period. We do not know if the percentage willchange as the number of customers with promotional subscriptions increases.

 

***Competition fromSIRIUS Canada and other traditional and emerging audio entertainment providerscould adversely affect our revenues.***

 

In seeking market acceptance, we encounter competition for bothlisteners and advertising revenues from many sources, including SIRIUS Canada,other Canadian subscription radio services, Internet based audio providers,direct broadcast satellite television audio service, MP3 players, digitalcable systems that carry audio service and traditional AM/FM radio.

 

Our direct competitor in satellite radio service is SIRIUS Canada, theonly other licensee for satellite radio service in Canada. SIRIUS Canada is ajoint venture between CBC-Radio Canada, Standard Broadcasting and SIRIUS, thesecond largest, by number of subscribers, satellite radio provider inthe U.S.

 

SIRIUS Canada’s application for a satellite radio service was approvedat the same time as ours. SIRIUS Canada launched its satellite radio service onDecember 1, 2005. SIRIUS Canada broadcasts channels and offers programmingthat we do not offer, and SIRIUS Canada’s satellite radio service may beoffered as an option on various Canadian car model brands, certain of which maynot offer our service. The Canadian Radio-television and TelecommunicationsCommission, or CRTC, has also approved CHUM’s application for a license tooperate a terrestrial subscription radio service. SIRIUS Canada and/or CHUM mayoffer a more attractive service or enhanced features, may have strongermarketing or distribution channels, and either or both may gain a competitiveadvantage over us.

 

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In addition, unlike satellite radio, traditional AM/FM radio alreadyhas a well-established and dominant market presence for its services andgenerally offers free broadcast reception supported by commercial advertising,rather than by a subscription fee. Many radio stations offer information programmingof a local nature, such as traffic and weather reports, which we are notpermitted to offer under our satellite radio license. To the extent thatconsumers place a high value on these features of traditional AM/FM radio, weare at a competitive disadvantage to the dominant providers of such audioentertainment services. In the U.S., some radio stations have begun reducingthe number of commercials per hour, expanding the range of music played on theair and experimenting with new formats in order to compete more directly withsatellite radio. Further, radio companies may launch an advertising campaigndesigned to assert the benefits of traditional AM/FM radio, as compared withsatellite radio service.

 

Internet radio broadcasts have no geographic limitations and canprovide listeners with radio programming from around the country and the world.We expect that improvements from higher bandwidths, faster modems and widerprogramming selections and mobile internet service will make Internet radio increasinglycompetitive as well. In light of the increasing popularity of Internet radio,we have added XM Radio Online, an Internet based version of our servicewith increased channel selection, as a free service to our subscribers as wellas offering  it as a stand alone serviceto which individuals may subscribe.

 

The Apple iPod®, a portable digital music player that stores up to20,000 songs, allows users to download and purchase music through Apple’siTunes® Music Store, which offers over 4 million songs, 100,000 podcasts,20,000 audio books, 5,000 music videos, 250 feature films and 350 televisionshows. The iPod® is also compatible with certain car stereos and various homespeaker systems. Our portable digital audio players including those with MP3 capabilitycompete with the iPod® and other downloading technology and devices; and someconsumers may use their digital music players in their vehicles rather thansubscribe to XM Radio.

 

***Our relationshipwith auto manufacturers for installing and distributing satellite radios toconsumers may not result in as many subscribers as we are expecting.***

 

We have entered into several exclusive arrangements with Canadian automanufacturers, including, among others, General Motors of Canada Limited, orGMCL, Honda Canada, Nissan Canada, Toyota Canada, Hyundai Canada, SubaruCanada, Porsche Cars Canada Ltd. and Suzuki Canada, for installation of XMradios in many of these auto manufacturers’ vehicles. We spend a significantamount of money on marketing expenditures towards auto manufacturers’initiatives, and purchasers of these auto manufacturers’ vehicles represents asubstantial proportion of our subscriber base. The customers of automanufacturers with which we have reached agreements may not subscribe or beattracted by our service. If any of these auto manufacturers with which we havereached arrangements, lose market share to manufacturers with whom we do nothave distribution arrangements or the market in general experiences a downturn,then our business may also be adversely affected.

 

***Wemay 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 complete moredetailed testing and receive direct consumer feedback, we may find that werequire more repeaters than originally planned in order to provide a level ofsignal availability that will be acceptable to our customers. To the extent weneed a more robust repeater network than currently planned, our capitalrequirements may be higher than we anticipate and we may need to seekadditional funding either through bank, equity or debt financing. Suchfinancing may not be available and, if available, may not be available oncommercially reasonable terms. Given our current negative cash flow, if weobtain additional financing we will be further leveraged and we may be lesslikely to generate sufficient revenue to repay our debts. As such, you couldlose your investment.

 

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***Wemay need additional funding for our business plan and additional financingmight not be available.***

 

We may need additional financing due to future developments, changes inour business plan or failure of our business plan to succeed, includingincreasing marketing, distribution or programming costs. Our actual fundingrequirements could vary materially from our current estimates. If additionalfinancing is needed, we may not be able to raise sufficient funds on favorableterms or at all. If we fail to obtain any necessary financing on a timelybasis, our ability to execute our current business plan may be limited, and ourbusiness could be adversely affected. As a result, we could default on ourcommitments to creditors or others and may have to seek a purchaser for ourbusiness or assets. See “Risk Factors — Risks Related to our Indebtedness.”

 

***Weaker than expectedmarket and advertiser acceptance of our satellite radio service in Canada couldadversely affect our advertising revenue and results of operations.***

 

Market and advertiser acceptance of our satellite radio service isimportant to the success of our business. Our ability to generate advertisingrevenues is directly affected by the number of subscribers to our satelliteradio service and the amount of time subscribers spend listening to our variouschannels. Our ability to generate advertising revenues also depends on severalother factors, including the level and type of market penetration of ourservice, competition for advertising dollars from other media and changes inthe advertising industry and economy generally. We compete directly foraudiences and advertising revenues with SIRIUS Canada, the other approvedCanadian satellite radio licensee, and traditional AM/FM radio stations, someof which maintain longstanding relationships with advertisers and possessgreater resources than we do, and “new media” including internet, internetradio and podcasts. In addition, our license restricts us from broadcastingmore than six minutes of national advertisements per clock hour on each of ourCanadian- produced channels. Because CRTC regulations limit our ability tooffer our satellite radio service other than to subscribers on apay-for-service basis, certain advertisers may be less likely to advertise onour satellite radio service.

 

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We believe that advertising is a discretionary business expense formany business organizations and industries. Consequently, a potential slowdownin the Canadian economy or in a particular business sector that represents asignificant share of our advertising revenues, could adversely affect ouradvertising revenues and, therefore, our results of operations. Also,advertising on the radio, whether through our satellite service or traditionalradio, may fall out of favor with the advertisers.

 

***Rapidtechnological and industry changes could make our service obsolete.***

 

The satellite radio industry and the audio entertainment industry areboth characterized by rapid technological change, frequent new productinnovations, changes in customer requirements and expectations, and evolvingindustry standards. There is no assurance that one or more of the technologiesthat is utilized by us may not become obsolete. If we are unable to keep pacewith these changes, our business may be unsuccessful. Products using newtechnologies, or emerging industry standards, could make our technologiesobsolete. In addition, we may face unforeseen problems in operating the XMsystem in Canada that could harm our business. Because XM Canada dependson third parties to develop technologies used in key elements of the XM radiosystem, more advanced technologies that we may wish to use may not be availableto us on reasonable terms or in a timely manner. Further, our competitors mayhave access to technologies not available to us, which may enable them toproduce entertainment products of greater interest to consumers, or at a morecompetitive cost.

 

***Our service network,national broadcast studios or other facilities could be damaged by naturalcatastrophes, which would adversely affect our business.***

 

Since our ground-based network of terrestrial repeaters is attached totowers, buildings and other structures around the country, an earthquake,tornado, flood, power outage or other catastrophic event anywhere in Canadacould damage our network, interrupt our service and harm our business in theaffected area. We do not have replacement or redundant facilities that can beused to assume the functions of our repeater network or of our centralproduction and broadcast facility in the event of a catastrophic event. Anydamage to our repeater network would likely result in degradation of ourservice for some subscribers and could result in complete loss of service inaffected areas. Damage to our central production and broadcast facility wouldalso restrict our production of programming and require us to obtainprogramming from third parties to continue our service.

 

***Theunfavourable outcome of pending or future litigation could have an adverseimpact on us.***

 

In theordinary course of business, we become aware from time to time of claims orpotential claims, or may become party to legal proceedings arising out ofvarious matters, such as contract matters, employment related matters, issuesrelating to our repeater network, product liability issues, and copyright,patent, trademark or other intellectual property matters. Third parties maybring suit relating to such matters. We cannot predict the outcome of any suchclaim, potential claim or these lawsuits and legal proceedings with certainty.Nevertheless, we believe that the outcome of any such claim, potential claim orproceeding, of which we are currently aware, even if determined adversely,would not have a material adverse effect on our business, consolidated resultsof operations or financial position.

 

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***Our service could beinterrupted in areas where there is no direct line of sight access to a satelliteor a terrestrial repeater, which would adversely affect our business.***

 

Our service may be unavailable or interrupted from time to time atspecific locations where radios cease to have direct line of sight access to asatellite or a terrestrial repeater (e.g., in tunnels, parking garages, orwithin or next to buildings). Our service could also be subject to occasionalinterference from other broadcasting sites.

 

***Failureof third parties to perform could affect our revenues.***

 

We need to assure proper manufacturing and distribution of XM radiosand the development and provision of programming in connection with ourservice. Many of these tasks are dependent on the efforts and performance ofthird parties that are outside of our control. If one or more of theserequirements are not performed in a satisfactory manner, our revenues could beless than expected and our business may suffer.

 

We rely on third party manufacturers and their distributors tomanufacture and distribute XM radios. If current manufacturers of XM radios,such as Audiovox Electronic Corporation, or Audiovox, Delphi AutomotiveSystems LLC, or Delphi, and Pioneer Electronics, or Pioneer, or goingforward, other manufacturers with whom we enter into agreements for themanufacture of XM radios, fail to develop XM radios for timely commercial sale,at an affordable price and for mass market nationwide distribution, ourrevenues would be less than expected and our business may suffer. In additionto the above mentioned manufacturers of XM radios, we expect that we may relyon others to develop, manufacture and market XM radios for car, home andportable use.

 

***A bankruptcy orfinancial difficulties of a third party with whom we have a significantrelationship could harm our results of operations.***

 

In the event that any other third party with whom we have significantrelationships, 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 arrangementsor otherwise becomes subject to any proceedings under applicable bankruptcylaws or insolvency laws with a trustee, or receiver appointed in respect of asubstantial portion of its property, or in the event that such a third partyliquidates or winds up its daily operations for any reason whatsoever, then ourbusiness and results of operations would likely be materially and adverselyaffected.

 

On October 8, 2005, Delphi and 38 of its domestic U.S. subsidiaries, whichwe refer to collectively as Delphi, filed voluntary petitions for relief underChapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Courtfor the Southern District of New York. Delphi manufactures, in factoriesoutside the United States, XM radios for installation in various brands of GMvehicles. Delphi also distributes to consumer electronics retailers variousmodels of XM radios manufactured abroad. Pursuant to an order of the BankruptcyCourt dated January 5, 2007, Delphi Corporation secured replacementdebtor-in-possession financing up to an aggregate principal amount of $4.5billion. The financing is guaranteed by all of the other Delphi entities, whichare debtors in the Delphi bankruptcy cases and is to be used in part to repay infull certain outstanding pre-bankruptcy loans and all loans and obligationsunder Delphi’s original debtor-in-possession financing. Delphi has also statedthat its overall liquidity (including funds on hand outside the United Statesthat Delphi does not plan to repatriate to fund U.S. operations) will supportits global operations outside the U.S. and help assure the continued adequacyof working capital throughout Delphi’s global business units. Delphi has statedthat its plants should continue normal operations and GM has stated that Delphiexpects no disruption in its ability to supply GM with the systems, componentsand parts GM needs. Delphi has advised us that it expects no disruption in thecontinued supply of XM radios. However, we cannot estimate with any reasonableassurance the impact, if any, on us or GM that may ultimately result fromDelphi’s petition for reorganization under Chapter 11.

 

***We need people withspecial skills to develop and maintain our new service. If we cannot find andkeep these people, our business could suffer.***

 

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We depend on the continued efforts of our executive officers and keyemployees, who have specialized technical knowledge regarding our repeaternetwork, broadcast facilities, information technology systems and radio systemsand business knowledge regarding the radio industry and subscription services.If we lose the services of one or more of these employees, or fail to attractqualified replacement personnel, it could harm our business and our futureprospects.

 

***Our business dependsupon certain on-air talent, the loss of whom could reduce the attractiveness ofour XM service to subscribers and advertisers and could adversely affectour business.***

 

We employ or independently contract with certain on-air talent, such asPhil Esposito and Jeff Fillion, who maintain significant loyal audiences in oracross various demographic groups. The fame of our on-air talent and theirability to retain and grow their respective audiences is a factor in ourability to sell subscriptions and advertising. Our on-air talent may notattract and/or retain the number of subscribers that we anticipate and,further, on-air talent may offend or alienate subscribers that are outside ofthe target audience of such on-air talent. We cannot be certain that our on-airtalent will remain with us or will be able to retain their respectiveaudiences. If we lose the services of one or more of these individuals, andfail to attract comparable on-air talent with similar audience loyalty, theattractiveness of our service to subscribers and advertisers could decline, andour business could be adversely affected.

 

***Consumerscould steal our service.***

 

Like all radio transmissions, the XM radio signal in Canada is subjectto interception. Pirates may be able to obtain or rebroadcast XM radio servicewithout paying the subscription fee. Although XM uses encryption technology tomitigate the risk of signal theft, such technology may not be adequate toprevent theft of the XM Radio signal. If widespread, signal theft could harmour business.

 

***If we fail toimplement effective internal controls meeting the requirements ofSection 404 of the Sarbanes-Oxley Act, it could have a material adverseeffect on our business in the future.***

 

Although we are not currently subject to the requirements ofSection 404 of the Sarbanes-Oxley Act, we are in the process ofdocumenting and assessing our internal control procedures so that we cansatisfy those requirements in the future, which will entail making certainadjustments to our internal control procedures, including adjustments relatedto our computer and accounting systems. We cannot assure you that this processwill not be time-consuming or costly. If we fail to maintain an effectiveinternal control environment, there could be a material adverse effect on ourbusiness, results of operations or financial condition.

 

**Risks Related to our Indebtedness**

 

***We have substantialindebtedness and we may be unable to service our indebtedness.***

 

Subsequent to successful completion of our US$100 million seniornotes offering, our $20 million convertible unsecured subordinated debentureoffering, and the activation of our standby Credit Facility with XM, we havesubstantial indebtedness and significant debt service obligations.

 

As of August 31, 2007 we had a total indebtedness ofUS$100 million (approximately $106 million), under our senior notesand $2,136,400 under our standby Credit Facility with XM. In addition, we havethe ability to continue to borrow up to the $45 million limit under astandby Credit Facility with XM, or the XM Credit Facility.

 

Our substantial indebtedness could have important consequences to you.For example, it could:

 

•                  makeit more difficult for us to satisfy our obligations with respect to the notesand other indebtedness;

 

•                  increaseour vulnerability to adverse economic and industry conditions;

 

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•                  requireus to dedicate a substantial portion of our cash flow from operations to thepayment of our indebtedness, thereby reducing the availability of cash to fundworking capital and capital expenditures and for other general corporatepurposes;

 

•                  limitour ability to obtain financing for working capital, capital expenditures,general corporate purposes or acquisitions;

 

•                  placeus at a disadvantage compared to our competitors that have less debt; and

 

•                  limitour flexibility in planning for or reacting to, changes in our business and inthe satellite radio industry.

 

In addition, the indenture governing the notes and XM CreditFacility contain financial and other restrictive covenants that limit ourability 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 defaultwhich, if not cured or waived, could result in the acceleration of all ofour debt.

 

***The agreementsgoverning our indebtedness contain significant restrictions that limit ouroperating and financial flexibility.***

 

The indenture governing the notes contains covenants that, among otherthings, limit our ability to:

 

•                  incuradditional indebtedness and issue preferred stock;

 

•                  paydividends and make distributions;

 

•                  repurchasestock or repay subordinated indebtedness;

 

•                  makecertain investments;

 

•                  transfer,sell or make certain dispositions of assets or engage in sale and leasebacktransactions;

 

•                  incurliens;

 

•                  enterinto transactions with affiliates;

 

•                  createdividend or other payment restrictions affecting restricted subsidiaries; and

 

•                  merge,consolidate, amalgamate or sell all or substantially all of our assets toanother person.

 

In addition, the XM Credit Facility contains certain restrictivecovenants. In order to continue to draw on the XM Credit Facility, we willbe required to satisfy specific financial ratios and certain financialcondition tests as a condition to the advance of funds. In the event of adefault under this facility, XM could seek to declare all amounts outstandingunder the XM Credit Facility, together with accrued and unpaid interest,if any, to be immediately due and payable. This could result in a cross-defaultunder the indenture governing the notes. If the indebtedness under theXM Credit Facility or the notes were to be accelerated, there can be noassurance that our assets would be sufficient to repay in full thatindebtedness or any of our other indebtedness.

 

***To service ourindebtedness, we require a significant amount of cash. Our ability to generatecash depends on many factors beyond our control.***

 

Our ability to make interest payments on and to repay or refinance ourindebtedness and to fund planned operating and capital expenditures will dependon our ability to generate cash in the future. This, to a certain extent, issubject to general economic, financial, competitive, legislative, regulatoryand other factors that are beyond our control.

 

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We cannot assure you, however, that our business will generatesufficient cash flow from operations to enable us to pay interest on the notes,the convertible debentures and the XM Credit Facility, or repay them atmaturity or to fund our other liquidity needs. We may need to refinance all ora portion of our indebtedness.

 

Our ability to refinance our indebtedness or obtain additionalfinancing will depend on, among other things:

 

•                  ourfinancial condition at the time;

 

•                  restrictionsin the indenture governing the notes and the XM Credit Facility or otheroutstanding indebtedness; and

 

•                  otherfactors, including the condition of the financial markets or the satelliteradio industry.

 

As a result, we may not be able to refinance any of our indebtedness oncommercially reasonable terms, or at all. If we do not generate sufficient cashflow from operations, and additional borrowings or refinancings or proceeds ofasset sales are not available to us, we may not have sufficient cash to enableus to meet all of our obligations, including payments on the notes.

 

***We may be able toincur additional indebtedness, which could further exacerbate the risksassociated with our substantial indebtedness.***

 

We and our subsidiaries may be able to incur substantial additionalindebtedness in the future. Although the XM Credit Facility and theindenture governing the notes contain restrictions on the incurrence ofadditional indebtedness, debt incurred in compliance with these restrictionscould be substantial. The XM Credit Facility permits total borrowingsthereunder of up to $45 million. In addition, the indenture governing thenotes, the indenture governing the convertible debentures, and theXM Credit Facility will not prevent us from incurring obligations that donot constitute indebtedness. If we and our subsidiaries incur additionalindebtedness or other obligations, the related risks that we and they facecould be magnified.

 

**Risks Related To Regulatory Matters**

 

***Failure to complywith CRTC and Industry Canada requirements could damage our business.***

 

As a licensee under the *BroadcastingAct* (Canada), CSR Inc. is subject to CRTC policies andregulations, and the specific conditions of our broadcasting license. Thoseconditions of license require, amongst other things, that we provide: a minimumof eight original Canadian produced programming channels, four of which must beprogrammed in the French language; a minimum of 85% of the total musicselections broadcast in any given week on each Canadian produced channel are tobe Canadian selections and a minimum of 85% of the total spoken wordprogramming content broadcast on all Canadian-produced channels must beCanadian spoken word programming; a maximum of nine non-Canadian-producedchannels for each original Canadian-produced channel that CSR Inc.broadcasts; a contribution each year equal to a minimum of 5% of our gross revenuesmust be made to eligible third parties who are associated with the developmentof Canadian musical and other artistic talent, and of such contributions mustbe divided equally between initiatives in support of English language andFrench language Canadian talent. In addition CSR Inc. must not provide anyoriginal local programming on any of its Canadian-produced channels, and isrestricted to the broadcast of no more than six minutes per hour of nationalcommercial messages on each Canadian-produced channel and is not permitted tobroadcast any local advertising. CSR Inc. is also required to comply withthe provisions of the *Sex-Role PortrayalCode for Television and Radio Programming* and the *Broadcast Code for Advertising to Children,*as well as certain applicable sections of the *RadioRegulations, 1986,* promulgated pursuant to the *Broadcast Act* (Canada). Compliance withthese conditions of license will be monitored by the CRTC and non-compliancecould result in a mandatory order to comply or license revocation.

 

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On February 10, 2006, the CRTC approved CSR Inc.’sapplication in which CSR Inc. voluntarily applied to have its conditionsof license amended to require it to provide a minimum of four of its eightCanadian-produced programming channels in the French language, (two of thefour to be music channels). Since we launched our service in November 2005with four French- language channels this new condition to the license hasalready been satisfied. In addition, other amendments to the license include ifcertain subscriber penetration figures are achieved and CSR Inc. has notadded two additional Canadian-produced programming channels, for a total often, within the three year period following launch of its service,CSR Inc. will increase to 6% (from 5%) of its gross service revenues asits annual contribution to approved third party initiatives in support ofCanadian talent development in both of Canada’s official languages. The twoadditional Canadian-produced programming channels have since been added to ourprogramming lineup.

 

On March 24th, 2006, CSR Inc. submitted an application to theCRTC requesting the amendment of its conditions of license. The requestedamendment would allow for the carry over of a credit into subsequent broadcastyears for contributions to the development of Canadian talent in excess of theprescribed amount. On May 11, 2007, this application was denied by the CRTC.

 

As one of two operators of a commercial satellite radio service inCanada, we are subject to Industry Canada rules and regulations which requireus to meet certain conditions including the power level of radio emissions ourreceivers may produce; coordination of our satellite radio service with radiosystems operating in the same range of frequencies in neighbouring countries;and coordination of our communications links to our satellites or terrestrialrepeaters 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 detrimentalIndustry Canada actions.

 

***TheCRTC 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 yearsand must be renewed prior to August 31, 2011. The CRTC has no obligationto renew the license and if the license is renewed it may be on conditionsdifferent than those existing today. If we are unable to renew this license,then we will be unable to continue legally to carry on a satelliteradio business.

 

***CRTCcontent regulations may impact our ability to acquire and retain subscribers.***

 

Given the conditions of our license imposed by the CRTC, we may not beable to offer a service that is sufficiently competitive to other audioofferings, both in Canada and the U.S. If the XM service in Canada issubstantially different from XM’s offering in the U.S., or if there arespecific channels that are offered in the U.S. but are not offered by usin 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 marketfor U.S. based XM radio has already developed in Canada and its continued strengthmay have a material adverse effect on our business.

 

***Feespayable by us may increase.***

 

Broadcasting license fees are payable by us to the CRTC, based on thebroadcasting regulatory costs incurred each year by the CRTC and other federaldepartments or agencies, including spectrum management costs. A failure to paythese 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 regulatorycosts incurred by the CRTC and other federal departments or agencies.

 

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***Interferencefrom 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 berestricted by Industry Canada in the transmitting power levels or thelocation(s) of the terrestrial repeater facilities that we will require toserve urban areas.

 

***Interferencewith other users could limit our operations.***

 

Industry Canada may require us to correct any interference, at ourcost, to existing broadcasting or land-mobile services (including WCSlicensees) occasioned through the operation of our terrestrial repeaters. Wemay also be required to bear the costs of relocating some incumbent FixedService (FS) Operators within the 2320-2356 MHz band, whose stations arewithin 300 kilometers of the terrestrial repeater transmitter sites. We donot see this as a significant concern as there are currently a small number ofthese operators.

 

We are required to adhere to Safety Code 6 “Limits of Human Exposure toRadiofrequency Electromagnetic Fields in the Frequency Range from 3 kHz to300 GHz” (“Safety Code 6”) prepared by the Radiation Protection Bureau ofHealth Canada in 1999, as amended from time to time. We are required to conductRadio Frequency surveys, at repeater facilities, in order to verify compliancewith Safety Code 6, and if such facilities do not comply with Safety Code 6, wemay be required by Industry Canada to reduce power levels or curtail thetransmissions from the terrestrial transmitters. This could result in serviceinterruption to our subscribers in areas where structures impede directreception of the signals from the XM satellites.

 

**Risks Related To Our Relationship With XM**

 

***Werely heavily on our relationship with XM for continued service.***

 

We have entered into an exclusive license arrangement with XM, pursuantto which it provides our service. We will therefore rely heavily on theservices and relationships provided by XM. A breach of this agreement or afailure by us or XM to perform our respective parts of the agreement could haveserious financial consequences to our business. The agreement with XM, whichbecame effective November 17, 2005, is only for an initial term of tenyears and we have a right to extend this exclusive agreement for an additionalfive years only if certain preconditions are satisfied. If we are unable torenew or extend the agreement with XM at the conclusion of the ten-year term,it could be impossible to operate our business.

 

***Additionalcosts to the business may result based on the outcome of XM’s negotiations withthird party programmers.***

 

We are responsible for the costs of Canadian distribution rights ofthird party programming content. XM, however, has the responsibility fornegotiating distribution arrangements with third party programmers. XM hasdisclosed that third-party content is an important part of marketing the XMservice and obtaining third-party content can be more expensive than formerlyanticipated, given the growth of the satellite radio industry and amounts paidfor other programming. As a result, agreements that XM enters into with third-partysuppliers of programming, including the amendment or renewal of existingagreements, could involve substantial costs to us. It is difficult toanticipate what the additional costs will be, how often they will need to bepaid and how frequently these third party contracts will need to bere-negotiated. These payment obligations could significantly delay our becomingprofitable.

 

***Ourbusiness may be impaired by third party intellectual property rights.***

 

We have the exclusive right and license to commercially offer andprovide to Canadian subscribers certain XM channels that are offered by XM inthe U.S. as part of its satellite digital audio radio services, incombination with those Canadian channels we supply to XM, as transmitted by theXM satellite system or as retransmitted within Canada using terrestrialrepeaters located in Canada. We do not have a direct interest in the technologycomprising the XM system. However, we have agreed to bear a pro rata shareof the cost of licensing necessary third party intellectual property incurredby XM, and this cost could be significant to us. Further, other parties mayhave patents or pending patent applications which will later mature intopatents or inventions which may block XM’s ability to operate its system or maynegatively affect our ability to license our technology from XM. The loss ofnecessary technologies by XM could require XM to obtain substitute technologyof lower quality performance standards, at greater cost or on a delayed basis,which could harm both of our businesses. Litigation that is successfullybrought by a third party against XM could require us to seek alternativelicenses from third parties which may offer services of an inferior qualitywhich could adversely affect our business.

 

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***Proposed Merger of XM and Sirius***

 

On February 19, 2007, XM Satellite Radio Holdings Inc. and SiriusSatellite Radio Inc. entered into an Agreement and Plan of Merger, pursuant towhich XM and Sirius will combine its businesses through a merger of XM and anewly formed, wholly owned subsidiary of Sirius (the “Merger”). The completionof the Merger is subject to various closing conditions, including obtaining theapproval of XM’s and Sirius’ stockholders and receiving certain regulatory andantitrust approvals (including from the Federal Communication Commission, orFCC, and under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, asamended). The time frame for the closing of the Merger is uncertain, if itoccurs at all. It is difficult to anticipate the impact of the Merger, shouldit occur, on our business operations here in Canada. While the Merger ispending, consumers in Canada may delay or defer decisions to become oursubscribers and existing subscribers may experience uncertainty about ourservice.

 

**Risk Related to Our Principal Shareholders**

 

***A small number ofshareholders own a significant percentage of our voting shares and couldsignificantly affect matters requiring a shareholder vote.***

 

Because a small number of shareholders own a significant percentage ofour Subordinate Voting Shares and Class B Voting Shares, they mayinfluence all major corporate decisions and our other shareholders may not beable to affect these corporate decisions. In addition, under the terms of ashareholders agreement, each of CSRI Inc., formerly Canadian Satellite RadioInvestments Inc., and XM has certain board nomination rights and certainconsent rights with respect to fundamental corporate actions. As a result,these shareholders will be able to directly impact our ability to undertake certainactions.

 

**Item 4 — Information on the Company**

 

**A.****            HISTORY ANDDEVELOPMENT OF THE COMPANY**

 

Our legal name is Canadian Satellite Radio Holdings Inc. Our tradename is XM Canada. We were incorporated under the *Business Corporations Act* (Ontario) onJuly 31, 2002, as 2014503 Ontario Inc. Our name was changed to “CanadianSatellite Radio Holdings Inc.” by articles of amendment filed onJuly 7, 2003 and on December 7, 2005 we amalgamated with2087609 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.cdnsatrad.com*. The information foundon our corporate website is, however, not part of this annual report. Our agentfor service of process in the United States with respect to our seniornotes is CT Corporation System, 111 Eighth Avenue, New York,New York 10011.

 

On August 19, 2003, our subsidiary CSR Inc. filed its initialapplication to the CRTC for a broadcasting license to provide subscription-basedsatellite radio service in Canada. On June 16, 2005, the CRTC grantedCSR Inc. a broadcasting license, based on certain conditions outlined inthis annual report. On September 7, 2005, CSR Inc. voluntarilyapplied to amend the CRTC broadcasting license to, among other things, increasethe minimum number of Canadian French-language channels that are offered fromthree to four.

 

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OnNovember 21, 2005, the CRTC advised us that it was satisfied that theconditions to the grant of our broadcasting license were fulfilled, and thatthe license would therefore be issued when: (i) the Department of Industrynotified the CRTC that its technical requirements had been met, and(ii) we confirmed to the CRTC that we were prepared to commenceoperations. The Department of Industry notified the CRTC that its technicalrequirements had been met on November 22, 2005. Similarly, on November 22,2005, we confirmed to the CRTC that we were prepared to commence operations. Asa result of the satisfaction of these conditions, we fulfilled all regulatoryconditions to launch, and we were authorized to launch our service.

 

On November 22, 2005, we launched our English and French satelliteradio service across Canada.

 

On December 12, 2005, we completed our initial public offering.

 

On February 10, 2006, we completed our offering ofUS$100 million senior notes.

 

On February 10, 2006, our application to amend the CRTCbroadcasting license was approved.

 

On July 1, 2007, we became the exclusive satellite radio home of theNHL.

 

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 ornegotiated agreements with various suppliers and distributors, includingretailers, automotive manufacturers, hardware manufacturers, infrastructureimplementation suppliers, and programming content providers. As we grow thebusiness, we will continue to pursue relationships with other distribution,supplier and programming partners.

 

For a description, including the amount invested, of our principalcapital expenditures for fiscal year ended August 31, 2007, see the “Liquidityand Capital Resources” section in our “Management Discussion and Analysis ofFinancial Condition and Results of Operation” included in this annual reportunder “Item 5 — Operating and Financial Review and Prospects.”

 

**B.****            BUSINESS OVERVIEW**

 

**Our Business**

 

We continue in our mission to become the market leader in providingsubscription based satellite radio entertainment to the Canadian market, basedon the number of satellite radio subscribers. During our second fiscal year,which ended August 31, 2007, we achieved 306,000 subscribers, a 102% increaseover the 151,600 subscribers we had as of August 31, 2006. We are the exclusiveCanadian licensee of XM, a pioneer in satellite radio and the leader, by totalsubscribers, in the U.S. satellite radio market. XM has publicly statedthat it had over 8.5 million satellite radio subscribers as ofSeptember 30, 2007. As the exclusive licensed provider of XM SDARS,in Canada, our service leverages XM’s existing satellite network andtechnology, its brand and distribution relationships and significantoperational know-how. Through XM, we currently offer up to 130 channels,which include commercial-free music, as well as news, talk, sports and children’sprogramming, including at least 13 Canadian channels designed and developed byus from our studios in Toronto, Montréal and Québec City. The subscription feefor our service is $14.99 per month, or $12.91 per month for subscribers whosign a 3 year subscription agreement with us. Subscribers are offered adiscount on the monthly subscription rate by prepaying for a fixed term ofone year or greater. Each subscriber also has the opportunity to purchase alimited number of additional subscriptions for $9.99 per month.

 

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Distribution of our satellite radios is primarily through automobileOEMs and consumer electronic retailers.

 

We have multi-year distribution arrangements with several automobileOEMs, including GMCL, Honda Canada, Nissan Canada, Toyota Canada, HyundaiCanada, Subaru Canada and Suzuki Canada. As a result of these agreements, XMsatellite radios represented more than 80 percent****ofall factory-installed satellite radios in 2007 vehicle models and are nowavailable in more than 180 vehicle models for the 2008 model year. Similarto U.S. OEMs, most Canadian OEMs commence their model year during thesummer, such that the 2008 model year started in the summer of 2007. GMCL,Honda Canada and Nissan Canada each have an equity stake in our Company.

 

Under our exclusive 13 year agreement with GMCL, which becameeffective November 10, 2005 at least 90% of GMCL’s vehicle lines for the2007 model year and beyond must offer factory-installed XM radios. GMCL is thesingle largest seller of automobiles in Canada.

 

In addition to our distribution arrangements with automobile OEMs, wehave multi-year distribution agreements with Harley-Davidson motorcycles forthe installation of XM satellite radios, Rogers Communication to provide XM Canadacontent across the Rogers Wireless, Cable and Internet platforms, Avis Rent ACar and Budget Rent A Car to provide the XM service in rental vehicles acrossCanada and Air Canada for exclusive programming of in-flight music channels. XMradios are also available in Canada at national and regional consumerelectronics retailers, such as Best Buy, Canadian Tire, Future Shop, TheSource, and other large national, regional and independent retailers that sellconsumer electronics in Canada. These retailers represent over3,600 stores.

 

On September 12, 2005, we and XM announced an approximatelyUS$100 million ten-year contract to broadcast National Hockey League, orNHL, games as part of the XM service. This ten-year contract was non-exclusiveto us for the first two years and we became the exclusive Canadian satelliteradio provider of NHL games beginning July 1, 2007. We believe that thistransaction will have a significant positive impact on attracting subscribersto the XM service in Canada. We are responsible for a substantial portion ofthe fees payable to the NHL under this agreement.

 

We are one of only two applicants who have received approval from theCRTC, for a Canadian broadcasting license to provide subscription-basedsatellite radio service in Canada. The other approved satellite licenseapplicant is SIRIUS Canada, a joint venture between CBC-Radio Canada, StandardBroadcasting and SIRIUS. A third applicant, CHUM Limited, or CHUM, alsoreceived approval from the CRTC for a broadcasting license to provide asubscription- based radio service in Canada, but only through terrestrialtransmitters.

 

We are broadcasting our service using XM’s existing satellite network,which covers the continental U.S. and Canada. We are supplementing XM’ssatellite coverage with a terrestrial repeater network of approximately62 repeaters, owned and operated by us. Our repeater deployment is focusedon the 16 largest Canadian cities to improve coverage and reduceinterruptions by buildings or other obstacles.

 

Radios designed to serve the car, home, portable and wearable stereomarkets are available in Canada at national and regional consumer electronicretailers under the Audiovox, Delphi and Pioneer brand names. The Delphi XpressRC is the newest addition to our Plug-n-Play radio portfolio, featuring acolour screen with split-screen scrolling and selection functionality, and willbe available to consumers Canada-wide as of November 2007. The initial cost ofany of these radios to the consumer ranges from approximately $30 to $300,inclusive of rebates.

 

For the fiscal period ending August 31, 2007, we generatedrevenues of approximately $21,244,380. Nearly all of our revenue comes fromsubscriptions, activations and sales of radios from the direct fulfillmentchannel. Incremental revenue is generated from advertising spots on thenon-music channels that we program in Canada and U.S. focusedadvertisements that we place on our National Hockey League Talk Channel. As wegrow our subscriber base, we expect that our service will become anincreasingly attractive medium for advertisers to target customers on anationwide basis.

 

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***Exclusive XM Relationship***

 

XM offers innovative and diverse radio programming in digital qualitysound 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 aninitial ten-year agreement with XM, which became effective November 17,2005, providing us with the exclusive rights to sell XM’s SDARS in Canada. XMhas a significant equity interest in our business.

 

Our service currently includes up to 130 channels, includingcommercial-free music, as well as news, talk, sports and children’sprogramming, including at least 117 XM channels and at least13 Canadian channels developed by us. We believe the content provided onthese channels is well suited to Canada’s diverse listening population.

 

We leverage XM’s existing content and existing satellite network, whichsignificantly lowers the capital required to enter and operate in the satelliteradio market. In addition to XM’s satellite network, we utilize XM’sestablished programming and broadcasting facilities and benefit from thesignificant capital invested by XM to date in research and development and ondeveloping its satellite network. XM has agreed to provide us with technicalexpertise in connection with our terrestrial repeater network across Canada andour information technology platform and broadcasting operations.

 

We have had, and will continue to have, the benefit of utilizing XM’sexperience in conducting our business and when making broadcasting, advertisingand other arrangements with third parties. In developing our informationtechnology and business processes, including our call center, we have utilizedXM’s experiences, and will continue to leverage its relationships. We haveworked closely with XM’s management to identify key success factors in bothmarketing to the consumer and training our distribution forces.

 

A summary of the key terms of the operational agreements between us andXM are contained below under the heading “Business — OperationalAgreements.”

 

**Competitive Strengths and Business Strategy**

 

We believe that our business benefits from a number of factors as aresult of our affiliation with XM and the later launch of our service inCanada. In particular, we have had the benefit of observing four years of XM’soperations in the U.S. before launching our service in Canada and we havebeen able to leverage many of the economies of scale XM has already achieved.We believe that other factors benefitting our business includethe following:

 

•      *Low funding requirements.*Since XM’ssatellite infrastructure already covers the continental U.S. and Canada, we arenot required to build, launch, maintain or manage our own satellites, whichsaves us significant time and funding. In addition, as we continue to developour information technology systems, we intend to leverage XM’s experience andexisting broadcasting licenses. This is less expensive, and requires less timethan building our own set of systems. We also believe that our relationshipwith XM, and XM’s experience in rolling out its U.S. service, has allowedus to design an efficient network of terrestrial repeaters. We had the benefitof designing our repeater network and coverage testing Canadian cities with theXM satellites already in place, and as a result, we believe that we were ableto model the optimal repeater sites more effectively.

 

•      XMcontinues to change programming in response to its listenership and offers aunique radio listening experience for Canadians. XM reports that it has a widervariety of programming than it did when it originally launched in theU.S. With the addition of a greater variety of sports channels, includingexclusive coverage of the National Hockey League play-by-play, as well aswell-known talk show personalities, such as Oprah Winfrey and Bob Edwards, XMcontinues to refine its programming lineup. We believe that Canadians have anappetite for specialized radio programming and are eager to have access to thedepth and choice that the XM system provides. We have fully functionalbroadcast studios in Toronto, Montréal and Québec City. These studios are wellequipped to program and broadcast music and talk channels in both Frenchand English.

