Quarterly Report

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Nature of Business

XM Satellite Radio Inc. (“Inc.”) was incorporated on December 15, 1992 in the State of Delaware for the purpose of operating a digital audio radio service (“DARS”) under a license from the Federal Communications Commission (“FCC”). XM Satellite Radio Holdings Inc. (the “Company”, “Holdings”, or “XM”) was formed as a holding company for Inc. on May 16, 1997. The Company commenced commercial operations in two markets on September 25, 2001 and completed its national rollout on November 12, 2001.

As of June 30, 2008, the principal differences between the financial conditions of Holdings and Inc. were:

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

Proposed Merger

On February 19, 2007, XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. (“Sirius”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which XM and Sirius will combine their businesses through a merger of XM and a newly formed, wholly owned subsidiary of Sirius (the “Merger”).

Each of XM and Sirius has made customary representations and warranties and covenants in the Merger Agreement. The completion of the Merger is subject to various closing conditions, including receiving certain regulatory approvals. In March 2008, XM and Sirius announced that the U.S. Department of Justice had informed the companies that it had ended its investigation into the pending merger of XM and Sirius without taking action to block the transaction. The merger is still subject to approval by the Federal Communications Commission.

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(2) Summary of Significant Accounting Policies and Practices

Principles of Consolidation and Basis of Presentation

The unaudited Condensed Consolidated Financial Statements include the accounts of XM Satellite Radio Holdings Inc. and its subsidiaries. All significant intercompany transactions and accounts have been eliminated. In addition, the Company evaluates its relationships with other entities to identify whether they are variable interest entities as defined by Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46(R), Consolidation of Variable Interest Entities, An Interpretation of ARB No. 51 , and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is consolidated in the unaudited Condensed Consolidated Financial Statements in accordance with FIN No. 46(R). Beginning March 31, 2007, the Company reported a variable interest entity subject to consolidation by the Company pursuant to FIN No. 46(R). Satellite Leasing (702-4) LLT is a separate legal entity whose primary beneficiary, as defined under FIN No. 46(R), is the Company. Satellite Leasing (702-4) LLC, an entity solely owned by the third party equity investors, will be entitled to the residual benefits, including ownership of the assets of the trust after repayment of the debt incurred by that entity.

The accompanying Condensed Consolidated Balance Sheet as of December 31, 2007, which has been derived from audited financial statements, and the interim unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America and Regulation S-X, Rule 10-01 of the United States Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these interim unaudited Condensed Consolidated Financial Statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC on February 28, 2008, as amended by Amendment No. 1 on Form 10-K/A, which was filed with the SEC on April 29, 2008. All adjustments that, in the opinion of management, are necessary for a fair presentation of the periods presented have been reflected as required by Regulation S-X, Rule 10-01.

Inventory

Inventories are stated at the lower of average cost or market. The Company provides estimated inventory allowances for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. Inventories consist of both finished goods and component parts. The Company had $7.1 million and $11.3 million of net inventory as of June 30, 2008 and December 31, 2007, respectively, which amounts are included in Prepaid and other current assets on the Condensed Consolidated Balance Sheets.

During the three and six months ended June 30, 2008, the Company recorded total inventory write-down charges of $0.5 million and $3.3 million, respectively; while for the comparable periods in 2007, the Company recorded total inventory write-down charges of $2.1 million and $6.9 million, respectively. These charges are reflected in Cost of merchandise in the unaudited Condensed Consolidated Statements of Operations.

Investments

Available-for-Sale Securities —Investments in securities classified as available-for-sale securities are carried at fair value. Unrealized gains and losses, net of tax, are recorded as a component of Accumulated other comprehensive income in Stockholders’ deficit in the Condensed Consolidated Balance Sheets.

Equity Method Investments —Investments in which the Company has the ability to exercise significant influence but not control are accounted for using the equity method. The Company recognizes its share of net earnings or losses of the affiliate as they occur in Other income (expense) in the unaudited Condensed Consolidated Statements of Operations. The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value of the equity method investments and their estimated fair values is recognized as an impairment when the loss in value is deemed other than temporary.

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Cost Method Investments —Investments in equity securities that do not have readily determinable fair values and in which the Company does not have a controlling interest or is unable to exert significant influence are recorded at cost, subject to other than temporary impairment.