 

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•      *Well-developed distribution channels.*Accordingto DesRosiers Automotive Consultants Inc., we have secured relationships tofactory install receivers with automotive companies that representapproximately 58% of vehicles sold in Canada in 2006, including General Motors,Honda, Toyota, Hyundai and Nissan. As a result of our relationship with XM, wehave been able to reach comparable distribution arrangements with most of theCanadian counterparts of these auto manufacturers. Also, given the increasedmarket awareness of satellite radio in Canada, retailers in Canada have beenwilling to carry and display satellite radio devices on their shelves.

 

•      *Lower cost and more variety of radios.*Weentered the market when the cost of manufacturing radios has been lessexpensive than it has been historically due to technology improvements andimproved scale of production. This has resulted in lower cost radios to theconsumer, significantly lowering a barrier to satellite radio technologyadoption. This trend continues to reduce subsidies provided by satellite radioservice providers, significantly lowering their cost to acquire newsubscribers. Lower costs also have resulted in a proliferation of stationary,portable and wearable radios and other technological devices equipped for theplaying and recording of music and other audio files. We believe that thisexpansion of devices has dramatically expanded the market opportunity forsatellite radio beyond car stereos.

 

•      *Future growth opportunities.*As wecontinue to build our subscriber business through traditional retail andautomobile OEM channels, we also plan to grow the business by offering specifichardware and services through non-traditional retail channels, including rentalcar companies, national and local businesses, hotel chains, and to boat andairplane owners, commercial airlines, truckers and others. Subscribers throughthese channels will have distinct hardware and service packages, includingweather information for marine and aviation. We expect that subscriber fees maybe different for each of these channels. XM also reports that XM’s telematicsservice offerings are becoming more widespread in the U.S. Telematics,which includes real time data and traffic information through vehiclenavigation systems such as XM NavTraffic, is being integrated into selectHonda/Acura, Toyota/Lexus, Nissan/Infiniti and General Motor models. XM NavTrafficis the U.S. first real-time satellite traffic data service and isavailable in 79 major metropolitan cities across North America, including3 Canadian cities for a monthly fee. We anticipate that the Canadian partnersof these automobile OEMs will promote telematics here in Canada. XM,working with several partners, introduced the XM Advanced Services vehicleat 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. andInfoGation) and other innovations.

 

**Our Product**

 

***ChannelLine-Up***

 

We currently offer up to 130 channels including commercial-freemusic, as well as news, talk, sports and children’s programming, including atleast 117 XM channels and at least 13 Canadian channels designed anddeveloped by us from our studios in Toronto, Montréal and Québec City, for abase subscription fee of $14.99 per month, or $12.91 per month for subscriberswho sign a 3 year subscription agreement, and additional family subscriptionsfor $9.99 per subscription. Subscribers are offered a discount on the monthlysubscription rate by prepaying for a fixed term of one year or greater.

 

Our service offers a broad range of music genres that are popular butcurrently unavailable in many Canadian markets. Hallmarks of our channel lineupin Canada include music from a variety of genres, including:

 

•      *Decades* — individual channels thatbroadcast music hits specific to each decade from the “40s through to the ”90s;

 

•      *Rock* — more than a dozen channels ofdifferent kinds of rock music, as well as exclusive artist interviews and liveperformances;

 

•      *Country* — old-time, classic,contemporary, bluegrass and alternative country;

 

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•      *Pop & Hits* — dedicatedchannels for pop hits from around the world, love songs, movie soundtracks,show tunes and chart toppers;

 

•      *Urban* — rhythm & blues, rapand hip hop;

 

•      *Jazz and Blues* — classical jazz, aswell as contemporary and future fusion hits;

 

•      *Classical* — complete coverage of theclassical spectrum, from the renaissance to today;

 

•      *Dance* — dance music from around theworld; and

 

•      *Lifestyle* — an eclectic mix ofclassical, jazz and rock.

 

Our digital signal transmitted via satellite and our terrestrialrepeater network provide coast-to-coast coverage, which is a particular benefitfor music formats that have strong widespread demand on a nationwide basis buthave 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 arenot available in many radio markets and we believe this makes our serviceappealing to dedicated sports fans and listeners whose tastes are not served byexisting AM/FM radio stations. On September 12, 2005, we and XM announceda US$100 million (approximately $106 million) ten-year contract tobroadcast National Hockey League, or NHL, games as part of the XM service. Theten-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 NHLgames. We believe that the exclusivity of this deal will have a significantpositive impact on attracting subscribers to the XM service in Canada. We areresponsible for a substantial portion of the fees payable to the NHL underthis agreement.

 

In addition to at least 117 XM channels, we also offer at least13 Canadian channels designed and developed by us. These 13 channels,of which 8 are English and 5 are French, are:

 

*EnglishChannels*

 

•      *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 featurescoverage from well-known commentators and former National Hockey League stars;

 

•      *Home IceInfo* — hockey scores, updates and play-by-play coverage of NHLgames;

 

•      *Home PlateInfo* — baseball scores, updates, interviews and player profilesavailable 24/7;

 

•      *Scoreboard*-a 24/7 sports score information channel covering all major league sportsincluding tennis and auto racing.

 

•      *The Verge*— a 24/7 rock music channel featuring new, emerging and recently establishedCanadian rock artists;

 

•      *Laugh Attack*— a comedy channel spotlighting Canadian comedians; and

 

•      *Canada 360*— a 24/7 national news and information channel focused on the latest news,weather, sports, business and entertainment information and issues ofimportance to Canadians.

 

•      *ATN —*a 24/7 channel produced by the Asian Television Network for XM Canada, Canada’spioneer South Asian Broadcaster,  servingthe South Asian community across North America with the latest news, sports andentertainment.

 

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*FrenchChannels*

 

•      Radio Parallel- Featuring “LePirate” Jeff Filion, Radio Parallel focuses on controversial issues ofimportance to Quebecers. Also features NHL play by play.

 

•      Quoi de Neuf — a 24/7national news and information channel focused on the latest news, weather,sports, business and entertainment information and issues of importance toFrancophones.;

 

•      *CalendrierSportif*— a 24/7 sports channel featuring continuously updatedschedules of sporting events taking place North America with a particular focuson Quebec;

 

•      *Air Musique*— a music station featuring selections chosen based on real time subscriberfeedback; and

 

•      *Sur La Route*— a music station featuring a blend of modern and classic pop, folk, rock androll, “chanson” and soul featuring yesterday’s, today’s and tomorrow’s stars.

 

Our music channels are completely commercial-free and our talk andsports channels have a reduced amount of advertising relative to terrestrialradio. We believe that a significant portion of the listening market will payto subscribe to a radio service that provides commercial-free channels andchannels with reduced advertising, as demonstrated by the appeal of limitedperiods of non-stop music used by some traditional AM/FM stations. Of the atleast 13 Canadian content channels that we program, those that have advertisingdo not broadcast more than six minutes of national commercial messages duringany hour, in accordance with our CRTC broadcasting license.

 

We believe that our service is an appealing alternative to traditionalAM/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 onmaximizing listener share within local markets. This limits the types of programmingthey can profitably provide to mass appeal formats. In contrast, ourcoast-to-coast coverage and ability to provide up to 130 channels in eachradio market allows us to aggregate listeners from markets across the country,expanding the types of programming we can provide. The following chartindicates some of the principal differences between XM radio in Canada andtraditional AM/FM radio.

 
| ** **                         | ** ** | **XM Radio in Canada**                                                                                                 | ** ** | **Traditional AM/FM Radio**                    |
|------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|
|                               |       |                                                                                                                        |       |                                           |
| **Programming quality and choice** |       | Up to 130 channels with an extensive  variety of programming                                                           |       | Limited formats in many markets                |
| **Coverage**                       |       | Coast-to-coast coverage in the densely  populated regions of Canada                                                         |       | Local area coverage                            |
| **Audio quality**                  |       | Digital quality sound                                                                                                       |       | Analog AM/FM quality sound                     |
| **Commercial 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  hour |
| **Radio 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 inWashington, District of Columbia; New York City, New York; and at theCountry Music Hall of Fame and Museum in Nashville, Tennessee. We havebroadcasting studios in Toronto and Québec City that have technologicalcapabilities comparable to those of XM’s studios in the U.S. We havecreated our own unique Canadian channels at these Canadian broadcastingfacilities. To that end, we have hired key programming and production staff andon-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 toensure that our programming meets the high standards established by XM.

 

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Accompanying the audio portion of the broadcast, the digital display ofour radios indicates the channel name, number and category. It also can beadjusted to indicate the name of the song and artist, or the name of the talkshow being aired. A personal stock ticker, sports ticker and clock are alsodisplayed on certain radios.

 

XM continues to implement its technology plan, which aims to reduce thecost of XM radios while increasing their functionality. We intend to continueto leverage any cost reductions and technological innovations achievedby XM.

 

***OtherOfferings***

 

Our subscribers and Canadian non-subscribers can now listen to a livestream of selected XM Canada channels over the internet via ourXM Radio Online Service, located at http://listen.xmradio.ca.XM Radio Online is available as part of the basic subscriber package forfree, as a stand alone subscription for $14.99 / month, and as a three-daycomplimentary trial is available to non-subscribers.

 

We continue our partnership with TELUS to deliver select XM Canadachannels to TELUS mobile phone users. As at June 30, 2007, TELUS hadapproximately 5.2 million wireless subscribers. TELUS wireless subscribers canpick a stand alone package of 22 channels for a price of $15.00 or it isincluded in the ‘Spark 25’ Bundle for $25.00.

 

On April 3, 2007, we launched a partnership with Rogers to deliverselect XM Canada channels to Rogers mobile phone users. As at June 30, 2007,Rogers had 6.9 million wireless voice and data subscribers. Rogers wirelesssubscribers can pick a stand alone package of 25 channels for a price of $15.00or it is included in the ‘Vision’ Bundle for $25.00.

 

***Marketing***

 

Our marketing strategy is aimed at educating and building awareness anddemand among potential subscribers in Canada of XM’s SDARS as the leader in thenew satellite radio category, with XM offering appealing features compared totraditional radio.

 

Our promotion of XM’s service in Canada has been and will continue tobe supported by both traditional and non-traditional advertising programsincluding radio, print, outdoor and direct marketing and television, some ofwhich may be co-branded (and potentially co-funded) with our distribution,programming and hardware manufacturer partners. We will focus on educatingconsumers about XM and satellite radio through hands-on experiences at sitessuch as retail outlets, automotive dealerships and various entertainmentvenues. We have and will continue to offer promotional programs geared to theconsumer when the timing and opportunity is appropriate. These opportunitiesmay include discounts on hardware pricing or multi-year subscription fees, orbundling XM with other related services. We also distribute sample programmingand marketing materials at retail outlets, car rental outlets, commercialairlines, concert venues and on the Internet to generate consumer interest.

 

We have allocated significant funds to GMCL to be utilized for mutuallyagreed upon advertising opportunities, dealer promotions, on-site activities,training and vehicle literature. Some examples of these co-brandedopportunities include: direct mail and outbound call programs to new GMCLvehicle owners with information on how to subscribe to the XM service throughus once the three-month trial period is complete; Canadian Auto Show presence;GMCL website representation; and various consumer promotions.

 

We recently began supplying XM content on Air Canada’s existing “enRouteFM”channels in both English and French, which is accessible to all of the 31million passengers Air Canada carries each year. Additionally, we have engagedin various marketing activities both on-board Air Canada’s aircraft and in itsMaple Leaf lounges across the country.

 

XM Canada is also now available free of charge to customers of AvisRent A Car and Budget Rent a Car, with rentals of higher General Motorsvehicles, subject to availability.

 

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***Distribution***

 

We market our satellite radio service through several distributionchannels including automotive manufacturers, national and regional electronicsretailers, car audio dealers and mass retailers. We continue to focus ondistribution of radios through retail distributors and automotive manufacturersto promote rapid market penetration.

 

***AutomobileOEMs***

 

We have multi-year distribution arrangements with several automobileOEMs, including, among others, GMCL, Honda Canada, Nissan Canada, ToyotaCanada, Hyundai Auto Canada, Porsche Cars Canada, Subaru Canada and SuzukiCanada. As a result of these agreements, XM satellite radios represented morethan 80 percent of all factory-installed radios in 2007 vehicle models and arenow available in more than 180 vehicle models for the 2008 model year. Similarto 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 withthese automobile OEM partners, we generally offer a 3-month trial to all new purchasersof vehicles that are XM enabled.

 

Under our exclusive 13 year agreement with GMCL, which became effectiveNovember 10, 2005 at least 90% of GMCL’s vehicle lines for the 2007 model yearand beyond must offer factory installed XM radios. GMCL is the single largestseller of automobiles in Canada A summary of the key terms of our distributionagreement with GMCL is contained below under the heading “Business — GMCLDistribution Arrangement”.

 

Our exclusive multi-year agreement with Honda Canada provides thatHonda will factory install XM satellite radios in Honda and Acura models. HondaCanada began factory installations starting in the  fall of 2007 with the Acura MDX and TL modelsand is expanding to a wider range of products for the 2008 model year toinclude the Acura RDX, the Honda Accord and the Honda Odyssey. Part of theagreement with Honda Canada includes an equity stake in our company. HondaCanada is the country’s fifth largest automobile manufacturer, with sales ofmore than 165,000 vehicles in 2006.

 

Our exclusive 10-year agreement with Nissan Canada includes the factoryinstallation of satellite radios in select 2008 model Nissan vehicles,including the top-selling Nissan Altima, and standard on all 2008 Infinitivehicles. It is anticipated that XM satellite radios will eventually be factoryinstalled in the majority of Nissan’s lineup. Nissan Canada also assumed anequity position in our Company as part of this agreement.

 

We have a 5 year distribution agreement with Toyota Canada. Toyota isthe second largest auto retailer in Canada with sales of over 195,000 vehicles.Toyota auto dealers have already begun installing XM satellite radio receiversin select Toyota/Lexus models.

 

We have an exclusive multi-year distribution agreement with HyundaiAuto Canada. Hyundai is among the best-selling foreign manufacturers in Canada,having sold over 70,000 vehicles in 2006. XM is currently offered as standardequipment on the award winning Azera and Sonata sedans, as well as the VeraCruz cross-over and Sante Fe sport utility vehicles.

 

We have an exclusive multi-year distribution agreement with PorscheCars Canada.

 

Suzuki Canada will factory install satellite radios on the 2008 XL-7JLX and dealer installation kits will be available for the 2007 Grand Vitaraand SX4 models.

 

Subaru Canada will commence factory installation in select 2008 modelyear cars.

 

We have also entered into a multi-year distribution agreement withHarley Davidson Motorcycles.

 

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***National andRegional Consumer Electronics Retailers***

 

XM radios are available at national and regional consumer electronicsretailers, such as Best Buy, Canadian Tire, Future Shop, The Source and otherlarge national, regional and independent retailers that sell consumerelectronics in Canada. These retailers represent over 3,600 stores inCanada. We develop in-store merchandising materials, including fully functionaldisplays for several retailers, and train the sales forces of all majorretailers.

 

**The XM Radio System**

 

***Overview***

 

The XM radio system broadcasts satellite radio signals over Canada andthe United States and their respective coastal waters using radiofrequencies. These radio frequencies are within a range of frequencies calledthe S-Band. XM reports that its radio system is capable of providing highquality satellite services to XM radios in automobiles, trucks, recreationvehicles and pleasure craft, as well as to fixed or portable XM radios andpersonal portable devices. XM reports that the XM radio system uses a networkconsisting of high-power satellites in two orbital slots, an uplink facility,and ground-based repeaters in the U.S. primarily in dense urban areas toprovide coverage where the satellite signal is obstructed.

 

***ConsumerHardware***

 

Subscribersaccess our service through specialized satellite radios that may also receivetraditional AM/FM channels. We launched our service with a focus on three XMradio categories. The XM2go radios were the first portable units available thatreceive the live satellite feeder that can be used in the home, in the car oron the go, and are currently available under the Delphi MyFi and Pioneer innoTMbrand names. The Pioneer innoTM also includes MP3 functionality. Second,Plug-n-Play radios allow subscribers to listen to XM radio in the car, or athome through their home stereo system or portable boom box. We currently marketa broad selection of radios and accessories, across different price points, byDelphi and Audiovox, including the Xpress family and RoadyXT’s. Finally,permanent in-car and home radios allow subscribers to upgrade their existingradios to include XM’s service, and are supported by a variety of radiomanufacturers including Alpine, Audiovox, Pioneer, Polk Audio, Sony, Yamaha andothers. The initial cost of these radios to the consumer ranges fromapproximately $70 to $300, inclusive of rebates. XM radios are available inCanada at national consumer electronics retailers such as Best Buy, FutureShop,  The Source, Canadian Tire and otherlarge national, regional and independent retailers.

 

***AdvancedSatellite Radio Technology***

 

Since the introduction of the first XM radio in 2001, XM reports thatthere has been significant advancement in the selection and features of XMhardware. On August 9, 2005, XM unveiled the Delphi RoadyXT and AudiovoxXpress, the smallest satellite radios ever. In 2006, the Pioneer innoTM withMP3 capabilities, the next generation of XM2go portable satellite radioreceivers, became available in many stores across Canada. A particularlyinnovative 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 fromthe XM + Napster online service. Additionally, at the 2006 ConsumerElectronics Show in Las Vegas, XM introduced several new radios with increasedfunctionality, including MP3 capability.

 

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***TerrestrialRepeaters***

 

The terrestrial repeater system that we have deployed in 16 majorcities across Canada supplements the coverage of the XM satellites in Canada.In some areas, satellite signals may be subject to blockages from tallbuildings and other obstructions. XM reports that due to the satellites’longitudinal separation, in most circumstances where reception is obscured fromone satellite, XM radio’s signal will still be available from another XMsatellite. XM has indicated, however, that in some urban areas with a highconcentration of tall buildings, line-of-sight obstructions to all satellitesmay be more frequent. Terrestrial repeaters are ground-based electronicsequipment installed on rooftops or existing tower structures that receive thesignal from one of the satellites, amplify it and retransmit it at asignificantly higher signal strength to overcome any satellite signalobstruction. XM’s network operating center monitors the terrestrial repeaternetwork to ensure that the XM radio system is operating properly. We utilize XM’sfault detection diagnostics systems to detect various system failures beforethey significantly impact our quality of service.

 

***SatelliteNetwork***

 

XM currently transmits its signal throughout the US and Canada from itstwo 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 failunexpectedly. XM expects to complete construction of another satellite, XM-5,by the end of 2007 for use as a ground spare or to be available for launch inthe event there is an early operations failure with XM-4.

 

**Competition**

 

We face competition for both listeners and advertising dollars. Inaddition to pre-recorded music purchased for playing in cars, homes and usingportable players, we compete most directly with the following providers ofradio or other audio services:

 

*SIRIUS Canada.*Ourdirect competitor in satellite radio service is SIRIUS Canada, the only otherCRTC licensee for satellite radio service in Canada. SIRIUS Canada is a jointventure between CBC-Radio Canada, Standard Broadcasting and SIRIUS, the secondlargest, by number of subscribers, satellite radio provider in theU.S. SIRIUS Canada launched its satellite radio service onDecember 1, 2005. SIRIUS Canada broadcasts channels and offers programmingthat we do not offer, and SIRIUS Canada’s satellite radio service may beoffered as an option on various Canadian car model brands, certain of which maynot offer our service.

 

*CHUM.*CHUM, inconjunction with Astral Media Ltd., received CRTC approval to receive abroadcasting license at the same time that we and SIRIUS Canada receivedapprovals for broadcasting licenses. CHUM’s business plan is, however,different from our business plan, as CHUM’s system would broadcast channels ofaudio programming via terrestrial transmission towers in the L-band. CHUM hasapplied to the CRTC to amend its license conditions to more closely match theconditions of our broadcasting license. Should it launch its service, we expectCHUM to become one of our competitors. Astral Media Ltd. has announcedthat it has agreed to provide certain content to SIRIUS.

 

*Traditional AM/FM Radio.*Ourcompetition also includes traditional AM/FM radio. Unlike XM’s SDARS,traditional AM/FM radio already has a well-established market for its servicesand generally offers free broadcast reception paid for by commercialadvertising rather than by a subscription fee. Also, many radio stations offerinformation programming of a local nature, such as detailed local traffic andweather reports. The AM/FM radio broadcasting industry is highly competitive.Radio stations compete for listeners and advertising revenues directly withother radio stations within their markets on the basis of a variety of factors,including program content, on-air talent, transmitter power, clarity orfidelity of sound, audience characteristics, local program acceptance, and thenumber and characteristics of other radio stations in the market.

 

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*Internet Radio.*Anumber of Internet radio broadcasts provide listeners with radio programmingfrom across the country and around the world. Although we believe that thecurrent sound quality of Internet radio is below standard and may varydepending on factors that can distort or interrupt the broadcast, such asnetwork traffic, we expect that improvements from higher bandwidths, fastermodems and wider programming selection may make Internet radio a moresignificant competitor in the future. There are a number of Internet-basedaudio formats in existence or in development that could compete directly withXM’s SDARS. For example, Internet users with the appropriate hardware andsoftware can download sound files for free or for a nominal charge and playthem from their personal computers or from specialized portable players orcompact disc players. Music in the public MP3 audio standard is readilyavailable and growing with sound files available on the websites of onlinemusic retailers, artists and record labels and through numerous file sharingsoftware programs. These MP3 files can be played instantly, burned to acompact disc or stored in various portable players available to consumers.

 

Recently, podcasting has become a popular method of publishing soundfiles to the Internet, allowing users to subscribe to a feed and receive newaudio files automatically. Podcasting has enabled independent producers tocreate self-published, syndicated radio shows, and has given broadcast radioprograms a new distribution channel.

 

Although presently available formats have drawbacks such as hardwarerequirements and download bandwidth constraints, which we believe make XM radioa more attractive option to consumers, Internet-based audio formats may becomeincreasingly competitive as quality improves and costs are reduced. In light ofthe increasing popularity of Internet radio, we have added XM RadioOnline, an Internet based version of our service with increased channelselection, as a free service to our subscribers, or standalone subscription for$14.99 per month.

 

*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’siTunes® Music Store, which features over 4 million songs, 100,000 podcasts,20,000 audio books, 5,000 music videos, 250 feature films and 350 televisionshows, 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® arecompatible with certain car stereos and various home speaker systems, andcertain automobile manufacturers have entered into arrangements withmanufacturers of portable media players that are expected to enhance thiscompatibility. Availability of music in the public MP3 audio standard has beengrowing in recent years with sound files available on the websites of onlinemusic retailers, artists and record labels and through numerous file sharingsoftware programs. These MP3 files can be played instantly, burned to a compactdisc or stored in various portable players available to consumers. Althoughpresently available formats have drawbacks such as hardware requirements anddownload bandwidth constraints, which we believe could make XM Radio a moreattractive option to consumers, Internet-based audio formats are becomingincreasingly competitive as quality improves and costs are reduced. Also, somerecently introduced XM radio devices have the ability to store and play MP3files.

 

*Cellphones.*Cellular telephones have increased in functionality overthe past few years. Many cell phone providers offer personalized musical ringtones. Some providers also offer streaming music and video services. Thesestreaming services are relatively new to Canadian consumers. We continue ourpartnership with TELUS to deliver select XM Canada channels to TELUS mobilephone users and recently launched a partnership with Rogers to deliver selectXM Canada channels to Rogers mobile phone users. TELUS wireless subscribers canpick a standalone package of 22 channels for a price of $15.00 or it isincluded in the ‘Spark 25’ Bundle for $25.00. Rogers wireless subscribers canpick a standalone package of 25 channels for a price of $15.00 or it isincluded in the ‘Vision’ Bundle for $25.00.

 

*Direct Broadcast Satellite and Cable Audio.*Anumber of companies provide specialized audio service through either directbroadcast satellite or cable audio systems. These services are targeted tofixed locations, mostly in-home. The radio service offered by direct broadcastsatellite and cable audio is often included as part of a package of digitalservices with video service, and video customers therefore generally do not payan additional monthly charge for the audio service. In addition, cable audiosystems typically offer a limited number of channels with little to no livecontent and a high level of repetitive program content, however, thiscould change.

 

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***Recent Developments***

 

We launched our service on November 22, 2005. As of the completionof our second fiscal year, we achieved 306,000 subscribers. XM haspublicly stated that it had over 8.5 million satellite radio subscribers as ofSeptember 30, 2007.

 

**Operational Agreements**

 

***XM LicenseAgreement***

 

We and CSR Inc. have entered into a license agreement with XM(the ”License Agreement”). The following is a summary of certain materialterms of the License Agreement, and is not intended to be complete. Referenceis made to the License Agreement for the full text of its provisions. See “MaterialContracts.”

 

*Overview*

 

The License Agreement gives us an exclusive, non-transferable right andlicense, on the terms set forth in the License Agreement: (i) to offer andprovide to subscribers in Canada at least 72 programming channels, asselected mutually by XM and us, that are offered by XM as part of its basicservices in the U.S., in combination with the XM Canada Channels(as defined below), (ii) to offer and provide to subscribers inCanada certain premium channels, as selected mutually by XM and us, that areoffered 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 thesignal received within Canada from XM’s satellites through our terrestrialrepeater network.

 

Under the License Agreement, we and XM have agreed that we and theywill work together to develop and implement commercially reasonable methods tominimize the number of Canadian gray market subscribers who subscribe to XM’ssatellite 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 atleast one year prior to the termination of the initial term, extend the LicenseAgreement for a further five years, provided that: (i) CSR Inc.’sbroadcasting license from the CRTC has been renewed at the end of the currentCRTC license term without any adverse modification (as described below);and (ii) we are not at such time in breach of any provision of the LicenseAgreement and have not failed to cure any breach of a provision of the LicenseAgreement in accordance with its terms.

 

If CSR Inc.’s license from the CRTC is renewed at the end of itscurrent term, but as part of such renewal is modified by the CRTC in a materialmanner, including without limitation any manner that adversely affects ourability or the ability of XM to carry out the arrangements made under theLicense Agreement, or that increases the Canadian content requirements orimposes additional conditions of license beyond those specified inCSR Inc.’s current CRTC license (as amended to reflect theSeptember 7, 2005 application to the CRTC submitted by CSR Inc.)that, in XM’s reasonable determination, make it technically less feasible oreconomically less attractive in any significant respect to perform under theLicense Agreement, then such modification will be an “adverse modification,”and in such event we shall not have the right to automatically extend theLicense Agreement. If there is such an adverse modification, then under theterms of the License Agreement we and XM have agreed to negotiate in good faithwhether to extend the term of the License Agreement.

 

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*Fees*

 

In consideration for the license granted to us by XM, we must, amongother charges, pay a monthly fee to XM equal to 15% of all subscriber feesearned by us in such month in respect of our basic service, and 50% of the netrevenues earned by us in such month in respect of our premium service(if any), in each case as determined in accordance with GAAP, consistentlyapplied. If in any month we are, on a per subscriber basis, based on the numberof cumulative activations and deactivations, and less any short-termpromotional subscribers, providing our basic service for less than 70% of theamount that XM charges its subscribers for our basic services(as converted into Canadian dollars based on the average exchange rate forsuch month), then for such month we must pay our ongoing subscriber fee as ifwe had received 70% of the amount charged by XM for its basic services in suchmonth. The monthly basic and premium fees must be paid by us on a monthly basisin arrears, with payment for each month to be due by the tenth business day ofthe following month.

 

Under the License Agreement, we must pay XM an activation charge eachtime XM activates a subscriber’s radio identification at our request.

 

All payments that must be made by us under the License Agreement mustbe made without any deduction for taxes. To the extent that we are required towithhold any amount in respect of taxes, other than net income or capitaltaxes, then we must pay such additional amounts as are necessary to ensure thatXM receives a net amount equal to the full amount which it would have receivedhad payment not been made subject to such tax.

 

*ChannelDetermination and Content Costs*

 

We and XM will mutually select the XM SDARS channels that willform part of the basic services and premium services (if any) to beoffered by us. XM has the right to determine the format, nature, content andquality of the channels chosen by XM and us. The parties have agreed, however,that approximately 50 of the 72 XM SDARS channels will bemusic channels.

 

Under the License Agreement, XM has sole responsibility for maintainingrelationships and negotiating agreements with third party programming providersto acquire Canadian distribution rights for the XM SDARS channels to bebroadcast in Canada as part of our basic and premium services. We mustreimburse 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 toCanadian subscribers as part of our basic and premium services.

 

*SubscriberActivation and Deactivation*

 

XM, from time to time, activates and deactivates subscribers to ourbasic service upon our request. XM has agreed that it will process activationand deactivation requests consistent with the level of effort and with thetiming that XM uses for its own subscribers. XM will not, however, have anyliability to us for failures to activate or deactivate subscribers within anyspecified period.

 

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*Third PartyRelationships*

 

Under the License Agreement, we have primary responsibility, inconsultation with XM, for maintaining relationships and negotiatingdistribution agreements for Canada with U.S. based retailers that sell XM’ssatellite radio services within the U.S. and that have retail operations inCanada, as well as for U.S. based airlines, hotels, cable companies andsimilar entities that wish to incorporate XM’s satellite radio services withinthe services offered by such entities to their patrons or customers in Canada.Before entering into such relationships, however, we and XM must discuss thecommission, revenue share or other payment to be paid to each such retailer forgenerating any new subscribers.

 

The License Agreement provides that we will, upon XM’s writteninstructions, authorize one or more automobile manufacturer, radio manufacturerand other OEM to distribute our services within Canada. XM will have primaryresponsibility for maintaining relationships and negotiating distributionagreements for Canada with such third parties, and we will have primaryresponsibility for negotiating joint or co-marketing arrangements with suchthird parties in consultation with XM. Prior to authorizing any such thirdparty to distribute our services, we and XM must mutually agree with respect tothe revenue share or other payment to be paid to each such third party forgenerating any new subscribers, such payments to be set by reference tothen-prevailing market practices with respect to sales of similar types ofservices and to the payments paid by XM with respect to sales of its satelliteradio services within the U.S.

 

We have agreed that with respect to common relationships that we willhave with XM and with radio manufacturers, retail distributors, strategicmarketing entities, technology providers and others, we will cooperate andcoordinate with XM to the extent and in the manner reasonably requested by XMto enable XM to maintain a successful relationship with such person or entityfor the benefit of both our and XM’s service, and to coordinate the terms andconditions for our services with those of XM’s service so as to obtain volumediscounts and consistent arrangements for particular technologies, jointadvertising and marketing, and the like.

 

*Restrictions*

 

The License Agreement provides that our license is subject to certainrestrictions, including the following:

 

(a)           we may only offer our basic service packagein its entirety to our subscribers, and may only offer premium services tocustomers who are subscribers to our basic service;

 

(b)           we may not, without XM’s prior writtenconsent, 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 ourterrestrial repeater network;

 

(c)           we may not provide satellite radio servicesor digital terrestrial radio services in Canada by means of any other satelliteradio or other transmission system without the prior written consent ofXM; and

 

(d)           we must offer our services on a Canada-widebasis, within the coverage of the XM satellites and our terrestrial repeaternetwork.

 

*XM Representations,Warranties and Covenants*

 

Under the License Agreement, XM represents, warrants and covenants tous that:

 

(a)           XM owns or has sufficient rights in and toits satellites, its satellite transmission spectrum and the associatedregulatory licenses, permits and regulatory approvals needed to operate itssatellites in order to grant the license under the License Agreement;

 

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(b)           XM has the full power and authority and hasobtained all necessary rights and/or permissions to grant the licensecontemplated by the License Agreement, including without limitation allnecessary rights from talent or other third parties in order to grant us thelicense to use the XM SDARS channels to be broadcast in Canada as part ofour basic and premium services, and advertising included therein;

 

(c)           XM will use reasonable commercial efforts tomake the XM SDARS channels to be broadcast in Canada as part of our basicand premium services, as well as the XM Canada Channels, available to usfor distribution to our subscribers via broadcast over XM’s satellitesthroughout the footprint of XM’s satellites within Canada twenty-four hours aday, seven days a week, provided that XM shall have no obligations or liabilitywith respect to any satellite or other failures that cause the services to beunavailable within Canada for any period; and

 

(d)           XM will use reasonable commercial efforts tomake the signal quality and strength for the XM SDARS channels to bebroadcast in Canada as part of our basic and premium services, as well as theXM Canada Channels, transmitted between XM’s satellites and the ground ofhigh quality throughout the coverage beam of such satellites within Canada24 hours a day, seven days a week.

 

XM has also agreed that if at any time there is a disruption in thesatellite transmission of our services in the Canadian footprint of XM’ssatellites 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 satellitenetwork system (and not our terrestrial repeater network), XM will keep usadvised 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 feesand expenses, with respect to any third party claim based on (i) anybreach or violation by XM or any of its agents of any of its obligationscontained in the License Agreement, or (ii) any negligence or willfulmisconduct by XM in connection with the License Agreement that results inpersonal injury, death or tangible property damage. There is no indemnity forany loss of XM service, other than as a result of negligence or willfulmisconduct.

 

*Termination*

 

XM may, in its sole discretion, terminate the License Agreement bywritten 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, isnot remedied within 60 days after we receive from XM a written noticeidentifying the breach and requiring it to be remedied or longer if the natureof the cure requires longer, provided we are diligently pursuing the cure;

 

(b)           we fail to pay any material amount payableunder the License Agreement when due and such failure is not remedied within30 days after we receive from XM a written notice identifying the failureand requiring it to be remedied, unless we have, in good faith, disputed inwriting to XM the obligation to pay such amount and deposited the amountspecified in such notice in escrow, and such dispute has not been finallyresolved;

 

(c)           any of the Programming Agreement, TechnicalServices Agreement or Trademark License Agreement expire or are terminated forany reason (other than material default by XM or expiration in accordance withits terms after performance by us has been completed), or we materially breachour share issuance agreement with XM or the Shareholders Agreement;

 

(d)           we fail to obtain distribution rights asneeded to meet our XM Canada Channel commitments by the date that ourservice is launched, or subsequent to that date during the term of the LicenseAgreement, and such failure is not remedied within 60 days (120 daysin the case of a failure to meet such commitments by the date that our serviceis launched) after we receive from XM a written notice identifying such failureand requiring it to be remedied;

 

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(e)           we fail to capture and maintain during theone year period commencing on the later to occur of the second anniversary ofthe date of the License Agreement and the OEM Condition Date (being the firstdate on which we with the assistance of XM have entered into, have been offeredthe opportunity to enter into or are a party to agreements with automobilemanufacturers with an aggregate 33% market share in Canada for the installationof satellite radios in automobiles) and each subsequent one year period duringthe term of the License Agreement (each, a “Contract Year”), on average duringsuch Contract Year, at least: (i) the specified percentage of actual SDARSsubscribers within Canada, which percentage will vary depending upon the numberof subscription radio providers within Canada, or (ii) if less,15 percentage points less than the percentage of actual SDARS subscriberswithin 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 failto meet the applicable subscriber requirements, we shall have a period of oneContract Year to seek to cure such default, and if during the immediatelysucceeding Contract Year our subscribers exceed the applicable threshold inthis paragraph, XM shall not have the right to terminate for theprior failure;

 

(f)            we undergo a change of control, which shallmean 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 theequity of CSR Inc.; or (iii) John I. Bitove holding,directly or indirectly, less than 50.01% of the voting rights or less than thelower of: (x) 33(1)/3% of the equity of CSRI Inc.,or (y) 50% of the number of shares of CSRI Inc. currently held byJohn I. Bitove;

 

(g)           XM is no longer transmitting its SDARSchannels within Canada due to (i) loss or damage (including natural end oflife) or technical problems with respect to XM’s satellites or any otherelement of XM’s satellite network system (including space and/or groundsegments) reasonably needed to make such transmissions, (ii) loss ofapplicable governmental licenses or other required regulatory approvals neededfor XM to continue operating its satellite network system and/or to continuetransmitting within Canada, or (iii) a decision by XM to discontinue, inwhole or in substantial part, offering SDARS;

 

(h)           any CRTC or Industry Canada license, or anyportion thereof, that is required for us to provide our services within Canadaexpires or is terminated, or is challenged and overturned by the Governor inCouncil or the Federal Court of Canada or any other governmental or regulatoryauthority with jurisdiction over such matters, or is modified by the CRTC orIndustry Canada in any material manner, including without limitation any mannerthat adversely affects our or XM’s ability to carry out the arrangements madeunder the License Agreement, or that increases the Canadian contentrequirements or imposes additional conditions of license beyond those specifiedin the license award received by CSR Inc. from the CRTC in June 2005(as modified to reflect the September 7, 2005 application to the CRTCsubmitted by CSR Inc. to the extent such application is approved by theCRTC) that, in XM’s reasonable determination, makes it technically lessfeasible or economically less attractive in any significant respect to performunder the License Agreement, provided that before terminating under thisparagraph following such a modification, XM must seek to conduct good faithnegotiations with us to address any such modification that primarily haseconomic consequences with appropriate changes to the License Agreement;

 

(i)            our business operations are curtailed bydecisions or rulings under applicable law in Canada and in consequence we ceasecarrying on or are compelled to discontinue all or substantially all of ourbusiness in Canada within a period of sixty (60) days or less; or

 

(j)            we have filed a petition in or have beenassigned into bankruptcy or become an insolvent person within the meaning ofany applicable bankruptcy or insolvency legislation, or make any assignment forthe benefit of creditors or make any arrangements or otherwise become subjectto any proceedings under applicable bankruptcy laws or insolvency laws with atrustee, or receiver appointed in respect of a substantial portion of ourproperty, or in the event we liquidate or wind up our daily operations for anyreason whatsoever.

 

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*Other Services*

 

Under the License Agreement XM has agreed that it shall not license anyother person or entity to provide XM’s satellite radio services in Canada, orprovide Canada-focused marketing or promotion of XM’s satellite radio services,without our prior written consent. We and XM have also agreed that we shallhave a right of first refusal with respect to any new non-SDARS introduced byXM in Canada.

 

***XM ProgrammingAgreement***

 

We have entered into a programming agreement with XM (the ”ProgrammingAgreement”). The following is a summary of certain material terms of theProgramming Agreement, and is not intended to be complete. Reference is made tothe 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 overaudio channels in its satellite system and terrestrial repeater network(the ”XM Canada Channels”) in the satellite footprint and over theInternet. So long as we remain in compliance with the Programming Agreement andthe License Agreement, XM will carry the XM Canada Channels as part of itsSDARS service made available to subscribers in both the U.S. and Canada. We willnot receive a fee or other payment for the broadcast of the XM CanadaChannels to XM subscribers.

 

We maintain creative control with respect to the XM CanadaChannels. We have agreed to consult with XM regarding general creativedirection, concerns and issues in connection with the nature, subject andproduction of the XM Canada Channels. Any name branding of the programs onthe XM Canada Channels and the XM Canada Channels themselves and anyrelated slogans (“Channel Brand Names”) will be subject to approval by XM, notto be unreasonably withheld. We will have the rights to the Channel Brand Nameswith respect to Canada and XM will have the rights to the Channel Brand Nameswith respect to all areas outside of Canada. We and XM have licensed the ChannelBrand Names to each other under the Trademark License Agreement.

 

We are entitled to retain substantially all advertising revenuescollected on the XM Canada Channels. In selling advertisements, we haveagreed to comply with certain XM and CRTC policies regarding the amount ofadvertising that can be included in each broadcast hour on non-music channelsand will not include any advertisements on any music-oriented XM CanadaChannel. In addition, advertising included on the XM Canada Channels maynot be used to (i) advertise or promote goods or services that areintended to be used or consumed primarily in the U.S., its territories orpossessions without coordinating with XM in advance and obtaining XM’s approvalto do so, or (ii) advertise or promote other satellite radio broadcasters,or goods or services that could reasonably be deemed detrimental to the imageof our services or XM. We are, however, entitled to place U.S. focusedadvertisements 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. Eitherparty may terminate the Programming Agreement upon written notice to the otherin the event that the defaulting party has materially breached its obligationsunder the Programming Agreement and such breach has not been cured within60 days after written notice thereof is given by the other party. Inaddition, the Programming Agreement will terminate if the License Agreementterminates.

 

Under the Programming Agreement, we and XM have agreed to indemnifyeach other for any losses or damages relating to the development, production orsupply of their respective programming and the content of such programming.

 

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***OtherAgreements***

 

We and XM have also entered into a: (i) repeater purchaseagreement (the ”Repeater Purchase Agreement”); (ii) technicalservices 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, andare not intended to be complete.

 

*Repeater PurchaseAgreement*

 

A total of 60 standard and 18 high power terrestrialrepeaters have already been delivered by XM.

 

The Repeater Purchase Agreement provides that we may at our optionpurchase additional terrestrial repeaters from XM from time to time, providedthat XM has terrestrial repeaters in inventory available for sale. Theagreement is not exclusive, and we are not precluded from ordering repeatersfrom alternative sources (subject to XM’s technical approval) if XM does nothave sufficient quantities available or if widespread defects in repeaterquality are encountered. Any terrestrial repeaters delivered by XM under theRepeater Purchase Agreement are delivered “as is” and without warranty and willbe deemed to be finally accepted by us if we have failed to notify XM of any materialdefects in the terrestrial repeaters within the earlier of (i) 60 businessdays following the date of delivery or (ii) ten business days aftercompletion of the installation and testing of the applicable terrestrialrepeaters.

 

The Repeater Purchase Agreement will be in effect until the earlier ofthe second anniversary of the date of the agreement and the date that XMnotifies us that its inventory of terrestrial repeaters available to be sold tous has been exhausted.

 

*Technical ServicesAgreement*

 

Under the Technical Services Agreement, XM has agreed that it will fromtime to time provide design, engineering, support and technical services forour terrestrial repeater system, as well as information technology andbroadcast operations. In consideration for these services, we have agreed topay a monthly fee, initially set at US$100,000 from September 2005 toDecember 2005. The rate decreased to US$50,000 in January 2006 and toUS$28,000 in April 2006 and to $25,000 in January 2007. The current rateof US$25,000 will continue until December 31, 2007. The parties will thenre-evaluate whether a different monthly rate should apply.

 

In addition to the general services contemplated by the TechnicalService Agreement, we may request from time to time that XM provide servicesfor specific projects not included in the monthly services. These projectrequests will be subject to a specific work order made by us to XM and willbecome binding upon acceptance of the specific work order by XM. In connectionwith any such projects, we will pay XM based on a time and materials basis athourly rates as agreed between the parties.

 

*Trademark LicenseAgreement*

 

Under the Trademark License Agreement, each of XM and we have granted anon-transferable license to use within the XM satellite footprint our and XM’srespective trademarks to the other party in association with our and XM’srespective SDARS. In addition to granting a license to our and XM’s respectivetrademarks, each of XM and we have also granted each other a non-transferablelicense to use any trade name, service mark, logo, design, domain name orbusiness name derived from our and XM’s respective trademarks.

 

The Trademark License Agreement has the same term as the LicenseAgreement, and will automatically be extended if the License Agreementis extended.

 

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***GMCL Distribution Arrangement***

 

CSR Inc., XM and GMCL have entered into an exclusive distributionarrangement (the ”GM Distribution Arrangement”). The following is asummary of certain material terms of the GM Distribution Arrangement, and isnot intended to be complete.

 

Under the GM Distribution Arrangement, GMCL will exclusively distributeXM radios configured for Canadian satellite radio subscription services, andwill install these radios in certain specified General Motors branded Canadianvehicles and market our satellite radio service in Canada. GMCL will usecommercially reasonable efforts to have all purchasers of enabled GeneralMotors vehicles subscribe to our satellite radio service. The GM DistributionArrangement has a term of 13 years from November 10, 2005, theeffective date of the agreement.

 

Under the GM Distribution Arrangement, GMCL must use commerciallyreasonable efforts to make XM radios configured for Canadian satellite radiosubscription services available as a factory-installed option in at leastninety percent (90%) of its vehicle lines in the with the 2007 model year.

 

The GM Distribution Arrangement provides for the payment of a number ofspecific fees by us to GMCL, including a revenue share and an incentivepayment, all as described below. For the first three years of the term of theGM Distribution Arrangement following the launch of our service, all paymentshave been waived by GMCL with the exception of the activation portion of theincentive payment. If we breach any of our material obligations under the GMDistribution Arrangement and fail to cure such breach in accordance with theterms thereof, however, then we must pay to GMCL any amounts that wereotherwise waived by GMCL.

 

The GM Distribution Arrangement authorizes GMCL to offer incentives toinduce new vehicle purchasers to subscribe to our satellite radio service. Aspart of this incentive, GMCL is authorized to offer such purchasers threemonths of free trial service. Under this promotional program, GMCL will pay usour regular subscription fee for the second and third months of this trialservice. We expect that the amounts owing by GMCL to us in respect of thesecond and third months of this trial service will be approximately equal tothe amount owing by us to GMCL in respect of the activation portion of theincentive payment.

 

Under the GM Distribution Arrangement, we have agreed that we will payGMCL an incentive payment for each purchaser of a new General Motors vehiclethat is installed with an XM radio who becomes a subscriber to our satelliteradio service within 12 months of the purchase of such vehicle. Thisincentive payment will consist of an activation charge, which is payable within30 days after the purchase of a new General Motors vehicle that includesan activated XM Canada radio, and a loyalty payment, which is payableafter a purchaser has been a subscriber for three months. The loyalty paymenthas been waived for the first three years of the term of the GM DistributionArrangement following the launch of our service. We have also agreed to payGMCL a revenue share based on the revenue billed to GMCL subscribers by us forour basic satellite radio services. This revenue share will resume after theinitial three year waiver period, including in respect of purchasers who becamesubscribers during the waiver period but who remain subscribers following thewaiver period. As an additional incentive, we have agreed to pay GMCL aone-time lump sum amount if, at the end of the third year of the term, thereare a specified number of GMCL/XM Canada subscribers.

 

The GM Distribution Arrangement also requires us to allocate to GMCLcertain amounts for market support funds, which are to be utilized for mutuallyagreed marketing efforts.

 

The GM Distribution Arrangement provides that any commercialarrangements between us and any other vehicle manufacturer will be no morefavorable 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 upon60 days prior written notice in the event of a breach by the other partyof any of its material obligations under the GM Distribution Arrangement thatis not cured within such period. Each of GMCL and we shall also have the rightto renegotiate certain terms of the GM Distribution Arrangement, or to beexcused from certain obligations under the GM Distribution Arrangement, incertain circumstances and on the occurrence of certain events, including ourfailure to satisfy certain financing conditions or the occurrence of a forcemajeure event. In addition:

 

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(a)           provided that GMCL has used commerciallyreasonable efforts to install radios in General Motors vehicles and market ourservices in Canada, GMCL may be relieved of its exclusivity obligations underthe GM Distribution Arrangement if, four years following initial launch of oursatellite radio services, or for any twelve month period thereafter, andsubject to a three-month cure period, our share of mobile aftermarket SDARSsubscribers in Canada is less than a specified percentage, based on the numberof mobile aftermarket SDARS providers in Canada;

 

(b)           we may trigger a renegotiation of the GMDistribution Arrangement if GMCL elects to install interoperable radios in theabsence of a regulatory requirement; and

 

(c)           provided we maintain a high quality,cost-competitive full channel service to our subscribers, we may trigger arenegotiation (with commercially reasonable efforts to conclude a deal) of theGM Distribution Arrangement five years following launch of our full Canadianservice if, at that time, the cumulative total number of our satellite radioenabled General Motors vehicles sold or leased by GMCL is less than aprescribed amount.

 

Under the GM Distribution Arrangement we and XM have agreed not todirectly or indirectly market, promote or endorse any company that distributesradio hardware of any description on an after-market basis to GMCL’s authorizedmotor vehicle dealers without the prior written consent of GMCL.

 

**Regulatory Matters**

 

*CRTC License.*OnJune 16, 2005, the CRTC approved the application of CSR Inc. for abroadcasting license to offer satellite radio services across Canada subject tocertain conditions set out below. On February 10, 2006, the CRTC approvedamendments to CSR Inc.’s license, as outlined below.

 

In its approval, the CRTC stated that a broadcasting license would begranted to CSR Inc. only when certain conditions had been fulfilled,including CRTC’s approval of the operating agreements between XM and us. OnNovember 21, 2005, the CRTC advised us that it was satisfied that theconditions to the grant of our broadcasting license were fulfilled, and thatthe license would therefore be issued when: (i) the Department of Industrynotified the CRTC that its technical requirements had been met, and(ii) we confirmed to the CRTC that we were prepared to commenceoperations. The Department of Industry notified the CRTC that its technicalrequirements had been met on November 22, 2005. Similarly, onNovember 22, 2005, we confirmed to the CRTC that we were prepared tocommence operations. As a result of the satisfaction of these conditions, wehave fulfilled all regulatory conditions to launch, and we have been authorizedto launch our service.

 

The satellite radio services offered by us are, *inter alia,* subject to the followingconditions:

 

•      CSR Inc.is required to distribute a minimum of eight original Canadian producedchannels, four of which must be French language original Canadian producedchannels.

 

•      CSR Inc.must distribute one Canadian produced channel for every nine non-Canadianproduced channels to be provided by XM, and at no time shall a subscriber beable to receive a package of channels that contains less than 10% of Canadianproduced channels.

 

•      Aminimum of 85% of the total music selections broadcast in any given week on theCanadian-produced channels is required to be Canadian content.

 

•      Aminimum of 85% of the total spoken word programming broadcast on all Canadian-producedchannels in any given week is required to be Canadian spoken word programming.

 

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•      Oneach of the four French-language Canadian produced channels, a minimum of 65%of its vocal musical selections must be French language musical selections.

 

•      Between6:00 am and midnight each week, each Canadian produced music channel isrequired to contain a minimum of 25% of new Canadian musical selections byartists who have not had a musical selection that has reached a position on oneor 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 eachbroadcast year to eligible third parties directly associated with thedevelopment of Canadian musical and other artistic talent, or to otherinitiatives approved by the CRTC for the purpose of Canadian talent development,half of this amount is to be allocated to Canadian French language talent andhalf to Canadian English language talent.

 

•      CSR Inc.is not permitted to broadcast any original local programming on a Canadianproduced channel.

 

•      Nomore than six minutes of national commercial messages are permitted to bebroadcast on the Canadian content channels during any hour and no localadvertising is permitted.

 

•      CSR Inc.is required to comply with applicable requirements of the *Radio Regulations, 1986* promulgated underthe *Broadcasting Act* (Canada),the Canadian Association of Broadcasters, *Sex-RolePortrayal 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 andself-assessments to the CRTC as required by the CRTC.

 

The term of the broadcasting license is six years and the license mustbe renewed prior to August 31, 2011. The broadcasting license does notspecifically set out the parameters of spectrum assignment and related issues,however, Industry Canada and the Department of Canadian Heritage have providedsome guidance in this respect as well as in respect of repeater licensingrequirements.

 

*Amendments to CRTC Broadcast License.*OnFebruary 10, 2006, the CRTC approved CSR Inc.’s application to amendits CRTC broadcasting license to allow it to continue to distribute a minimumof eight original Canadian produced channels, four of which are in the Frenchlanguage and four in the English language. In that application CSR Inc.proposed adding two more Canadian channels, for a total of ten, provided thatcertain conditions are satisfied relating to technology and to CSR Inc.’ssubscription base. The two additional Canadian produced channels have sincebeen added to our programming lineup.

 

On March 24th, 2006, CSR Inc. submitted an application tothe CRTC requesting the amendment of its conditions of license. The requestedamendment would allow for the carry over of a credit into subsequent broadcastyears for contributions to the development of Canadian talent in excess of theprescribed amount. On May 11, 2007, this application was denied by the CRTC.

 

*Foreign Ownership Restrictions.*Weown all of the outstanding shares of CSR Inc., which holds the CRTCbroadcast license under the *Broadcasting Act*(Canada). The Governor General in Council (i.e., the cabinet of theCanadian federal government) has, pursuant to its authority under the *Broadcasting Act* (Canada), issued adirection setting out the legal requirements relating to Canadian ownership andcontrol 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, upto 331/3% of the voting shares and 331/3%of the votes of a parent company which has a subsidiary operating companylicensed under the *Broadcasting Act*(Canada). In addition, up to 20% of the voting shares and 20% of the votes ofthe operating licensee company may be owned and controlled, directly orindirectly, by non-Canadians. The Direction also provides that the ChiefExecutive Officer and 80% of the members of the board of directors of theoperating company must be Canadian. In addition, where the parent company isless than 80% Canadian-owned, the parent company and its directors areprohibited from exercising any control or influence over the programmingdecisions of a subsidiary operating company. There are no restrictions on thenumber of non-voting shares that may be held by the non-Canadians at either theparent 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 factwhether a given licensee is controlled by non-Canadians.

 

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*Spectrum.*InAugust 1998, the governments of both the U.S. and Canada signed a spectrumcoordination agreement with respect to broadcasts in the 2320-2345 MHzbands. In essence, this agreement was an acknowledgement by the Canadiangovernment that U.S. SDARS services would be broadcasting across NorthAmerica in that spectrum, and that in the future, existing Canadian MobileAeronautical Telemetry Services, or MATS, could not claim protection from SDARSinterference. As such, Canada put a moratorium on usage of the SDARS bandwidthwithin Canada.

 

Since our approval to broadcast has been granted by the CRTC, therelevant portion of SDARS bandwidth used by XM in the U.S. has beenauthorized for our usage in Canada.

 

*U.S. SDARS Operators.*IndustryCanada mandated that we coordinate with U.S. SDARS operators at all bordersites where broadcast power is over a prescribed minimum level. As our repeaterdeployment was performed in conjunction with staff at XM, this did not resultin any material issues.

 

*Wireless Communication Services Operators.*IndustryCanada has auctioned off the Wireless Communications Services, or WCS, spectrumbordering 2320-2345 MHz to various telecom enterprises. These auctionswere conducted under a series of policy statements highlighting the possiblefuture existence of terrestrial repeaters, and the operating parameters of suchas described above. As such, on September 21, 2004 Industry Canada issuedthe following policy statement, in the form of a letter written to the CRTC bythe Director Broadcasting, Multi Media Planning and Technical Policy, IndustryCanada:

 

•      SDARSterrestrial repeaters deployed during the initial phase application ofimplementation, i.e., the existing application to the CRTC, for thepurpose of augmenting the satellite coverage within the core urban areas whichmeet the requirements for technical certification will not need to coordinatefurther with WCS operators. In all other cases SDARS terrestrial transmittersexceeding a maximum EIRP of 50 Watts (17 dBW) will need to seek anarrangement with the WCS operator licensed to operate within the coverage areaof the SDARS terrestrial repeater. Written confirmation shall be provided tothe Department. This power level for exemption is under review.

 

We do not see this as a concern as repeaters are typically not requiredoutside urban areas.

 

*Fixed Service (FS) Operators.*IndustryCanada requires us to reach a working arrangement with incumbent FS operatorswithin the 2320-2345 MHz band whose stations are within 300 km of aterrestrial repeater transmitter site. These include the MATS servicesdescribed above. We do not see this as a significant concern as there arecurrently a small number of these operators and the band has all been vacatedin the wake of strong interference from the SDARS operators. Furthermore, veryfew FS operators have become established in urban areas.

 

**System Technology**

 

We have not and will not acquire any intellectual property rights inthe satellites. We do not own the design of XM’s system, including aspects ofthe technology used in communicating from the satellites and certain aspects ofthe 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 asthe “XM” logo and certain XM slogans with the Trademarks Branch of the CanadianIntellectual Property Office. We have an exclusive license from XM to use thesetrademarks in Canada in connection with satellite radio service.

 

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We are in the process of registering the titles of our Canadian contentchannels, as applicable, as trademarks in Canada.

 

**Legal Matters**

 

We are not aware of any litigation outstanding, threatened or pendingas of the date hereof by or against us or relating to our business, which wouldbe material to our financial condition or results of operations.

 

**C.****                                    ORGANIZATIONALSTRUCTURE**

 

We operate our business through our wholly-owned subsidiary, CanadianSatellite Radio Inc., a corporation incorporated under the Canada BusinessCorporations Act (Ontario) on July 6, 2002 as 600455 Canada Inc.It changed its name to “Canadian Satellite Radio Inc.” by articles ofamendment filed on July 7, 2003.

 

**D.****                                    PROPERTY,PLANTS AND EQUIPMENT**

 

Our corporate office is located in leased space at 590 King StreetWest, 3rd Floor, Toronto, Ontario, M5V 1M3.

 

We also lease a broadcast studio at 175 Avenue Road, Toronto,Ontario, M5R 2J2; and office space and broadcast studios at 451 de L’Eglise,3rd Floor, Verdun, Quebec, H4G 2M6.

 

We have 62 terrestrial repeaters located across Canada onproperties we lease from various parties.

 

**Item 4A. — Unresolved StaffComments**

 

None.

 

**Item 5. — Operatingand Financial Review and Prospects**

 

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

# **Management’s Discussionand Analysis of Financial Condition and Results of Operations**

# ** **

*The following management’s discussion andanalysis of the financial condition and results of operations of CanadianSatellite Radio Holdings Inc. (the “Company”) has been prepared as of November14, 2007 at which time 20,541,916 Class A Subordinate Voting shares areoutstanding, and 81,428,133 Class B Voting shares are outstanding. The discussionand analysis should be read in conjunction with our audited ConsolidatedFinancial Statements and Notes included herewith, and with our Management’sDiscussion and Analysis of Financial Condition and Results of Operations andaudited consolidated financial statements and related notes thereto, includedin the Company’s Annual Report for 2007. The financial statements of theCompany are prepared in accordance with Canadian generally accepted accountingprinciples (GAAP) and expressed in Canadian dollars.*

 

*This discussion contains certain informationthat may constitute forward-looking statements within the meaning of securitieslaws. These statements relate to future events or future performance andreflect management’s expectations and assumptions regarding the growth, resultsof operations, performance and business prospects and opportunities of theCompany on a consolidated basis. In some cases, forward-looking statements canbe 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 expressionsconcerning matters that are not historical facts. In particular, statements regardingthe Company’s objectives, plans and goals, including future operating results,economic performance and subscriber recruitment efforts involve forward-lookingstatements. A number of factors could cause actual events, performance orresults to differ materially from what is projected in the forward-lookingstatements. Although the forward-looking statements contained in thisdiscussion are based on what management of the Company considers to bereasonable assumptions based on information currently available to it, therecan be no assurance that actual events, performance or results will beconsistent with these forward-looking statements, and management’s assumptionsmay prove to be incorrect. The Company does not intend and does not assume anyobligation, to update or revise any forward-looking statements to reflect newinformation, future events or otherwise. These forward-looking statements aresubject to risks and uncertainties that could cause actual results or events todiffer materially from expectations. These include but are not limited to therisk factors included in our Annual Report in Form 20-F (“Form 20-F”) for thefiscal year ended August 31, 2007. Readers are advised to review these riskfactors for a detailed discussion of the risks and uncertainties affecting theCompany’s business.*

 

**1.0****       Overview**

 

***1.1 Our Business***

 

We, through our wholly-ownedsubsidiary, Canadian Satellite Radio Inc. (CSR Inc.), are the exclusivelicensed provider of XM satellite digital audio radio services, or SDARS, inCanada. We launched the first SDARS in Canada on November 22, 2005. Our serviceleverages XM’s existing satellite network and technology, its brand anddistribution relationships and significant operational know-how. Through XM, weoffer 130 channels, which include commercial-free music as well as news, talk,sports and children’s programming, and thirteen Canadian channels designed anddeveloped from studios in Toronto, Montréal and Québec City, for an initialbase subscription fee of $14.99 per month.

 

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Our business plan is based onestimates regarding expected future costs and expected revenue. Our costs mayexceed our estimates, and our revenues may be lower than expected. Theseestimates may change and may also be affected by future developments. Any ofthese factors may increase our need for funds, which would require us to seekadditional funding.

 

***1.2 National Hockey League Broadcast Rights***

 

 

**On September 12, 2005, we and XM announced a ten-yearcontract to broadcast National Hockey League, or NHL, games as part of the XMservice. As of July 1, 2007, we are the exclusive satellite radio network ofthe NHL for the next eight seasons. Every team. Everywhere. Exclusively on XM.We will fund a substantial portion of the fees payable to the NHL under thisagreement.**

** **

***1.3 XM Agreements***

 

**On November 17, 2005, we agreed to terms on a number ofagreements with XM which provide us with exclusive rights to offer XM SDARS inCanada.**

** **

**The license agreement requires payment of a fee of 15% onrecognized subscriber revenue for the basic service. We will also pay to XM anadditional fee for any premium services sold to subscribers, an activationcharge, monthly payments for technical support, and will provide XM with theright to use our trademarks and the right to license and transmit to XMsubscribers the channels created by us.**

** **

**We have also obtained a $45 million standby credit facilityfrom XM which can be utilized to finance purchases of terrestrial repeaters orfor the payment of license fees (the “XM Credit Facility”). The facilitymatures on December 31, 2012 and bears an interest rate of 9%. XM has a rightto convert unpaid principal amounts into our Class A Subordinate Voting Shares,subject to regulatory approval. The Company has drawn on the XM Credit Facilityfor the payment of license fees and for interest accrued. As at August 31,2007, we have drawn approximately $2.1 million against this credit facility.**

 

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***1.4 Agreements with Original EquipmentManufacturers***

 

**Based on reports from DesRosiers Automotive ConsultantsInc., we have secured relationships to factory install XM receivers withautomotive companies that represent approximately 944,000 vehicles sold inCanada in 2006, or approximately 58% of the Canadian market. Vehicle sales (inthousands) and market share breakdown are shown below:**

** **

 

 

**On November 30, 2005, we entered into a 13-year exclusivedistribution agreement with General Motors of Canada Limited (“GMCL”) tofactory-install satellite radios in certain GMCL vehicles and to market ourservices. In exchange, we will pay consideration to GMCL that includesinstallation commissions, subscriber commissions, a share of subscription feesfor GMCL subscribers and funds to be used on joint advertising opportunities.On July 16, 2007, we announced that 150,000 General Motors vehicles equippedwith factory-installed satellite radios were on the road.**

** **

 

**In March 2006, the Company entered into an exclusivedistribution agreement with Honda Canada Inc. (“Honda”) for 8 years. OnSeptember 6, 2007, we announced that Honda’s 2008 model year lineup willinclude XM Satellite Radio as factory-installed feature on the Honda Accord andthe redesigned 2008 Honda Odyssey. We also announced that XM will be a standardfeature on the Acura RDX, Acura CSX with a navigation system, Acura MDX andAcura TL.**

 

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**In March 2006, the Company entered into an exclusive distributionagreement with Nissan Canada Inc. (“Nissan”) for 10 years. On September 4,2007, we announced that Nissan will offer new car buyers XM Satellite Radio asa factory-installed option on the entire 2008 vehicle line up, and that every2008 Infiniti model will have XM Satellite Radio as a standard,factory-installed feature.**

** **

 

**InMay 2006, the Company entered into a 5-year agreement with Toyota Canada Inc (“Toyota”)to factory-install satellite receivers in certain Toyota vehicles. On August13, 2007, we announced that XM Satellite Radio will be available as a standardfeature in the luxury flagship hybrid Lexus LS 600h L. Lexus of Canada is alsointroducing XM Satellite Radio exclusively as a factory-installed feature inthe Lexus LS 460. This distribution agreement includes the right to loyaltycommissions in lieu of the extended trial period Toyota customers currentlyreceive.**

** **

 

**InDecember 2006, the Company entered into an exclusive multi-year distributionagreement with Hyundai Auto Canada (“Hyundai”) to factory-install satellitereceivers in several Hyundai models. The 2007 Hyundai Sonata was the firstvehicle in the mid-size segment of the Canadian market to offer satellite radioas standard equipment on all models. On October 2, 2007, Hyundai added XM asstandard equipment on the 2008 model year Hyundai Santa Fe crossover utilityvehicle, joining the previously announced Sonata, Veracruz and Azera.**

** **

***1.5 Significant External Factors***

 

Our results of operations,business prospects and financial condition are subject to a number of risks anduncertainties, and are affected by a number of factors outside of the controlof our management.

 

Our future success will dependin large part on our ability to market and sell subscriptions. Successfulcommercialization of the XM satellite radio system will depend on a number offactors, including achieving sufficient demand among Canadian subscribers andour ability to successfully market and distribute the service at its projectedselling price. The emergence of new or existing products as competition willalso affect our future success.

 

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We rely on XM for the provisionof our satellite radio service. Our success will depend on XM’s cooperation andprogramming content, satellite network and underlying technology, as well as XM’soperational and marketing efficiency, competitiveness, finances, regulatorystatus and overall success in the U.S. Because of our dependency on XM, shouldXM’s business suffer as a result of increased competition, increased costs ofprogramming, satellite malfunctions, regulatory changes, adverse effects oflitigation or other factors, our business would suffer as well.

 

Please refer to Form 20-F, forthe fiscal year ended August 31, 2007, for additional risk factors.

 

***1.6 U.S. Merger***

 

OnFebruary 19, 2007, XM Satellite Radio and Sirius Satellite Radio in the UnitedStates announced their intention to merge subject to U.S. shareholder andgovernment approval. As XM and Sirius seek U.S. regulatory approval, we willdiligently review the possible alternatives available to the Company to benefitour shareholders and customers. At this point in time it is unclear how thisannouncement will impact our business.

 

***1.7 $20 million Convertible Debt Offering***

 

OnSeptember 12, 2007, we closed a private placement of $20 million aggregateprincipal amount of convertible unsecured subordinated debentures due September12, 2014 (the “Debentures”). The Debentures bear interest at a rate of 8.0 percent per annum payable semi-annually in arrears on December 31 and June 30.Each debentureholder shall have the option to receive such interest either inthe form of cash or Class A Subordinated Voting Shares of CSR. At any timeprior to September 12, 2014, the Debentures will be convertible at a conversionprice of $5.92 at the holders’ option into Shares of CSR which is equal to aconversion ratio of 168.919 Shares per $1,000 principal amount of Debentures,subject to adjustment in certain circumstances.

 

**2.0Vision & Strategy**

 

TheCompany’s vision is to be the leading premium digital audio entertainment andinformation service provider in Canada. Our strategy is founded on theprinciples of acquiring subscribers in the near and long term in the most costeffective manner. We will accomplish this through building awareness for thisnew and emerging category and converting that interest into subscribersutilizing the OEM, retail, direct and other ancillary sales channels. TheCompany will utilize advertising and promotional platforms both on a massmarket and on a highly targeted basis through point of sale (POS) in ourdistribution channels. We will also utilize our unique programming assets, suchas our exclusive broadcasting agreement with the NHL, our NHL Home Ice channel,as well as our English and French music channels to promote XM in communitiesacross the country. These XM Canada originally-produced, owned and controlledchannels will provide unique programming and marketing opportunities both fromstudio facilities in Montréal, Toronto and Québec City, and on a mobile remote basis, thus allowing sampling opportunities in themarketplace. The Company is focused on achieving positive operating income asquickly as possible by maximizing our revenues through subscriptions,advertising and other ancillary opportunities as well as maintaining effectivecost controls, managing subscriber acquisition costs and by creating along-term customer base through quality service. We believe that a premiumservice will attract a premium customer.

 

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**3.0****       Operating Definitions**

 

3.1 *Self-Paying**Subscribers*– Self-Paying Subscribers are those who are receiving and have agreed to payfor our satellite radioservice through a credit card, prepaid card or invoice. Radioreceivers that are revenue generating are counted individually as Self-PayingSubscribers.

 

3.2 *Other PayingSubscribers –*Other Paying Subscribers include: subscriberscurrently in an OEM trial period and vehicles factory-activated with the XMservice, whereby automakers have agreed to pay for a portion or all of thetrial period service; and Partnership Subscribers, which include those who areaccessing a portion of our programming through other subscription services thatwe are partnered with. With respect to Partnership Subscribers, in exchange forproviding the programming, we receive a portion of the monthly revenuecollected by our partners, on a per subscriber basis. Revenue generated fromOther Paying Subscribers contributes to Other Revenue in our Results fromFinancial Operations.

 

3.3 *OEMPromotional Subscribers* – OEM Promotional Subscribers includesubscribers in the OEM trial period (generally a three-month period) where noneof the trial is paid for by automakers, and all subscribers in the OEMpost-trial period. The OEM post-trial period is the three-month periodfollowing the OEM trial period where we continue to attempt to convertsubscribers into Self-Paying Subscribers.

 

Other Paying Subscribers and OEMPromotional Subscribers are not included in our reporting of SubscriptionRevenue, ARPU, Cost per Gross Addition, Subscriber Acquisition Costs and SAC.

 

3.4 *SubscriptionRevenue* - Our revenue consists primarily of monthly subscriptionfees for our satellite audio service charged to consumers, commercialestablishments and fleets, which are recognized as the service is provided. Promotionsand discounts are treated as a reduction to revenue over the term of the planpurchased by the subscriber. Subscription revenue growth is predominantlydriven by the growth in our subscriber base but is affected by fluctuations inthe percentage of subscribers in our various discount plans and rate changes. Additionally,the timing of subscriber additions affects comparability between years.

 

3.5 *SubscriberAcquisition Costs and SAC –* Subscriber acquisition costs includesubsidies and distribution costs and net costs related to equipment sold directto the consumer. Subscriber acquisition costs are divided by Self-Paying grossadditions for the period to calculate what we refer to as “SAC”. SAC is ameasure of operational performance and not a measure of financial performanceunder generally accepted accounting principles. In our financial statements,most of our SAC costs are captured in Marketing.

 

3.6 *Cost PerGross Addition (“CPGA”)*– CPGA costs include the amounts in SAC, aswell as Advertising and marketing, which includes advertising, media and otherdiscretionary marketing expenses. CPGA costs do not include the costs ofmarketing staff. Cost Per Gross Addition is a measure of operationalperformance and not a measure of financial performance under generally acceptedaccounting principles. CPGA costs are primarily captured by the combination ofSubsidies & distribution, Advertising & marketing, plus the negativemargins from equipment sales. These costs are divided by the Self-Paying grossadditions for the period to calculate Average CPGA.

 

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3.7 *AverageMonthly Subscription Revenue Per Subscriber (“ARPU”)* – Averagemonthly subscription revenue per subscriber is derived from the total of earnedsubscription revenue (net of promotions and rebates) divided by the monthlyweighted average number of Self-Paying Subscribers for the period reported. Averagemonthly revenue per subscriber is a measure of operational performance and nota measure of financial performance under generally accepted accountingprinciples. Average monthly subscription revenue per subscriber will fluctuatebased on promotions, changes in our rates, as well as the adoption rate ofannual and multi-year prepayment plans, multi-radio discount plans (such as thefamily plan), commercial plans and premium services.

 

3.8 *AdjustedOperating Loss* – Adjusted Operating Loss is defined as Operatingloss before the undernoted excluding amortization, stock-based compensation toemployees, directors, officers and service providers, and non-cash costs paidby our parent company. We believe that Adjusted Operating Loss, as opposed toOperating loss or Net loss, provides a better measure of our core businessoperating results and improves comparability. This non-GAAP measure should beused in addition to, but not as a substitute for, the analysis provided instatement of operations. We believe Adjusted Operating Loss is a useful measureof our operating performance and is a significant basis used by our managementto measure the operating performance of our business. While amortization andstock-based compensation are considered operating costs under generallyaccepted accounting principles, these expenses primarily represent non-cashcurrent period allocation of costs associated with long-lived assets acquiredor constructed in prior periods and non-cash employee and service providercompensation. Costs paid by parent company are non-cash costs related to thelicence application process and are not related to ongoing operations of thebusiness. Adjusted Operating Loss is a calculation used as a basis forinvestors and analysts to evaluate and compare the periodic and futureoperating performances and value of similar companies in our industry, althoughour measure of Adjusted Operating Loss may not be comparable to similarlytitled measures of other companies. Adjusted Operating Loss does not purport torepresent operating loss or cash flow from operating activities, as those termsare defined under generally accepted accounting principles, and should not beconsidered as an alternative to those measurements as an indicator of ourperformance.

 

We do not report AdjustedOperating Loss for periods prior to fiscal 2006 as we were a development stagecompany focused on obtaining a licence from the CRTC. 

 
| ** **                                                               | ** ** | **Fiscal Year 2007** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------|------------|
| **($ 000’s)**                                                  | ** ** | **Q1**                         | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| Reconciliation  of Loss before the undernoted to Adjusted Operating Loss |       |                           |       |   |   |   |   |   |   |
| Operating  loss before the undernoted                                    |       | (19,286                        | )          | (22,292 | ) | (16,157 | ) | (18,622 | ) |
| Add back  non-Adjusted Operating Loss items included in Operating loss   |       |                           |       |   |   |   |   |   |   |
| Amortization                                                             |       | 5,602                          |       | 5,603 |   | 5,606 |   | 5,599 |   |
| Stock-Based  Compensation                                                |       | 845                            |       | 842 |   | 720 |   | 736 |   |
| Costs paid  by parent company                                            |       | 49                             |       | 51 |   | 52 |   | 53 |   |
| ** **                                                               | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Adjusted  Operating Loss                                                 |       | (12,790                        | )          | (15,796 | ) | (9,779 | ) | (12,234 | ) |

 

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| ** **                                                               | ** ** | **Fiscal Year 2006** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------|------------|
| **($ 000’s)**                                                  | ** ** | **Q1**                         | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| Reconciliation  of Loss before the undernoted to Adjusted Operating Loss |       |                           |       |   |   |   |   |   |   |
| Operating  Loss before the undernoted                                    |       | (14,607                        | )          | (44,400 | ) | (19,188 | ) | (20,828 | ) |
| Add back  non-Adjusted Operating Loss items included in Operating loss   |       |                           |       |   |   |   |   |   |   |
| Amortization                                                             |       | 479                            |       | 4,713 |   | 5,253 |   | 5,470 |   |
| Stock-Based  Compensation                                                |       | 0                              |       | 22,245 |   | 691 |   | 759 |   |
| Costs paid  by parent company                                            |       | 2,863                          |       | 0 |   | 0 |   | 186 |   |
| ** **                                                               | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Adjusted  Operating Loss                                                 |       | (11,265                        | )          | (17,443 | ) | (13,244 | ) | (14,413 | ) |
|                                                                     |       |                           |       |   |   |   |   |   |   |

 
| ** **                                                               | ** ** | **12 Months Ended August 31,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| **($ 000’s)**                                                  | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| Reconciliation of Loss before the  undernoted to Adjusted Operating Loss |       |                                               |       |   |   |
| Operating Loss before the undernoted                                     |       | (76,357                                            | )          | (99,024 | ) |
| Add back non-Adjusted Operating Loss items  included in Operating loss   |       |                                               |       |   |   |
| Amortization                                                             |       | 22,409                                             |       | 15,914 |   |
| Stock-Based Compensation                                                 |       | 3,144                                              |       | 23,695 |   |
| Costs paid by parent company                                             |       | 205                                                |       | 3,049 |   |
|                                                                     |       |                                               |       |   |   |
| Adjusted Operating Loss                                                  |       | (50,599                                            | )          | (56,366 | ) |

 

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**4.0Results from Financial Operations**

 

The following selectedfinancial information is derived from our consolidated financial statements foreach of the three years ended August 31, 2007, 2006 and 2005. The summaryinformation should be read in conjunction with our consolidated financialstatements and notes included herewith. 

 
| ** **                                  | ** ** | **Year ended August 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|
| **($000’s  except per share amounts)** | ** ** | **2007**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(Cdn $)**                              | ** ** | **(Cdn $)** | ** ** | **(Cdn $)** | ** ** |
| Revenue                                     |       | 21,244                                   |       | 6,949 |   | 0 |   |
| Net loss for the year                       |       | (84,640                                  | )          | (102,704 | ) | (6,705 | ) |
| Basic and fully diluted loss per share      |       | 2                                        |       | 3 |   | 17,883 |   |
| Total assets                                |       | 289,152                                  |       | 355,846 |   | 3,003 |   |
| Total long-term debt                        |       | 107,435                                  |       | 110,660 |   | 0 |   |
| Total shareholders’ equity             |       | 146,856                                  |       | 227,357 |   | (8,879 | ) |

 

In fiscal 2005 we were in adevelopment stage, focused on obtaining licence approvals from the CRTC. Thiswas accomplished on June 16, 2005 and the activities since then changed tofocus on setting up our infrastructure, launching our business and growing oursubscriber base. Costs related to these expenditures were incurred mostly infiscal 2006. Fiscal 2007 was our first full year of operations.