The Company adopted the provisions of SFAS No. 157 on January 1, 2008 as it applies to financial assets and liabilities. SFAS No. 157 establishes a fair value hierarchy for input into valuation techniques as follows: i) Level 1 input—quoted prices in active markets for identical instrument; ii) Level 2 input—observable market data for same or similar instrument but not Level 1; and iii) Level 3 input—unobservable inputs developed using the best information available. XM uses Level 1 inputs to fair value its investments in shares of Class A common stock of WorldSpace, Inc. (“WSI”). XM uses Level 3 inputs to fair value its investments in auction rate certificates (“ARCs”) issued by student loan trusts and 8% convertible unsecured subordinated debentures issued by XM Canada. These investments are not material to the Company’s condensed consolidated results of operations or financial position.

Investments are periodically reviewed for impairment and a write down is recorded whenever declines in fair value below carrying value are determined to be other than temporary. In making this determination, the Company considers, among other factors, the severity and duration of the decrease as well as the likelihood of a recovery within a reasonable timeframe.

Escrow Deposit

During May 2008, the Company deposited $120.0 million into an escrow account pursuant to an agreement with Major League Baseball ^® (“MLB”) for general credit support. The deposit requirement is diminished in the last two seasons of the original contract. The deposit was recorded to Escrow Deposit in the Condensed Consolidated Balance Sheets and is in satisfaction of a minimum credit support requirement.

Property and Equipment

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

In February 2007, the transponders on XM-4 were the subject of a sale-leaseback transaction and are now being amortized over their nine-year lease term, less the estimated residual value.

Maintenance and repairs costs are expensed as incurred, whereas expenditures for renewal and betterments are capitalized. The cost of internally developed software is capitalized in accordance with Statement of Position (“SOP”) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and amortized over its estimated useful life. Interest costs incurred in connection with the construction of major equipment and facilities are capitalized as part of the asset cost to which it relates and

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depreciated over the asset’s useful life. Upon the normal sale or retirement of depreciable property, the net carrying value less any salvage value is recognized as a gain or loss in Other income (expense) in the unaudited Condensed Consolidated Statements of Operations.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Net Loss per Common Share

The Company computes net loss per common share in accordance with SFAS No. 128, Earnings Per Share and SEC Staff Accounting Bulletin (“SAB”) No. 98, Computations of Earnings Per Share . Under the provisions of SFAS No. 128 and SAB No. 98, basic net loss per common share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common and dilutive equivalent shares outstanding during the period. Options, warrants and convertible instruments outstanding as of June 30, 2008 to purchase 49.4 million shares of common stock (47.7 million of which were vested) were not included in the computation of diluted net loss per common share for the three and six months ended June 30, 2008 as their inclusion would have been anti-dilutive. Options, warrants and convertible instruments outstanding as of June 30, 2007 to purchase 50.3 million shares of common stock (47.0 million of which were vested) were not included in the computation of diluted net loss per common share for the three and six months ended June 30, 2007 as their inclusion would have been anti-dilutive. Unvested shares of restricted stock in the amount of 7.3 million and 7.4 million as of June 30, 2008 and 2007, respectively, are not included in the computation of basic net loss per common share or in diluted net loss per common share because their inclusion would have been anti-dilutive. The Company had a net loss in each of the periods presented, and therefore, basic and diluted net loss per common share are the same.

Comprehensive Income or Loss

Accumulated other comprehensive income or loss is reported on the Condensed Consolidated Balance Sheets. Unrealized gains and losses on available-for-sale securities and foreign currency translation adjustments are included in other comprehensive income or loss (see Note 4, under the headings “WorldSpace”, “Canadian Satellite Radio” and “Auction Rate Certificates”). However, in the event that an unrealized loss is deemed other than temporary, the loss is recognized in earnings. The components of Comprehensive income or loss for the three and six months ended June 30, 2008 and 2007 are as follows (in thousands):