 

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The following selectedfinancial information for the three and twelve months ended August 31, 2007 and2006 has been derived from our audited consolidated financial statements. Thesummary information should be read in conjunction with our audited andunaudited consolidated financial statements and related notes included in our Form20-F. 

 
| ** **                             | ** ** | **Three Months Ending Aug 31** | ** ** | **Twelve Months Ending Aug 31** | ** ** |
|----------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                           | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue                                |       |                                               |       |                                                |       |   |   |   |   |
| Subscription                           |       | 5,662,610                                          |       | 2,722,205                                           |       | 17,968,931 |   | 5,914,637 |   |
| Activation                             |       | 181,092                                            |       | 98,519                                              |       | 610,972 |   | 216,286 |   |
| Equipment sales                        |       | 421,894                                            |       | 436,166                                             |       | 1,283,668 |   | 644,765 |   |
| Advertising and Other Revenue          |       | 567,644                                            |       | 160,483                                             |       | 1,380,809 |   | 173,594 |   |
| Total Revenue                          |       | 6,833,240                                          |       | 3,417,373                                           |       | 21,244,380 |   | 6,949,282 |   |
|                                   |       |                                               |       |                                                |       |   |   |   |   |
| Operating expenses                     |       |                                               |       |                                                |       |   |   |   |   |
| Cost of revenue                        |       |                                               |       |                                                |       |   |   |   |   |
| Revenue share and royalties            |       | 1,818,751                                          |       | 774,201                                             |       | 5,651,743 |   | 1,669,394 |   |
| Customer care & billing operations |       | 581,712                                            |       | 523,387                                             |       | 2,501,325 |   | 1,874,287 |   |
| Cost of merchandise                    |       | 1,260,265                                          |       | 527,985                                             |       | 2,869,738 |   | 1,201,146 |   |
| Broadcast and operations               |       | 948,363                                            |       | 948,655                                             |       | 3,414,826 |   | 3,139,219 |   |
| Programming and content                |       | 1,495,261                                          |       | 2,038,730                                           |       | 10,875,672 |   | 11,166,638 |   |
| Total cost of revenue                  |       | 6,104,352                                          |       | 4,812,958                                           |       | 25,313,304 |   | 19,050,684 |   |
|                                   |       |                                               |       |                                                |       |   |   |   |   |
| Indirect costs                         |       | 0                                                  |       | 0                                                   |       | 0 |   | 827,125 |   |
| General and administrative             |       | 3,630,207                                          |       | 5,428,765                                           |       | 16,201,717 |   | 18,465,217 |   |
| Special charges                        |       | 1,450,680                                          |       | 0                                                   |       | 2,024,080 |   | 0 |   |
| Stock based compensation               |       | 736,070                                            |       | 759,049                                             |       | 3,143,643 |   | 23,694,846 |   |
|                                   |       |                                               |       |                                                |       |   |   |   |   |
| Marketing                              |       |                                               |       |                                                |       |   |   |   |   |
| Support                                |       | 672,307                                            |       | 538,572                                             |       | 3,394,413 |   | 2,143,594 |   |
| Subsidies and distribution             |       | 2,075,651                                          |       | 1,723,940                                           |       | 5,506,628 |   | 6,899,148 |   |
| Advertising and marketing              |       | 5,187,182                                          |       | 5,512,362                                           |       | 19,608,453 |   | 18,978,417 |   |
| Total marketing                        |       | 7,935,140                                          |       | 7,774,874                                           |       | 28,509,494 |   | 28,021,159 |   |
|                                   |       |                                               |       |                                                |       |   |   |   |   |
| Amortization                           |       | 5,598,817                                          |       | 5,470,009                                           |       | 22,409,443 |   | 15,914,239 |   |
| Total operating expenses               |       | 25,455,266                                         |       | 24,245,655                                          |       | 97,601,681 |   | 105,973,270 |   |
|                                   |       |                                               |       |                                                |       |   |   |   |   |
| Operating loss before the undernoted   |       | (18,622,026                                        | )          | (20,828,282                                         | )          | (76,357,301 | ) | (99,023,988 | ) |
| Interest income                        |       | 555,144                                            |       | 1,001,512                                           |       | 2,491,256 |   | 2,619,481 |   |
| Interest expense                       |       | (3,646,493                                         | )          | (3,773,180                                          | )          | (15,287,703 | ) | (8,279,303 | ) |
| Foreign exchange gain / (loss)         |       | 1,327,548                                          |       | (131,858                                            | )          | 4,513,905 |   | 1,980,232 |   |
|                                   |       |                                               |       |                                                |       |   |   |   |   |
| Net loss for the period                |       | (20,385,827                                        | )          | (23,731,808                                         | )          | (84,639,843 | ) | (102,703,578 | ) |

 

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The following is a summary ofour quarterly results for the past eight fiscal quarters. 

 
| ** **                                                         | ** ** | **Fiscal Quarter** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|
| **In thousands except per share amounts** | ** ** | **Q4 ‘07**    | ** ** | **Q3 ‘07** | ** ** | **Q2 ‘07** | ** ** | **Q1 ‘07** | ** ** |
|                                                               |       |                    |       |   |   |   |   |   |   |
| Revenue                                                            |       | 6,833                   |       | 5,711 |   | 4,862 |   | 3,839 |   |
| Net income  (loss)                                                 |       | (20,386                 | )          | (13,268 | ) | (27,064 | ) | (23,922 | ) |
| Net income (loss) per basic and fully  diluted share               |       | 0                       |       | 0 |   | (1 | ) | (1 | ) |

 
| ** **                                                         | ** ** | **Fiscal Quarter** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|
| **In thousands except per share amounts** | ** ** | **Q4 ‘06**    | ** ** | **Q3 ‘06** | ** ** | **Q2 ‘06** | ** ** | **Q1 ‘06** | ** ** |
|                                                               |       |                    |       |   |   |   |   |   |   |
| Revenue                                                            |       | 3,417                   |       | 2,341 |   | 1,145 |   | 46 |   |
| Net income  (loss)                                                 |       | (23,732                 | )          | (20,404 | ) | (43,961 | ) | (14,607 | ) |
| Net income (loss) per basic and fully  diluted share               |       | (1                      | )          | 0 |   | (1 | ) | (38,848 | ) |

 

Revenue grew by 20% from Q32007 to Q4 2007 and by 100% from Q4 2006 to Q4 2007. This is a direct result ofour growing subscriber base.

 

We incurred significantexpenses during the launch phase of the business. As our subscriber base grows,we expect our losses to improve.

 

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**Resultsof Operations**

 

*For thethree and twelve months ended August 31, 2006 and 2007.*

 

The following table is asummary of some of the key financial and operating metrics that we use to helpmeasure success of operations. Please refer to Section 3.0 for operatingdefinitions. 

 
| ** **                | ** ** | **Three Months Ending Aug 31** | ** ** | **Twelve Months Ending Aug 31** | ** ** |
|---------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                | ** ** | **2007**                                           | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Financial Metrics ($000s) |       |                                               |       |                                                |       |   |   |   |   |
| Revenue                   |       | 6,833                                              |       | 3,417                                               |       | 21,244 |   | 6,949 |   |
| Adjusted Operating Loss   |       | (12,234                                            | )          | (14,413                                             | )          | (50,599 | ) | (56,366 | ) |
|                      |       |                                               |       |                                                |       |   |   |   |   |
| Operating Metrics         |       |                                               |       |                                                |       |   |   |   |   |
| Subscribers               |       | 306,300                                            |       | 151,600                                             |       | 306,300 |   | 151,600 |   |
| ARPU                      |       | $                                                  | 11.33      |                                                | $          | 11.78 |   | $ | 11.32 |   | $ | 12.23 |   |
| SAC                       |       | $                                                  | 58         |                                                | $          | 59 |   | $ | 51 |   | $ | 68 |   |
| CPGA                      |       | $                                                  | 183        |                                                | $          | 242 |   | $ | 208 |   | $ | 268 |   |

 

During the three months endedAugust 31, 2007, we incurred approximately $2.0 million of non-cash,non-recurring Advertising & Marketing expenses related to the write-off ofprepaid advertising costs. We also incurred approximately $1.5 million ofspecial charges during the three months ended August 31, 2007, and a total of$2.0 million of special charges for the twelve months ended August 31, 2007.Special charges are non-recurring and are not part of our normal course ofoperations. Excluding these two expenses, Adjusted Operating Loss isapproximately $8.7 million for the three months ended August 31, 2007, and$46.6 million for the twelve months ended August 31, 2007

 

**Subscribers**

** **

 

As at August 31, 2007 we had atotal subscriber count of 306,300, comprised of 272,800 Paying Subscribers and33,500 OEM Promotional Subscribers. Included in the 272,800 Paying Subscribersare 185,400 Self-Paying and 87,400 Other Paying.

 

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Our Self-Paying subscriber basegrew by 32,900 in the fourth quarter of 2007. This represents a a 104%improvement over the 16,100 subscribers that we added in the third quarter of2007 and a 22% improvement over the 27,000 Self-Paying subscribers that weadded in the fourth quarter of 2006. We attribute much of this success to thefollowing:

 

•      Commencement of our NHLexclusivity;

 

•      Increasing penetration offactory-installed vehicles, as our OEM partners continue to increase the numberof models that come with XM as either standard equipment or as an option;

 

•      Enhanced aftermarket radioproducts, including additional products at different price points; and

 

•      Increasing points ofdistribution for aftermarket products.

 

Other Paying Subscribersdecreased in the fourth quarter of 2007. This is an expected seasonal trend inour business model due to a slow down in automotive production during thesummer months.

 

Paying Subscribers are theprimary source of our revenues. Our target market is the over 25 millionregistered vehicles, 1.5 million new vehicles sold annually and over 12 millionhouseholds in Canada. We expect subscribers in OEM promotional periods tobecome a significant contributor to our Self-Paying subscriber base after theirpromotional period ends. In addition, our existing OEM partner agreementsinclude an increase in the number of models offering our services which willincrease the production of XM enabled vehicles.

 

**ARPU**

 

 

 

ARPU was $11.78 and $11.33 forthe three months ended August 31, 2006 and 2007, respectively. ARPU was $12.23and $11.32 for the twelve months ended August 31, 2006 and 2007, respectively.The year-over-year decline was primarily attributable to our fiscal 2007holiday promotion, which included service credits and hardware rebates thatwere amortized as a reduction of revenues over the term of the subscriberpayment plan, as well as the introduction of multi-year plans during the summerof 2006. Effective September 1, 2006, the basic monthly subscription is pricedat $14.99 and the family plan (up to four additional radios for the samehousehold) at $9.99. All Self-Paying Subscribers on the $12.99 basic monthlysubscription plan as at August 31, 2006 maintained the $12.99 price throughAugust 31, 2007. The increase in multi-year plans improves our cash position asall plans are prepaid in advance.

 

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*Revenue*

 

Revenue includes SubscriberRevenue, activation fees, the sale of merchandise through our direct fulfillmentchannel, advertising revenue on our Canadian-produced channels and Otherrevenue from Partnership Subscribers.

 

•      *ThreeMonths:* For the three months ended August 31, 2006 and 2007, Revenuewas $3.4 million and $6.8 million, respectively, an increase of 100% or $3.4million. The increase was directly attributable to our increasing subscriberbase.

 

•      *TwelveMonths:* For the twelve months ended August 31, 2006 and 2007,Revenue was $6.9 million and $21.2 million, respectively, an increase of 206%or $14.3 million. The increase was directly attributable to our increasingsubscriber base.

 

($000,000)

 

 

*Cost ofRevenue*

 

For the three months endedAugust 31, 2006 and 2007, Cost of Revenue was $4.8 million and $6.1 million,respectively, an increase of 27% or $1.3 million. For the twelve months endedAugust 31, 2006 and 2007, Cost of Revenue was $19.1 million and $25.3 million,respectively, an increase of 33% or $6.2 million. These expenses are comprisedof the following:

 

*Revenue Share & Royalties* – Revenue share& royalties includes CRTC fees, Canadian talent development fees,performance rights obligations to composers, artists, and copyright owners forpublic performances of their creative works broadcast on XM Canada, residualcommissions paid to distribution partners, and fees paid to XM, including a 15%monthly royalty on all subscriber revenue.

 

•      *ThreeMonths:* For the three months ended August 31, 2006 and 2007, RevenueShare & Royalties expenses were $0.8 million and $1.8 million,respectively, an increase of 135% or $1.0 million. This increase is directlyattributable to our increasing revenue and subscriber base. We expect thesecosts to continue to increase with the growth in revenues and subscribers, andmay fluctuate based on future agreements.

 

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•      *TwelveMonths:* For the twelve months ended August 31, 2006 and 2007,Revenue Share & Royalties expenses were $1.7 million and $5.7 million,respectively, an increase of 239% or $4.0 million. This increase is directlyattributable to our increasing revenue and subscriber base. We expect thesecosts to continue to increase with the growth in revenues and subscribers, andmay fluctuate based on future agreements.

 

*Customer Care and Billing Operations* – Customercare & billing costs consist primarily of personnel and related costsassociated with the ongoing operations of a call centre to activate and billsatellite radio subscribers.

 

•      *ThreeMonths:* For the three months ended August 31, 2006 and 2007, CustomerCare & Billing Operations expenses were $0.5 million and $0.6 million,respectively, an increase of 11% or $0.1 million. These costs are primarilydriven by the volume derived from our existing subscriber base and the rate ofgrowth in gross activations of subscribers. We expect Customer Care &Billing Operations expenses to decrease on an average cost per subscriberbasis.

 

•      *TwelveMonths:* For the twelve months ended August 31, 2006 and 2007,Customer Care & Billing Operations expenses were $1.9 million and $2.5million, respectively, an increase of 33% or $0.6 million. These costs areprimarily driven by the volume derived from our existing subscriber base andthe rate of growth in gross activations of subscribers. We expect Customer Care& Billing Operations expenses to decrease on an average cost per subscriberbasis.

 

•      Customer Care & BillingOperations cost per average Self-Paying Subscriber for the three months endedAugust 31, 2006 and 2007 was $2.24 and $1.16, respectively, a decrease of $1.08or 48%.

 

**Cost per average Self-Paying Subscriber**

 

 

*Cost of Merchandise* – We sell merchandisedirect to employees, friends and family and to commercial accounts through ourDirect Fulfillment Channel. Cost of merchandise consists primarily of the costof radios and accessories and related fulfillment costs associated with thedirect sale of this merchandise.

 

•      *ThreeMonths:* For the three months ended August 31, 2006 and 2007, Cost ofMerchandise expenses were $0.5 million and $1.3 million, respectively, anincrease of 139% or $0.8 million. These costs are primarily driven by thevolume of radios sales, which is mostly affected by promotional programs andcommercial accounts.

 

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•      *TwelveMonths:* For the twelve months ended August 31, 2006 and 2007, Costof Merchandise expenses were $1.2 million and $2.9 million, respectively, anincrease of 139% or $1.7 million. These costs are primarily driven by thevolume of radios sales, which is mostly affected by promotional programs andcommercial accounts.

 

*Broadcast & Operations* – Broadcast andoperations includes costs associated with operating our terrestrial repeaternetwork, the management and maintenance of systems and facilities as well asinformation technology expense related to our studios. Broadcast expensesinclude costs associated with the management and maintenance of the systems,software, hardware, production and performance studios used in the creation anddistribution of our Canadian-produced channels. Operations expense includesfacilities, operations costs for the repeater network and informationtechnology expenses related to the broadcast facilities.

 

•      *Three Months*:For the three months ended August 31, 2006 and 2007, Broadcast & Operationsexpenses were $0.9 million and $0.9 million, respectively, thus remainingconsistent year-over-year.

 

•      *TwelveMonths*: For the twelve months ended August 31, 2006 and 2007,Broadcast & Operations expenses were $3.1 million and $3.4 million,respectively, an increase of 9% or $0.3 million. The year over year increase isattributed to the broadcast and repeater operations expenses incurred duringall four quarters of 2007, as opposed to 2006 where we incurred only partialquarters of expenditures during the operational launch phase of the business.

 

•      Broadcast & Operationscost per average Self-Paying Subscriber for the three months ended August 31,2006 and 2007 was $4.07 and $1.90, respectively, a decrease of $2.17 or 53%.

 

**Cost per average Self-Paying Subscriber**

 

 

*Programming & Content* – Programming &content include the creative, production and licensing costs associated withour Canadian-produced channels, which includes third party content acquisition.We view Programming and content expenses as a cost of attracting and retainingsubscribers. This includes costs of programming staff and fixed payments forthird party content. These costs are primarily driven by programminginitiatives. National Hockey League® was launched on the XM Servicein October 2005. NHL seasons run for the nine month period beginning in Octoberof each year and we have amortized these costs over the same period.

 

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•      *Three Months*:For the three months ended August 31, 2006 and 2007, Programming & Contentexpenses were $2.0 million and $1.5 million, respectively, a decrease of 27% or$0.5 million. We continue to examine ways to grow subscribers by looking atother areas to invest in the business.

 

•      *TwelveMonths*: For the twelve months ended August 31, 2006 and 2007,Programming & Content expenses were $11.2 million and $10.9 million,respectively, a decrease of 3% or $0.3 million.

 

*Marketing*–For the three months ended August 31, 2006 and 2007, Marketing expenses were$7.8 million and $7.9 million, respectively, an increase of 2% or $0.1 million.For the twelve months ended August 31, 2006 and 2007, Marketing expenses were$28.0 million and $28.5 million, respectively, an increase of 2% or $0.5million. Marketing costs consist of the direct cost to acquire a subscriber,which include subsidies to drive hardware price points and distributioncommissions, as well as discretionary costs consisting of advertising and branddevelopment and promotion of the launch of our service. Marketing also includesthe cost of marketing staff.

 

*Marketing Support* –Marketing Support includes staffing directly associated with selling radioreceivers through our distribution channels, converting OEM trial customersinto Self-Paying Subscribers, and marketing the brand.

 

•      *Three Months*:For the three months ended August 31, 2006 and 2007, Marketing Support expenseswere $0.5 million and $0.7 million, respectively, an increase of 25% or $0.2million. During the past year, we ramped up staff in support of our promotingthe XM brand across Canada.

 

•      *TwelveMonths*: For the twelve months ended August 31, 2006 and 2007,Marketing Support expenses were $2.1 million and $3.4 million, respectively, anincrease of 58% or $1.3 million. During the past year, we ramped up staff insupport of our promoting the XM brand across Canada.

 

*Subsidies & Distribution*– These direct costs include the subsidization of radios, commissions for thesale and activation of radios, and certain promotional costs.

 

•      *Three Months*:For the three months ended August 31, 2006 and 2007, Subsidies &Distribution expenses were $1.7 million and $2.1 million, respectively, anincrease of 20% or $0.4 million. Subsidies & Distribution expensesincreased due to a strong quarter for achieving new subscribers compared tolast year.

 

•      *TwelveMonths*: For the twelve months ended August 31, 2006 and 2007,Subsidies & Distribution expenses were $6.9 million and $5.5 million,respectively, a decrease of 20% or $1.4 million. Subsidies & Distributionexpenses decreased due to lower retail gross additions compared to last year,compensated by an increase in OEM gross additions from OEM partners to whom wedo not make substantial commission or subsidy payments.

 

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**SAC**

 

 

*Subscriber Acquisition Costs and SAC* – SAC was$59 and $58 for the three months ended August 31, 2006 and 2007, respectively.SAC was $68 and $51 for the twelve months ended August 31, 2006 and 2007,respectively. The decline in 2007 was attributable to an increasing proportionof OEM subscriber additions, specifically from OEM partners to whom we do notmake substantial commission or subsidy payments. With the exception ofseasonality, we do not expect SAC to fluctuate substantially over the nextyear.

 

*Advertising & Marketing*– We achieve success in these areas through coordinated marketing campaignsthat include retail advertising through various media, cooperative advertisingwith our distribution partners, sponsorships, and ongoing market research. Thesecosts fluctuate based on the timing of these activities.

 

•      *Three Months*:For the three months ended August 31, 2006 and 2007, Advertising &Marketing expenses were $5.5 million and $5.2 million, respectively, a decreaseof 6% or $0.3 million. Advertising & Marketing expenses decreased due to areallocation of spending towards more efficient advertising and marketing.Also, during the fourth quarter of 2007, we incurred approximately $2 millionof non-cash, non-recurring Advertising & Marketing expenses related to thewrite-off of prepaid advertising costs.

 

•      *Twelve Months*: For the twelve months ended August 31, 2006and 2007, Advertising & Marketing expenses were $19.0 million and $19.6million, respectively, an increase of 3% or $0.6 million. Also, during thefourth quarter of 2007, we incurred approximately $2 million of non-cash,non-recurring Advertising & Marketing expenses related to the write-off ofprepaid advertising costs.

 

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**CPGA**

 

 

*Cost Per Gross Addition (CPGA)* – CPGA was $242and $183 for the three months ended August 31, 2006 and 2007, respectively.CPGA was $268 and $208 for the twelve months ended August 31, 2006 and 2007,respectively. The decrease was primarily attributable to our SAC andAdvertising & Marketing expenses decreasing.

 

*General& Administrative* – General & Administrativeexpenses primarily include management’s salaries and benefits, professionalfees, general business insurance as well as other corporate expenses.

 

•      *Three Months*:For the three months ended August 31, 2006 and 2007, General &Administrative expenses were $5.4 million and $3.6 million, respectively, adecrease of 33% or $1.8 million. We continue to evaluate the amount spent onGeneral & Administrative expenses based on opportunities to deploy expensesin other areas to grow the business.

 

•      *TwelveMonths*: For the twelve months ended August 31, 2006 and 2007,General & Administrative expenses were $18.5 million and $16.2 million,respectively, a decrease of 12% or $2.3 million. We continue to evaluate theamount spent on General & Administrative expenses based on opportunities todeploy expenses in other areas to grow the business.

 

•      General & Administrativecost per average Self-Paying Subscriber for the three months ended August 31,2006 and 2007 was $23.28 and $7.51, respectively, a decrease of $15.77 or 68%.

 

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**Cost per average Self-Paying Subscriber**

 

 

*Stock basedcompensation* – These are expenses related to theissuance of stock options.

 

•      *Three Months*:For the three months ended August 31, 2006 and 2007, Stock based compensationwas $0.8 million and $0.7 million, respectively, remaining relativelyconsistent year over year.

 

•      *TwelveMonths*: For the twelve months ended August 31, 2006 and 2007, Stockbased compensation was $23.7 million and $3.1 million, respectively, a decreaseof $20.6 million. A significant amount of Stock based compensation related toour initial public offering was incurred during the second quarter of 2006.

 

*SpecialCharges –*In March 2007, management commenced actionsdesigned to improve the company’s efficiencies, improve the content on talk andmusic channels produced by the company, and allocate resources on high growthsubscriber channels. Charges incurred in connection with these initiativesduring the third and fourth quarters totaled $2.0 million. No further chargesare expected.

 

**Adjusted Operating Loss (in millions)**

 

 

*AdjustedOperating Loss* – We believe that Adjusted OperatingLoss, as opposed to Operating loss or Net loss, provides a better measure ofour core business operating results and improves comparability. A more detaileddefinition and calculation of Adjusted Operating Loss is provided in Section3.8.

 

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•      *Three Months*:For the three months ended August 31, 2006 and 2007, Adjusted Operating Losswas $14.4 million and $12.2 million, respectively, an improvement of $2.2million. As we continue to grow our subscriber base and manage Programming,General & Administrative and Marketing costs, we expect Adjusted OperatingLoss to improve.

 

•      *TwelveMonths*: For the twelve months ended August 31, 2006 and 2007,Adjusted Operating Loss was $56.4 million and $50.6 million, respectively, animprovement of $5.8 million. As we continue to grow our subscriber base andmanage Programming, General & Administrative and Marketing costs, we expectAdjusted Operating Loss to improve.

 

***Net Non-operating Expenses***

 

*InterestExpense*– Interest expense includes costs associatedwith our Notes.

 

•      *Three Months*:For the three months ended August 31, 2006 and 2007, Interest Expense was $3.8million and $3.6 million, respectively. The $0.2 million difference is due tothe depreciation of the US$ in comparison to the Canadian dollar.

 

•      *Twelve Months*: For the twelve months ended August 31, 2006and 2007, Interest Expense was $8.3 million and $15.3 million, respectively, anincrease of $7.0 million. Interest Expense increased in fiscal 2007 as fourcomplete quarters of interest on the Notes were recognized while in fiscal2006, one complete quarter and one partial quarter of interest was recognized.

 

*InterestIncome*– Interest income includes income from our cashbalances and restricted investments.

 

•      *Three Months*:For the three months ended August 31, 2006 and 2007, Interest Income was $1.0million and $0.6 million, respectively, a decrease of $0.4 million. InterestIncome decreased because the restricted and unrestricted cash balances werehigher in the fourth quarter of 2006.

 

•      *TwelveMonths*: For the twelve months ended August 31, 2006 and 2007,Interest Income was $2.6 million and $2.5 million, respectively, a decrease of$0.1 million.

 

*ForeignExchange Gain*– Includes costs or gains associatedwith our Notes, restricted investment and cash balances which are denominatedin US$.

 

•      *Three Months*:For the three months ended August 31, 2007, Foreign Exchange Gain was $1.3million. This is due to the Canadian dollar strengthening versus the US dollarover this period.

 

•      *TwelveMonths*: For the twelve months ended August 31, 2007, ForeignExchange Gain was $4.5 million. This is due to the Canadian dollarstrengthening versus the US dollar over this period.

 

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**Liquidityand Capital Resources**

 

At August 31, 2007, cash andshort term investments declined $0.8 million in the fourth quarter, from $15.6million to $14.8 million, a significant improvement from previous quarters andmuch better than our plan. We attribute most of this improvement in cash usageto our growing subscriber base signing up for multi-year pre-payment plans, ourimprovement in Company efficiencies, continued reduction of costs and managingour accounts payable.

 

During fiscal 2007, our balanceof unrestricted cash and short term investments declined $30.4 million from$45.2 million to $14.8 million. Under our current business plan, we expect ouraverage quarterly usage of cash to vary by quarter, and we expect our fiscal2008 annual usage of cash to be significantly lower than cash usage in fiscal2007 due to the following:

 

•                  Increasingrevenue as we continue to add Self-Paying Subscribers to the service; and

 

•                  Improvement ofCompany efficiencies and reduction of costs to suppliers and licenceagreements.

 

During 2007, we began utilizingthe XM Credit Facility. We expect to continue this during 2008. We also raised$20 million of Debentures in September, 2007.

 

Provided that we meet therevenue, expense and cash flow projections of our current business plan, weexpect to be able to finance our operations through current and internallygenerated cash resources. Our business plan is based on estimates regardingexpected future costs and expected future revenue, and includes the assumptionthat we will increase our Self-Paying subscriber base from current levelsduring fiscal 2008. Our costs may exceed or our revenues may fall short of ourestimates, our estimates may change, and future developments may affect ourestimates. Any of these factors may increase our need for funds, which wouldrequire us to seek additional financing to continue implementing our currentbusiness plan. Revenue, expenses and cash flow projections of our business planare based on, but are not limited to:

 

•                  Subscriberforecasts;

 

•                  Retailsubscriber acquisition cost;

 

•                  Decisions wemake to enhance availability of our service (i.e. new products) by installingmore terrestrial repeaters in certain markets;

 

•                  OEM post-trialretention (i.e. converting Other Paying Subscribers and OEM PromotionalSubscribers) based on an estimated number of OEM installations;

 

•                  Effectivemanagement of fixed cost expenditures required to meet our subscriber growthplans;

 

•                  Success ofmulti-year pre-payment plans; and

 

•                  Partnership opportunities.

 

We are pursuing a plan designedto increase our subscribers and revenues at a significantly higher rate thanthe related increases in our operating costs. Our plan contemplates focusing onthe new automobile market where we have relationships with automobilemanufacturers, the continuing introduction of innovative yet affordabletechnology in the retail aftermarket and the use of our most productivedistribution channels.

 

66

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The following table presents asummary of our cash flows, beginning and ending cash balances for years endedAugust 31, 2007, 2006 and 2005 

 
| ** **                                              | ** ** | **Year ended August 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                              | ** ** | **2007**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                              | ** ** | **(Cdn $)**                              | ** ** | **(Cdn $)** | ** ** | **(Cdn $)** | ** ** |
| ** **                                              | ** ** | **(000’s)**                         | ** ** | **(000’s)** | ** ** | **(000’s)** | ** ** |
| Net cash used in operating activities.                  |       | (42,756                                  | )          | (62,247 | ) | 0 |   |
| Net cash used in investing activities                   |       | 7,245                                    |       | (66,245 | ) | 0 |   |
| Net cash provided by financing activities               |       | 0                                        |       | 174,942 |   | 0 |   |
| Foreign exchange loss on cash held in  foreign currency |       | (151                                     | )          | (1,262 | ) | 0 |   |
| Change in cash and during the year                      |       | (35,663                                  | )          | 45,188 |   | 0 |   |
| Cash – beginning of year                           |       | 45,188                                   |       | 0 |   | 0 |   |
| Cash – end of year                                 |       | 9,525                                    |       | 45,188 |   | 0 |   |
| Add: current balance of short-term  investments         |       | 5,281                                    |       | 0 |   | 0 |   |
| Cash and short-term investments – end of  year     |       | 14,806                                   |       | 45,188 |   | 0 |   |

 

*Operating Activities* – Operating activitiesprimarily consist of net loss adjusted for certain non-cash items includingamortization, stock-based compensation, unrealized foreign exchange gains andlosses and the effect of changes in working capital.

 

•                  During 2007,cash used in operating activities was $42.8 million, consisting of a net lossof $84.6 million adjusted for net non-cash expenses of $23.6 million and a$18.2 million source from working capital. As we continue to grow oursubscriber base, we expect operating losses to decrease.

 

*Investing Activities* – Investing activitiesprimarily consist of capital expenditures and activity in our restrictedinvestment accounts.

 

•                  During 2007,cash provided by investing activities was $7.2 million, consisting of a net useof $1.2 million for capital expenditures, $5.9 million for purchasing shortterm investments, and a $14.3 million payment for interest expense on our U.S.debt, paid from restricted investments.

 

*Financing Activities* – Financing activitiesprimarily consist of net proceeds from debt and equity financing.

 

•                  During 2007, nocash was provided by or used for financing activities. The proceeds from theDebentures were secured in the first quarter of fiscal 2008.

 

67

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**ContractualCommitments**

 

We have entered into a numberof leases and other contractual commitments. The following table summarizes ouroutstanding contractual commitments as of August 31, 2007 (in 000’s): 

 
| ** **                       | ** ** | **Total(1)** | ** ** | **Less than  1 Year** | ** ** | **1 – 3 Years** | ** ** | **4 – 5 Years** | ** ** | **More than  5 Years** | ** ** |
|----------------------------------|------------|--------------|------------|---------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|
| NHL Agreement                    |       | 61,629       |       | 7,657                           |       | 14,892                              |       | 15,315                              |       | 23,765                           |       |
| Principal on 12.75% Senior Notes |       | 105,620      |       | 0                               |       | 0                                   |       | 0                                   |       | 105,620                          |       |
| Interest on 12.75% Senior Notes  |       | 87,533       |       | 13,467                          |       | 26,933                              |       | 26,933                              |       | 20,200                           |       |
| Operating leases                 |       | 5,981        |       | 1,264                           |       | 2,225                               |       | 988                                 |       | 1,504                            |       |
| Marketing & Advertising(2)   |       | 25,625       |       | 6,995                           |       | 3,207                               |       | 3,402                               |       | 12,020                           |       |
| Information Technology           |       | 18,373       |       | 4,985                           |       | 8,963                               |       | 4,425                               |       | 0                                |       |
| Other                            |       | 4,383        |       | 3,727                           |       | 456                                 |       | 200                                 |       | 0                                |       |
|                             |       | 309,143      |       | 38,095                          |       | 56,676                              |       | 51,264                              |       | 163,108                          |       |

 

----

Notes:

 

(1) In connection with ourbroadcasting License, amended February 10, 2006, we are required to contributeor make payments based on a minimum of 5% of revenues over the six year licenseterm towards Canadian talent development. In addition, the Company will berequired to make certain music programming royalty payments to Canadiancopyright collectives. The specific amounts payable under these arrangementsare negotiated on a periodic basis. These arrangements have not been includedin the table above due to the variability of the commitments.

 

(2) We have committed topurchase for cash $7 million of a total $10 million of advertising committedfrom an entity over a three period commencing on the closing of the initial publicoffering, subject to a per annum minimum of $1.5 million. In addition, we havea commitment with one of our distribution partners to provide advertising andmarketing spend towards co-branding initiatives.

 

**Off-BalanceSheet Arrangements**

 

Wehave no off-balance sheet arrangements.

 

**Arrangements,Relationships and Transactions with Related Parties**

 

A description of related party transactionsand disclosure of the transaction and amounts due to related parties isincluded in note 6 of the annual consolidated financial statements. John I.Bitove, our Chairman, Chief Executive Officer and controlling shareholder,provided, through companies he controls, all the initial funding for ouractivities.

 

As at December 12, 2005, XM hada 23.3% ownership interest in the Company. As described under recentdevelopments above, we have entered into certain agreements with XM.

 

**CriticalAccounting Policies and Estimates**

 

The preparation of financialstatements in accordance with Canadian GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the year. We believe that the accounting estimates used to assess thecarrying value of intangibles and long-lived assets, as well as stock-basedcompensation are critical accounting estimates. We believe the estimates forroyalties to artists and estimates related to convertible instruments will becritical estimates in future periods.

 

68

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***Intangibles and Long-Lived Assets***

 

We review the carrying value ofour amortizable intangible assets and capital assets whenever events and circumstancesindicate that the carrying value of an asset may not be recoverable from theestimated future cash flows expected to result from its use and eventualdisposition. Significant management judgment is required in the forecasting offuture operating results, which are used in the preparation of the projectedcash flows. Any change in estimates which cause the undiscounted expectedfuture cash flows to be less than the carrying value would result in animpairment loss being recognized equal to the amount by which the carryingvalue of the asset exceeds the fair value of the asset.

 

***Stock-basedCompensation***

 

The estimated fair value ofstock awards granted to employees as of the date of grant is recognized ascompensation expense over the period in which the related employee services arerendered. For stock options granted to non-employees, the estimated fair valueof stock awards granted to non-employees is recognized as expense over theperiod in which the related goods or services are rendered. The determinationof the fair value of stock awards includes the use of option pricing models andthe use of the following estimates: expected volatility, expected option life and expected interest rates.

 

***Disclosure Controls andProcedures***

 

Management has designeddisclosure controls and procedures to provide reasonable assurance thatmaterial information relating to the Company is made known to it by others. Asat August 31, 2007, the Chief Executive Officer and the Chief FinancialOfficer, with participation of the Company’s management, have concluded thatthe design and operation of the Company’s disclosure controls and procedureswere effective to provide that information required to be disclosed by theCompany in reports that it files or submits under the United States SecuritiesExchange Act of 1934 and applicable Canadian securities laws is (i) recorded,processed, summarized and reported within the time periods specified inapplicable rules and forms and (ii) accumulated and communicated to our management,including its Chief Executive Officer and Chief Financial Officer, to allowtimely decisions regarding required disclosure. Due to the inherent limitationsin control systems and procedures, their evaluation can provide onlyreasonable, not absolute, assurance that such disclosure controls andprocedures are operating effectively. A control system, no matter how wellconceived or operated, can provide only reasonable, not absolute, assurancethat the objectives of the control system are met.

 

***Internal Controls***

 

During the three months endedAugust 31, 2007, there were no changes in the Company’s internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

**RecentAccounting Pronouncements**

 

 

69

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*FinancialInstruments, Comprehensive Income and Hedges*

 

In January 2005, the CICAissued Handbook Sections 3855, “Financial Instruments – Recognition andMeasurement”, 1530, “Comprehensive Income”, 3251, “Equity”, and 3865, “Hedges”.These new standards are effective for interim and annual financial statementsrelating to fiscal years commencing on or after October 1, 2006 on aprospective basis. The Company will adopt these new standards effectiveSeptember 1, 2007.

 

Section 3855 prescribes when afinancial instrument is to be recognized on the balance sheet and at whatamount. It also specifies how financial instrument gains and losses are to bepresented. This Section requires that:

 

•                  All financialassets be measured at fair value on initial recognition and certain financialassets to be measured at fair value subsequent to initial recognition;

 

•                  All financialliabilities be measured at fair value if they are classified as held fortrading purposes. Other financial liabilities are measured at amortized costusing the effective interest method;

 

•                  All derivativefinancial instruments be measured at fair value on the balance sheet, even whenthey are part of an effective hedging relationship.

 

Section 1530 introduces a newrequirement to temporarily present certain gains and losses from changes infair value outside net income. It includes unrealized gains and losses, suchas: changes in the currency translation adjustment relating to self-sustainingforeign operations; unrealized gains or losses on available for-saleinvestments; and the effective portion of gains or losses on derivativesdesignated as cash flow hedges or hedges of the net investment in self-sustainingforeign operations.

 

Section 3251 describes thechanges in how to report and disclose equity and changes in equity as a resultof the new requirements of Section 1530. Upon adoption of these standards, theCompany will report the following items in the consolidated financialstatements:

 

•                  Comprehensiveincome and its components;

 

•                  Accumulatedother comprehensive income and its components.

 

Section 3865 providesalternative treatments to Section 3855 for entities which choose to designatequalifying transactions as hedges for accounting purposes. It replaces andexpands on Accounting Guideline 13 “Hedging Relationships”, and the hedgingguidance in Section 1650 “Foreign Currency Translation” by specifying how hedgeaccounting is applied and what disclosures are necessary when it is applied.

 

The Company is currentlyassessing the impact of these new standards on its consolidated financialstatements.

 

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*AccountingChanges*

 

The CICA has reissued HandbookSection 1506, “Accounting Changes” (“CICA 1506”). CICA 1506 requires that allcompanies comply with the revised Handbook Section for fiscal years beginningon or after January 1, 2007. CICA 1506 requires that voluntary changes inaccounting policy are only made if they results in the financial statementsproviding reliable and more relevant information; changes in accounting policyare applied retrospectively unless doing to is impracticable or the change inaccounting policy is made on initial application of a primary source of GAAP; achange in accounting estimate is generally recognized prospectively; materialprior period errors are corrected retrospectively; new disclosures required inrespect of changes in accounting policies, changes in accounting estimates, andcorrection of errors.

 

***Outstanding Share Data andOther Information***

 

The Company is authorized toissue an unlimited number of Class A Subordinate Voting Shares, an unlimitednumber of Class B Voting Shares and an unlimited number of Class C non-votingshares. As at November 14, 2007, we had 20,541,916 fully paid andnon-assessable Class A Subordinate Voting Shares and 81,428,133 fully paid andnon-assessable Class B Voting Shares outstanding. There are currently no ClassC non-voting shares outstanding. A total of 2,481,000 stock options areoutstanding under our stock option plan. Additional information concerning theCompany, including our Form 20-F for the fiscal year ended August 31, 2007, isavailable on SEDAR at www.sedar.com.

 

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**Item 6 — Directors, SeniorManagement And Employees**

 

**A.****                                    DIRECTORSAND SENIOR MANAGEMENT**

 

The following table provides certain information regarding ourdirectors and executive officers as of November 14, 2007.

 
| **Name & Place of Principal Residence** | ** ** | **Age**    | ** ** | **Position with the Company**                                              |
|----------------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------------|
| ** **                                                           | ** ** | ** ** | ** ** | ** **                                                                                |
| John I. Bitove*Toronto, Ontario*                                     |       | 47         |       | Director, Chairman and Chief Executive Officer                                            |
| Michael Washinushi*Toronto, Ontario*                                 |       | 38         |       | Chief Financial Officer, Treasurer and Secretary                                          |
| Stewart Lyon*s Toronto, Ontario*                                     |       | 34         |       | Executive Vice President                                                                  |
| Donald McKenzi*e Toronto, Ontario*                                   |       | 50         |       | Acting President and Chief Operating Officer, Senior Vice-President,  Marketing and Sales |
| Philip Evershed*Toronto, Ontario*                                    |       | 47         |       | Director                                                                                  |
| Mat Wilcox*Vancouver, British  Columbia*                             |       | 46         |       | Director                                                                                  |
| Gary M. Parsons*Potomac, Maryland*                                   |       | 57         |       | Director                                                                                  |
| Joseph A. Verbrugg*e Silver Spring, Maryland*                        |       | 38         |       | Director                                                                                  |
| Marc Comeau *Courtice, Ontario*                                      |       | 48         |       | Director                                                                                  |
| Robert Storey(1)(2)(3)* Ottawa, Ontario*                        |       | 65         |       | Director                                                                                  |
| James W. McCutcheon(1)(2)(3)* Toronto, Ontario*                 |       | 71         |       | Director                                                                                  |
| Pierre Boivin(1)(2)(3)* Mount Royal,  Québec*              |       | 54         |       | Director                                                                                  |

 

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Notes:

(1)                                  Denotes member of the Audit Committee.

(2)                                  Denotes member of the Compensation Committee.

(3)                                  Denotes member of the Corporate GovernanceCommittee.

 

*John I. Bitove.*JohnI. Bitove is our Chairman and Chief Executive Officer and controls CSRI Inc.,formerly Canadian Satellite Radio Investments Inc., our controllingshareholder. Mr. Bitove has also been our Director since 2003. He is alsothe Chairman and Chief Executive Officer of Priszm Canadian Income Fund(TSX:QSR.UN), the owner and operator of 481 KFCTM, Pizza HutTM and TacoBellTM restaurants in seven provinces across Canada, and Chairman and ChiefExecutive Officer of Scott’s Real Estate Investment Trust (TSX:SRQ.UN). In1993, he founded the Toronto Raptors Basketball Club. While with the Raptors, Mr. Bitovehelped to launch what is now Raptors TV almost eleven years ago. Mr. Bitovehas been associated in various broadcasting ventures for more thana decade.

 

*Michael Washinushi.*MichaelWashinushi is our Chief Financial Officer, Treasurer and Secretary. Prior tojoining us in 2005, Mr. Washinushi served as the Director of Developmentand Acquisitions for KIT Limited Partnership where he was responsible formanaging the firm’s existing real estate portfolio and identifying new realestate opportunities, from 2003 to 2005. From 2000 to 2003, Mr. Washinushiserved as the Director of Finance for Priszm Brandz where he was responsiblefor the planning and corporate finance of the company. Mr. Washinushiholds a Bachelor of Arts degree in Economics from York University.

 

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*Stewart Lyons.*StewartLyons is our Executive Vice President. Mr. Lyons joined us at inceptionand worked with XM throughout its critical launch and early growth period. Mr. Lyonsjoined us while he was employed at Scotia Capital Inc., where, from 2003to 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 theToronto 2008 Olympic Bid. Mr. Lyons has an MBA from the University ofToronto and an LLB from Osgoode Hall Law School.

 

*Donald McKenzie.*DonaldMcKenzie is our acting President and Chief Operating Officer, as well as SeniorVice President Sales and Marketing. Mr. McKenzie has more than22 years experience in sales and marketing in a variety of industries,including the past 10 years in Canada’s wireless telecommunications arenawhere he played a prominent role in the design and build of distributionchannels for TELUS Mobility. Mr. McKenzie began his career in advertisingand product marketing where he worked with Ogilvy & Mather, Young &Rubicam, Faberge, Cadbury Beverages and CPAS Systems. Mr. Mackenzieholds an MBA from Richard Ivey School of Business at the University of Westernand a Bachelor of Arts from Victoria University at the University of Toronto.

 

*Philip Evershed.*PhilipEvershed has been our Director since 2005. Mr. Evershed is a principal ofGenuity, a Canadian investment bank. Prior to co-founding Genuity, Mr. Evershedspent 14 years at CIBC World Markets, most recently as Co-Head ofInvestment 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. Evershedhas an MA (Economics) from the University of Toronto and a BA (School ofBusiness and Economics) from Wilfrid Laurier University.

 

*Mat Wilcox.*MatWilcox has been our Director since 2005. Ms. Wilcox oversees alloperations at Wilcox Group, one of Canada’s largest national, independentpublic relations firms with offices in Toronto and Vancouver. Ms. Wilcoxhas provided strategic communications advice and support to CEOs of leadingCanadian companies. She has also counseled global corporations entering theCanadian marketplace and provided growth strategies as they expandedacross Canada.

 

*Gary M. Parsons.*GaryM. Parsons has been our Director since 2005. Mr. Parsons has served asChairman of the Board of Directors of XM since May 1997. Mr. Parsonsis Chairman and was previously Chief Executive Officer of Mobile SatelliteVentures L.P., and serves on the board of WorldSpace, Inc. Mr. Parsonswas Chairman of the Board of Directors of Motient Corporation from March 1998to May 2002. Previously, Mr. Parsons was with MCI CommunicationsCorporation where he served in a variety of roles from 1990 to 1996, includingmost recently as Executive Vice President of MCI Communications, and as ChiefExecutive Officer of MCI’s subsidiary MCImetro, Inc. From 1984 to 1990, Mr. Parsonswas one of the principals of Telecom*USA, which was acquired by MCI. Prior tothe recruitment of Hugh Panero, Mr. Parsons served as XM’s Chief ExecutiveOfficer.

 

*Joseph A. Verbrugge.*JosephA. Verbrugge has been our Director since 2005. Dr. Verbrugge is SeniorVice President, Automotive Accounts and International Operations for XM. Currently,he oversees all XM automotive partnerships, including General Motors, Honda,Toyota, Nissan, Hyundai and Porsche. Prior to joining XM, Dr. Verbruggewas a management consultant with The Dealy Strategy Group LLC, aWashington, DC-based advisory firm providing financial/negotiating/strategicconsulting services and operational support primarily to satellitecommunications companies (including XM), as well as private equity andinvestment banking firms active in the satellite industry. Dr. Verbruggeholds an MBA from Georgetown University and a Ph.D. in Management Studies fromOxford University.

 

*Marc Comeau.*Marc J.Comeau joined our board in 2006. Mr. Comeau began his career with GeneralMotors in 1983 as a Product Distribution Specialist in the Montreal Zone. Heserved in a variety of assignments leading to a District Manager position. In1988, Marc became the Distribution Manager and in 1989 was appointed RegionalHuman Resources Development Manager. Mr. Comeau also served as theRegional Marketing/Business Planning Manager, Area Marketing Manager, andMontreal Zone Manager. In 1995, Marc was appointed Director Strategic Marketingand Research for Buick Motor Division in Flint. In 1997, he returned to GeneralMotors of Canada as the General Director — Sales. Marc J. Comeau wasappointed to his current position of Vice President, Sales, Service &Marketing effective April 1, 2002, and a member of the Board of Directorsfor General Motors of Canada Limited. In 2005, Mr. Comeau was an awardrecipient of Marketing Magazine’s “Marketers That Mattered”.

 

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*Robert Storey.*RobertStorey has been our Director since 2005. Mr. Storey is Chairman of theconsulting company MASABE and Company and President of Teraca CommunicationsCorporation. He has worked in the broadcasting and communications industry inCanada and abroad for more than 30 years. Mr. Storey is the foundingofficer of South Fraser Broadcasting Ltd. and has served on the board ofseveral private companies with broadcast and cable interests in Canada and theU.S. Mr. Storey is a two time Olympian; President of the FédérationInternationale de Bobsleigh et de Tobogganing; director of the Association ofInternational Olympic Winter Sports Federation; director of the CanadianOlympic Committee; a member of the Canadian Olympic Committee Hall of Fame andseveral International Olympic Committee commissions. Mr. Storey was theChief International Strategist for the successful Vancouver 2010Olympic Bid.

 

*James W. McCutcheon, Q.C.*JamesW. McCutcheon has been our Director since 2005. Mr. McCutcheon practiceslaw as independent Counsel and is an active Corporate Director. He was Counselto McCarthy Tétrault LLP from 1990 until December 31, 2005. Mr. McCutcheonwas called to the Ontario Bar in 1962. He was a founding partner of Shibley,Righton & McCutcheon in 1964. For some ten years Mr. McCutcheon practicedpredominantly civil litigation before Ontario courts and tribunals. Hispractice was diversified to include commercial real estate, insurance, trustand corporate law. As independent Counsel, he now advises on a broad variety oflitigation, corporate, individual and charity issues. Mr. McCutcheon hasserved as a director of many public corporations, presently Dominion of CanadaGeneral Insurance Company, Empire Life Insurance Company and Guardian CapitalGroup Limited. Mr. McCutcheon has also served on boards of the Art Galleryof Ontario Foundation, Canadian Institute of International Affairs, EglintonSt. George’s United Church, Royal Agricultural Winter Fair, Royal OntarioMuseum, University Health Network Toronto, Victoria University in the Universityof Toronto and World Wildlife Fund (Canada).

 

*Pierre Boivin.*Pierre Boivin has been our Director since2005. Mr. Boivin is President of the Montréal Canadiens, L’Arena desCanadiens Inc. and Gillett Entertainment Group. In 1994, Mr. Boivin wasappointed President and Chief Executive Officer of Canstar Sports Inc., aMontréal based public company in the hockey equipment industry. In 1995,Canstar was acquired by Nike, Inc. and formed Bauer Nike Hockey Inc., and Mr. Boivinremained Chief Executive Officer of the new company until 1999. Mr. Boivinis a member of the Board of Governors of the National Hockey League. He isChairman of the Board of Directors of Kangaroo Media Inc. and Vice Chairman ofthe Board of Hexagram. Mr. Boivin is also Chairman of the Sainte-JustineHospital Foundation and member of the Board of Directors for Special OlympicsQuebec.

 

**B.****                                    COMPENSATION**

 

**Remuneration of Directors**

 

Mat Wilcox, Phil Evershed and each of the independent directors will bepaid an annual fee of $25,000 for serving on the board, as well as $1,000 perdirector for each regularly scheduled meeting of the board of directors, or acommittee 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 theboard of directors will be paid an annual fee of $10,000 ($15,000 in the caseof the chair of the audit committee). At the time of our initial publicoffering, we issued 25,000 options to acquire Subordinate Voting Shares toeach of the independent directors. The exercise price of these options is ourinitial public offering price of the Subordinate Voting Shares, or $16 perSubordinate Voting Share. These options vest equally over five years. On November 14,2007 the Board of Directors approved a grant of a further 50,000 options toacquire Subordinate Voting Shares to each of the independent directors and25,000 options to acquire Subordinate Voting Shares to each of Mat Wilcox andPhil Evershed. See “Item 6 — Directors, Senior Management And Employees — E.Share Ownership — Stock Option Plan”.

 

**Executive Compensation**

 

The following table provides a summary of the compensation of thePresident and Chief Executive Officer and the Chief Financial Officer of theCompany and the three most highly compensated individuals who served asexecutive officers of the Company (collectively, the “**Named Executive Officers**”) for the fiscalyears ended August 31, 2007, 2006 and 2005, respectively, whose totalbonus and salary exceeded $150,000(1).

 

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| ** **                                                  | ** ** | **Annual  Compensation** | ** ** | **Long-Term  Compensation** | ** ** |
|-------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Name  and Principal Position**                            | ** ** | **Year**                 | ** ** | **Salary**                  | ** ** | **Bonus** | ** ** | **Other  Annual****Compensation** | ** ** | **Securities****Under****Options****Granted** | ** ** | **Restricted  Stock Units** | ** ** | **All  Other Compensation** | ** ** |
|                                                        |       |                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| John I. Bitove,                                             |       | 2007                     |       | $                           | 250,000    |   | $ | 55,340 | (2) | Nil |   | Nil |   | $ | 45,937 | (3) | Nil |   |
| *Chairman and Chief*                                        |       | 2006                     |       | $                           | 250,000    |   | $ | 75,000 | (3) | Nil |   | $ | 1,000,000 |   | Nil |   | Nil |   |
| *Executive Officer*                                         |       | 2005                     |       | $                           | 250,000    |   | Nil |   | Nil |   | Nil |   | Nil |   | Nil |   |
| Donald McKenzie                                             |       | 2007                     |       | $                           | 245,000    |   | $ | 73,787 |   | Nil |   | Nil |   | $ | 61,252 | (5) | Nil |   |
| *Acting President and Chief  Operating Officer (and Senior* |       | 2006                     | (6)        | $                           | 15,862     |   | Nil |   | Nil |   | 80,000 |   | Nil |   | Nil |   |
| * Vice President Sales and Marketing)*(4)              |       | 2005                     |       | N/A                         |       | N/A |   | N/A |   | N/A |   | N/A |   | Nil |   |
| Stephen Tapp,**                                             |       | 2007                     |       | $                           | 316,667    |   | Nil |   | Nil |   | Nil |   | $ | 41,562 | (8) | $ |  835,383 | (9) |
| *President and Chief Operating*                             |       | 2006                     |       | $                           | 400,000    |   | $ | 120,000 | (8) | Nil |   | $ | 500,000 | (10) | Nil |   | Nil |   |
| *Officer*(7)                                                |       | 2005                     |       | $                           | 183,000    | (11) | Nil |   | Nil |   | Nil |   | Nil |   | Nil |   |
| Michael Washinushi,                                         |       | 2007                     |       | $                           | 250,000    |   | $ | 29,665 |   | Nil |   | Nil |   | $ | 24,624 | (12) | Nil |   |
| *Chief Financial Officer,*                                  |       | 2006                     |       | $                           | 244,583    | (13) | $ | 40,000 | (12) | Nil |   | $ | 300,000 |   | Nil |   | Nil |   |
| *Treasurer and Secretary*                                   |       | 2005                     |       | $                           | 77,000     | (14) | Nil |   | Nil |   | Nil |   | Nil |   | Nil |   |
| Ross Davies,                                                |       | 2007                     |       | $                           | 250,000    |   | $ | 27,500 |   | Nil |   | $ | 4,000 |   | Nil |   | Nil |   |
| *Vice President, Programming*                               |       | 2006                     |       | $                           | 250,000    |   | $ | 56,600 |   | Nil |   | $ | 15,000 |   | Nil |   | Nil |   |
| (15)                                                        |       | 2005                     |       | N/A                         |       | N/A |   | N/A |   | N/A |   | Nil |   | N/A |   |
| Stewart Lyons,                                              |       | 2007                     |       | $                           | 150,000    |   | $ | 35,400 |   | Nil |   | Nil |   | Nil |   | Nil |   |
| *Executive Vice President*                                  |       | 2006                     |       | $                           | 150,000    |   | $ | 34,800 |   | Nil |   | $ | 300,000 |   | Nil |   | Nil |   |
|                                                        |       | 2005                     |       | Nil                         |       | Nil |   | Nil |   | Nil |   | Nil |   | Nil |   |
|                                                             |            |                          |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Notes:

(1)                                  Based on the foregoing, the individuals werethe only Named Executive Officers during the Company’s most recent completedfinancial year.

 

(2)                                  Mr. Bitove has elected to defer receiptof this 2007 fiscal year bonus entitlement until such time as the Company iscash flow positive.

 

(3)                                  On January 12, 2007, Mr. Bitove’s2006 fiscal year bonus entitlement of $75,000 was paid in the form of10,965 RSU’s. On January 18, 2007, Mr. Bitove was granted 6,716 RSU’sas a 2007 fiscal year bonus entitlement. As at August 31, 2007, the totalmarket value of these RSU’s was $88,405.

 

(4)                                  Effective June 15, 2007 Mr. McKenzieassumed the role of Acting President and Chief Operating Officer on an interimbasis.

 

(5)                                  On January 18, 2007, Mr. McKenziewas granted 8,955 RSU’s a 2007 fiscal year bonus entitlement. As at August 31,2007, the market value of these RSU’s was $44,775.

 

(6)                                  Mr. McKenzie was appointed Senior VicePresident Sales and Marketing in August 2006. Mr. McKenzie’s basesalary was $245,000, of which $15,862 was paid to Mr. McKenzie for thefiscal year ended August 31, 2006.

 

(7)                                  Mr. Tapp resigned from his position asPresident and Chief Operating Officer effective June 15, 2007.

 

(8)                                  On January 12, 2007, Mr. Tapp’s 2006fiscal year bonus entitlement of $120,000 was paid in the form of 17,544RSU’s. On June 13, 2007 Mr. Tapp was granted 14,583 RSU’s inconnection with his resignation. As at August 31, 2007, the total marketvalue of these RSU’s was $160,635.

 

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(9)                                  This amount was / will be paid to Mr. Tappin connection with his resignation on June 15, 2007. In addition, Mr. Tappis entitled to receive 17,500 RSUs in each of the following two years.

 

(10)                            In addition, in December 2005, CSRI Inc., a company controlled byJohn I. Bitove, our Chairman and Chief Executive Officer, granted options to Mr. Tappto acquire shares of CSRI Inc. with a nominal exercise price and a fair marketvalue at that time of approximately $1.0 million.

 

(11)                            Mr. Tapp was appointed President and Chief Operating Officer of theCompany in October, 2004. His base salary was $200,000, of which $183,000 waspaid to Mr. Tapp for the fiscal year ended August 31, 2005.

 

(12)                            On January 12, 2007, Mr. Washinushi’s 2006 fiscal year bonusentitlement of $40,000 was paid in the form of 5,848 RSU’s. On January 18,2007, Mr. Washinushi was granted 3,600 RSU’s as a 2007 fiscal year bonusentitlement. As at August 31, 2007, the total market value of these RSU’swas $47,240.

 

(13)                            Mr. Washinushi’s base salary was increased from $180,000 to$250,000 on October 15, 2005.

 

(14)                            Mr. Washinushi was appointed Chief Financial Officer, Secretary andTreasurer in April, 2005. Prior to his appointment, the Company did not have aChief Financial Officer. Mr. Washinushi’s base salary was $185,000, ofwhich $77,000 was paid to Mr. Washinushi for the fiscal year ended August 31, 2005.

 

(15)                            Mr. Davies resigned from his position as Vice President Programmingeffective August 31, 2007 and is no longer employed by CSR.

 

**Long-Term Compensation — Option GrantedDuring the Fiscal Year Ended August 31, 2007**

 

During the most recently completed financial year, we issued to ourdirectors, officers and employees a total of 73,000 options to acquireSubordinate Voting Shares, of which 4,000 options were issued to the NamedExecutive Officers. However, as of the date hereof, such 4,000 options havebeen cancelled (in accordance with the terms of the Company’s Stock OptionPlan) in connection with Ross Davies’ resignation, and another 13,000 optionshave been cancelled (in accordance with the Company’s Stock Option Plan) inconnection with the termination of certain employees’ employment.

 

**Long Term Compensation – Restricted StockUnit Granted During the Fiscal Year Ended August 31, 2007**

 

During the most recently completed financial year, we issued a total of84,566 Restricted Stock Units, or RSU’s, 68,211 of which were issued to theNamed Executive Officers as summarized above in the Executive Compensationtable. Each of James McCutcheon and Bob Storey received 5,995 RSU’s and 5,739RSU’s, respectively, in lieu of their director compensation for the 2006 fiscalyear. The remaining 4,621 RSU’s were issued to senior level directors as part oftheir bonus entitlement for the fiscal year ended August 31, 2007.

 

**Long-TermCompensation — Option Grants During the Current Fiscal Year**

 

No options have yet been granted to the Named Executive Officers duringthe 2008 fiscal year. On November 14, 2007 the Board of Directorsapproved a grant of 50,000 options to acquire Subordinate Voting Shares to eachof the independent directors and 25,000 options to acquire Subordinate VotingShares to each of Mat Wilcox and Phil Evershed. See “Item 6 — Directors, SeniorManagement And Employees – E. Share Ownership – Stock Option Plan”.

 

**Employment Agreements**

 

We have entered into employment agreements with the Named ExecutiveOfficers and other members of senior management, certain material terms ofwhich are summarized below.

 

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*John I. Bitove.*Theemployment agreement with Mr. Bitove is for an indefinite term, subject tothe provisions within the agreement. The agreement provides for a current basesalary of $250,000 and eligibility to receive a maximum annual bonus of up to100% of his base salary based on the goals established pursuant to the bonusplan. The agreement contains non-solicitation and non-competition covenants inour favor, which apply during the term of Mr. Bitove’s employment and fora period of 24 months following the termination of his employment, andconfidentiality covenants in our favor, which apply indefinitely. In addition,if Mr. Bitove’s employment is terminated for any reason other than forcause, Mr. Bitove will receive his base salary (and a pro ratashare of his bonus and other forms of compensation) for a period of24 months following the date of such termination. If Mr. Bitove’semployment is terminated, or if he resigns for good reason, within12 months following a change of control, Mr. Bitove will receive hisbase salary (and a pro rata share of his bonus and other forms ofcompensation) for a period of 24 months following the date of suchtermination.

 

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*Stephen Tapp.*Until the effective date of Mr. Tapp’sresignation his employment with CSR was governed by an employment contractwhich provided for a base salary of $400,000 and eligibility to receive amaximum annual bonus of up to 100% of his base salary based on the goalsestablished pursuant to the bonus plan. The agreement containednon-solicitation and non-competition covenants in our favor, which appliedduring the term of Mr. Tapp’s employment and will continue to apply for aperiod of 24 months following the termination of his employment, andconfidentiality covenants in our favor, which apply indefinitely. The financialterms of Mr. Tapp’s resignation are summarized under Item 6B “ExecutiveCompensation”.

 

*Michael Washinushi.*Theemployment agreement with Mr. Washinushi is for an indefinite term,subject to the provisions within the agreement. The agreement provides for acurrent base salary of $250,000 and eligibility to receive a maximum annualbonus of up to 60% of his base salary based on the goals established pursuantto the bonus plan. The agreement contains non-solicitation and non-competitioncovenants in our favor, which apply during the term of Mr. Washinushi’semployment and for a period of 12 months following the termination of hisemployment, and confidentiality covenants in our favor, which applyindefinitely. In addition, if Mr. Washinushi’s employment is terminatedfor any reason other than for cause, Mr. Washinushi will receive his basesalary (and a pro rata share of his bonus and other forms ofcompensation) for a period of 12 months following the date of suchtermination. If Mr. Washinushi’s employment is terminated, or if heresigns for good reason, within 12 months following a change of control, Mr. Washinushiwill receive his base salary (and a pro rata share of his bonus andother forms of compensation) for a period of 18 months following the dateof such termination.

 

*Ross Davies.*Until the effective date of Mr. Davies’resignation, his employment with CSR was governed by an employment contractwhich provided for a base salary of $250,000 and eligibility to receive amaximum annual bonus of up to 60% of his base salary based on the goalsestablished pursuant to the bonus plan. The agreement containednon-solicitation and non-competition covenants in our favor, which appliedduring the term of Mr. Davies’ employment and will continue to apply for aperiod of 12 months following the termination of his employment, andconfidentiality covenants in our favor, which apply indefinitely.

 

*Stewart Lyons.*Theemployment agreement with Mr. Lyons is for an indefinite term, subject tothe provisions within the agreement. The agreement provides for a current basesalary of $150,000 and eligibility to receive a maximum annual bonus of up to50% of his base salary based on the goals established pursuant to the bonusplan. The agreement contains non-solicitation and non-competition covenants inour favor, which apply during the term of Mr. Lyons’ employment and for aperiod of 12 months following the termination of his employment, andconfidentiality 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 ofhis bonus and other forms of compensation) for a period of 12 monthsfollowing the date of such termination. If Mr. Lyons’ employment isterminated, or if he resigns for good reason, within 12 months following achange of control, Mr. Lyons will receive his base salary (and apro rata share of his bonus and other forms of compensation) for a periodof 18 months following the date of such termination.

 

*Donald McKenzie.*Theemployment agreement with Mr. McKenzie is for an indefinite term, subjectto the provisions within the agreement. The agreement provides for a currentbase salary of $250,000 and an annual target bonus of 50% of his base salarybased on the goals established pursuant to the bonus plan. The agreementcontains non-solicitation and non-competition covenants in our favor, whichapply during the term of Mr. McKenzie’s employment and for a period of12 months following the termination of his employment, and confidentialitycovenants in our favor, which apply indefinitely. In addition, if Mr. McKenzie’semployment is terminated for any reason other than for cause, Mr. McKenziewill receive his base salary (and a pro rata share of his bonus andother forms of compensation) for a period of 12 months following the dateof such termination.

 

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**C.****                                    BOARDPRACTICES**

 

Our board of directors has three committees: an audit committee(the ”**Audit Committee**”); acompensation committee (the ”**CompensationCommittee**”); and a corporate governance committee (the ”**Corporate Governance Committee**”), all ofwhich 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 ofapplicable securities laws. The Audit Committee is responsible for theoversight and supervision of:

 

•                  ouraccounting and financial reporting practices and procedures;

 

•                  theadequacy of our internal accounting controls and procedures; and

 

•                  thequality 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 thepre-approval of all non-audit services provided by the external auditor, andfor directing the auditor’s examination into specific areas of our business.The Audit Committee has a written charter and procedures to address complaintsregarding accounting, internal accounting controls or auditing matters and hasestablished a procedure to address confidential, anonymous employee submissionsof concerns regarding questionable accounting or auditing matters.

 

During the fiscal year ended August 31, 2007, the Audit Committeeof the Company consisted of the following three directors: Pierre Boivin; JamesW. McCutcheon; and Robert Storey. Pierre Boivin serves as Chairman of the AuditCommittee. During the fiscal year ended August 31, 2007, the Audit Committeemet 4 times.

 

**Compensation Committee**

 

The Compensation Committee reviews and makes recommendations to theboard concerning the appointment of our officers and the hiring, compensation,benefits and termination of our senior executive officers and all other keyemployees. The committee will annually review the Chief Executive Officer’sgoals and objectives for the upcoming year and provide an appraisal of theChief Executive Officer’s performance. The committee administers and makesrecommendations regarding the operation of our stock option plan as previouslydescribed.

 

Our Compensation Committee Charter provides that profitable growth isfundamental to our long-term viability. In each year of profitable operation, anominal percentage (as determined by the Compensation Committee) of ourpre-tax profits for that year, shall be included as part of the overallannual compensation plan for our senior officers (as recommended by theChief Executive Officer with concurrence by the Compensation Committee). Forthe purposes of determining the amount of this payment, any compensation earnedby any officer in the corresponding year under any existing compensationarrangement shall be deducted from the amount otherwise payable to such officerunder these profit sharing arrangements. The Compensation Committee Charteradditionally provides that a nominal percentage of pre-tax profits in eachprofitable year shall be allocated to charitable foundations or social causes(as recommended by the Chief Executive Officer with concurrence by theCompensation Committee). The Compensation Committee, in exercising itsfiduciary obligation, shall ensure that these nominal profit sharingallocations remain consistent with appropriate overall executive compensationlevels and annual budget objectives and performance.

 

All members of this committee are directors who are independent withinthe meaning of applicable securities laws.

 

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During the fiscal year ended August 31, 2007, the CompensationCommittee of the Company consisted of the following three directors: PierreBoivin; James W. McCutcheon; and Robert Storey. Robert Storey serves asChairman of the Compensation Committee. During the fiscal year ended August 31,2007, the Audit Committee met 3 times.

 

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**Corporate Governance Committee**

 

The Corporate Governance Committee is responsible for developing ourapproach to corporate governance issues, advising the board in filling vacancieson the board and periodically reviewing the composition and effectiveness ofthe board and the contribution of individual directors. All members of thiscommittee are directors who are independent within the meaning of applicablesecurities laws.

 

During the fiscal year ended August 31, 2007, the Compensation andCorporate Governance Committee consisted of the following three directors:Pierre Boivin; James W. McCutcheon; and Robert Storey. James W. McCutcheonserves as Chairman of the Corporate Governance Committee.

 

**D.****                                    EMPLOYEES**

 

As of October 31, 2007, we had 78.5 full-time equivalentemployees, which included 5 members of senior management and73.5 employees working in Finance, Human Resources, Sales &Marketing, Programming, Infrastructure and IT. This is a decrease of28.5 full-time equivalent employees since August 31, 2006. We alsocontinue to engage Accenture Inc. to design, build, and deploy asubscriber management system that includes billing, customer care, supplychain, subscriber management and radio provisioning systems. In addition, werely upon a number of consultants and other advisors. The extent and timing ofany increase in staffing will depend on the availability of qualified personneland other developments in our business. None of our employees are representedby a labor union, and we believe that our relationship with our employeesis good.

 

**E.****                                      SHAREOWNERSHIP**

 

The following table sets forth the names of the Company’s NamedExecutive Officers and directors and the number of Subordinate Voting Shares,assuming conversion of all Class B Voting Shares into Subordinate VotingShares, beneficially owned, directly or indirectly, or over which control ordirection is exercised by each of them as at the date hereof.

 

 
| **Name**              | ** ** | **Subordinate Voting Shares  Beneficially Owned or   Controlled as of November 14, 2007(1)** | ** ** | **Percent of total shares held** | ** ** |
|-----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
|                  |       |                                                                                                                                           |       |                                                 |       |
| John I. Bitove        |       | 27,194,061                                                                                                                                     | (2)        | 57.03                                                | %          |
| Donald McKenzie(3)    |       | N/A                                                                                                                                            |       | N/A                                                  |       |
| Stephen Tapp(3)       |       | N/A                                                                                                                                            |       | N/A                                                  |       |
| Michael Washinushi(3) |       | N/A                                                                                                                                            |       | N/A                                                  |       |
| Ross Davies(3)        |       | N/A                                                                                                                                            |       | N/A                                                  |       |
| Stewart Lyons(3)      |       | N/A                                                                                                                                            |       | N/A                                                  |       |
| Philip Evershed       |       | Nil                                                                                                                                            |       | Nil                                                  |       |
| Mat Wilcox            |       | 153,055                                                                                                                                        |       | 0.32                                                 | %          |
| Gary M. Parsons       |       | Nil                                                                                                                                            |       | Nil                                                  |       |
| Joseph A. Verbrugge   |       | Nil                                                                                                                                            |       | Nil                                                  |       |
| Marc Comeau           |       | Nil                                                                                                                                            |       | Nil                                                  |       |
| Robert Storey         |       | 5,000                                                                                                                                          |       | 0.01                                                 | %          |
| James W. McCutcheon   |       | 20,000                                                                                                                                         |       | 0.04                                                 | %          |
| Pierre Boivin         |       | 2,500                                                                                                                                          |       | 0.01                                                 | %          |

 

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Notes

 

(1)                                  Individual directors have furnishedinformation as to Subordinate Voting Shares, assuming conversion of all Class BVoting Shares into Subordinate Voting Shares, beneficially owned by them,directly or indirectly, or over which they exercise control or direction.

 

(2)                                  27,142,711 Subordinate Voting Shares,assuming conversion of all Class B Voting Shares into Subordinate VotingShares, are controlled indirectly by John I. Bitove through CSRI Inc.

 

(3)                                  Individual beneficially owns less than 1% ofall Subordinate Voting Shares and individual’s share ownership previously hasnot been disclosed to shareholders or otherwise made public.

 

**Stock Option Plan**

 

We have established a stock option plan (the “**Plan**”) for our employees, directors, seniorofficers and consultants and our affiliates. The Plan was established toprovide additional incentives for us and our affiliates to attract and retainemployees, directors, senior officers and consultants.

 

Under the Plan, options to purchase our Subordinate Voting Shares may begranted by the board of directors to our, and our affiliates, directors, seniorofficers, employees and consultants. Options granted under the Plan will havean exercise price of not less than the volume weighted average trading price ofthe Subordinate Voting Shares on the stock exchange on which the SubordinateVoting Shares are traded for the five trading days immediately preceding theday on which the option is granted. The maximum aggregate number of SubordinateVoting Shares which may be subject to options under the Plan is 10% of ourshares outstanding from time to time. As a result, any increase in the issuedand outstanding shares will result in an increase in the available number ofthe Subordinate Voting Shares issuable under the Plan, and any exercises ofoptions will make new grants available under the Plan, effectively resulting ina re-loading of the number of options available to grant under the Plan. Thenumber of shares issuable to insiders, at any time, under all our security-basedcompensation arrangements, cannot exceed 10% of the number of shares in ourcapital that are outstanding from time to time. Similarly, the number of sharesissued to insiders, within any one year period, under all security basedcompensation arrangements, cannot exceed 10% of the number of shares in ourcapital that are outstanding from time to time.

 

Unless the Board decides otherwise, options granted under the Plan willvest over a five-year period and may be exercised in whole or in part atany time as to one-fifth on each anniversary of the grant date for thefive-year period. Unless the Board decides otherwise, options will expire onthe seventh anniversary of the grant date. Any option not exercised prior tothe expiry date will become null and void.

 

In connection with certain change of control transactions, including atake-over bid, merger or other structured acquisition, the board of directors may acceleratethe vesting date of all unvested options such that all optionees will beentitled to exercise their full allocation of options and in certaincircumstances where such optionee’s employment is terminated in connection withsuch transactions, such accelerated vesting will be automatic.

 

Unless the Board decides otherwise, options granted under the Planterminate on the earlier of the expiration date of the option or 180 daysfollowing the death of the optionee, termination of the optionee’s employmentbecause of permanent disability, termination of the optionee’s employmentbecause of the retirement of an optionee or as a result of such optioneeceasing to be a director, 30 days following termination of an optionee’semployment without cause or immediately upon an optionee’s employment beingterminated for cause.

 

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As at the end of our last fiscal year, we had issued to our directors,officers and employees a total of 2,516,250 options to acquire SubordinateVoting Shares. On April 16, 2007 we issued to our employees and an officer73,000 options to acquire Subordinate Voting Shares. Of these 73,000 options: (i) onehalf will vest on April 16, 2008; and (ii) one half will vest on April 16,2009. On November 14, 2007 the Board of Directors approved a grant of50,000 options to acquire Subordinate Voting Shares to each of the independentdirectors and 25,000 options to acquire Subordinate Voting Shares to each ofMat Wilcox and Phil Evershed. As of the date hereof, a total of 108,250 optionswere cancelled (in accordance with the terms of the Plan) as a result of thetermination of employment of certain employees and officers. The followingchart sets out the number of options to purchase Subordinate Voting Sharesissued to the groups of individuals identified below which are outstanding asof the date hereof:

 
| **Group**                | ** ** | **Number of   Persons Holding   Option** | ** ** | **Number of   Options** | ** ** | **Exercise   Price** | ** ** | **Market Value on   Date of Grant** | ** **      | **Expiration Dates** | ** **                |
|--------------------------|------------|--------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------|------------|--------------------------------------------------------------|-----------------|---------------------------|---------------------------|
|                     |       |                                                         |       |                              |       |                      |       |                                                         |            |                      |                      |
| Named Executive Officers |       | 4                                                            |       | 1,050,000                         |       | $                         | 0.01  |                                                         | N/A        |                      | December 12, 2012(1) |   |
| and Former Named         |       | 4                                                            |       | 1,050,000                         |       | $                         | 16.00      |                                                         | $               | 16,800,000                |                      | December 12, 2012(1) |   |
| Executive Officers       |       | 1                                                            |       | 80,000                            |       | $                         | 8.74       |                                                         | $               | 699,200                   |                      | July 13, 2013 |   |
|                     |       |                                                         |       |                              |       |                      |       |                                                         |            |                      |                      |
| Directors and Former     |       | 3                                                            |       | 75,000                            |       | $                         | 16.00      |                                                         | $               | 1,200,000                 |                      | December 12, 2012(1) |   |
| Directors who are not    |       | 5                                                            |       | 200,000                           |       | $                         | 5.38       |                                                         | $               | 1,076,000                 |                      | November 14, 2012 |   |
| Named Executive Officers |       |                                                         |       |                              |       |                      |       |                                                         |            |                      |                      |
|                     |       |                                                         |       |                              |       |                      |       |                                                         |            |                      |                      |
| Current and Former       |       | 1                                                            |       | 25,000                            |       | $                         | 0.01       |                                                         | N/A   |                      | December 12, 2012(1) |   |
| Employees                |       | 1                                                            |       | 25,000                            |       | $                         | 16.00      |                                                         | $               | 400,000                   |                      | December 12, 2012(1) |   |
|                     |       | Greater than 10                                              |       | 120,000                           |       | $                         | 8.74       |                                                         | $               | 1,048,800                 |                      | July 13, 2013 |   |
|                     |       | Greater than 10                                              |       | 56,000                            |       | $                         | 6.53       |                                                         | $               | 365,680                   |                      | April 16, 2014 |   |
|                     |       |                                                         |       |                              |       |                      |       |                                                         |            |                      |                      |
| Consultants              |       | —                                                       |       | —                            |       | —                    |       | —                                                       |            | —                    |                      |

 

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Notes:

 

(1)                                  The expiration date of these options is orwill be, as applicable, seven years from the closing of our initial publicoffering.

 

As at the date hereof, our directors and Named Executive Officers holdoptions to acquire an aggregate of 2,455,000 of our Subordinate Voting Shares,our employees hold options to acquire an aggregate of 226,000 of ourSubordinate Voting Shares, and no consultants hold any options.

 

Reference is made to “Item 6 — Directors, Senior Managementand Employees — Compensation — Executive Compensation” above forinformation regarding the number of options held by each of the Named ExecutiveOfficers, including the exercise price, the percent of options outstanding andthe expiration date of the options.

 

**Restricted Stock Unit Plan**

 

Following approval by the majority of Shareholders present at theCompany’s 2006 Annual Shareholder Meeting we implemented a restricted stockunit plan (the “**RSU Plan**”) which allows for thepayment of performance bonuses to employees and/or directors of the Company orany of its affiliates in the form of Subordinate Voting Shares. This willprovide such individuals with an additional incentive to further the growth anddevelopment of the Company and will encourage them to remain in the employmentof the Company.

 

The Compensation Committee of the Board of Directors administers theRSU Plan and is responsible for the selection of individual employees ordirectors to whom grants of RSUs will be made, as well as determine the amountsand terms of such grants. The selection of recipients will be based on theindividual’s current and potential contribution to the Company and the terms ofthe grants may include non-competition provisions or the achievement ofcertain individual or collective performance related criteria, such as thefinancial performance of the Company. The terms of any particular grant neednot 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 Planitself, without shareholder approval.

 

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Each RSU granted under the RSU Plan will entitle the recipient at theend of the grant period to receive one Subordinate Voting Share of the Company ata future date (the “Release Date”), provided (i) the Participant iscontinuously employed by the Company or any of its affiliates from the date orthe effective date of such grant to the Release Date, or as otherwisedetermined by the Board of Directors, and (ii) all other terms andconditions of the grant have been satisfied. The grant of a RSU will notentitle the individual to exercise any voting rights, receive any dividends orexercise any other right which attaches to ownership of Subordinate VotingShares. The maximum number of Subordinate Voting Shares which may beissued from treasury under the RSU Plan is 250,000.

 

Unless the Compensation Committee decides otherwise, in the event anindividual’s employment is terminated with the Company or any of its affiliatesfor any reason other than death before the Release Date has occurred, suchindividual’s RSUs will be forfeited and no Subordinate Voting Shares will beissued. If a individual’s employment is terminated due to his/her death, theRSUs will not be forfeited, but rather, the deceased Participant’s estate willbe entitled to receive an amount of Subordinate Voting Shares, which depends onthe date of death, at the Release Date.

 

The RSU Plan also includes certain protections for an individual in theevent of a change in control of the Company. In such a case, an individual willbe entitled, subject to certain conditions, to receive a Subordinate VotingShare for each RSU granted prior to such change of control.

 

As of the date hereof, our directors and named Executive Officers holdan aggregate of 84,566 RSU’s which are not conditioned on continued employmentwith the Company.

 

Reference is made to “Item 6 – Directors, Senior Management andEmployees – Compensation – Executive Compensation” above for informationregarding the number of RSUs granted to each of the Named Executive Officersduring our fiscal year ended August 31, 2007.