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Unrealized loss on available-for-sale securities for the three and six months ended June 30, 2008 is shown net of $0.1 million tax provision; while for the comparative periods in 2007, unrealized gain on available-for-sale securities is shown net of tax provision of $0.8 million. The Company did not record a tax benefit for the unrealized loss on available-for-sale securities related to its investment in ARCs for the three and six months ended June 30, 2008. The Company did not record a tax provision for the reclassification adjustment for unrealized loss on available-for-sale securities for the six months ended June 30, 2007. Foreign currency translation adjustment for the three and six months ended June 30, 2008 is shown net of tax benefit of $0.2 million and immaterial tax provision, respectively; while for the comparable periods in 2007, foreign currency translation adjustment is shown net of tax provision of $2.4 million and $2.3 million, respectively.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements . This Statement defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 and FSP 157-2, Effective Date of FASB Statement No. 157 . FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP 157-2, Effective Date of FASB Statement No. 157 delays the effective date of SFAS No. 157 for all nonfinancial assets and liabilities except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009 for calendar year end entities. The Company adopted the provisions of SFAS No. 157 on January 1, 2008, except as it applies to nonfinancial assets and liabilities as noted in FSP 157-2. The partial adoption had no significant impact on its consolidated results of operations or financial position. The Company has not determined the impact, if any, that the adoption of SFAS No. 157, as it relates to nonfinancial assets and liabilities, will have on its consolidated results of operations or financial position.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—An amendment of FASB Statement No. 133 , which requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption permitted. The Company will adopt this Statement effective January 1, 2009. Based on the Company’s current evaluation of this Statement, the Company does not expect the adoption of SFAS No. 161 to have a significant impact on its consolidated results of operations or financial position.

In December 2007, the FASB ratified EITF No. 07-1, Accounting for Collaborative Agreements , which provides guidance on how the parties to a collaborative agreement should account for costs incurred and revenue generated on sales to third parties, how sharing payments pursuant to a collaboration agreement should be presented in the income statement and certain related disclosure requirements. This Issue is effective for the first annual or interim reporting period beginning after December 15, 2008, and should be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The Company will adopt the provisions of EITF No. 07-1 effective January 1, 2009. The Company is currently evaluating the impact, if any, that the adoption of EITF No. 07-1 will have on its consolidated results of operations and financial position.

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(3) Property and Equipment

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

(4) Investments

The Company’s investments consist primarily of an equity method investment, a cost method investment and available-for-sale securities as follows (in thousands):

Equity Method Investment and Available-for-Sale Debt Securities

Canadian Satellite Radio (“XM Canada”)

In December 2005, XM Canada, a related party, issued to XM 11,077,500 Class A subordinate voting shares representing a 23.33% ownership interest and 11% voting interest in XM Canada. These shares were determined to have an initial fair value of $149.4 million, based on the XM Canada initial public offering price of C$16.00 per share. XM accounts for its ownership in XM Canada using the equity method of accounting.

XM Canada has a fiscal year end of August 31. XM records its share of XM Canada’s net income or loss, using the average currency exchange rate for the period, based on XM Canada’s quarterly periods ending on the last day of February, May, August and November. During the three and six months ended June 30, 2008, XM recorded a currency translation loss of $0.3 million (net of $0.2 million tax benefit) and currency translation gain of $0.1 million (net of immaterial tax provision), respectively, as a component of Accumulated other comprehensive income in Stockholders’ deficit in the Condensed Consolidated Balance Sheets. During the three and six months

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ended June 30, 2007, XM recorded a currency translation gain of approximately $3.9 million (net of $2.4 million tax provision) and $3.7 million (net of $2.3 million tax provision), respectively, as a component of Accumulated other comprehensive income in Stockholders’ deficit in the Condensed Consolidated Balance Sheets.

During June 2007 and December 2006, the Company reduced the carrying value of its equity method investment in XM Canada due to decreases in fair value that were considered to be other than temporary and recorded impairment charges of $35.8 million and $57.6 million, respectively. XM Canada’s shares trade publicly on the Toronto Stock Exchange under the symbol “XSR.TO”. The fair value of the Company’s equity method investment in XM Canada is determined based on XM Canada’s quoted share price on the date of the most recent financial statements, which precedes the Company’s by one month. The quoted market price on May 31, 2008 (the date of XM Canada’s most recent financial statements) was C$4.20, or US$4.23. Based on the number of shares held by the Company, the fair value of the Company’s equity method investment in XM Canada was $46.9 million on June 30, 2008. The carrying value of the Company’s equity method investment in XM Canada was $21.8 million and $30.1 million at June 30, 2008 and December 31, 2007, respectively.