 

**Item 7 — Major Shareholders AndRelated Party Transactions**

 

**A.****                                    MAJORSHAREHOLDERS**

 

The following table shows the name of each person or company who, as atNovember 14, 2007, owned of record, or who, to our knowledge, ownedbeneficially, directly or indirectly, more than 5% of our Subordinate VotingShares, assuming conversion of all Class B Voting Shares into SubordinateVoting Shares.

 
| **Principal Shareholder**   | ** ** | **Type of   Ownership** | ** ** | **Number of   Subordinate   Voting Shares** | ** ** | **Percentage of   Subordinate   Voting Shares   Outstanding** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
|                             |       |                              |       |                                                            |       |                                                                                   |       |
| CSRI Inc.(1)                     |       | Direct                            |       | 27,142,711                                                      |       | 56.92                                                                                  | %          |
| XM Holdings                 |       | Direct                            |       | 11,077,500                                                      |       | 23.23                                                                                  | %          |
| General Motors of Canada Limited |       | Direct                            |       | 3,323,250                                                       |       | 6.97                                                                                   | %          |

 

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Notes:

 

(1)                                  CSRI Inc., formerly Canadian Satellite RadioInvestments Inc., is controlled by John I. Bitove, our Chairman and ChiefExecutive Officer.

 

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**B.****                                    RELATEDPARTY TRANSACTIONS**

 

The Company,CSR Inc. and CSRI Inc., formerly Canadian Satellite Radio Investments Inc.,which is controlled by John I. Bitove, our Chairman and Chief ExecutiveOfficer, have entered into a shareholders agreement with XM (the “Shareholders’****Agreement”). The Shareholders’ Agreement provides formatters relating to the composition of our board of directors and the board ofdirectors of CSR Inc., and also contains certain rights and restrictions withrespect to the shareholders of each of XM and CSRI Inc. In addition, the leasefor our Toronto studio is with an affiliate of CSRI Inc.

 

In addition,we have entered into a number of operational, credit and governance agreementswith XM, one of our principal shareholders, including a license agreement, aprogramming agreement, a credit facility, a shareholders agreement and aregistration rights agreement providing for certain demand and piggybackregistration rights in connection with our Subordinate Voting Shares. See “Item10 – C. Material Contracts”. Mr. Gary Parsons and Dr. JosephVerbrugge, who were each appointed as directors prior to the closing of ourinitial public offering, are each officers and Mr. Parsons is a directorof XM.

 

Mr. Marc Comeau, one of our directors, isan officer of GMCL. We have agreed to a distribution arrangement with GMCL.

 

During theyear 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 isincluded in accounts payable. In addition, during the year ended August 31,2007, CSRI Inc. incurred $204,905 (2006 - $3,049,041) of costs related to theCompany’s license application process. This amount has been included incontributed surplus. (See our annual financial statements for the fiscal yearended August 31, 2007 which are included in this annual report beginning onpage F-1.)

 

During theyear ended August 31, 2007, the Company received printing services fromAMI Printing valued at approximately $671,046 (2006 - $1,776,926). An affiliateof CSRI Inc. holds an indirect minority interest in AMI Printing.

 

During theyear ended August 31, 2007, the Company received payroll services from KITLP in the amount of $27,723 (2006 - $20,000). In addition, the Company soldapproximately $226,800 (2006 - $55,000) of advertising to KIT LP during theyear. KIT LP is owned, directly and indirectly, approximately 60% by PriszmCanadian Income Fund and approximately 40% by a company controlled by John I.Bitove.

 

During the yearended August 31, 2007, the Company received field marketing services fromVision Group of Companies (Vision), valued at approximately $2,277,600 (2006 -$1,965,735). This amount consists of fees paid to Vision of $375,000(2006-$300,000) and amounts paid by Vision to vendors on the Company’s behalfof $1,902,600 (2006-$1,665,735). The principal of Vision is related to John I.Bitove.

 

During theyear ended August 31, 2007, the Company incurred consulting servicesrelated to public relations from the Wilcox Group totalling $388,226 (2006 -$725,015). Mat Wilcox, a director of the Company is the principal of the WilcoxGroup.

 

During theyear ended August 31, 2007, the Company incurred $536,427 (2006 -$599,969)of expenses related to the reimbursement of operating and travel expenses andthe lease of its Toronto studio from a company controlled by John I. Bitove.The Company has leased this property for a 15-year period for a total amount ofapproximately $2.5 million.

 

The relatedparty transactions described above have been recorded at the exchange amount,which is the consideration paid or received as established and agreed to by therelated parties.

 

Other than theforegoing, no director, executive officer or shareholder who beneficially owns,directly or indirectly, or exercises control or direction over more than 10% ofthe outstanding Subordinate Voting Shares or known associate or affiliate ofany such person, has or had any material interest, direct or indirect, in anytransaction within the last three years or in any proposed transaction, thathas materially affected or will materially affect us.

 

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**C.****                                    INTERESTSOF EXPERTS AND COUNSEL**

 

Not applicable.

 

**Item 8 — Financial Information**

 

**A.****                                    CONSOLIDATEDSTATEMENTS AND OTHER FINANCIAL INFORMATION**

 

Our consolidated balance sheets as at August 31, 2006 and 2007 andconsolidated statements of operations shareholder’s equity and cash flows forthe years ended August 31, 2005, 2006 and 2007, including the notes theretoand together with the auditors’ report thereon, are presented at Item 18of this annual report.

 

**B.****                                    SIGNIFICANTCHANGES**

 

Except as otherwise disclosed in this annual report, there have been nomaterial changes in our financial position, operations or cash flows since August 31, 2007.

 

**Item 9 — The Offer And Listing**

 

**A.****                                    OFFERAND LISTING DETAILS**

 

Not applicable.

 

**B.****                                    PLANOF DISTRIBUTION**

 

Not applicable.

 

**C.****                                    MARKETS**

 

Not applicable.

 

**D.****                                    SELLINGSHAREHOLDERS**

 

Not applicable.

 

**E.****                                      DILUTION**

 

Not applicable.

 

**F.****                                      EXPENSESOF THE ISSUER**

 

Not applicable.

 

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**Item 10 — Additional Information**

 

**A.****                                    SHARECAPITAL**

 

Not applicable.

 

**B.****                                    MEMORANDUMAND ARTICLES OF ASSOCIATION**

 

The Articles of Amalgamation of the Company have been previously filedby us as Exhibit 3.1 of Canadian Satellite Radio Holdings Inc.’sAmendment No.1 to the Registration Statement on Form F-4 dated June 282006, Registration Statement No. 333-134004. Our Articles of Amalgamationare referred to as our “Articles”. The following is a summary of certainprovisions of our Articles and bylaws:

 

1.                                       On December 8,2005, Canadian Satellite Radio Holdings Inc. and2087609 Ontario Inc. amalgamated under Part XIV of the BusinessCorporations Act (Ontario), into a single company using the name “CanadianSatellite Radio Holdings Inc.” with the Ontario CorporationNumber 1681731. The Articles provide no restrictions on the business thatthe Company may carry on or on the powers that the Company may exercise.

 

2.                                       Subject to anyrestriction which may from time to time be include in the Articles or ourbylaws, or the terms, rights or restrictions of any of our shares or securitiesoutstanding, our directors may authorize us, by simple resolution to: (i) borrowmoney on the credit of the Company; (ii) issue, reissue, sell or pledgebonds, debentures, notes or other evidences of indebtedness or guarantee of theCompany, whether secured or unsecured; (iii) to the extend permitted bythe Business Corporations Act (Ontario), give a guarantee on behalf of theCompany to secure performance of any present or future indebtedness, liabilityor obligation of any person; and (iv) mortgage, hypothecate, pledge orotherwise create a security interest in al or any currently owned or subsequentlyacquired real or personal, movable or immovable, property of the Companyincluding book debts, rights, powers, franchises and undertakings, to secureany such bond, debentures, notes or other evidences of indebtedness orguarantee or any other present or future indebtedness, liability or obligationof the Company.

 

Neither the Articles nor our bylaws containprovisions with respect to (i) directors’ power to vote on a proposal,arrangement or contract in which the director is materially interested; (ii) directors’power, in the absence of an independent quorum, to vote compensation themselvesor any members of their body; (iii) the retirement or non-retirement ofour directors under an age limit requirement; or (iv) the number ofshares, if any, required for the qualification of our directors.

 

3.                                       The rights,preferences and restrictions attaching to our Class A Subordinate VotingShares, Class B Voting Shares and Class C Non-Voting Shares are setforth below:

 

(a)                                  Dividendrights: Subject to the prior rights of the holders of any other shares rankingsenior to the Class A Subordinate Voting Shares, the Class B VotingShares and the Class C Non-Voting Shares in respect of priority in thepayment of dividends, the holders of Class A Subordinate Voting Shares, Class BVoting Shares and Class C Non-Voting Shares shall be entitled toparticipate at the same time in any dividend, whether in cash, in shares of theCorporation or otherwise, which may be declared or paid on any class of suchshares, such participation to be, with respect to the Class A SubordinateVoting Shares and the Class C Non-Voting Shares, on an equal per share basis,including without limitation with respect to the amount per share of thedividend (the “Dividend Amount”), and to be, with respect to the Class B VotingShares, an amount per share equal to one-third (1/3) ofthe Dividend Amount.

 

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(b)                                 Voting rights: At allmeetings of shareholders of the Company, except meetings at which only holdersof another class of shares are entitled to vote, the holders of the Class ASubordinate Voting Shares shall be entitled to one (1) vote in respect ofeach Class A Subordinate Voting Share and the holders of the Class BVoting Shares shall be entitled to one (1) vote in respect of each Class BVoting Share.

 

The holders of the Class C Non-Voting Shares shall be not beentitled to vote at any meetings of the shareholders of the Company (exceptwhere the holders of a specified class of shares are entitled to voteseparately as a class as provided in the Business Corporations Act(Ontario), in which case each holder of Class C Non-Voting Shares shall beentitled to one (1) vote in respect of each Class C Non-VotingShare). The holders of the Class C Non-Voting Shares shall not be entitledto vote separately as a class or series or to dissent upon a proposalto amend the articles of the Corporation to:

 

(i)                                     increase ordecrease any maximum number of authorized shares of such class or series,or increase any maximum number of authorized shares of a class or series havingrights or privileges equal or superior to the shares of such class or series;

 

(ii)                                  effect an exchange,reclassification or cancellation of the shares of such class orseries; or

 

(iii)                               create a new class orseries of shares equal or superior to the shares of such class or series.

 

(c)                                  Rights to share inour profits: Other than as described in paragraph (a) above andparagraph (d) below, None.

 

(d)                                 Rights uponliquidation: In the event of the liquidation, dissolution or winding up of theCorporation, whether voluntary or involuntary, or any other distribution ofassets of the Corporation among its shareholders for the purpose of winding upits affairs, all of the remaining property of the Corporation available fordistribution to the holders of the Class A Subordinate Voting Shares, the Class BVoting Shares and the Class C Non-Voting Shares (the “RemainingProperty”) shall, subject to the prior rights of the holders of any sharesranking senior to the Class A Subordinate Voting Shares, the Class BVoting Shares and the Class C Non-Voting Shares in respect of any suchdistribution, liquidation, dissolution or winding-up of the Corporation orother distribution of assets among its shareholders for the purpose ofwinding-up its affairs, whether voluntary or involuntary, be paid ordistributed to the holders of the Class A Subordinate Voting Shares, the Class BVoting Shares and the Class C Non-Voting Shares such that the holders ofthe Class A Subordinate Voting Shares and the Class C Non-VotingShares share equally in the Remaining Property on a per share basis, and theholders of the Class B Voting Shares each receive, on a per share basis,one-third of the amount paid or distributed, on a per share basis, to theholders of the Class A Subordinate Voting Shares and the Class CNon-Voting Shares.

 

(e)                                  Redemptionprovisions: None.

 

(f)                                    Sinkingfund provisions: None.

 

(g)                                 Liabilityto further capital calls by us: None.

 

(h)                                 Provisions discriminatingagainst existing or prospective holders of shares as a result of such holderowning a substantial number of shares: None.

 

4.                                       Under theBusiness Corporations Act (Ontario), (i) the Articles may be amendedby the affirmative vote of the holders of two-thirds of the votes cast by theshareholders at a special meeting called for that purpose; and (ii) ourbylaws may be amended by the directors, by resolution.

 

5.                                       The directorsand each of the chair of the board, the president and the chief executiveofficer have the power to call annual meetings of shareholders and specialmeetings of shareholders. Annual meetings of shareholders and special meetingsof shareholders will be held on the date and at the time and place in oroutside Ontario as the person(s) calling the meeting determine.

 

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If the Company is not a distributing corporation, the time period toprovide notice of the time and place of a meeting of shareholders is not lessthan twenty-one (21) days and not more than sixty (60) days beforethe meeting.

 

The only persons entitled to be present at a meeting of shareholdersare those persons entitled to vote at the meeting, the directors, the officers,the auditor of the Company and others who, although not entitled to vote, areentitled or required under any provision of the Act or the articles or by-lawsto be present at the meeting. Any other person may be admitted with theconsent of the chair of the meeting or the persons present who are entitled tovote at the meeting.

 

A quorum of shareholders is present at a meeting of shareholders if theholders of not less than five (5)% of the shares entitled to vote at themeeting are present in person or represented by proxy, and at least two personsentitled to vote at the meeting are actually present at the meeting.

 

The chair of any meeting of shareholders is the first mentioned of thefollowing officers that is present at the meeting: (i) the chair of theboard; (ii) the president; or (iii) a vice-president (in orderof corporate seniority). If no such person is present at the meeting, thepersons present who are entitled to vote shall choose a director who ispresent, or a shareholder who is present, to chair the meeting.

 

6.                                       The Company ownsall of the outstanding shares of CSR Inc., which holds the licence fromthe CRTC under the Broadcasting Act (Canada). The Governor General in Council(i.e., the cabinet of the Canadian federal government) has, pursuant toits authority under the Broadcasting Act, issued a direction setting out thelegal requirements relating to Canadian ownership and control of broadcastingundertakings entitled the Direction to the CRTC (Ineligibility ofNon-Canadians) (the “Direction”). Under the Direction, non-Canadians arepermitted to own and control, directly or indirectly, up to 33 1/3%of the voting shares and 331/3% of the votes of a parentcompany which has a subsidiary operating company licenced under theBroadcasting Act. In addition, up to 20% of the voting shares and 20% of thevotes of the operating licensee company may be owned and controlled,directly or indirectly, by non-Canadians. The Direction also provides that theChief Executive Officer and 80% of the members of the board of directors of theoperating company must be Canadian. In addition, where the parent company isless than 80% Canadian-owned, the parent company and its directors areprohibited from exercising any control or influence over the programmingdecisions of a subsidiary operating company. CSR Inc. has formed aprogramming committee. There are no restrictions on the number of non-votingshares that may be held by the non-Canadians at either the parent companyor licensee operating company level. The CRTC, however, retains the discretionunder the Direction to determine as a question of fact whether a given licenseeis controlled by non-Canadians.

 

The Articles give our board of directors the authority to restrict theissue, transfer and voting of our Class A Subordinate Voting Shares and Class BVoting Shares, and the issue and transfer of our Class C Non-VotingShares, for the purpose of ensuring that we remain qualified to hold, obtain,maintain, renew or amend any licence pursuant to any broadcasting legislationor other licence required in order to carry on any broadcasting undertaking.

 

7.                                       The Board ofDirectors can refuse to register a transfer of any Class A SubordinateVoting Share or Class B Voting Share, if the transfer would, in theopinion of the Board of Directors, jeopardize the Company remaining qualifiedto hold, obtain, maintain, renew or amend any licence pursuant to anybroadcasting legislation or other licence required in order to carry on anybusiness related to business and ensuring that the Corporation, or anycorporation in which the corporation has a direct or indirect interest thoughthe holding of shares in that or other corporations, is not in breach of anyBroadcasting Legislation or the terms of any Licence held by the Corporation,or such corporation in which the Corporation has a direct or indirect interestthrough the holding of shares in that or other corporations, required in orderto carry on a Broadcasting Business.

 

8.                                       Notapplicable.

 

9.                                       Notapplicable.

 

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10.                                 Notapplicable.

 

**C.****                                    MATERIALCONTRACTS**

 

The following is a summary of each material contract, other thancontracts entered into in the ordinary course of business, to which we or oursubsidiary is a party:

 

**(a)****                                  XM SystemLicense Agreement, effective as of November 17, 2005, by and amongXM Satellite Radio Inc. and Canadian Satellite RadioHoldings Inc. and Canadian Satellite Radio Inc.**

 

Reference is made to “Item 4 — Information on theCompany — Business Overview — Operational Agreements”.

 

**(b)****                                  ProgrammingAgreement, effective as of November 17, 2005, by and amongXM Satellite Radio Inc. and Canadian Satellite RadioHoldings Inc. and Canadian Satellite Radio Inc.**

 

Reference is made to “Item 4 — Information on theCompany — Business Overview — Operational Agreements”.

 

**(c)****                                  RepeaterPurchase Agreement, effective as of November 17, 2005, by and amongXM Satellite Radio Inc. and Canadian Satellite RadioHoldings Inc. and Canadian Satellite Radio Inc.**

 

Reference is made to “Item 4 — Information on theCompany — Business Overview — Other Agreements”.

 

**(d)****                                  TechnicalServices Agreement, effective as of November 17, 2005, by and amongXM Satellite Radio Inc. and Canadian Satellite RadioHoldings Inc. and Canadian Satellite Radio Inc.**

 

Reference is made to “Item 4 — Information on theCompany — Business Overview — Other Agreements”.

 

**(e)****                                  TrademarkLicense Agreement, effective as of November 17, 2005, by and amongXM Satellite Radio Inc. and Canadian Satellite RadioHoldings Inc. and Canadian Satellite Radio Inc.**

 

Reference is made to “Item 4 — Information on theCompany — Business Overview — Other Agreements”.

 

**(f)****                                    DistributionAgreement, effective as of November 10, 2005, by and among General Motorsof Canada Limited, Canadian Satellite Radio Inc. and XM SatelliteRadio Inc.**

 

Reference is made to “Item 4 — Information on theCompany — Business Overview — GMCL Distribution Arrangement”.

 

**(g)****                                 CreditAgreement, effective November 17, 2005, by and among Canadian SatelliteRadio Inc., Canadian Satellite Radio Holdings Inc. andXM Satellite Radio Holdings Inc. (the ”XM Credit Facility”)**

 

We have a commitment for a $45 million standby credit facilityfrom XM for the purchase of terrestrial repeaters and the payment ofsubscription royalties to XM and interest on outstanding debt on the credit facilityas these are incurred. The following is a summary of certain material terms ofthe XM Credit Facility, and is not intended to be complete.

 

Interest on amounts outstanding under the XM Credit Facility willaccrue quarterly at a rate of 9.0% per annum and be payable through additionalborrowings under the XM Credit Facility until availability under theXM Credit Facility is exhausted, and thereafter in cash. We have alsoguaranteed the obligations outstanding under the XM Credit Facility.

 

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XM has the right to convert any amount outstanding under theXM Credit Facility into our Subordinate Voting Shares at any time at theinitial public offering price. In addition, any amount outstanding under the XM CreditFacility shall be automatically converted into Subordinate Voting Shares uponthe occurrence of: (i) our having three consecutive quarters of positiveEBITDA; (ii) our shares being listed on a major U.S. or Canadian stockexchange following an initial public offering of our securities for grossproceeds in excess of $25 million; and (iii) our publicly tradedshares having an average closing price over any ten consecutive trading daysthat is greater than 250% of the price at which our securities were issued andsold pursuant to our initial public offering. The conversion price shall be ourinitial public offering price.

 

The XM Credit Facility permits us to incur up toUS$125 million of unsecured bond debt. For so long as any notes issuedunder the Indenture (as defined below) are outstanding and unsecured(other than the lien on the interest reserve account), the XM CreditFacility will not be secured. As an alternative to unsecured bond debt, if inthe future we cease to have unsecured bond debt outstanding, the XM CreditFacility permits the incurrence of senior bank indebtedness in an aggregateprincipal 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 firstpriority lien on any terrestrial repeaters purchased with funds from the creditfacility and a lien on all the remaining assets of CSR Inc. (excluding theCRTC license and the stock of any subsidiary holding the CRTC license). TheXM Credit Facility liens on the remaining assets of CSR Inc. would besubordinated 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 financialcondition tests and periodic and episodic reporting obligations. The variouscovenants, financial ratios and financial condition tests are not in effectuntil funds have been drawn under the XM Credit Facility. These covenantsinclude, without limitation, restrictions on our ability to pay dividends. Thebreach of any of these covenants could result in a breach under theXM Credit Facility.

 

**(h)****                                 Indenture(the “Indenture”) relating to US$100 million aggregate principalamount of 12.75% Senior Notes due February 15, 2014, dated February 10,2006, by and among Canadian Satellite Radio Holdings Inc., the guarantorsparty thereto and The Bank of Nova Scotia Trust Company of New York,as trustee.**

 

On February 10, 2006, we issued US$100 million aggregate principalamount of 12.75% Senior Notes with a 3 year interest reserve(as described below), due February 15, 2014. Interest on these notesis 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 unconditionallyguaranteed on a senior unsecured basis by all of our current restrictedsubsidiaries and each of our future material restricted subsidiaries.

 

These notes are senior unsecured obligations. They rank equal in rightof payment to any future senior indebtedness, senior in right of payment withany future subordinated indebtedness and effectively subordinated to anysecured indebtedness to the extent of any collateral securing suchindebtedness. Before February 15, 2009, we may, at our option, redeem upto 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 allor a part of the notes at the redemption prices specified in theIndenture, plus accrued and unpaid interest, liquidated damages, if any, andadditional 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 ofcertain equity offerings at 112.75% of the aggregate principal amount thereof,plus accrued and unpaid interest, liquidated damages, if any, and additionalamounts, if any, to the date of redemption, provided at least 75% of theaggregate principal amount of the notes remains outstanding after the redemption.

 

Subject certain exceptions and qualifications, the Indenture, amongother things, limits our ability and the ability of our restrictedsubsidiaries to:

 

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•                                          incuradditional indebtedness and issue preferred stock;

 

•                                          paydividends and make distributions in respect of the capital stock;

 

•                                          repurchasestock or repay subordinated indebtedness;

 

•                                          makecertain investments;

 

•                                          transfer,sell or make certain dispositions of assets or engage in sale and leasebacktransactions;

 

•                                          incurliens;

 

•                                          enterinto transactions with affiliates;

 

•                                          createdividend or other payment restrictions affecting restrictedsubsidiaries; and

 

•                                          merge,consolidate, amalgamate or sell all or substantially all of our assets toanother person.

 

**(i)****                                    InterestReserve and Security Agreement, dated February 10, 2006, by and amongCanadian Satellite Radio Holdings Inc., as guarantor, Canadian SatelliteRadio Inc. and The Bank of Nova Scotia Trust Company of New York, asInterest Reserve Agent and Trustee.**

 

Approximately US$35.5 million of the proceeds of our offering ofnotes was deposited into an interest reserve account in the United States.Funds in this account are invested in U.S. government securities, of whichwe are the beneficial owners. Funds and other assets held in the interestreserve account have been pledged to secure the payment and performance whendue of our obligations under the Indenture with respect to the notes and wehave also granted to the trustee for the benefit of itself and the holders ofthe notes, a first priority security interest in the interest reserve account.These funds have been designated for the first six payments of interest on thenotes. Any funds remaining in the interest reserve account after the sixthinterest 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 ofConvertible 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 beissued under the Trust Indenture is unlimited. The debentures may beissued in one or more series.

 

On September 12, 2007, the Company completed an offering of $20million aggregate principal amount of debentures (the “Initial Debentures”) dueSeptember 12, 2014 on a private placement basis. The Initial Debenturesbear interest at a rate of 8.0 per cent per annum payable semi-annually inarrears on December 31 and June 30, with the initial interest paymentdue on December 31, 2007. Each debentureholder has the option to receivesuch interest either in the form of cash or Subordinate Voting Shares. Atany time prior to September 12, 2014, the Initial Debentures will beconvertible at a conversion price of $5.92 (the “Conversion Price”) at theholders’ option into Subordinate Voting Shares which is equal to a conversionratio of 168.919 Subordinate Voting Share per $1,000 principal amount ofdebentures, 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 achange of control has occurred. At any time on and after September 12,2010, the Initial Debentures may be redeemed in whole or in part fromtime to time at the option of the Company 

 

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on not more than 60 days’ and not less than 30 days’ prior notice at aprice equal to the their principal amount plus accrued and unpaid interestthereon up to but excluding the redemption date, provided that the CurrentMarket Price (as defined in the Trust Indenture) of the Subordinate VotingShares on the date on which the notice of redemption is given is in excess of150% of the Conversion Price. On redemption or on maturity of the InitialDebentures, the Company may, at its option and subject to any applicableregulatory or shareholder approvals, elect to satisfy its obligation to pay allor a portion of the aggregate principal amount of the Initial Debentures byissuing and delivering Subordinate Voting Shares to such holders of Initial Debentures.

 

The Initial Debentures are direct unsecured obligations of the Companyand are subordinated to the Senior Indebtedness (as defined in the TrustIndenture) of the Company. The Initial Debentures rank *pari passu*witheach other series of debentures except for sinking Company provisions (ifany) applicable to different series of debentures. The Trust Indenturedoes not restrict the Company from incurring additional indebtedness forborrowed money or from mortgaging, pledging or charging its properties tosecure any indebtedness.

 

**D.****                                    EXCHANGECONTROLS**

 

None.

 

**E.****                                      TAXATION**

 

**ANY DISCUSSION OF U.S. FEDERAL TAXISSUES SET FORTH IS INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, BYANY PERSON FOR THE PURPOSE OF AVOIDING ANY U.S. FEDERAL TAX PENALTIES THATMAY BE IMPOSED ON SUCH PERSON. EACH U.S. HOLDER SHOULD SEEK ADVICEBASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.**

 

**Certain U.S. Federal Income TaxConsiderations**

 

The following summary describes certain U.S. federal income tax consequencesto U.S. persons (as defined below) of the ownership and dispositionof exchange notes acquired in the exchange offer. Subject to the exceptions,assumptions and qualifications set forth below, the discussion accuratelyreflects the material U.S. federal income tax consequences toU.S. Holders (as defined below) of the ownership and disposition ofexchange notes acquired in the exchange offer. This discussion is based oncurrently existing provisions of the Internal Revenue Code of 1986, as amended(the “Code”), existing, temporary and proposed Treasury regulationspromulgated thereunder, and administrative and judicial interpretationsthereof, all as in effect or proposed on the date hereof and all of which aresubject to change, possibly with retroactive effect, or differentinterpretations. This discussion assumes that U.S. persons holds theexchange notes as capital assets (“U.S. Holders”) within the meaning of Section 1221of the Code. Moreover, this discussion is for general information only and doesnot address the tax consequences to holders that are not U.S. Holders orthe tax consequences that may be relevant to particular initial investorsin light of their personal circumstances or to certain types of initialinvestors subject to special tax rules (such as for example brokers, banksand other financial institutions, insurance companies, tax-exempt entities,dealers in securities or currencies, traders in securities that elect to use amark-to-market method of accounting for their securities holdings, regulatedinvestment companies, real estate investment trusts, U.S. expatriates orformer long-term residents of the U.S., investors liable for the alternativeminimum tax, individual retirement accounts and other tax-deferred accounts,investors that hold notes as part of straddles, hedging transactions orconversion transactions for U.S. federal income tax purposes or investorswhose functional currency is not the U.S. dollar). In addition, thisdiscussion does not include any description of estate and gift taxconsequences, or the tax laws of any state, local or foreign government that may heapplicable to the exchange notes.

 

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No rulings from the U.S. Internal Revenue Service (the “IRS”)have been or will be sought with respect to the matters discussed below. Therecan be no assurance that the IRS will not disagree with or challenge anyposition taken herein regarding the tax consequences of the ownership ordisposition of the exchange notes, or that any such position, if challenged,would be sustained.

 

**EACH U.S. HOLDER SHOULD CONSULT ITS TAXADVISOR REGARDING THE U.S. FEDERAL INCOME TAX CONSEQUENCES APPLICABLE TOSUCH HOLDER IN LIGHT OF ITS PARTICULAR SITUATION WITH RESPECT TO THE OWNERSHIP ANDDISPOSITION OF THE EXCHANGE NOTES, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISEUNDER THE LAWS OF ANY OTHER RELEVANT FOREIGN, STATE, LOCAL, OR OTHER TAXINGJURISDICTION.**

 

As used herein, the term “U.S. person” means a beneficial owner ofan exchange note that is, for U.S. federal income tax purposes, (i) anindividual who is a citizen or resident of the U.S., (ii) a corporation orother entity taxable as a corporation created or organized in the U.S. or underthe laws of the U.S. or of any state thereof (including the District ofColumbia), (iii) an estate the income of which is subject toU.S. federal income tax regardless of its source, or (iv) a trust (A) ifa U.S. court is able to exercise primary supervision over the trust’sadministration and one or more “United States persons” (within the meaningof 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 aU.S. person under the Code on the previous day, and has a valid electionin effect to continue to be so treated.

 

If a partnership or other pass-through entity holds the exchange notes,the tax treatment of a partner in or owner of the partnership or pass-throughentity will generally depend upon the status of the partner or owner and theactivities of the entity. If you are a partner in or owner of a partnership orother pass-through entity that holds exchange notes, you should consult yourtax advisor.

 

*Taxation of Interest on Exchange Notes*

 

Stated interest on an exchange note will generally be taxable to aU.S. Holder as ordinary income at the time it is paid or accrued inaccordance with the U.S. Holder’s method of accounting for tax purposes.In addition to interest on the exchange notes, a U.S. Holder will berequired to include as income any Additional Amounts paid as a result of theimposition of foreign withholding taxes (see “Description of ExchangeNotes-Additional Amounts”). As a result, a U.S. Holder may berequired to include more interest in gross income than the amount of cash itactually receives.

 

*Market Discount*

 

If a U.S. holder acquired an exchange note for an amount that isless than its principal amount, then subject to a statutory *de minimus* rule, the difference will betreated as market discount. Market discount generally accrues on astraight-line basis over the remaining term of the exchange note. Upon anirrevocable election, however, market discount will accrue on a constant yieldbasis. A U.S. Holder might be required to defer all or a portion of theinterest expense on indebtedness incurred or continued to purchase or carry anexchange note. If a U.S. Holder elects to include market discount in grossincome currently as it accrues, the preceding rules relating to therecognition of market discount and deferral of interest expense will not apply.An election made to include market discount in gross income as it accrues willapply to all debt instruments acquired by the U.S. Holder on or after thefirst day of the taxable year to which the election applies and may berevoked only with the consent of the IRS.

 

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*Sale, Redemption or Retirement of theExchange Notes*

 

Upon the sale, redemption, retirement at maturity or other taxabledisposition of an exchange note, a U.S. Holder generally will recognizegain or loss equal to the difference between the sum of cash plus the fairmarket value of all other property received on such disposition (except to theextent such cash or property is attributable to accrued but unpaid interest,which will be taxable as ordinary income) and such U.S. Holder’s adjustedtax basis in the note. A U.S. Holder’s adjusted tax basis in an exchangenote generally will be its cost for the note increased by any accrued marketdiscount previously included in income through the date of disposition. A gainor loss recognized on the disposition of an exchange note generally will becapital gain or loss and will be long-term capital gain or loss if, at the timeof such disposition, the note is treated as having been held for more than oneyear. 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 netlong-term capital gain is 15%. The deductibility of capital losses is subjectto limitations.

 

*Foreign Tax Credit Considerations*

 

If interest payments on the exchange notes become subject to Canadianwithholding taxes, a U.S. Holder may be able, subject to generallyapplicable limitations, to claim a foreign tax credit or take a deduction forsuch withholding taxes imposed on interest payments (including any AdditionalAmounts). Interest (including any Additional Amounts) will constitute incomefrom sources without the U.S. for U.S. foreign tax credit limitationpurposes. 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 governingthe U.S. foreign tax credit are complex, and U.S. Holders are urgedto consult their tax advisors regarding the application of such rules totheir particular circumstances.

 

If the U.S. Holder is a U.S. resident (as defined in section 865of the Code), gains realized upon disposition of an exchange note by suchU.S. Holder generally will be U.S. source income, and dispositionlosses 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 reportingrequirements may apply to certain payments of principal of, and intereston, an exchange note and to proceeds of the sale or other disposition of anexchange note before maturity, if a U.S. Holder:

 

•                  failsto furnish its taxpayer identification number,

 

•                  failsto certify that such number is correct,

 

•                  failsto certify that such U.S. Holder is not subject to backupwithholding, or

 

•                  otherwisefails to comply with the applicable requirements of the backup withholdingrules.

 

Certain U.S. Holders, including corporations, are generally notsubject to backup withholding and information reporting requirements providedtheir exemptions from backup withholding and information reporting are properlyestablished. Any amounts withheld under the backup withholding rules froma payment to a U.S. Holder will be allowed as a credit against such holder’sU.S. federal income tax and may entitle the holder to a refund,provided that the required information is furnished to the IRS.

 

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**Canadian Material Federal Income TaxConsiderations for Non-Residents of Canada**

 

The following summary fairly describes the main Canadian federal incometax consequences applicable to you if you exchanged old notes for new notespursuant to any of our exchange offers or invested, as initial purchaser, inthe notes, and if, for purposes of the Income Tax Act (Canada) (which werefer to as the Act) you are not resident in Canada and do not use or hold thenotes in carrying on business in Canada. This summary does not apply to you ifyou are an insurer who carries on business in Canada and elsewhere or an “authorizedforeign bank” (as defined in the Act). This summary is based on therelevant provisions of the Act and the Regulations thereunder as in force onthe date hereof, and our understanding of the administrative practices of theCanada Revenue Agency. It also assumes that specific proposals to amend the Actand the Regulations publicly announced by the Minister of Finance of Canadaprior to the date of this annual report are enacted in their present form. Thissummary does not address provincial, territorial or foreign income taxconsiderations. Changes in the law or administrative practices or future courtdecisions may affect your tax treatment.

 

Based on the foregoing, amounts that we pay to you as interest,principal or premium on the notes will be exempt from Canadian withholding taxprovided that you deal at arm’s length with us at the time we make thepayments, and no other taxes on income (including taxable capital gains) willbe payable under the Act in respect of the holding, redemption or dispositionof notes.

 

**F.****                                      DIVIDENDSAND PAYING AGENTS**

 

Not applicable.

 

**G.****                                    STATEMENTBY EXPERTS**

 

Not applicable.

 

**H.****                                    DOCUMENTSON DISPLAY**

 

We file periodic reports and other information with the SEC. Thesereports include certain financial and statistical information about us and may beaccompanied by exhibits. You may read and copy this information at the SEC’sPublic Reference Room at 100 F Street, N.E., Room 1580,Washington, D.C. 20549, or obtain copies of this information by mailfrom the public reference room at the prescribed rates. You may callthe SEC at 1-800-SEC-0330 for further information on the SEC’s PublicReference Room. The SEC also maintains an Internet website that containsreports and other information about issuers like us who file electronicallywith the SEC. The URL of that website is http://www.sec.gov. Any documentsreferred to in this annual report may also be inspected at our offices at590 King Street West, 3rd Floor, Toronto, Ontario,M5V 1M3.

 

**I.****                                         SUBSIDIARYINFORMATION**

 

Not applicable.

 

**Item 11 — Quantitativeand Qualitative Disclosures About Market Risk**

 

The Company has formed an Investment Committee, consisting of directorsand senior officers of the Company, in order monitor and account for the risksassociated with fluctuations in interest rates, foreign currency exchange ratesand other credit risk factors.

 

96

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To perform sensitivity analysis, we assess the risk of loss infair values due to the impact of hypothetical changes in interest rates andforeign currency exchange rates on market-sensitive instruments. Informationprovided by the analysis does not represent our view of future market changes,nor does it necessarily represent the actual changes in fair value that wewould incur under normal market conditions because, of necessity, all variablesother than the specific market risk factor are held constant. In reality,changes in one factor may result in change in another, which may magnifyor counteract the sensitivities. The results of sensitivity analysis at August 31,2007 follow.

 

*Foreign Currency Exchange Rate Risk*

 

Most of our revenues and expenses are received or denominated inCanadian dollars. Under the XM License Agreement, we are not exposed tomaterial foreign currency exchange rate risk as the monthly fees due under thisagreement are payable in Canadian dollars. We are exposed to material foreigncurrency exchange rate risk only with respect to payments due to XM under thebroadcasting agreement with the NHL and with respect to the interest paymentson our U.S. dollar-denominated notes. However, until August 2009, ourforeign currency exchange rate risk is reduced because the first six interestpayments on our notes will be drawn from our interest reserve account, which isheld in the United States in a U.S. dollar account.

 

At August 31, 2007, a 10% change in the exchange rate of the U.S. dollaragainst the Canadian dollar, with all other variables remaining constant, wouldresult in a $17.3 million change in the fair market value of our notes anda $6.2 million change in the value of our obligations due under the broadcastingagreement with the NHL.

 

*Interest Rate Risk*

 

We are not exposed to material interest rate risk from changes ininterest rates as the interest payments on our notes and convertible debenturesare fixed payments. We do however run the risk that market rates will declineand the required payments will exceed those based on current market rates.Under our current policies, we do not use interest rate derivative instrumentsto manage our exposure to interest rate fluctuations.

 

*Equity Price Risk*

 

As of August 31, 2007, we were not exposed to material market riskfrom changes in the market value of long-term investments, as we did not holdany significant publicly traded long-term investments.

 

**Item 12 — Description of SecuritiesOther Than Equity Securities**

 

Not applicable.

 

**PART II**

 

**Item 13 — Defaults, DividendArrearages and Delinquencies**

 

None.

 

**Item 14 — Material Modifications toThe Rights Of Security Holders And Use Of Proceeds**

 

**MATERIAL MODIFICATIONS TO THE RIGHTS OFSECURITY HOLDERS**

 

There have been no modifications to the rights of security holders.

 

97

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**USE OF PROCEEDS**

 

Not applicable.

 

**Item 15 — Controlsand Procedures**

 

Management has designed disclosure controls and procedures to providereasonable assurance that material information relating to the Company is madeknown to them by others. As at August 31, 2007, the Chief ExecutiveOfficer and the Chief Financial Officer, with participation of the Company’smanagement, have concluded that the design and operation of the Company’sdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed by the Company in reports that it files or submitsunder the United States Securities Exchange Act of 1934 and applicableCanadian securities laws is (i) recorded, processed, summarized andreported within the time periods specified in applicable rules and formsand (ii) accumulated and communicated to our management, including itsChief Executive Officer and Chief Financial Officer, to allow timely decisionsregarding required disclosure. A control system, no matter how well conceivedor operated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met.

 

During the fiscal year ended August 31, 2007, there were nochanges in the Company’s internal control over financial reporting that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

**Item 16 — [RESERVED]**

 

**Item 16A — Audit CommitteeFinancial Expert**

 

Our Board of Directors has determined that Pierre Boivin is an “auditcommittee financial expert” (as defined in Item 16A of Form 20-F)serving on our Audit Committee. Our Board of Directors has determined thatPierre 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 our principal executive officer, principal financial officer,principal accounting officer or controller, or persons performing similarfunctions. We have filed a copy of this code of ethics as Exhibit 11.1to this annual report. Any person who would like a copy of our code ofethics may request so, without charge, by contacting us at 590 KingStreet West, 3rd Floor, Toronto, Ontario, M5V 1M3.