During September 2007, the Company purchased C$4.0 million face value 8% convertible unsecured subordinated debentures issued by XM Canada for $3.9 million. The notes mature in 2014 and are convertible into shares of Class A subordinate voting shares of XM Canada at a price of C$5.92 per share. The embedded conversion feature is required under SFAS No. 133 to be bifurcated from the underlying debt, or host contract, and accounted for as a derivative at fair value with changes in fair value recorded in earnings as Interest income. The host contract is held as an available-for-sale security at fair value with changes in fair value recorded in Accumulated other comprehensive income, net of tax. The host contract and derivative were initially recorded at $2.4 million and $1.5 million, respectively. Foreign currency translation adjustments related to the host contract and derivative are recorded in Accumulated other comprehensive income, net of tax and Other income (expense), respectively. The change in fair value of the host contract and related foreign currency translation adjustment were not material for the three and six months ended June 30, 2008. For the three and six months ended June 30, 2008, the Company recorded reductions to Interest income of $0.4 million and $0.6 million (net of immaterial tax benefit), respectively, related to the derivative. As of June 30, 2008, the fair value of the host contract and derivative was $2.8 million and $0.8 million, respectively.

Summarized unaudited financial information for XM Canada is as follows (US$ in thousands):

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Cost Method Investment and Available-for-Sale Equity Securities

WorldSpace

On July 18, 2005, XM acquired 1,562,500 shares of Class A common stock of WorldSpace, Inc. (“WSI”) and a warrant to purchase at WSI’s initial public offering price of $21.00 an additional aggregate number of shares equal to $37.5 million, subject to certain operational vesting conditions, in exchange for $25.0 million. XM allocated its $25.0 million investment between the two financial instruments, $12.9 million to the Class A common stock and $12.1 million to the warrant. XM accounts for its investment in WSI Class A common stock as available-for-sale securities and accounts for its investment in the warrant under the cost method, subject to other than temporary impairment. WorldSpace provides XM certain programming in exchange for a nominal monthly fee under an amended programming agreement that extends through June 7, 2009.

During June 2006 and December 2007, the Company reduced the carrying values of its investment in WSI common stock due to decreases in fair values that were considered to be other than temporary and recorded impairment charges of $7.3 million and $3.4 million, respectively. During June 2006 and September 2007, the Company reduced the carrying value of its investment in the warrant due to decreases in fair values that were considered to be other than temporary and recorded impairment charges of $11.6 million and $0.5 million, respectively. The warrant expired unexercised on July 18, 2008. WorldSpace’s shares trade publicly on the NASDAQ Stock Exchange under the symbol “WRSP”. The quoted market price on June 30, 2008 was $1.87. Based on the number of shares held by the Company, the fair value of the Company’s investment in WSI common stock was $2.9 million on June 30, 2008. As of June 30, 2008 and December 31, 2007, the cost basis of the Company’s investment in WSI common stock was $2.6 million.

Auction Rate Certificates

In October 2007, the Company purchased $9.5 million of ARCs issued by student loan trusts. ARCs are long-term securities structured to frequently reset their coupon by means of an auction. During the first quarter 2008, the auction market for these securities effectively failed due to the lack of bids. These ARCs are held as available for sale securities at fair value with changes in fair value recorded in Accumulated other comprehensive income in Stockholders’ Deficit in the Condensed Consolidated Balance Sheets. As of June 30, 2008, the carrying value of these securities was $8.9 million.

(5) Deferred Financing Fees

Long-term Deferred financing fees consist of the following (in thousands):

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Included in Prepaid and other current assets are net deferred financing fees in the amount of $9.9 million and $0 as of June 30, 2008 and December 31, 2007. These deferred financing fees relate to the Company’s senior secured revolving credit facility (see Note 6, under the heading “Senior Secured Revolving Credit Facility”) and senior secured term loan (see Note 6, under the heading “Senior Secured Term Loan”) and are classified as a current asset due to the short-term nature of the underlying debt.

(6) Debt

Certain of the Company’s debt instruments and credit facilities contain covenants that include restrictions on indebtedness, mergers, limitations on liens, limitations on dividends, liquidations and sale and leaseback transactions, and also require the maintenance of certain financial ratios. The Company was in compliance with all of its covenants as of June 30, 2008. The Company’s debt instruments and credit facilities permit the debt issued thereunder to be accelerated upon certain events, including the failure to pay principal when due under any of the Company’s other debt instruments or credit facilities subject to materiality thresholds.

The Company has agreed with the holders of its $400 million aggregate principal amount of 1.75% convertible senior notes due 2009 to increase the interest rate to 10% per annum, with such increased interest rate to be given effect, subject to completion of the Company’s proposed merger with Sirius, as of July 2, 2008. The noteholders that are party to the agreement have agreed not to assert any claim that the merger constitutes a “Fundamental Change” under the existing indenture, which, if any, would require an offer be made by the Company to repurchase the existing notes at par within a specified period following the merger.

In addition, the holders of a majority in aggregate principal amount of Inc.’s outstanding 9.75% senior notes due 2014 (“9.75% Notes”) have agreed to waive the change of control repurchase obligation of Inc. arising under the terms of the notes with respect to the consummation of the merger with Sirius. This waiver is effective as to all holders of the 9.75% Notes. The waiver also provides that Inc. will commence an offer to exchange the 9.75% Notes for a combination of (i) at least $400 million of cash and (ii) up to $200 million aggregate principal amount of a new series of senior notes to be issued by Inc. (the “Exchange Notes”). The waiver is subject to the consummation of the merger and if the merger and the satisfaction of specified conditions have not occurred by August 31, 2008, the waiver will cease to be effective.

The Exchange Notes will mature in 2014, or 2013 in certain circumstances. The yield to maturity on the Exchange Notes (calculated solely on the basis of interest rate on the Exchange Notes and the price at which they are offered in exchange for 9.75% Notes) will be calculated on the basis of the selling price of and interest rate on certain other senior notes expected to be issued by Inc. in connection with its merger-related refinancing transactions. The effective yield on these new senior notes will not be less than 13.92% per annum. In the event that Inc. issues less than $150 million aggregate principal amount of such other senior notes, the effective yield on the Exchange Notes will not be less than 15% per annum. Inc. recently launched a $400 million senior note offering to raise the funds necessary for the offer to exchange.

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The following table presents a summary of the debt activity for the six months ended June 30, 2008 (in thousands):

Senior Secured Revolving Credit Facility

On May 5, 2006, Inc. entered into a $250.0 million senior secured revolving credit facility with a group of banks (“revolving credit facility”). On June 26, 2008, Inc. and certain of the lenders who are party to the revolving credit facility entered into an amendment approving a $100.0 million credit agreement (as described below under the heading “Senior Secured Term Loan”) in lieu of Inc.’s right under the revolving credit facility to elect to increase the size by $100.0 million.

The revolving credit facility has a term of three years. Borrowings under the revolving credit facility bear interest at a rate of LIBOR plus 150 to 225 basis points or an alternate base rate, to be the higher of the JPMorgan Chase prime rate and the Federal Funds rate plus 50 basis points, in each case plus 50 to 125 basis points. The revolving credit facility includes a $120.0 million sublimit for letters of credit and a $5.0 million sublimit for swingline loans. There is a commitment fee of 37.5 to 50 basis points per year on unused portions of the revolving credit facility. The revolving credit facility is secured by substantially all of Inc.’s assets other than specified property. The revolving credit facility includes customary events of default and requires Inc. to maintain at all times unrestricted cash and cash equivalents of at least $75.0 million. On May 21, 2008, Inc. executed an amendment to the revolving credit facility to provide that the $75.0 million in unrestricted cash and cash equivalents that Inc. is required to maintain is decreased to $50.0 million for a period of 90 days from the date of such amendment. On June 26, 2008, Inc. executed an amendment to the revolving credit facility to approve a $100 million senior secured term loan (as described below under the heading “Senior Secured Term Loan”). The revolving credit facility also includes customary conditions to draw, including Inc. not undergoing any material adverse change.