 

We have not made any amendments to or granted a waiver from a provisionof the code of ethics with respect to any of our director, officeror employees.

 

PricewaterhouseCoopers LLP has served as our independent publicaccountant for the fiscal year ending August 31, 2007, for which auditedconsolidated financial statements appear in this annual report on Form 20-F.

 

**Item 16C — Principal AccountantFees and Services**

 

PricewaterhouseCoopers LLP has served as our independent publicaccountant for the fiscal year ending August 31, 2007, for which auditedconsolidated financial statements appear in this annual report on Form 20-F.

 

The Audit Committee of our Board of Directors establishes the externalauditors’ compensation. In 2006, our Audit Committee also established policiesand procedures to pre-approve all audit and non-audit services to be performedby the external auditors, but only to the extent those services are permittedby the Sarbanes-Oxley Act of 2002 and Canadian law.

 

98

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For the fiscal year ended August 31, 2007, all of the non-auditservices described below were approved by the Audit Committee of our Board ofDirectors pursuant to this “de minimis exception” under the Sarbanes-Oxley Actof 2002. The following table presents the aggregate fees for professionalservices and other services rendered by our independent auditor,PricewaterhouseCoopers LLP, for the fiscal years ended August 31, 2007 and2006. 

 
| ** **         | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
|               |       |     |       |     |       |
| Audit Fees(1)      |       | $        | 221,000    |     | $          | 883,500 |   |
| Audit-Related Fees |       | —   |       | —   |       |
| Tax Fees           |       | 77,880   |       | 38,356   |       |
| All Other Fees     |       | 12,500   |       | —   |       |
| Total Fees         |       | 311,380  |       | 921,856  |       |
|                    |            |          |            |          |            |  |  |

 

----

Note:

 

(1)                                  This amount includes fees related to the reviewof our prospectus and debt registration documents during 2006.

 

**Item 16D — Exemptions from theListing Standards for Audit Committees**

 

Not applicable.

 

**Item 16E — Purchases of EquitySecurities 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, 2007 and our auditedstatement of operations and deficit and cash flows for the fiscal period endingAugust 31, 2007, including the notes thereto and together with auditor’sreport thereon, are included in this annual report beginning on page F-1.

 

99

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**Item 19 — Exhibit**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 1.1                 |       | 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.                                                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 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).                                                   |

 

100

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| 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 John I. Bitove, 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 John I. Bitove, 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.                                                                                                                                                                                                      |

 

101

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**Signature**

 

The registrant hereby certifies that it meets all of the requirementsfor filing on Form 20-F and that it has duly caused and authorizedthe undersigned to sign this annual report on its behalf.

 
| ** ** | **Canadian Satellite Radio Holdings Inc.** |
|------------|-------------------------------------------------|
|       |                                            |   |
|       | By:                                             | /s/ MICHAEL WASHINUSHI |   |
|       |                                            |   |
|       |                                            | Michael Washinushi |
|       |                                            | Chief Financial Officer, Treasurer and Secretary |

 

Dated: November 26, 2007

 

102

----

 

 

**Indexto Consolidated Financial Statements**

**CanadianSatellite Radio Holdings Inc.**

 
| Annual  Consolidated Financial Information as at August 31, 2007 and 2006, and for  the Years Ended August 31, 2007, 2006, and 2005 |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|
| Report  of Independent Registered Public Accounting Firm                                                                            | F-2    |
| Consolidated Balance Sheets as at August 31, 2007 and 2006                                                                          | F-3    |
| Consolidated Statements of Operations and Deficit for the years ended  August 31, 2007, 2006 and 2005                               | F-4    |
| Consolidated Statements of Cash Flows For the years ended August 31,  2007, 2006 and 2005                                           | F-5    |
| Notes to Consolidated Financial Statements August 31, 2007, 2006 and  2005                                                          | F-6    |

 

F-1

----

 

 

 

**PricewaterhouseCoopersLLP**

PO Box 82

Royal TrustTower, Suite 3000

Toronto Dominion Centre

Toronto, Ontario

Canada M5K 1G8

Telephone +1416 863 1133

Facsimile +1416 365 8215

 

November 15, 2007

 

 

**Auditors’ Report**

 

**To the Shareholders of**

**Canadian Satellite Radio Holdings Inc.**

 

We have audited the consolidated balancesheets of **Canadian Satellite Radio Holdings Inc.**as at August 31, 2007 and 2006 and the consolidated statements of operationsand deficit and cash flows for each of the years in the three-year period endedAugust 31, 2007. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform an audit to obtain reasonableassurance whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, these consolidated financialstatements present fairly, in all material respects, the financial position ofthe Company as at August 31, 2007 and 2006 and the results of its operationsand its cash flows for each of the years in the three-year period ended August31, 2007 in accordance with Canadian generally accepted accounting principles.

 

**(Signed) “PricewaterhouseCoopersLLP”**

 

**Chartered Accountants, Licensed Public Accountants**

 

PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopersLLP and the other member firms of PricewaterhouseCoopers International Limited,each of which is a separate and independent legal entity.

 

F-2

----

 

**Canadian Satellite Radio Holdings Inc.**

Consolidated Balance Sheets**As at August 31, 2007 and 2006**

 
| ** **                                                                | ** ** | **2007 ** | ** ** | **2006**** ** | ** ** |
|---------------------------------------------------------------------------|------------|----------------|------------|--------------------|------------|
| ** **                                                                | ** ** | **$ **    | ** ** | **$**              | ** ** |
| **Assets**                                                                |       |           |       |               |       |
|                                                                      |       |           |       |               |       |
| **Current assets**                                                        |       |           |       |               |       |
| Cash                                                                      |       | 9,524,931      |       | 45,188,214         |       |
| Short term investments                                                    |       | 5,281,000      |       | —             |       |
| Accounts receivable                                                       |       | 4,904,803      |       | 2,125,367          |       |
| Inventory                                                                 |       | 2,462,975      |       | 600,124            |       |
| Prepaid expenses and other assets                                         |       | 2,401,315      |       | 6,882,247          |       |
| Restricted investments (note 3)                                           |       | 13,043,109     |       | 13,663,023         |       |
|                                                                      |       |           |       |               |       |
|                                                                      |       | 37,618,133     |       | 68,458,975         |       |
|                                                                      |       |           |       |               |       |
| **Restricted investments** (note 3)                                       |       | 6,301,677      |       | 19,370,939         |       |
|                                                                      |       |           |       |               |       |
| **Deferred financing costs** (note 3)                                     |       | 4,456,280      |       | 5,146,280          |       |
|                                                                      |       |           |       |               |       |
| **Property and equipment** (note 4)                                       |       | 20,878,489     |       | 23,221,760         |       |
|                                                                      |       |           |       |               |       |
| **Contract rights, distribution  rights and computer software**  (note 5) |       | 219,897,424    |       | 239,648,067        |       |
|                                                                      |       |           |       |               |       |
| **Total assets**                                                          |       | 289,152,003    |       | 355,846,021        |       |
|                                                                      |       |           |       |               |       |
| **Liabilities and Shareholders’  Equity**                            |       |           |       |               |       |
|                                                                      |       |           |       |               |       |
| **Current liabilities**                                                   |       |           |       |               |       |
| Accounts payable and accrued liabilities  (notes 6 and 13)                |       | 20,412,856     |       | 13,516,770         |       |
| Deferred revenue                                                          |       | 10,445,788     |       | 2,969,366          |       |
|                                                                      |       |           |       |               |       |
|                                                                      |       | 30,858,644     |       | 16,486,136         |       |
|                                                                      |       |           |       |               |       |
| **Long-term debt**(note 3)                                                |       | 107,434,473    |       | 110,660,000        |       |
|                                                                      |       |           |       |               |       |
| **Deferred revenue**                                                      |       | 3,626,134      |       | 1,032,289          |       |
|                                                                      |       |           |       |               |       |
| **Other long-term liabilities**                                           |       | 376,316        |       | 310,405            |       |
|                                                                      |       |           |       |               |       |
| **Total liabilities**                                                     |       | 142,295,567    |       | 128,488,830        |       |
|                                                                      |       |           |       |               |       |
| **Shareholders’ Equity**                                             |       |           |       |               |       |
| Share capital (note 7)                                                    |       | 312,948,883    |       | 312,595,362        |       |
| Contributed surplus (notes 6 and 7)                                       |       | 30,129,704     |       | 26,344,137         |       |
| Deficit                                                                   |       | (196,222,151   | )          | (111,582,308       | )          |
|                                                                      |       |           |       |               |       |
| **Total shareholders’ equity**                                       |       | 146,856,436    |       | 227,357,191        |       |
|                                                                      |       |           |       |               |       |
| **Total liabilities and  shareholders’ equity**                      |       | 289,152,003    |       | 355,846,021        |       |

 

**Contracts and commitments**(note 15)

 

# **Approvedby the Board of Directors**

 
| **(signed) John I. Bitove** | ** ** | **(signed) Pierre Boivin** |
|-----------------------------|------------|----------------------------|
| John I. Bitove, Director    |       | Pierre Boivin, Director    |

 

F-3

----

 

**CanadianSatellite Radio Holdings Inc.**

Consolidated Statements ofOperations and Deficit**For the years ended August 31, 2007, 2006 and 2005**

 
| ** **                                                    | ** ** | **2007**** ** | ** ** | **2006**** ** | ** ** | **2005**** ** | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                    | ** ** | **$**              | ** ** | **$**              | ** ** | **$**              | ** ** |
| ** **                                                    | ** ** | ** **         | ** ** | ** **         | ** ** | ** **         | ** ** |
| **Revenue**                                                   |       | 21,244,380         |       | 6,949,282          |       | —             |       |
|                                                          |       |               |       |               |       |               |       |
| **Operating expenses**                                        |       |               |       |               |       |               |       |
| Cost of revenue                                               |       | 25,313,304         |       | 19,050,684         |       | —             |       |
| Indirect costs (note 6)                                       |       | —             |       | 827,125            |       | 3,528,914          |       |
| General and administrative (note 6)                           |       | 16,201,717         |       | 18,465,217         |       | 3,172,480          |       |
| Special charges (note 9)                                      |       | 2,024,080          |       | —             |       | —             |       |
| Stock-based compensation (notes 6 and 7)                      |       | 3,143,643          |       | 23,694,846         |       | —             |       |
| Marketing                                                     |       | 28,509,494         |       | 28,021,159         |       | —             |       |
| Amortization of intangible assets and  property and equipment |       | 22,409,443         |       | 15,914,239         |       | 3,865              |       |
|                                                          |       |               |       |               |       |               |       |
|                                                          |       | 97,601,681         |       | 105,973,270        |       | 6,705,259          |       |
|                                                          |       |               |       |               |       |               |       |
| **Loss before the undernoted**                                |       | (76,357,301        | )          | (99,023,988        | )          | (6,705,259         | )          |
|                                                          |       |               |       |               |       |               |       |
| **Interest revenue**                                          |       | 2,491,256          |       | 2,619,481          |       | —             |       |
|                                                          |       |               |       |               |       |               |       |
| **Interest expenses**                                         |       | (15,287,703        | )          | (8,279,303         | )          | —             |       |
|                                                          |       |               |       |               |       |               |       |
| **Foreign exchange gains**                                    |       | 4,513,905          |       | 1,980,232          |       | —             |       |
|                                                          |       |               |       |               |       |               |       |
| **Net loss for the year**                                     |       | (84,639,843        | )          | (102,703,578       | )          | (6,705,259         | )          |
|                                                          |       |               |       |               |       |               |       |
| **Deficit - Beginning of year**                               |       | (111,582,308       | )          | (8,878,730         | )          | (2,173,471         | )          |
|                                                          |       |               |       |               |       |               |       |
| **Deficit - End of year**                                     |       | (196,222,151       | )          | (111,582,308       | )          | (8,878,730         | )          |
|                                                          |       |               |       |               |       |               |       |
| **Basic and fully diluted loss  per share**(note 8)           |       | (1.78              | )          | (2.99              | )          | (17,833            | )          |

 

F-4

----

 

**CanadianSatellite Radio Holdings Inc.**

Consolidated Statements of CashFlows**For the years ended August 31, 2007, 2006 and 2005**

 
| ** **                                                                                      | ** ** | **2007 ** | ** ** | **2006**** ** | ** ** | **2005**** ** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                                      | ** ** | **$**          | ** ** | **$**              | ** ** | **$**              | ** ** |
| **Cash provided by (used in)**                                                                  |       |           |       |               |       |               |       |
|                                                                                            |       |           |       |               |       |               |       |
| **Operating activities**                                                                        |       |           |       |               |       |               |       |
| Net loss for the year                                                                           |       | (84,639,843    | )          | (102,703,578       | )          | (6,705,259         | )          |
| Add (deduct): Non-cash items                                                                    |       |           |       |               |       |               |       |
| Costs paid by parent company                                                                    |       | 204,905        |       | 3,049,041          |       | —             |       |
| Stock-based compensation expense                                                                |       | 3,143,643      |       | 23,694,846         |       | —             |       |
| Amortization of intangible assets                                                               |       | 19,278,227     |       | 14,075,636         |       | —             |       |
| Amortization of property and equipment                                                          |       | 3,131,216      |       | 1,838,603          |       | 3,865              |       |
| Accrued interest - debt                                                                         |       | 71,154         |       | 519,161            |       | —             |       |
| Accrued interest receivable                                                                     |       | (1,266,730     | )          | (814,774           | )          | —             |       |
| Amortization of deferred financing costs                                                        |       | 690,000        |       | 373,752            |       | —             |       |
| Interest accretion expense                                                                      |       | 35,079         |       | 25,299             |       | —             |       |
| Writeoff of prepaid advertising                                                                 |       | 2,000,000      |       |               |       |               |       |
| Unrealized foreign exchange gains                                                               |       | (3,634,039     | )          | (2,098,253         | )          | —             |       |
| Net change in non-cash working capital  related to operations (note 10)                         |       | 18,229,966     |       | (206,745           | )          | 6,701,394          |       |
|                                                                                            |       |           |       |               |       |               |       |
| Net cash used in operating activities                                                           |       | (42,756,422    | )          | (62,247,012        | )          | —             |       |
|                                                                                            |       |           |       |               |       |               |       |
| **Investing activities**                                                                        |       |           |       |               |       |               |       |
| Restricted investments                                                                          |       | —         |       | (41,015,595        | )          | —             |       |
| Payment of interest expense from restricted  investments                                        |       | 14,270,438     |       | 7,396,855          |       | —             |       |
| Purchase of short-term investment                                                               |       | (5,850,000     | )          |               |       |               |       |
| Purchase of property and equipment                                                              |       | (1,524,723     | )          | (24,055,466        | )          | —             |       |
| Rebate received on prior year purchase of  computer software                                    |       | 432,157        |       |               |       |               |       |
| Purchase of computer software                                                                   |       | (83,240        | )          | (8,570,715         | )          | —             |       |
|                                                                                            |       |           |       |               |       |               |       |
| Net cash used in investing activities                                                           |       | 7,244,632      |       | (66,244,921        | )          | —             |       |
|                                                                                            |       |           |       |               |       |               |       |
| **Financing activities**                                                                        |       |           |       |               |       |               |       |
| Initial public offering - net of issuance  costs                                                |       | —         |       | 50,042,354         |       | —             |       |
| Shares issued to CSR Investments                                                                |       | —         |       | 15,000,000         |       | —             |       |
| Deferred financing costs                                                                        |       | —         |       | (5,520,032         | )          | —             |       |
| Proceeds from long-term debt                                                                    |       | —         |       | 115,420,000        |       | —             |       |
|                                                                                            |       |           |       |               |       |               |       |
| Net cash provided by financing activities                                                       |       | —         |       | 174,942,322        |       | —             |       |
|                                                                                            |       |           |       |               |       |               |       |
| **Foreign exchange loss on cash  held in foreign currency**                                     |       | (151,493       | )          | (1,262,195         | )          | —             |       |
|                                                                                            |       |           |       |               |       |               |       |
| **Change in cash and cash  equivalents during the year**                                        |       | (35,663,283    | )          | 45,188,194         |       | —             |       |
|                                                                                            |       |           |       |               |       |               |       |
| **Cash and cash equivalents -  Beginning of year**                                              |       | 45,188,214     |       | 20                 |       | 20                 |       |
|                                                                                            |       |           |       |               |       |               |       |
| **Cash and cash equivalents -  End of year**                                                    |       | 9,524,931      |       | 45,188,214         |       | 20                 |       |
|                                                                                            |       |           |       |               |       |               |       |
| **Supplemental cash flow  disclosures**                                                         |       |           |       |               |       |               |       |
| Rights acquired through issuance of shares                                                      |       |           |       | 245,152,988        |       | —             |       |
| Property and equipment purchases in  accounts payable                                           |       |           |       | 736,778            |       | 1,729,148          |       |
| Computer software purchases in accounts  payable                                                |       |           |       | 123,499            |       | 1,006,634          |       |
| Prepaid advertising purchased through  issuance of equity                                       |       |           |       | 2,000,000          |       | —             |       |
| Utilization of XM credit facility                                                               |       | 2,136,400      |       |               |       |               |       |
| Additions to property and equipment and  long-term obligations for asset retirement obligations |       | 30,832         |       | 268,119            |       | 16,987             |       |

 

F-5

----

 

**CanadianSatellite Radio Holdings Inc.**

Notes to Consolidated FinancialStatements **August 31, 2007, 2006 and 2005**

### ** **

**1       Organization and nature of business**

** **

CanadianSatellite Radio Holdings Inc. (the Company) was incorporated on July 31, 2002for the purpose of establishing and operating a Canadian satellite radioservice. On June 16, 2005, the Canadian Radio-television and TelecommunicationsCommission (CRTC) approved the application for a licence to the Company’swholly owned subsidiary, Canadian Satellite Radio Inc. (CSR). The decisiongranted a broadcast licence to CSR to carry on a satellite subscriptionundertaking, subject to certain conditions. The initial form of the broadcastinglicence will expire on August 31, 2011. The broadcast licence is describedfurther in note 11.

 

TheCompany has certain exclusive arrangements with XM Satellite Radio HoldingsInc. (XM) to provide the Company’s services in Canada, as further explained innote 13. The Company’s operations depend on XM’s programming content,satellite network and underlying technology, as well as XM’s operational andmarketing efficiency.

 

TheCompany has a single operating segment and all of the Company’s property andequipment and intangible assets are located in Canada.

 

**2       Summary of significant accountingpolicies**

** **

Theconsolidated financial statements of the Company have been prepared inaccordance with Canadian generally accepted accounting principles (GAAP) andinclude the following significant accounting policies:

 

**Principles of consolidation**

 

Theconsolidated financial statements include the accounts of the Company and itssubsidiary, CSR. All material intercompany transactions and balances have beeneliminated.

 

**Short-term investments**

 

Short-terminvestments consist of US dollar corporate bonds with an original maturitygreater than three months, which are valued at cost.

 

**Restricted investments**

 

Asat August 31, 2007, restricted investments represent securities held in trustas security against the next three interest payments with respect to the debtoffering described in note 3. Restricted investments consist of US dollardenominated certificates of deposits totalling approximately US$18.3 million.These investments are recorded at amortized cost.

 

**Inventory**

 

Inventoryis valued at the lower of weighted average cost and market value and consistsof finished goods.

 

F-6

----

 

**Property and equipment**

 

Propertyand equipment are recorded at cost less accumulated amortization.

 

Repairsand maintenance that do not enhance the service potential of the related assetsare charged to expenses as incurred. Renewals and betterments, which materiallyprolong the useful lives of the assets, are capitalized. The cost and relatedaccumulated amortization of property sold are removed from the accounts, andgains and losses are recognized in the consolidated statements of operationsand deficit.

 

**Amortization of property and equipment**

 

Amortizationis computed on a straight-line basis at rates sufficient to amortize the costof the assets over their estimated useful lives.

 
| Terrestrial repeater network |   | 5 to 10 years      |   |
|------------------------------|--------|--------------------|--------|
| Leaseholds                   |   | initial lease term |   |
| Broadcast studio equipment   |   | 3 to 10 years      |   |
| Computer hardware            |   | 3 to 5 years       |   |
| Furnishings and equipment    |   | 3 to 10 years      |   |

 

Amortizationrelated to the terrestrial repeater network and broadcast studio equipment hasbeen excluded from cost of revenue and included in amortization of intangibleassets and property and equipment on the consolidated statements of operationsand deficit.

 

**Asset retirement obligations**

 

TheCompany has obligations with respect to the retirement of terrestrial repeaterequipment and restoration of facilities back to their original state at the endof the lease term. Accruals are made based on management’s estimates of currentmarket restoration costs, inflation rates and discount rates. At the inceptionof a lease, the present value of the expected cash payments is recognized as anasset retirement obligation with a corresponding amount recognized in propertyassets. The property asset amount is amortized and the liability is accretedover the period from the lease inception to the time the Company expects to removethe terrestrial repeater equipment and vacate the premises, resulting in bothamortization and accretion charges in the consolidated statements of operationsand deficit.

 

Duringthe year ended August 31, 2007, the Company incurred an asset retirement obligationof $30,832 (2006 - $268,119), which is included in other long-termliabilities, and recorded accretion expense of $35,079 (2006 - $25,299).

 

F-7

----

 

**Contract rights, distribution rights and computer software**

 

Contractrights, distribution rights and computer software consist of: XM rights;General Motors of Canada Limited (GMCL), Honda Canada Inc. (Honda) and NissanCanada Inc. (Nissan) distribution rights; and computer software. These assetsare recorded at cost and amortized as follows:

 
| XM rights                  |   | 15 years |   |
|----------------------------|--------|----------|--------|
| GMCL distribution rights   |   | 13 years |   |
| Honda distribution rights  |   | 8 years  |   |
| Nissan distribution rights |   | 10 years |   |
| Computer software          |   | 5 years  |   |

** **

**Impairment of long-lived assets**

 

Propertyand equipment and contract rights, distribution rights and computer softwareare tested for impairment whenever events or changes in circumstances indicatethat the carrying value may not be recoverable. If it is determined that thecarrying value of the asset or group of assets is not recoverable, a writedownto fair value is charged to the consolidated statements of operations anddeficit in the year that such a determination is made.

 

**Foreign currency translation**

 

Monetaryassets and liabilities denominated in foreign currencies are translated at theexchange rate in effect at the consolidated balance sheet dates andnon-monetary items are translated at historical exchange rates.

 

Operatingrevenue and expenses are translated at average exchange rates prevailing duringthe year. Gains or losses arising from these transactions are included in theconsolidated statements of operations and deficit.

 

**Income taxes**

 

Income taxes are accounted for under theliability method, whereby future income tax assets and liabilities arerecognized for temporary differences between the income tax and accountingbases of assets and liabilities, as well as for the benefit of losses availableto be carried forward to future years for income tax purposes. A valuationallowance is provided for the portion of future income tax assets that is morelikely than not to remain unrealized. Significant judgment is involved indetermining the realizability of temporary differences and tax losscarry-forwards. Future income tax assets and liabilities are measured usingsubstantively enacted income tax rates applicable to taxable income in theyears in which those temporary differences are expected to be recovered orsettled. Future income tax assets and liabilities are adjusted for the effects ofchanges in income tax laws in the year in which the change occurs.

 

**Stock-based compensation**

 

TheCompany expenses the fair value of share options and other stock-based awardswhen granted to employees, directors and senior officers over the related vestingperiod.

 

F-8

----

 

**Revenue recognition**

 

The Company derives revenue primarily fromsubscriber fees, activation fees and advertising.

 

Subscriber fees, which generally are billedin advance, are recognized as the service is provided. Activation fees, whichare generally non-refundable after 30 days, are recognized over the estimated40-month life of the customer relationship. Sales incentives consisting ofrebates to customers are accounted for as reductions of revenue when therevenue is recognized or the incentive is offered.

 

The Company recognizes advertising revenuefrom sales of advertisements in the period in which the advertising isbroadcast. Advertising revenues from barter transactions are recognized at fairvalue. Merchandise or services received in barter transactions are recorded asexpenses when used or received.

 

During the year ended August 31, 2007, theCompany entered into several non-monetary transactions. These transactionsinvolve the exchange of advertising and satellite radio services from theCompany, for advertising and other services. These transactions were measuredat the fair value of the goods and services received or provided, whichever ismore reliably determined. The total dollar amount of non-monetary transactionsduring the year was approximately $ 333,500.

 

**Marketing**

 

Advertising and marketing includesadvertising and costs for media and events which are  expensed as incurred.

 

Marketing also includes incentives andsubsidies to retailers and manufacturers to promote the distribution of radioswith the capacity to receive XM satellite digital radio programming (XM Radios)are included in marketing. These costs are generally expensed upon sale oractivation of the XM Radios.

 

**Subscriber service costs**

 

The activation fee paid to XM as part of thelicence agreement (note 13) is deferred and amortized to cost of revenue overthe estimated 40-month life of the customer relationship. The XM subscriptionfees are expensed as a cost of revenue as the related subscription revenue isrecognized into income.

 

**Broadcast licence acquisition costs**

 

All costs related to obtaining andmaintaining the broadcast licence are expensed as incurred.

 

**Programming royalty arrangements**

 

The Company negotiates music programmingroyalty arrangements with a number of Canadian copyright collectives. The costof these royalty arrangements is expensed as a cost of revenue. Until thesearrangements are finalized, the Company recognizes the cost based on management’sbest estimate.

 

F-9

----

 

**Loss per share**

 

Loss per share is computed by dividing thenet loss for the year by the weighted average number of common sharesoutstanding during the year. Diluted net loss per common share is computed bydividing the net loss for the year by the weighted average number of common anddilutive equivalent shares outstanding during the year.

 

**Financial instruments**

 

The carrying amounts of cash and cashequivalents, accounts receivable and accounts payable and accrued liabilitiesapproximate their fair values because of the near-term maturity of theseinstruments.

 

The Accounting Standards Board has issuedCICA Handbook section 1530, Comprehensive Income, (“Section 1530”, HandbookSection 3855 Financial Instruments – Recognition and Measurement, (“Section3855”) and Handbook Section 3865 Hedges, (“Section 3855”). Section 3855 expandson the CICA Handbook Section 3860 Financial Instruments – Disclosure andPresentation by prescribing when a financial instrument is to be recognized onthe balance sheet and at what amount. It also specifies how financialinstrument gains and losses are to be presented. Section 3865 is optional. Itprovides alternative treatments to Section 3855 for entities that choose todesignate qualifying transactions as hedges for accounting purposes andspecifies how hedge accounting is applied and what disclosures are necessarywhen applied. Section 1530 introduced a new requirement to present certaingains and losses outside net income in a new component of shareholders’equityentitled Comprehensive Income. These standards are effective for the Companyand will be adopted beginning September 1, 2007.

 

**Use of estimates**

 

Thepreparation of consolidated financial statements in accordance with CanadianGAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosures of contingentassets and liabilities at the dates of the financial statements and expenses forthe periods reported. Actual amounts could differ from those estimates.

 

**AccountingChanges**

 

The CICA hasreissued Handbook Section 1506, “Accounting Changes” (“CICA 1506”). CICA 1506requires that all companies comply with the revised Handbook Section for fiscalyears beginning on or after January 1, 2007. CICA 1506 requires that voluntarychanges in accounting policy are only made if they result in the financialstatements providing reliable and more relevant information; changes inaccounting policy are applied retrospectively unless it is impracticable or thechange in accounting policy is made on initial application of a primary sourceof GAAP; a change in accounting estimate is generally recognized prospectively;material prior period errors are corrected retrospectively; new disclosuresrequired in respect of changes in accounting policies, changes in accountingestimates, and correction of errors.

 

F-10

----

 

**Equity**

 

TheCICA replaced Section 3250, “Surplus”, with Section 3251, “Equity”,establishing standards for the presentation of equity and changes in equityduring a reporting period. This pronouncement applies to interim and annualfinancial statements relating to fiscal years beginning on or after October 1,2006. The Company will adopt this standard beginning on September 1, 2007. Theadoption of this new guidance is not expected to have a material impact on theCompany’s financial position, results of operations or cash flows.

 

**Inventory**

 

In March 2007,the CICA issued Section 3031, “Inventories”, which has replaced Section 3030with the same title. The new Section establishes that inventories should bemeasured at the lower of cost and net realizable value, with guidance on thedetermination of cost. The final standard is effective for interim and annualfinancial statements relating to fiscal years beginning on or after January 1,2008 and is applicable for the Company’s first quarter of fiscal 2009. TheCompany is currently evaluating the impact of this new standard.

 

**3       Long term debt**

 
| ** **         | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|--------------------|------------|-------------|------------|-------------|------------|
| ** **         | ** ** | ** **  | ** ** | ** **  | ** ** |
| Senior notes       |       | 105,619,999 |       | 110,660,000 |       |
| XM credit facility |       | 1,814,474   |       | —      |       |
|               |       |        |       |        |       |
|               |       | 107,434,473 |       | 110,660,000 |       |

 

OnFebruary 10, 2006, the Company issued US$100.0 million aggregate principalamount of 12.75% senior notes, due in 2014 (the notes), in a private placement.Interest payments on the notes are due semi-annually, on February 15 and August15, commencing on August 15, 2006. The notes are redeemable at the option ofthe Company on or after February 15, 2010. Prior to February 15, 2009, theCompany may redeem up to 25% of the notes with the proceeds of sales of itsshare capital.

 

InJuly 2006, CSR completed an exchange of the notes issued in the privateplacement for notes registered under the Securities Act of the United States.The terms of the notes did not change under the exchange.

 

Theindenture governing the notes required the Company to establish an interestreserve account to cover the first six interest payments due under the notes.The remaining balance of the interest reserve account is disclosed asrestricted investments on the consolidated balance sheets. The indenture alsocontains certain provisions which restrict or limit the Company’s ability to,among other things, incur more debt, pay dividends, redeem shares or make otherdistributions, enter into transactions with affiliates, transfer or sellassets.

 

Thenotes issued by the Company are guaranteed by its wholly owned subsidiary, CSR,the Company’s only subsidiary. The guarantee is full and unconditional. TheCompany has no independent assets or operations. As permitted by theregulations of the U.S. Securities Exchange Commission, the consolidatingfinancial information has not been provided.

 

F-11

----

 

Aspart of the issuance of the above-mentioned notes, the Company incurred costsamounting to $5,520,032. These costs are amortized using the effective interestrate method over the term of the notes. During the year ended August 31,2007, $690,000 (2006 - $373,752) of amortization was included in theconsolidated statements of operations and deficit.

 

Infiscal 2006, XM provided to the Company a $45 million credit facility to beutilized to finance the purchase of terrestrial repeater equipment and to paylicense fees. During the year ended August 31, 2007, the Company utilized$2,136,400 under the facility to pay fees due to XM of $2,071,903 and interestaccrued thereon of $64,497. The facility matures on December 31, 2012 and bearsan interest rate of 9% per year. The interest can be satisfied throughadditional borrowings under the facility. XM has the right to convert theunpaid principal amounts into Class A Subordinate Voting Shares of the Companyat the Offering price of $ 16.00 per share at any time and any unpaid principalamounts are automatically converted upon the occurrence of certain conditions.The amount available under the credit agreement is permanently reduced by theaggregate principal borrowed under the facility prior to its maturity.Availability of remaining amounts of the credit facility is dependent on theCompany meeting certain annual covenants.

 

Thisfinancial instrument contains both a liability and an equity element. TheCompany has determined the value of the liability, the most easily measureablecomponent to be $1,807,391 and assigned the residual amount of $329,009 to theequity component as provided in the Canadian Institute of Chartered AccountantsHandbook Section 3860, “Financial Instruments – Disclosure and Presentation”.Over the term of the facility, the liability value must be accreted to itsmaturity value of $2,136,400, with the increase in liability value recorded asinterest expense over the period the liability is outstanding. During the yearended August 31, 2007, the Company recognized $71,579 of interest expenserelated to the credit facility at an effective interest rate of 12.75%.

 

**4       Property and equipment**

** **

Property and equipment consist of thefollowing:

 

| ** **                   | ** ** | **2007**       | ** ** |
|------------------------------|------------|----------------|------------|
| ** **                   | ** ** | **Cost ** | ** ** | **Accumulated   amortization ** | ** ** | **Net ** | ** ** |
| ** **                   | ** ** | **$**          | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                   | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Terrestrial repeater network |       | 14,455,042     |       | 2,660,466 |   | 11,794,576 |   |
| Leaseholds                   |       | 7,494,877      |       | 1,161,223 |   | 6,333,654 |   |
| Broadcast studio equipment   |       | 1,571,556      |       | 506,124 |   | 1,065,432 |   |
| Computer hardware            |       | 850,582        |       | 283,144 |   | 567,438 |   |
| Furnishings and equipment    |       | 1,475,684      |       | 358,295 |   | 1,117,389 |   |
|                         |       |           |       |   |   |   |   |
|                         |       | 25,847,741     |       | 4,969,252 |   | 20,878,489 |   |

 

F-12

----

 

 

| ** **                   | ** ** | **2006**       | ** ** |
|------------------------------|------------|----------------|------------|
| ** **                   | ** ** | **Cost ** | ** ** | **Accumulated   amortization ** | ** ** | **Net ** | ** ** |
| ** **                   | ** ** | **$**          | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                   | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Terrestrial repeater network |       | 14,224,908     |       | 982,774 |   | 13,242,134 |   |
| Leaseholds                   |       | 7,374,217      |       | 439,182 |   | 6,935,035 |   |
| Broadcast studio equipment   |       | 1,437,812      |       | 197,987 |   | 1,239,825 |   |
| Computer hardware            |       | 753,453        |       | 112,649 |   | 30,130 |   |
| Furnishings and equipment    |       | 1,274,585      |       | 110,623 |   | 1,163,962 |   |
|                         |       |           |       |   |   |   |   |
|                         |       | 25,064,975     |       | 1,843,215 |   | 23,221,760 |   |

 

**5       Contract rights, distribution rights andcomputer software**

** **

Contract rights, distribution rights andcomputer software consist of the following:

 

 

| ** **                                  | ** ** | **2007**       | ** ** |
|---------------------------------------------|------------|----------------|------------|
| ** **                                  | ** ** | **Cost ** | ** ** | **Accumulated   amortization ** | ** ** | **Net ** | ** ** |
| ** **                                  | ** ** | **$**          | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                  | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| XM rights (notes 7 and 13)                  |       | 177,610,410    |       | 21,134,594 |   | 156,475,816 |   |
| GMCL distribution rights (notes 7 and 14)   |       | 53,172,000     |       | 7,157,769 |   | 46,014,231 |   |
| Honda distribution rights (notes 7 and 14)  |       | 9,827,325      |       | 1,740,256 |   | 8,087,069 |   |
| Nissan distribution rights (notes 7 and 14) |       | 4,913,663      |       | 696,099 |   | 4,217,564 |   |
| Computer software                           |       | 7,727,889      |       | 2,625,145 |   | 5,102,744 |   |
|                                        |       |           |       |   |   |   |   |
|                                        |       | 253,251,287    |       | 33,353,863 |   | 219,897,424 |   |

 

| ** **                                  | ** ** | **2006**       | ** ** |
|---------------------------------------------|------------|----------------|------------|
| ** **                                  | ** ** | **Cost ** | ** ** | **Accumulated   amortization ** | ** ** | **Net** | ** ** |
| ** **                                  | ** ** | **$**          | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                  | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| XM rights (notes 7 and 13)                  |       | 177,610,410    |       | 9,292,962 |   | 168,317,448 |   |
| GMCL distribution rights (notes 7 and 14)   |       | 53,172,000     |       | 3,067,615 |   | 50,104,385 |   |
| Honda distribution rights (notes 7 and 14)  |       | 9,827,325      |       | 511,840 |   | 9,315,485 |   |
| Nissan distribution rights (notes 7 and 14) |       | 4,913,663      |       | 204,735 |   | 4,708,928 |   |
| Computer software                           |       | 8,200,305      |       | 998,484 |   | 7,201,821 |   |
|                                        |       |           |       |   |   |   |   |
|                                        |       | 253,723,703    |       | 14,075,636 |   | 239,648,067 |   |

 

F-13

----

 

During year ended August 31, 2007,$19,278,227 (2006 - $14,075,636) of amortization was recorded on theseintangible assets.

 

**6       Related party accounts and transactions**

** **

JohnI. Bitove is the Chairman and Chief Executive Officer of the Company and thecontrolling shareholder of CSRI Inc. (CSRI), the controlling shareholder of theCompany. The Company was established for the purpose of making satellite radioservice available to the Canadian public on a commercial basis. To achieve thispurpose, John I. Bitove and the Company entered into a 2003 Memorandum ofAgreement (MOA) with XM dated August 7, 2003. Prior to completing the MOA, theCompany commenced some initial assessments and investigation of satellite radiofor Canada. The MOA confirmed the binding arrangements for the parties to worktogether to obtain a Canadian broadcast licence to operate a subscription-basedsatellite radio service in Canada. In addition, the MOA also included thenon-binding arrangements with respect to a future licence arrangement betweenthe parties, the equity structure, corporate governance and other mattersimpacting the launch, marketing and operations of the satellite radio servicein Canada.

 

In2003, CSRI granted 34,918 options to acquire shares of CSRI at a nominalexercise price to a director of CSRI who, in fiscal 2005, became an officer ofthe Company. The grant included anti-dilution provisions which entitled thedirector to a 5% interest in CSRI. These options vested upon receiving theregulatory approval for the CRTC licence. The grant date fair value of eachoption was $15.75. The compensation cost related to these options has beenincluded in indirect costs in fiscal 2005, 2004 and 2003. The estimated fairvalue of the options was based on the same value arising from the $15 millionof equity contributed to the Company by CSRI.

 

InJune 2005, CSRI granted 21,868 options to acquire shares of CSRI at $7.54 pershare to certain consultants who provided services to the Company, employees ofa company related to CSRI and an officer of the Company. These options had agrant 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 exercisableimmediately and, accordingly, the compensation cost was included in indirectcosts in fiscal 2005. These options expire in June 2008. The remaining optionsvest in June 2008, expire in December 2008 and compensation costs are beingexpensed as stock-based compensation, starting with fiscal 2005, over thethree-year vesting period. The estimated fair market value of the options wasdetermined using the Black-Scholes valuation model using the followingassumptions: estimated fair value of CSRI of $152 per share; risk-free interestrate of 5%; expected life of 3 years; dividend yield of nil%; and volatility of82.5%. Stock-based compensation includes $180,000 (2006 - $90,000) related tothese options.

 

InDecember 2005, through a series of steps, including the amalgamation of theCompany with 2087609 Ontario Inc., the existing option holders exercised halfof their options and received 1,007,289 Class A Subordinate Voting Shares. Thisseries of steps represented a modification of the options and has resulted inan additional stock-based compensatory expense of approximately $3 millionduring fiscal 2006. The Company did not receive any consideration on theexercise of these options.

 

InDecember 2005, 2,403 options of CSRI were granted to an officer of the Companywith a nominal exercise price. These options vest over three years but may beaccelerated if the officer ceases to be employed by the Company. Accordingly,an additional stock-based compensatory expense of approximately $1 million was 

 

F-14

----

 

recordedin the year ended August 31, 2006. These options were valued using theBlack-Scholes valuation model using the following assumptions: fair value ofCSRI of $416 per share; risk-free interest rate of 5%; expected life of 3years; dividend yield of nil%; and volatility of 82.5%. The officer ceased hisemployment with the Company during fiscal 2007.

 

Asdescribed in note 7, XM has a 23.30% interest in the Company. See note 13 fortransactions with and amounts owed to XM.

 

Duringthe year ended August 31, 2006, CSRI advanced $300,000 to the Company. Thisloan is non-interest-bearing, has no fixed terms of repayment and is includedin accounts payable. In addition, during the year ended August 31, 2007, CSRIincurred $204,905 (2006 - $3,049,041) of costs related to the Company’s licenceapplication process. This amount has been included in contributed surplus.

 

Duringthe year ended August 31, 2007, the Company incurred $536,427 (2006 - $599,969)of expenses related to the reimbursement of operating and travel expenses andthe lease of its Toronto studio from a company controlled by John I. Bitove.The Company has leased this property for a 15-year period for a total amount ofapproximately $2.5 million.

 

Duringthe year ended August 31, 2007, the Company received printing services from AMIPrinting valued at approximately $671,046 (2006 - $1,776,926). An affiliate ofCSR Investments holds an indirect minority interest in AMI Printing.

 

Duringthe year ended August 31, 2007, the Company received payroll services from KITLP for an amount of $27,723 (2006 - $20,000). In addition, the Company soldapproximately $226,800 (2006 - $55,000) of advertising to KIT LP during theyear. KIT LP is owned, directly and indirectly, approximately 60% by PriszmCanadian Income Fund and approximately 40% by a company controlled by John I.Bitove.

 

Duringthe year ended August 31, 2007, the Company received field marketing servicesfrom Vision Group of Companies (Vision) valued at approximately $ 2,277,600(2006 - $1,965,735). This amount consists of fees paid to Vision of $375,000(2006 - $300,000) and amounts paid by Vision to vendors on the Company’s behalfof $1,902,600 (2006 - $1,665,735). The principal of Vision is related to JohnI. Bitove.

 

 During the year ended August 31, 2007, theCompany incurred consulting services related to public relations from theWilcox Group totalling $388,226 (2006 - $725,015). A director of the Company isthe principal of the Wilcox Group

 

Therelated party transactions described above have been recorded at the exchangeamount, which is the consideration paid or received as established and agreedto by the related parties.

 

F-15

----

 

**7       Share capital and other activity**

** **

Theauthorized share capital of the Company as at August 31, 2007 consisted of thefollowing shares:

 
| Class A Subordinate Voting Shares |   | unlimited |   |
|-----------------------------------|--------|-----------|--------|
| Class B Voting Shares             |   | unlimited |   |
| Class C Non-Voting Shares         |   | unlimited |   |

 

TheClass B Voting Shares are convertible at any time at the holder’s option intofully paid and non-assessable Class A Subordinate Voting Shares upon the basisof one Class A Subordinate Voting Share for three Class B Voting Shares. TheClass A Subordinate Voting Shares and the Class C Non-Voting Shares participatein the equity of the Company on a per share rate equal to one third of the rateof participation of the Class A Subordinate Voting Shares and the Class CNon-Voting Shares.

 

Share capital and other activity aresummarized as follows:

 
| ** **                                                                                                       | ** ** | **Number of shares** | ** ** | **Value of shares**          | ** ** | ** **                   | ** ** | ** **           | ** ** | ** **                             | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------------|------------|------------------------------|------------|----------------------|------------|----------------------------------------|------------|
| ** **                                                                                                       | ** ** | **Common    shares**           | ** ** | **Class  A Subordinate Voting Shares** | ** ** | **Class  B  Voting  Shares** | ** ** | **Common    shares** | ** ** | **Class  A Subordinate Voting Shares** | ** ** | **Class  B  Voting  Shares** | ** ** | **Contributed  surplus** | ** ** | **Equity  portion of debt** | ** ** | **Total** | ** ** |
| ** **                                                                                                       | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                   | ** ** | **$**                | ** ** | **$**                                  | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                                                                                       | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                   | ** ** | ** **           | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance as at  August 31, 2005                                                                              |       | 200                            |       |                                   |       |                         |       | 20                   |       |                                   |       |   |   |   |   |   |   | 20 |   |
|                                                                                                             |       |                           |       |                                   |       |                         |       |                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Costs incurred by CSR Investments (note 6)                                                                       |       | —                         |       | —                                 |       | —                       |       | —               |       | —                                 |       | — |   | 3,049,041 |   | — |   | 3,049,041 |   |
| Issuance of Common shares to CSRI Inc                                                                            |       | 15,000,000                     |       | —                                 |       | —                       |       | 15,000,000           |       | —                                 |       | — |   | — |   | — |   | 15,000,000 |   |
| Issuance of Class A Subordinate Voting Shares to XM                                                              |       | —                         |       | 11,077,500                             |       | —                       |       | —               |       | 177,240,000                            |       | — |   | — |   | — |   | 177,240.000 |   |
| Issuance of Class A Subordinate Voting Shares to GMCL                                                            |       | —                         |       | 3,323,250                              |       | —                       |       | —               |       | 53,172,000                             |       | — |   | — |   | — |   | 53,172,000 |   |
| Conversion 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                              |       | — |   | — |   | — |   | 2,000,000 |   |
| Stock based compensation expense                                                                                 |       | —                         |       | —                                 |       | —                       |       | —               |       | —                                 |       | — |   | 23,694,846 |   | — |   | 23,694,846 |   |
| Issuance of Class A Subordinate Voting Shares in an initial public  offering (less issuance costs of $4,957,646) |       | —                         |       | 3,437,500                              |       | —                       |       | —               |       | 50,042,354                             |       | — |   | — |   | — |   | 50.042,354 |   |
| Issuance of Class A Subordinate Voting Shares to Honda                                                           |       | —                         |       | 949,500                                |       | —                       |       | —               |       | 9,827,325                              |       | — |   | — |   | — |   | 9,827,325 |   |
| Issuance of Class A Subordinate Voting Shares to Nissan                                                          |       | —                         |       | 474,750                                |       | —                       |       | —               |       | 4,913,663                              |       | — |   | — |   | — |   | 4,913,663 |   |
| Exercise of stock options                                                                                        |       | —                         |       | 25,000                                 |       | —                       |       | —               |       | 400,000                                |       | — |   | — |   | — |   | 400,000 |   |
| Conversion of Class B Voting Shares to Class A Subordinate Voting  Shares                                        |       | —                         |       | 62,500                                 |       | (187,500                     | )          | —               |       | 34,460                                 |       | (34,460 | ) | — |   | — |   | — |   |
|                                                                                                             |       |                           |       |                                   |       |                         |       |                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Balance as at August 31, 2006                                                                                    |       |                           |       | 20,482,289                             |       | 81,428,133                   |       |                 |       | 297,629,802                            |       | 14,965,560 |   | 26,344,137 |   | — |   | 338,939,499 |   |
|                                                                                                             |       |                           |       |                                   |       |                         |       |                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Costs incurred by CSR Investments (note 6)                                                                       |       | —                         |       | —                                 |       | —                       |       | —               |       | —                                 |       | — |   | 204,904 |   | — |   | 204,904 |   |
| Stock-based compensation expense                                                                                 |       | —                         |       | —                                 |       | —                       |       | —               |       | —                                 |       | — |   | 3,058,171 |   | — |   | 3,058,171 |   |
| Issuance of Class A Subordinate Voting Shares to 2 employees and 2  contractors                                  |       | —                         |       | 12,500                                 |       | —                       |       | —               |       | 85,500                                 |       | — |   | — |   | — |   | 85,500 |   |
| Restricted Stock Units issued                                                                                    |       | —                         |       | —                                 |       | —                       |       | —               |       | —                                 |       | — |   | 412,059 |   | — |   | 412,059 |   |
| Restricted Stock Units converted to shares                                                                       |       | —                         |       | 47,127                                 |       | —                       |       | —               |       | 268,020                                |       | — |   | (218,575 | ) | — |   | 49,445 |   |
| Equity portion of XM credit facility                                                                             |       | —                         |       |                                   |       |                         |       | —               |       | —                                 |       | — |   | — |   | 329,009 |   | 329,009 |   |
|                                                                                                             |       |                           |       |                                   |       |                         |       |                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Balance as at August 31, 2007                                                                                    |       | —                         |       | 20,541,916                             |       | 81,428,133                   |       | —               |       | 297,983,322                            |       | 14,965,560 |   | 29,800,696 |   | 329,009 |   | 343,078,587 |   |

 

F-16

----

 

Asa result of a reorganization of the Company on December 8, 2005, the Company’sexisting 15,000,200 common shares were converted to 81,615,633 Class B VotingShares and 1,007,289 Class A Subordinate Voting Shares were issued. As threeClass B Voting Shares are economically equivalent to one Class A SubordinateVoting Share, the conversion resulted in the issuance of 28,212,500 commonshare equivalents. The conversion has been accounted for as a share split,resulting in 1.88 common share equivalents being issued for each pre-existingcommon share. The per share information in these consolidated financial statementshas been restated to reflect the impact of the share split.

 

OnNovember 17, 2005, the Company entered into a Share Issuance Agreement andprovided XM its rights to a 23.30% ownership interest in the Company, ascontemplated in the 2003 MOA and as reflected in documents filed with the CRTC.Immediately prior to the closing of the Offering, the Company issued 11,077,500Class A Subordinate Voting Shares of the Company to XM. The Class A SubordinateVoting Shares were determined to have a value of $177,240,000, based on theOffering price of $16.00 per share. Rights with a value of $177,240,000 havebeen recorded as an intangible asset to be amortized over the initial term ofthe XM agreements of ten years, plus the additional renewal period of fiveyears.

 

Aspart of the distribution agreement with GMCL (note 14), the Company agreed toprovide GMCL with a 7% equity interest in the Company. Immediately prior to theclosing of the Offering in December 2005, the Company issued 3,323,250 Class ASubordinate Voting Shares to GMCL. The Class A Subordinate Voting Shares weredetermined 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 beenrecorded as an intangible asset to be amortized over the 13-year term of theGMCL distribution agreement.

 

InDecember 2005, the Company issued 125,000 Class A Subordinate Voting Shares inexchange for the purchase of radio advertising services to be received by theCompany in an aggregate amount of $2 million. A corresponding amount wasrecorded as prepaid expenses. This balance was written off during the yearended August 31, 2007 and the expense was included in marketing as the Companywas unable to reach an agreement to appropriately utilize the balance topromote its satellite radio services.

 

F-17

----

 

Aspart of the distribution agreement with Honda (note 14), the Company provided949,500 Class A Subordinate Voting Shares, which were determined to have avalue of $9,827,325, based on the market price of the shares at the date theshares 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 theeight-year term of the Honda distribution agreement. As part of thedistribution agreement with Nissan (note 14), the Company provided 474,750Class 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 wereprovided. Distribution rights with a value of $4,913,663 have been recorded asan intangible asset to be amortized over the ten-year term of the Nissandistribution agreement.

 

**Stock options**

 

InNovember 2005, the Board of Directors of the Company approved a stock optionplan for the purpose of providing additional incentives to attract and retainemployees, directors and senior officers of the Company and its affiliates.

 

Underthis plan, the Company has granted options to certain of its employees andsenior officers, for 1,100,000 Class A Subordinate Voting Shares with anexercise price of $0.01. The options were conditional on the closing of theinitial public offering (the Offering). 1,075,000 options will vest in equal one-fourthannual amounts beginning on the date of the closing of the Offering and endingon the third anniversary thereof. Vesting may be accelerated if the employeeceases to be employed by the Company. The remaining 25,000 options were vestedon the closing of the Offering. The options were valued at $16.00 each, basedon Offering price of the shares. An expense of $17.6 million has beenrecorded during the year ended August 31, 2006. During fiscal 2006, 25,000options were exercised and as at August 31, 2007. 735,938 of the options wereexercisable.

 

Duringthe year ended August 31, 2006, the Company granted options to certain of itsdirectors, employees and senior officers for 1,225,000 Class A SubordinateVoting Shares with exercise prices of $8.74 and $16.00. The options vest overthree to five years. The weighted average grant date fair value of theseoptions was $10.67. The total fair value of these options was $13.1 million.During the year ended August 31, 2007, $2.5 million (2006 - $1.9 million) wasrecorded as an expense in the consolidated statements of operations and deficitrelated to these options.

 

Theoptions will expire on the seventh anniversary of the grant date. Any optionnot exercised prior to the expiry date will become null and void.

 

InSeptember 2006, the Company granted options to certain of its employees for241,250 Class A Subordinate Voting Shares with an exercise price of $8.74. Theoptions vest from immediately to four years. The weighted average grant datefair value of the options was $2.80. The total fair value of these options was$0.7 million and during the year ended August 31, 2007, $0.2 million wasrecorded as an expense in the consolidated statements of operations and deficitrelated to these options.

 

F-18

----

 

DuringApril 2007, the Company granted stock options to all of its employees,excluding certain executives, for 73,000 Class A Subordinate Voting Shares withan exercise price of $6.53. The options vest equally over two years. Theweighted average grant date fair value of these options was $2.09.

 

Thefair value of the options was estimated on the date of the grant using theBlack-Scholes option pricing model. The following assumptions were used for theoptions: risk-free interest rate of 5.00% (2006 – 4.00%); expected life of 1 to4 years (2006 – 5 years); expected dividend yield of nil% (2006 – nil%); andexpected volatility of 52.00% to 62.88% (2006 – 82.75%).

 

| ** **                    | ** ** | **Number of   options** | ** ** | **Weighted   average   exercise price** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------|------------|
| ** **                    | ** ** | ** **                        | ** ** | **$**                                                  | ** ** |
| Balance as at August 31, 2005 |       | —                            |       | —                                                 |       |
| Granted                       |       | 2,325,000                         |       | 8.20                                                   |       |
| Exercised                     |       | (25,000                           | )          | 0.01                                                   |       |
| Forfeited                     |       | (25,000                           | )          | 16.00                                                  |       |
|                          |       |                              |       |                                                   |       |
| Balance as at August 31, 2006 |       | 2,275,000                         |       | 8.20                                                   |       |
| Granted                       |       | 314,250                           |       | 8.23                                                   |       |
| Forfeited                     |       | (59,750                           | )          | 8.60                                                   |       |
|                          |       |                              |       |                                                   |       |
| Balance as at August 31, 2007 |       | 2,529,500                         |       | 8.19                                                   |       |

 

Outstanding options as at August 31, 2007 areas follows:

 

| **Exercise price ** | ** ** | **Number   outstanding** | ** ** | **Remaining   contractual life   (years)** | ** ** | **Number   exercisable** | ** **   |
|-------------------------------|------------|-------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------|--------------|
| **$**                         | ** ** | ** **                    | ** ** | ** **                                                | ** ** | ** **                    | ** **   | ** ** |
| ** **                    | ** ** | ** **                    | ** ** | ** **                                                | ** ** | ** **                    | ** **   | ** ** |
| 16.00                         |       |                          | 1,150,000  |                                                      | 5.3        |                          | 567,500      |   |
| 8.74                          |       |                          | 235,000    |                                                      | 2.8        |                          | 30,554       |   |
| 6.53                          |       |                          | 69,500     |                                                      | 1.5        |                          | –– |   |
| 0.01                          |       |                          | 1,075,000  |                                                      | 5.3        |                          | 735,938      |   |
|                          |       |                          |       |                                                      |       |                          |         |   |
|                          |       |                          | 2,529,500  |                                                      |       |                          |         |   |

 

During the year ended August 31, 2007, 15,000previously issued Restricted Share Units (Units) were exercised and 15,000Class A Subordinate Voting Shares of the Company were issued. These Units hadbeen issued in fiscal 2006 to an employee of the Company. The Units vested overa six month period and could be settled, at the option of the Company, in eitherClass A Subordinate Voting Shares of the Company or for a cash amount equal tothe market value of the Class A Subordinate Voting Shares. An amount of$105,000 was transferred from contributed surplus to share capital.

 

F-19

----

 

During the year ended August 31, 2007, theCompany’s Board of Directors approved the issuance of 46,091 Restricted ShareUnits (Units) to three senior executives and two members of the Board ofDirectors to satisfy approximately $315,000 related to 2006 bonus and directorsfees. Each unit allows the participant to receive one Class A SubordinateVoting Share in January 2008. Class A Subordinate Voting Shares will be issuedimmediately if the participant ceases to be employed by the Company prior toJanuary 2008. During the year ended August 31, 2007, 17,544 Units were releasedand 17,544 Class A Subordinate Voting Shares were issued upon the terminationof a senior executive.

 

**8       Loss per share**

** **

Theweighted average number of shares outstanding used to compute basic loss pershare was 47,645,534 (2006 – 34,315,416).

 

Forpurposes of the weighted average number of shares outstanding, the Class BVoting Shares were converted into the equivalent number of Class A SubordinateVoting Shares. Class B Voting Shares participate in the dividends anddistributions at a rate of one third of each Class A Subordinate Voting Shareand are convertible into Class A Subordinate Voting Shares on the basis of oneClass A Subordinate Voting Share for three Class B Voting Shares.

 

Thestock options (note 7) and convertible debt were not included in thecomputation of diluted loss per share, as they would have been anti-dilutivefor the years presented.

 

**9       Special charges**

** **

During the year ended August 31, 2007, managementimplemented actions designed to improve the Company’s efficiencies, improve thecontent on talk and music channels produced by the Company and allocateresources to high growth subscriber channels. The Company’s actions primarilyincluded workforce reductions, with the majority resulting from the formatchange on talk and music channels produced by the Company. The total chargesincurred in connection with these initiatives is approximately $2,024,080.Included in the balance are 49,583 Restricted Share Units (Units) granted to aformer senior executive of the Company. Each of the Units allow the participantto receive one Class A Subordinate Voting Share. During the year ended August31, 2007, 14,583 Units were exchanged for 14,583 Class A Subordinate VotingShares. The remaining Units can be exchanged by the participant for 17,500Class A Subordinate Voting Shares in June 2008 and 2009, respectively.

 

A balance of $ 1,043,357 related to thespecial charges remains in accounts payable and accrued liabilities as atAugust 31, 2007. No further charges are expected.

 

F-20

----

 

**10     Supplemental cash flow disclosures**

** **

Changesin non-cash working capital related to operations for the years ended August 31are as follows:

 

| ** **                                                    | ** ** | **2007 ** | ** ** | **2006**** ** | ** ** | ** 2005 ** | ** ** |
|---------------------------------------------------------------|------------|----------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                    | ** ** | **$**          | ** ** | **$**              | ** ** | **$**                | ** ** |
| ** **                                                    | ** ** | ** **     | ** ** | ** **         | ** ** | ** **           | ** ** |
| Increase in current assets                                    |       |           |       |               |       |                 |       |
| Accounts receivable                                           |       | (2,779,436     | )          | (2,125,367         | )          | —               |       |
| Inventory                                                     |       | (1,862,851     | )          | (600,124           | )          | —               |       |
| Prepaid expenses and other assets                             |       | 4,480,932      |       | (4,882,247         | )          | —               |       |
| Increase in current liabilities                               |       |           |       |               |       |                 |       |
| Accounts payable and accrued liabilities                      |       | 8,321,054      |       | 3,399,338          |       | 6,701,394            |       |
| Deferred revenue                                              |       | 10,070,267     |       | 4,001,655          |       | —               |       |
|                                                          |       |           |       |               |       |                 |       |
| Net change in non-cash working capital  related to operations |       | 18,229,966     |       | (206,745           | )          | 6,701,394            |       |

 

**11     Broadcast licence**

** **

OnJune 16, 2005, CSR received approval of its application for a broadcast licencefrom the CRTC, subject to certain conditions which were satisfied on November22, 2005. The Department of Industry notified the CRTC that its technicalrequirements had been met on November 22, 2005. As a result of the satisfactionof these conditions, CSR fulfilled all regulatory conditions to launch, and CSRlaunched its service on November 22, 2005. As part of the licence, the Companymust contribute a minimum of 5% of gross revenues of the satellite radioundertaking to eligible third parties directly connected to the development ofCanadian musical and artistic talent during each broadcast year.

 

**12     Income taxes**

** **

Asat August 31, 2007, the Company has available income tax loss carry-forwards ofapproximately $171,926,778  (2006 -$72,615,000) that may be used to reduce taxable income in future years. Theselosses expire in 2017.

 

TheCompany has not recorded a provision for income taxes. The difference betweenthe amount computed by multiplying the net loss by the combined statutoryCanadian federal and provincial income tax rate and the $nil provision forincome taxes is reconciled as follows:

 

| ** **                                                                                                                    | ** ** | **2007 ** | ** ** | **2006**** ** | ** ** | ** 2005 ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                                                                                    | ** ** | **$**          | ** ** | **$**              | ** ** | **$**                | ** ** |
| ** **                                                                                                                    | ** ** | ** **     | ** ** | ** **         | ** ** | ** **           | ** ** |
| Net loss for the year                                                                                                         |       | 84,639,843     |       | 102,703,578        |       | 6,705,259            |       |
| Combined federal and provincial income  taxes at statutory rates - 2007 — 35.53%; 2006 — 35.22%; 2005 — 36.12% |       | (30,072,536    | )          | (36,172,200        | )          | (2,421,940           | )          |
| Differences in income taxes resulting from                                                                                    |       |           |       |               |       |                 |       |
| Losses not recognized                                                                                                         |       | 28,299,922     |       | 27,444,937         |       | 2,418.603            |       |
| Permanent differences                                                                                                         |       | 1,772,614      |       | 8,727,263          |       | 3,337                |       |
|                                                                                                                          |       |           |       |               |       |                 |       |
| Provision for income taxes                                                                                                    |       | —         |       | —             |       | —               |       |

 

F-21

----

 

Futureincome taxes reflect the net income tax effects of temporary differencesbetween the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. Future income tax assetsand liabilities consist of the following temporary differences:

 

| ** **                  | ** ** | **2007 ** | ** ** | **2006**** ** | ** ** | ** 2005 ** | ** ** |
|-----------------------------|------------|----------------|------------|--------------------|------------|----------------------|------------|
| ** **                  | ** ** | **$**          | ** ** | **$**              | ** ** | **$**                | ** ** |
| ** **                  | ** ** | ** **     | ** ** | ** **         | ** ** | ** **           | ** ** |
| Future income tax assets    |       |           |       |               |       |                 |       |
| Non-capital losses          |       | 61,085,584     |       | 25,573,254         |       | 3,050,633            |       |
| Property and equipment      |       | 1,900,810      |       | 783,190            |       | 138,857              |       |
| Intangible assets           |       | (2,601,536     | )          | 4,960,499          |       | -                    |       |
| Other                       |       | 41,198         |       | 809,192            |       | -                    |       |
| Valuation allowance         |       | (60,426,056    | )          | (32,126,135        | )          | (3,189,490           | )          |
|                        |       |           |       |               |       |                 |       |
| Net future income tax asset |       | —         |       | —             |       | —               |       |

 

Afull valuation allowance has been provided to fully offset the future incometax assets, as the Company is not certain that such benefits can be utilized inthe near future.

 

**13     XM agreements**

** **

On November 17, 2005, and as contemplated bythe MOA with XM, the Company entered into a number of agreements with XM, whichprovide the Company with exclusive rights to offer XM satellite digital radioservice in Canada. These agreements include a Licence Agreement, a ProgrammingAgreement and a Trademark Agreement, which include the following rights:

 

•      exclusive non-transferable rights and licence to sell the XM basicchannels 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 repeaternetwork and broadcast facilities;

•      computer software and system support; and

•      sharing of technology licences.

 

Theagreements have an initial term of ten years. The Company may, at its option,extend the term for an additional five years.

 

TheLicence Agreement requires the payment of a fee of 15% on recognized subscriberrevenues for the basic service, an activation charge for each subscriber and anadditional fee for any premium services.

 

Inaddition, XM has agreed to provide certain technical and consulting services tothe Company to assist with the installation and rollout of the terrestrialrepeater equipment and other services, including technical assistance withequipment interfaces between the Company’s and XM’s systems and operationalsupport. The Company paid XM US$28,000 per month from September 2006 toDecember 2006 and US$25,000 per month from January 2007 to August 2007 forthese services.

 

F-22

----

 

Thefollowing amount, included as part of accounts payable and accrued liabilities,is due to XM in respect of fees under the Licence Agreement related tosubscriber revenues and activation charges, fees under the Technical ServicesAgreement, reimbursement of call centre charges paid on CSR’s behalf and thepurchase of terrestrial repeaters.

 
| ** **             | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------|------------|------------|------------|------------|------------|
| ** **             | ** ** | **$**      | ** ** | **$**      | ** ** |
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts payable to XM |       | 3,466,953  |       | 628,234    |       |

 

**14     Agreements with original equipmentmanufacturers (OEM)**

** **

OnNovember 30, 2005, the Company entered into a 13-year distribution agreementwith GMCL to install satellite radio receivers in certain GMCL vehicles and tomarket the Company’s services. In exchange, the Company will pay considerationto GMCL that includes installation commissions, subscriber commissions, a shareof subscription fees for GMCL subscribers and funds to be used on jointadvertising opportunities.

 

Inaddition, the Company agreed to issue in escrow a 3% equity interest in theCompany to other automobile OEMs that enter into a distribution agreement withthe Company on certain specific terms. In December 2005, 1,424,250 Class ASubordinate Voting Shares of the Company were placed in escrow. In March 2006,the Company entered into agreements with Honda and Nissan for eight and tenyears, respectively. The distribution agreements include installationcommissions, subscriber commissions and a share of subscription fees. Theshares released from escrow and issued to Honda and Nissan are describedfurther in note 8.

 

InMay 2006, the Company entered into a five-year agreement with Toyota CanadaInc. (Toyota) to install satellite receivers in certain Toyota vehicles. Thisdistribution agreement includes the right to installation commissions in lieuof the extended trial period Toyota customers currently receive.

 

InDecember 2006, the Company entered into a five year agreement with Hyundai AutoCanada (Hyundai) to factory-install satellite receivers in certain Hyundaimodels. This agreement includes installation commissions to be paid to Hyundai.

 

**15     Contracts and commitments**

** **

**Lease obligations**

 

TheCompany has non-cancellable operating leases for office space and terrestrialrepeater sites committed as at August 31, 2007. The annual minimum leasepayments in the following table include rents payable to a related party ofapproximately $170,000 per year, as described in note 6, but do not include anycommon costs, such as income taxes and utilities, which cannot be determined inadvance.

 

F-23

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| ** ** | ** ** | **$**     | ** ** |
|------------|------------|-----------|------------|
|       |       |      |       |
| 2008       |       | 1,263,572 |       |
| 2009       |       | 1,112,520 |       |
| 2010       |       | 1,111,823 |       |
| 2011       |       | 763,924   |       |
| 2012       |       | 224,981   |       |
| Thereafter |       | 1,504,342 |       |
|       |       |      |       |
|       |       | 5,981,162 |       |

 

**National Hockey League**

 

OnSeptember 9, 2005, XM and the National Hockey League signed a term sheetto secure satellite radio National Hockey League broadcast and marketingrights. The agreement between XM and the National Hockey League is a ten-yearagreement, with satellite radio exclusivity over the last eight years, forwhich XM’s total cost is approximately US$100 million. The Company’s commitmentto reimburse XM for a portion of its obligations under this term sheet totalledUS$69.1 million. US$5.5 million was paid in fiscal 2007 and US$5.25 million in2006 and the remainder is payable as follows:

 
| ** ** | ** ** | **$**      | ** ** |
|------------|------------|------------|------------|
| ** ** | ** ** | ** ** | ** ** |
| 2008       |       | 7,250,000  |       |
| 2009       |       | 7,100,000  |       |
| 2010       |       | 7,000,000  |       |
| 2011       |       | 7,250,000  |       |
| 2012       |       | 7,250,000  |       |
| Thereafter |       | 22,500,000 |       |
|       |       |       |       |
|       |       | 58,350,000 |       |

 

**Service provider agreement**

 

OnFebruary 28, 2006, the Company entered into a three-year agreement withAccenture Inc. (Accenture) for maintenance and development services for theCompany’s customer care and billing system. Under the agreement, the Companycommitted to pay a minimum of $12.3 million over the three-year period. InDecember 2006, the Company signed an amendment to the Accenture agreement toextend the term of the agreement an additional three years to December 31,2011. Under this amendment, the Company is now committed to pay $24 millionover the six year term of the agreement.

 
| ** ** | ** ** | **$**      | ** ** |
|------------|------------|------------|------------|
| ** ** | ** ** | ** ** | ** ** |
| 2008       |       | 4,100,000  |       |
| 2009       |       | 4,400,000  |       |
| 2010       |       | 4,425,000  |       |
| 2011       |       | 4,425,000  |       |
|       |       |       |       |
|       |       | 17,350,000 |       |

 

F-24

----

 

**Advertising and marketing commitments**

 

TheCompany has committed to $25.6 million of expenditures related to advertisingand marketing and joint advertising with commercial partners. These commitmentsinclude the purchase of $10 million of total advertising from an entity overthe three-year period commencing in December 2005, with $3 million to be paidthrough the issuance of the Company’s Class A Subordinate Voting Shares at theOffering price of $16.00 per share. Total commitments under all arrangementsare as follows:

 
| ** ** | ** ** | **$**      | ** ** |
|------------|------------|------------|------------|
| ** ** | ** ** | ** ** | ** ** |
| 2008       |       | 6,995,000  |       |
| 2009       |       | 1,580,000  |       |
| 2010       |       | 1,627,000  |       |
| 2011       |       | 1,676,000  |       |
| 2012       |       | 1,726,000  |       |
| Thereafter |       | 12,020,000 |       |
|       |       |       |       |
|       |       | 25,625,000 |       |

** **

**16     Canadian and United States accountingpolicy differences**

** **

The consolidated financial statements of theCompany have been prepared in accordance with GAAP as applied in Canada. Incertain aspects, GAAP, as applied in the United States (U.S.), differs fromCanadian GAAP. The following tables and disclosures represent the principalreconciling items between US GAAP and Canadian GAAP affecting the consolidatedstatement of operations and deficit, the balance sheet, as well as additionaldisclosures required by US GAAP. A consolidated statement of cash flowsprepared under US GAAP is not included because there is no difference from thestatement of cash flows prepared under Canadian GAAP.

 

 
| ** **                                              | ** ** | **2007 ** | ** ** | **2006**** ** | ** ** | **2005**** ** | ** ** |
|---------------------------------------------------------|------------|----------------|------------|--------------------|------------|--------------------|------------|
| ** **                                              | ** ** | **$**          | ** ** | **$**              | ** ** | **$**              | ** ** |
| ** **                                              | ** ** | ** **     | ** ** | ** **         | ** ** | ** **         | ** ** |
| Net loss for the year in accordance with  Canadian GAAP |       | (84,639,843    | )          | (102,703,578       | )          | (6,705,259         | )          |
| Convertible debt (a)                                    |       | 7,082          |       | —             |       | —             |       |
| Net loss for the year in accordance with US  GAAP       |       | (84,632,761    | )          | (102,703,578       | )          | (6,705,259         | )          |

 

F-25

----

 
| ** **                              | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|-----------------------------------------|------------|-------------|------------|-------------|------------|
| ** **                              | ** ** | **$**       | ** ** | **$**       | ** ** |
| ** **                              | ** ** | ** **  | ** ** | ** **  | ** ** |
| **Long-term debt**                      | ** ** | ** **  | ** ** | ** **  | ** ** |
|   Balance under Canadian GAAP |       | 107,434,473 |       | 110,660,000 |       |
|   Convertible debt (a)        |       | 329,009     |       | —      |       |
|   Balance under US GAAP       |       | 107,763,482 |       | 110,660,000 |       |
|                                    |       |        |       |        |       |
| **Share capital**                       |       |        |       |        |       |
|   Balance under Canadian GAAP | ** ** | 312,948,883 |       | 312,595,362 | ** ** |
|   Convertible debt (a)        | ** ** | (336,091    | )          | —      | ** ** |
|   Balance under US GAAP       | ** ** | 312,619,874 |       | 312,595,362 | ** ** |

 

(a)       Convertible debt

 

Under Canadian GAAP, as described in Note 3,the XM credit facility contains both a liability and an equity element. As ofAugust 31, 2007, the value ascribed to XM’s conversion option, which ispresented in Share capital, was $329,009; the value ascribed to debt was$1,807,391. Under US GAAP, the total value of the proceeds received as ofAugust 31, 2007 of $2,136,400 was treated as debt.

 

**Other disclosures**

 

The following amounts are included inaccounts payable and accrued liabilities:

 
| ** **                         | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | **$**      | ** ** | **$**      | ** ** |
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trade creditors                    |       | 15,526,830 |       | 10,123,578 |       |
| Amounts due to related parties     |       | 3,477,888  |       | 2,003,528  |       |
| Amounts related to employees       |       | 817,823    |       | 870,503    |       |
| Interest accrual on long-term debt |       | 590,315    |       | 519,161    |       |
|                               |       |       |       |       |       |
|                               |       | 20,412,856 |       | 13,516,770 |       |

 

**Recent U.S. accounting pronouncements**

 

In December 2004, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standard No.123R (SFAS No. 123R). SFAS No. 123R requires recognition of compensationexpense for stock options granted to employees. The expense is equal to thegrant-date fair value of the option granted, and the expense is recognized overthe vesting period. The standard was effective for the Company as at September1, 2005 and was adopted on that date. The Company adopted the standard underthe modified prospective basis afforded under the standard. There were nocumulative effect adjustments as a result of the adoption of the standard.

 

F-26

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In February 2006, the FASBissued SFAS No. 155, *Accounting forCertain Hybrid Financial Instruments — an amendment of FASB StatementsNo. 133 (Accounting for Derivative Instruments and Hedging Activities) andNo. 140 (Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities),*which permits fair valueremeasurement for any hybrid financial instrument that contains an embeddedderivative that otherwise would require bifurcation. In addition, SFASNo. 155 establishes a requirement to evaluate interests in securitizedfinancial assets to identify interests that are freestanding derivatives orthat are hybrid financial instruments that contain an embedded derivative requiringbifurcation under the requirements of Statement No. 133. This Statementshall be effective for all financial instruments acquired or issued after thebeginning of an entity’s first fiscal year that begins after September 15,2006. The Company will adopt this Statement effective September 1, 2007. Basedon the Company’s current evaluation of this Statement, the Company does notexpect the adoption of SFAS No. 155 to have a significant impact on itsconsolidated results of operations or financial position.

 

In June 2006, the FASBissued FASB Interpretation (“FIN”) No. 48, *Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109*, which clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, *Accounting for Income Taxes*. This Interpretation prescribesa recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina 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 ofan entity’s first fiscal year that begins after December 15, 2006. TheCompany will adopt this Interpretation effective September 1, 2007. Based onthe Company’s current evaluation of this Interpretation, the Company does notexpect the adoption of FIN No. 48 to have a significant impact on itsconsolidated results of operations or financial position.

 

In September 2006, the FASBEmerging Issues Task Force issued EITF No. 06-1,*Accounting for Consideration Given by a Service Provider toManufacturers or Resellers of Equipment Necessary for an End-Customer toReceive Service from the Service Provider,* which states how aservice provider company that depends on specialized equipment should accountfor consideration paid to the manufacturers and resellers of such equipment.EITF No. 06-1 requires that the service provider recognize payments basedon the form of benefit the end-customer receives from the manufacturer orreseller. If the form of benefit is “other than cash” or the service providerdoes not control the form of benefit provided to the customer, theconsideration would be classified as an expense. If the form of benefit iscash, the consideration would be classified as an offset to revenue. Theconsensus would require retrospective application to all prior periods as ofthe beginning of the first annual reporting period beginning afterJune 15, 2007. The Company is currently evaluating the impact of theadoption of EITF No. 06-1 on its consolidated results of operations andfinancial position.

 

In September 2006, the FASBissued SFAS No. 157,*Fair ValueMeasurements*. This Statement defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements. This Statement appliesunder other accounting pronouncements that require or permit fair valuemeasurements, the FASB having previously concluded in those accountingpronouncements 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 yearsbeginning after November 15, 2007. The Company will adopt this Statementeffective September 1, 2008. Based on the Company’s current evaluation of thisStatement, the Company does not expect the adoption of SFAS No. 157 tohave a significant impact on its consolidated results of operations orfinancial position.

 

 

F-27

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In September 2006, theSecurities and Exchange Commission issued Staff Accounting Bulletin (“SAB”)No. 108,*Considering the Effects ofPrior Year Misstatements when Quantifying Current Year Misstatements,*which provides interpretive guidance on the consideration of the effects ofprior year misstatements in quantifying current year misstatements for thepurpose of a materiality assessment. SAB No. 108 establishes an approachthat requires quantification of financial statement misstatements under boththe income statement (rollover) and balance sheet (iron curtain) methods. SABNo. 108 permits initial adoption of its provisions either by(i) restating prior financial statements; or (ii) recording thecumulative effect adjustment, with an offsetting adjustment recorded to the openingbalance of retained earnings in the year of adoption. SAB No. 108 iseffective for annual financial statements issued for fiscal years ending afterNovember 15, 2006. The Company adopted the provisions of SAB No. 108during the fourth quarter of 2006. The adoption had no significant impact onits consolidated results of operations or financial position.

 

In February 2007, the FASBissued SFAS No.159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (SAFS 159”). SFAS 159 permits entities the option, at specifiedelection dates, to measure eligible financial instruments at fair value (“fairvalue option”), thereby mitigating volatility in reported earnings caused bymeasuring related assets and liabilities differently without having to applyhedge accounting provisions. The fair value option is irrevocable. SFAS 159 iseffective for fiscal years beginning after November 15, 2007. The Company iscurrently evaluating the impact of this standard on its consolidated financialstatements.

 

**17     Subsequent events**

** **

OnSeptember 12, 2007, the Company issued $20 million aggregate principal amountof 8.0% unsecured, subordinated convertible notes, due September 12, 2014 (theconvertible notes) in a private placement. Interest payments on the convertiblenotes are due semi-annually, on June 30 and December 31, commencing on December31, 2007. The debenture holders may elect to receive interest payments in theform of Class A Subordinate Voting Shares of the Company based on the marketprice of the Class A Subordinate Voting Shares at the time of payment.

 

Theconvertible notes are convertible at the option of the debenture holders at anytime at a conversion price of $5.92 per share. The notes are redeemable at theoption of the Company on or after September 12, 2010.

 

TheCompany may elect to pay the amount due on the maturity of the debentures inClass A Subordinate Voting Shares. The number of shares to be issued would bedetermined based on dividing the principal amounts of the debentures due by 95%of the market price of the Class A Subordinated Voting Shares on the maturitydate.

 

TheCompany incurred costs amounting to $0.6 million related to the issuance of theconvertible notes.

 

$4.0million of the convertible notes were issued to XM and $6.0 million were issuedto shareholders of CSRI, including John I. Bitove.

 

F-28

----