In February 2008, the Company borrowed $187.5 million or 75% of the amount available under the revolving credit facility. The proceeds were used for general corporate purposes, including the Company’s annual payment to MLB and its 2007 payment under the Copyright Royalty Board proceeding, both due in March 2008, as well as its record label settlements. Interest under the revolving credit facility is currently 4.75% and is based on 9-month LIBOR. All amounts drawn under the revolving credit facility are due on May 5, 2009. As a result of drawing 75% of the amount available under the revolving credit facility, the Company has full access to the $150.0 million senior secured credit facility (as described below under the heading “Senior Secured Credit Facility”) provided by General Motors (“GM”), which may be used only for payments to GM.

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In May 2008, the Company borrowed $62.5 million, which equaled the remaining 25% of the amount available under the revolving credit facility. The proceeds were used for general corporate purposes, including the escrow deposit (see Note 2, under the heading “Escrow Deposit” ). Interest under the revolving credit facility is currently 5.75% and is based on the prime rate plus a spread. As of June 30, 2008, the Company has $250.0 million outstanding under the revolving credit facility.

Senior Secured Credit Facility

The Company and Inc. have a revolving $150.0 million senior secured credit facility with GM (“GM facility”) that matures on the earlier of December 31, 2009 or six months after the Company achieves investment grade status. It enables the Company to make monthly draws to finance payments that become due under the Company’s distribution agreement with GM and other GM payments. All draws under the GM facility bear interest at a per annum rate of LIBOR plus 8%. Interest payments are due semiannually.

The Company is required to prepay the amount of any outstanding advances in an amount equal to the lesser of (i) 50% of the Company’s excess cash and (ii) the amount necessary to prepay the draws in full. Also, in the event that the Company merges with another entity or sells, assigns, transfers, conveys or otherwise disposes of all or substantially all of its assets, then any outstanding advances are required to be prepaid by the Company. Furthermore, in the event that the revolving credit facility is terminated prior to its expiration and not replaced with a revolving credit facility of at least $250.0 million with a term that extends to December 31, 2009 or beyond, then any outstanding advances are required to be prepaid by the Company.

In order to make draws under the GM facility, the Company is required to have a minimum pre-marketing operating income as defined therein. The GM facility was unsecured until the first draw under Inc.’s revolving credit facility and then secured on a second priority basis behind the secured indebtedness permitted to be incurred under the revolving credit facility.

In June 2008, the Company drew on its GM facility to satisfy payments in the amount of $29.0 million for commissions and revenue share due under the Company’s distribution agreement with GM. In connection with this draw, as required the Company put in place a security interest in favor of GM under which drawn amounts are secured by substantially all of Inc.’s assets other than specified property (on a subordinated to the revolving credit facility and senior secured term loan). The Company subsequently entered into a credit agreement (as described below under the heading “Senior Secured Term Loan”), a portion of the proceeds of which were used to repay the $29.0 million draw. As of June 30, 2008, the GM facility was fully available and there were no amounts outstanding.

Senior Secured Term Loan

On June 26, 2008, the Company and Inc. entered into a credit agreement relating to a $100.0 million senior secured term loan (the “term loan”) with UBS AG. The Company used a portion of the term loan proceeds to repay the draw under its GM facility.

The term loan includes syndication and commitment fees, interest and expenses, and, similar to the revolving credit facility, has a scheduled maturity date of May 5, 2009, will survive if the pending merger with Sirius is consummated, and is secured by substantially all of Inc.’s assets other than specified property (on a pari passu basis with the revolving credit facility). Interest is payable quarterly on September 26, December 26 and March 26 at a rate currently set at 5.5625%. Thereafter, the rate is reset quarterly to 225 basis points over the 9-month LIBOR. The term loan also contains covenants, representations and events of default that are substantially similar to those under the revolving credit facility. In addition, the term loan, like the revolving credit facility, contains a financial covenant that requires Inc. to maintain a level of cash and cash equivalents from time to time of either $50 million or $75 million. If Inc. does not comply with the various covenants under the term loan, the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding under the revolving credit facility and foreclose on the collateral.

Debt of Consolidated Variable Interest Entity

On February 13, 2007, the Company entered into a sale-leaseback transaction with respect to the transponders on the XM-4 satellite, which was launched in October 2006 and placed into service during December 2006. The Company sold the XM-4 transponders to

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Satellite Leasing (702-4) LLT (“Trust”), a third-party trust formed solely for the purpose of facilitating the sale-leaseback transaction. The Trust pooled the funds used to purchase the transponders from a $57.7 million investment by an equity investor and the $230.8 million in proceeds from the issuance of its 10% senior secured notes due 2013 (“Debt of consolidated variable interest entity”). The Company is accounting for the sale and leaseback of the transponders under sale-leaseback accounting with a capital lease, pursuant to SFAS No. 13, Accounting for Leases , as amended. Furthermore, the Company determined that the Trust is a variable interest entity, as that term is defined under FIN No. 46(R), and that the Company is the primary beneficiary of the Trust. Pursuant to FIN No. 46(R), the Company consolidated the Trust into its unaudited Condensed Consolidated Financial Statements.

The Company sold the XM-4 transponders to the Trust owned by Satellite Leasing (702-4) LLC (“Owner participant”) for $288.5 million. XM Satellite Radio Inc. is leasing the transponders for a term of nine years. These lease payment obligations, which are unconditional and guaranteed by XM Satellite Radio Holdings Inc., are senior unsecured obligations and rank equally in right of payment with existing and future senior unsecured obligations. Under the terms of the lease, the Company is obligated to make payments that total $437.4 million, of which $126.6 million is interest, over the nine-year base lease term. Payments totaling $27.9 million and $17.5 million were made in 2007 and in the first six months of 2008, respectively, while the following amounts are due in the future: $15.7 million in the remaining six months of 2008, $28.9 million in 2009, $28.4 million in 2010, $71.0 million in 2011, $145.8 million in 2012 and $102.2 million thereafter.

Throughout the term of the lease, at any time when the Company is not investment grade, the Company will provide credit support to the Owner participant. To provide this credit support, the Company retired the existing mortgages on its headquarters and data center properties in Washington, D.C. and put into place new mortgage liens on those properties in favor of the Owner participant.

The Company will have full operational control over the transponders for the lease term, absent default. The Company is subject to an obligation to sell the XM-4 Bus, the remaining component of the XM-4 satellite, to the lessor for a nominal sum in the event that the Company does not repurchase the transponders at the end of the term.

The Company has an early buyout option in year five, a buy-out right at the end of the lease term and other rights to purchase the transponders or the equity interest in the lessor. The Company also has rights to cause the lessor to effect a refinancing of the notes, and any interest savings from the refinancing would result in reduced lease payments.

The Company can be required to repurchase the transponders upon the occurrence of specified events, including an event of loss of the satellite (subject to the right to substitute another satellite meeting equivalent or better value and functionality tests), changes in law that impose a material regulatory burden on the Owner participant, changes of control and events resulting in the absence of another holder (other than the Company and its affiliates) of FCC satellite radio licenses in the frequency bands that can be served by the XM-4 satellite. The Company has agreed to provide indemnities in the event that certain actions by the Company cause the Owner participant to lose or not be able to take certain tax positions relating to the transaction.

(7) Equity

Preferred Stock

The Company has authorized 60,000,000 shares of preferred stock, par value $0.01, of which 15,000,000 shares were designated non-voting Series A convertible preferred stock, 3,000,000 shares were designated non-voting 8.25% Series B convertible redeemable preferred stock, and 250,000 shares were designated 8.25% Series C convertible redeemable preferred stock, all of which are convertible into Class A common stock at the option of the holder. Additionally, 250,000 shares were designated as non-voting Series D participating preferred stock in connection with the adoption of the Shareholders’ Rights Plan and are junior to all other classes of preferred stock. The Series A convertible preferred stock receives dividends, if declared, ratably with the common stock. The Series C convertible redeemable preferred stock contains voting and certain consent rights.

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There were 5,393,252 shares of Series A convertible preferred stock issued and outstanding with a liquidation preference of $51.4 million as of June 30, 2008 and December 31, 2007. During 2006, the Company repurchased the Series B convertible redeemable preferred stock and converted the Series C convertible redeemable preferred stock. There were no shares issued and outstanding of the Series B convertible redeemable preferred stock, Series C convertible redeemable preferred stock or Series D preferred stock as of June 30, 2008 and December 31, 2007.

Common Stock

The Company has authorized 600,000,000 shares of Class A common stock, par value of $0.01, of which 319,587,602 and 316,684,482 shares were issued and outstanding as of June 30, 2008 and December 31, 2007, respectively. As of June 30, 2008 and December 31, 2007, there were 7,259,419 and 7,023,387, respectively, restricted Class A common shares issued and outstanding that was subject to forfeiture pending vesting. The Company has authorized 15,000,000 shares of Class C common stock, par value of $0.01, of which no shares were issued and outstanding as of June 30, 2008 and December 31, 2007.

(8) Share-Based Payment

The Company has three share-based payment plans. It is the practice of the Company to satisfy awards and options granted under these plans through the issuance of new shares. During the three and six months ended June 30, 2008, the Company recognized share-based payment expense of $12.9 million and $30.5 million, respectively; while for the comparable periods in 2007, the Company recognized share-based payment expense of $14.1 million and $28.2 million, respectively. In each of the periods described above, compensation expense was recorded in the unaudited Condensed Consolidated Statements of Operations related to these plans. For a summarized schedule of the distribution of share-based payment expense, see the appended footnote to the unaudited Condensed Consolidated Statements of Operations. The Company did not capitalize any share-based payment cost during the three and six months ended June 30, 2008 and 2007. The Company did not realize any income tax benefits from share-based payment plans during the three and six months ended June 30, 2008 and 2007, as a result of a full valuation allowance that is maintained for substantially all net deferred tax assets.

2007 Stock Incentive Plan

On May 25, 2007, the Company adopted the 2007 Stock Incentive Plan (“2007 Plan”) under which officers, other employees and other key individuals may be granted various types of equity awards, including restricted stock, stock units, stock options, stock appreciation rights, dividend equivalent rights and other stock awards. A total of 25,000,000 shares of the Company’s Class A common stock are reserved for issuance pursuant to these awards. Stock option awards under the 2007 Plan generally vest ratably over three years based on continuous service; while restricted stock generally vests ratably over one or three years based on continuous service. Stock option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant and expire no later than ten years from the date of grant. Grants of equity awards other than stock options or stock appreciation rights reduce the number of shares available for future grant by 1.5 times the number of shares granted under such equity awards. As of June 30, 2008, there were 13,128,251 shares available under the 2007 Plan for future grant.

1998 Shares Award Plan

On June 1, 1998, the Company adopted the 1998 Shares Award Plan (“1998 Plan”) under which, as amended, employees, consultants and non-employee directors may be granted stock options and restricted stock for up to 25,000,000 shares of the Company’s Class A common stock. Stock option awards and restricted stock awards under the 1998 Plan generally vest ratably over three years based on continuous service. Stock option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant and expire no later than ten years from the date of grant. The 1998 Plan terminated in June 2008 and shares are no longer available for future grant.

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XM Talent Option Plan

In May 2000, the Company adopted the XM Talent Option Plan (“Talent Plan”) under which non-employee programming consultants to the Company may be granted stock options for up to 500,000 shares of the Company’s Class A common stock, which shares are reserved under the Talent Plan. Stock option awards under the Talent Plan generally vest ratably over three years based on continuous service. Stock option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant and expire no later than ten years from the date of grant. As of June 30, 2008, there were 340,000 options available under the Talent Plan for future grant.

Stock Options —The fair value of each stock option award is estimated on the date of grant using a Black-Scholes option-pricing model based on the following weighted average assumptions:

A summary of the status of the Company’s aggregate stock option awards under the 2007 Plan, 1998 Plan and the Talent Plan as of June 30, 2008, and activity during six months then ended is presented below:

The per share weighted-average fair value of stock option awards granted during the six months ended June 30, 2008 and 2007 was $5.83 and $6.23, respectively on the date of grant. The total intrinsic value on the date of exercise of stock option awards exercised during the six months ended June 30, 2008 and 2007 was $0.8 million and $2.6 million, respectively. As of June 30, 2008, there was $8.8 million of total unrecognized compensation cost related to stock option awards granted under the 2007 Plan, 1998 Plan and Talent Plan. The weighted-average period over which the compensation expense for these awards is expected to be recognized is 1.42 years as of June 30, 2008.

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Restricted Stock —A summary of the status of the Company’s aggregate restricted stock awards under the 2007 Plan and 1998 Plan as of June 30, 2008 and activity during the six months then ended is presented below: