Quarterly Report

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

F orm 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

Commission file number 0-24710

1221 Avenue of the Americas, 36th Floor
New York, New York 10020
(Address of principal executive offices)
(Zip code)

212-584-5100
(Registrant’s telephone number, including area code)

SIRIUS SATELLITE RADIO INC.
(Former name, if changed since last report)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No þ

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

Common Stock, $0.001 par value		3,176,663,555 shares
(Class)		(Outstanding as of August 6, 2008)

 

 

SIRIUS XM RADIO INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q

		Page
Part I—Financial Information
Item 1. Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007 (Unaudited)			1
Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007			2
Consolidated Statement of Stockholders’ Deficit for the six months ended June 30, 2008 (Unaudited)			3
Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (Unaudited)			4
Notes to Unaudited Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures about Market Risk			41
Item 4. Controls and Procedures			41
Part II—Other Information
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 3. Defaults Upon Senior Securities			51
Item 4. Submission of Matters to a Vote of Security Holders			51
Item 5. Other Information			51
Item 6. Exhibits			51
Signatures			52
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION
EX-99.1: UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

See Notes to Unaudited Consolidated Financial Statements

See Notes to Unaudited Consolidated Financial Statements

See Notes to Unaudited Consolidated Financial Statements

See Notes to Unaudited Consolidated Financial Statements

SIRIUS XM RADIO INC. AND SUBSIDIARIES

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

We recognize subscription fees as our service is provided to a subscriber. We record deferred revenue for prepaid subscription fees and amortize these prepayments to revenue ratably over the term of the respective subscription plan.

          At the time of sale, vehicle owners purchasing or leasing a vehicle with a subscription to our service typically receive between a six month and one year prepaid subscription. We receive payment from automakers for these subscriptions in advance of our service being activated. Such prepayments are recorded to deferred revenue and amortized ratably over the service period upon activation and sale to a customer. We also reimburse automakers for certain costs associated with the SIRIUS radio installed in the applicable vehicle at the time the vehicle is manufactured. The associated payments to the automakers are included in subscriber acquisition costs. Although we receive payments from the automakers, they do not resell our service; rather, automakers facilitate the sale of our service to our customers, acting similar to an agent. We believe this is the appropriate characterization of our relationship since we are responsible for providing service to our customers including being obligated to the customer if there was interruption of service.

          Activation fees are recognized ratably over the estimated term of a subscriber relationship, currently estimated to be 3.5 years. The estimated term of a subscriber relationship is based on market research and management’s judgment and, if necessary, will be refined in the future.

          As required by Emerging Issues Task Force (“EITF”) No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” an estimate of rebates that are paid by us directly to subscribers is recorded as a reduction to revenue in the period the subscriber participates in and activates our service.

          We recognize revenues from the sale of advertising on some of our non-music channels as the advertising is broadcast. Agency fees are calculated based on a stated percentage applied to gross billing revenue for our advertising inventory and are reported as a reduction of advertising revenue. We pay certain third parties a percentage of advertising revenue. Advertising revenue is recorded gross of such revenue share payments in accordance with EITF No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” as we are the primary obligor in the transaction. Advertising revenue share is recorded in the period the advertising is broadcast.

          Equipment revenue from the direct sale of SIRIUS radios and accessories is recognized upon shipment. Shipping and handling costs billed to customers are recorded as revenue. Shipping and handling costs associated with shipping goods to customers are recorded to cost of equipment.

          EITF No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” provides guidance on how and when to recognize revenues for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Revenue arrangements with multiple deliverables are required to be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Arrangement consideration must be allocated among the separate units of accounting based on their relative fair values.

          We have determined that the sale of our service through our direct to consumer channel with accompanying equipment constitutes a revenue arrangement with multiple deliverables. In these types of arrangements, fair value of all deliverables is determined and then allocated to each element based on their relative fair value; amounts received for equipment are recognized as equipment revenue; amounts received for service are recognized as subscription revenue; and amounts received for the non-refundable, up-front activation fees that are not contingent on the delivery of the service are allocated to equipment revenue. Activation fees are recorded to equipment revenue only to the extent that the aggregate equipment and activation fee proceeds do not exceed the fair value of the equipment. Any activation fees not allocated to the equipment are deferred upon activation and recognized as subscriber revenue on a straight-line basis over the estimated term of a subscriber relationship.

           Stock-Based Compensation

          We account for stock-based compensation in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). The stock-based compensation cost recognized includes compensation cost for all stock-based awards granted to employees and members of our board of directors (i) prior to, but not vested as of,

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

January 1, 2006 based on the grant date fair value originally estimated in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and (ii) subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R.

          Compensation cost under SFAS No. 123R is recognized ratably using the straight-line attribution method over the expected vesting period.

          FAS No. 123R requires forfeitures to be estimated on the grant date and revised in subsequent periods if actual forfeitures differ from those estimates. Prior to the adoption of SFAS No. 123R we accounted for forfeitures as they occurred.

          Pursuant to SFAS No. 123R, we recognized $16,840 and $34,441, and $15,840 and $32,775 of compensation cost for stock-based awards granted to employees and members of our board of directors for the three and six months ended June 30, 2008 and 2007, respectively. Total unrecognized compensation costs related to unvested stock-based awards granted to employees and members of our board of directors at June 30, 2008, net of estimated forfeitures, was $88,075 and is expected to be recognized over a weighted-average period of three years.

          We account for stock-based awards granted to non-employees, other than non-employee members of our board of directors, at fair value in accordance with SFAS No. 123R and SEC guidance contained in Staff Accounting Bulletin (“SAB”) No. 107. The fair value of equity instruments granted to non-employees is measured in accordance with EITF No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” The final measurement date of equity instruments with performance criteria is the date that each performance commitment for such equity instrument is satisfied or there is a significant disincentive for non-performance.

          Stock-based awards granted to employees, non-employees and members of our board of directors generally include warrants, stock options, restricted stock and restricted stock units.

          We estimate the fair value of stock-based awards using the Black-Scholes option valuation model (“Black-Scholes”). Black-Scholes was developed to estimate the fair market value of traded options, which have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions. Because our stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective assumptions can materially affect the fair market value estimate, existing option valuation models do not necessarily provide a reliable single measure of the fair value of our stock-based awards.

          Fair value determined using Black-Scholes varies based on assumptions used for the expected life, expected stock price volatility and risk-free interest rates. We estimate the fair value of awards granted using the implied volatility of actively traded options on our stock. The expected life assumption represents the weighted-average period stock-based awards are expected to remain outstanding. These expected life assumptions are established through a review of historical exercise behavior of stock-based award grants with similar vesting periods. Where historical patterns do not exist contractual terms are used. The risk-free interest rate represents the daily treasury yield curve rate at the reporting date based on the closing market bid yields on actively traded U.S. treasury securities in the over-the-counter market for the expected term. Our assumptions may change in future periods.

          The following table summarizes the weighted-average assumptions used to compute reported stock-based compensation to employees and members of our board of directors for the periods set forth below:

          No income tax benefits have been realized from stock option exercises during the three and six months ended June 30, 2008 and 2007 because a valuation allowance was maintained for all net deferred tax assets.

           Subscriber Acquisition Costs

          Subscriber acquisition costs include hardware subsidies paid to radio manufacturers, distributors and automakers, including subsidies paid to automakers who include a SIRIUS radio and a prepaid subscription to our service in the sale or lease price of a new vehicle; subsidies paid for chip sets and certain other components used in manufacturing radios; device royalties for certain SIRIUS radios; commissions paid to retailers and automakers as incentives to purchase, install and activate SIRIUS radios; product warranty obligations; provisions for inventory allowance; and compensation costs associated with stock-based awards granted in connection with certain distribution agreements. Subscriber acquisition costs do not include advertising, loyalty payments to distributors and dealers of SIRIUS radios and revenue share payments to automakers and retailers of SIRIUS radios.

          Subsidies paid to radio manufacturers and automakers are expensed upon shipment or installation. Commissions paid to retailers and automakers are expensed either upon activation or sale of the SIRIUS radio. Chip sets that are shipped to radio manufacturers and held on consignment are recorded as inventory and expensed as subscriber acquisition costs when placed into production by radio manufacturers. Costs for chip sets not held on consignment are expensed as subscriber acquisition costs when the chip sets are shipped to radio manufacturers.

          We record product warranty obligations in accordance with Financial Accounting Standards Board Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34.” FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. We warrant that certain products sold through our retail and direct to consumer distribution channels will perform in all material respects in accordance with specifications in effect at the time of the purchase of the products by the customer. As of April 2008, we changed our warranty period to 90 days on our products from the purchase date for repair or replacement of components and/or products that contain defects of material or workmanship. Products purchased prior to April 2008 contain a warranty period of 12 months from the purchase date. Customers may exchange products directly to the retailer within 30 days of purchase. We record a liability for an estimate of costs that we expect to incur under our warranty when the product is shipped from the manufacturer. Factors affecting our warranty liability include the number of units sold and historical and anticipated rates of claims and costs per claim. We periodically assess the adequacy of our warranty liability based on changes in these factors.

          The following table reconciles the beginning and ending aggregate product warranty liability:

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

           Research and Development Costs

          Research and development costs are expensed as incurred. Research and development costs for the three months ended June 30, 2008 and 2007 were $8,238 and $10,482, respectively, and $16,074 and $20,532 for the six months ended June 30, 2008 and 2007, respectively. These costs are included in engineering, design and development expenses in our accompanying unaudited consolidated statements of operations.

           Income Taxes

          We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” and FIN No. 48, “Accounting for Uncertainty in Income Taxes.” Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established when necessary based on the weight of available evidence, if it is considered more likely than not, that all or some portion of the deferred tax assets will not be realized. Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities.

           Net (Loss) Income Per Share

          We compute net (loss) income per share in accordance with SFAS No. 128, “Earnings Per Share.” Basic net (loss) income per share is calculated using the weighted average common shares outstanding during each reporting period. Diluted net (loss) income per share adjusts the weighted average common shares outstanding for the potential dilution that could occur if common stock equivalents (convertible debt, warrants, stock options and restricted stock units) were exercised or converted into common stock. Common stock equivalents of approximately 125,000,000 and 138,000,000 for the three and six months ended June 30, 2008, respectively, and 164,000,000 and 166,000,000 for the three and six months ended June 30, 2007, respectively, were not considered in the calculation of diluted net loss per share as the effect would have been anti-dilutive.

           Inventory

          Inventory consists of finished goods, refurbished goods, chip sets and other raw material components used in manufacturing SIRIUS radios. Inventory is stated at the lower of cost, determined on a first-in, first-out basis, or market. We record an estimated adjustment for inventory that is considered slow moving and obsolete or whose carrying value is in excess of net realizable value. The provision related to product purchased for our direct to consumer distribution channel is recorded to cost of equipment in our unaudited consolidated statements of operations. The remaining provision is recorded to subscriber acquisition costs in our unaudited consolidated statements of operations.

          Inventory, net consists of the following:

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

           Marketable Securities

          We account for marketable securities in accordance with the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Marketable securities consist of certificates of deposit. As of June 30, 2008 and December 31, 2007, certificates of deposit were $465 and $469, respectively. The basic objectives of our investment policy are the preservation of capital, maintaining sufficient liquidity to meet operating requirements and maximizing yield. We classify our marketable securities as available-for-sale securities. Available-for-sale securities are carried at fair market value. Unrealized gains and losses are included in accumulated other comprehensive (loss) income as a separate component of stockholders’ deficit. Realized gains and losses, dividends and interest income, including amortization of the premium and discount arising at purchase, are included in interest and investment income. The specific-identification method is used to determine the cost of all securities and the basis by which amounts are reclassified from accumulated comprehensive (loss) income into earnings.

          We received proceeds from the sale or maturity of marketable securities of $4 and $10,846 for the six months ended June 30, 2008 and 2007, respectively. There were no unrealized holding gains or losses on marketable securities as of June 30, 2008 and December 31, 2007.

           Restricted Investments

          As of June 30, 2008 and December 31, 2007, short-term restricted investments of $35,000 primarily included certificates of deposit placed in escrow for the benefit of a third party pursuant to a programming agreement.

          As of June 30, 2008 and December 31, 2007, long-term restricted investments of $21,000 and $18,000, respectively, primarily included certificates of deposit and money market funds deposited in escrow for the benefit of third parties pursuant to programming agreements and certificates of deposit placed in escrow to secure our reimbursement obligations under letters of credit issued for the benefit of lessors of office space.

           Investment, stated at cost

          In September 2006, we invested in a third party for strategic purposes. We accounted for this investment under the cost method. We terminated our investment in this third party in 2008 and our original investment was returned in March 2008. There was no investment as of June 30, 2008.

           Equity Method Investment

          We have a 49.9% economic interest in SIRIUS Canada. Our investment in SIRIUS Canada is recorded using the equity method since we have significant influence, but less than a controlling voting interest. Under this method, our investment in SIRIUS Canada, originally recorded at cost, is adjusted to recognize our share of net earnings or losses as they occur rather than as dividends or other distributions are received, limited to the extent of our investment in, advances to and commitments to fund SIRIUS Canada. Our share of net earnings or losses of SIRIUS Canada is recorded to equity in net loss of affiliate in our accompanying unaudited consolidated statements of operations. We recorded $0 for both the three months ended June 30, 2008 and 2007, and $0 for the six months ended June 30, 2008 and 2007, for our share of SIRIUS Canada’s net loss.

           Merger Costs

          We have incurred approximately $48,100 in direct costs as of June 30, 2008 in connection with our merger with XM Radio. In accordance with SFAS No. 141, “Business Combinations,” which specifies that the cost of an entity acquired in a business combination include the direct costs of the business combination, we have capitalized and included such costs in other long-term assets in our accompanying unaudited consolidated balance sheet.

           Reclassifications

          Certain amounts in the prior period unaudited consolidated financial statements have been reclassified to conform to the current period presentation. Specifically, during the first six months of 2008, we reclassified equipment related retention costs from cost of equipment to sales and marketing expense. Equipment related retention costs are associated with efforts to retain existing subscribers that we believe will result in higher revenue and lower churn.

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

           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. We 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. We have 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 November 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which continues to require that all business combinations be accounted for by applying the acquisition method. Under the acquisition method, the acquirer recognizes and measure the identifiable assets acquired, the liabilities assumed, and any contingent consideration and contractual contingencies, as a whole, at their face value as of the acquisition date. Under SFAS No. 141R, all transaction costs are expenses as incurred. SFAS No. 141R rescinds EITF 93-07 “Uncertainties Related to Income Taxes in a Purchase Business Combination.” Under EITF 93-07, the effect of any subsequent adjustments to uncertain tax positions were generally applied to goodwill, except for post-acquisition interest on uncertain tax provisions, which was recognized as an adjustment to income tax expense. Under SFAS No. 141R, all subsequent adjustments to these uncertain tax positions that otherwise would have impacted goodwill will be recognized in the income statement. The guidance in SFAS No. 141R will be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008, and accordingly it is not expected to have an impact on the accounting for our merger with XM.

4. Subscriber Revenue

          Subscriber revenue consists of subscription fees, revenue derived from our agreement with Hertz, non-refundable activation fees and the effects of rebates. Revenues received from automakers for prepaid subscriptions included in the sale or lease price of a new vehicle are also included in subscriber revenue over the service period upon activation and sale to the customer.

          Subscriber revenue consists of the following:

6. Related Party Transactions

          In 2005, we entered into a license and services agreement with SIRIUS Canada. Pursuant to such agreement, we are reimbursed for certain costs incurred by us to provide SIRIUS Canada service, including certain costs we incur for the production and distribution of radios as well as information technology support costs. In consideration for the rights granted pursuant to this license and services agreement, SIRIUS Canada pays us a royalty based on a percentage of its annual gross revenues, as long as SIRIUS Canada maintains a positive cash flow position for twelve consecutive months. Additionally, the initial financing we provided to SIRIUS Canada is by way of subscription to non-voting shares which carry an 8% cumulative dividend.

          Total costs that have been or will be reimbursed by SIRIUS Canada for the three months ended June 30, 2008 and 2007 were $3,128 and $723, respectively, and $7,830 and $2,600 for the six months ended June 30, 2008 and 2007, respectively. We recorded $0 and $643 in royalty income for the three months ended June 30, 2008 and 2007, respectively, and $0 and $1,159 for the six months ended June 30, 2008 and 2007, respectively. Such royalty income was recorded to other income in our accompanying unaudited consolidated statements of operations. We also recorded dividend income of $0 and $216 for the three months ended June 30, 2008 and 2007, respectively, and $0 and $422 for the six months ended June 30, 2008 and 2007, respectively, which was included in interest and investment income in our accompanying unaudited consolidated statements of operations.

          The amounts due from SIRIUS Canada at June 30, 2008 were $4,672, of which $1,435 and $3,237 are included in other current assets and other long-term assets, respectively, on our accompanying unaudited consolidated balance sheet. The amounts due from SIRIUS Canada at December 31, 2007 were $5,398, of which $2,161 and $3,237 are included in other current assets and other long-term assets, respectively, on our accompanying unaudited consolidated balance sheet. The amounts payable to SIRIUS Canada at June 30, 2008 and December 31, 2007 to fund its remaining capital requirements, were $1,386 and $1,148, respectively, and is included in other long-term liabilities in our accompanying unaudited consolidated balance sheet.

7. Debt

          Debt consists of the following:

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

           Senior Secured Term Loan

          In June 2007, we entered into a Term Credit Agreement with a syndicate of financial institutions. The Term Credit Agreement provides for a term loan of $250,000, which has been drawn. Interest under the Term Credit Agreement is based, at our option, on (i) adjusted LIBOR plus 2.25% or (ii) the higher of (a) the prime rate and (b) the Federal Funds Effective Rate plus ¹ / 2 of 1.00%, plus 1.25%. As of June 30, 2008, the interest rate was 4.75%. LIBOR borrowings may be made for interest periods, at our option, of one, two, three or six months (or, if agreed by all of the lenders, nine or twelve months). The loan amortizes in equal quarterly installments of 0.25% of the initial aggregate principal amount for the first four and a half years, with the balance of the loan thereafter being repaid in four equal quarterly installments. The loan matures on December 20, 2012.

          The loan is guaranteed by our wholly owned subsidiary, Satellite CD Radio, Inc., a Delaware corporation (the “Guarantor”). The Term Credit Agreement is secured by a lien on substantially all of our and the Guarantor’s assets, including our four satellites and the shares of the Guarantor.

          The Term Credit Agreement contains customary affirmative covenants and event of default provisions. The negative covenants contained in the Term Credit Agreement are substantially similar to those contained in the indenture governing our 9 ⁵ / 8 % Senior Notes due 2013.

           9 ⁵ / 8 % Senior Notes due 2013

          In August 2005, we issued $500,000 in aggregate principal amount of our 9 ⁵ / 8 % Senior Notes due 2013 resulting in net proceeds of $493,005. Our 9 ⁵ / 8 % Senior Notes due 2013 mature on August 1, 2013 and interest is payable semi-annually on February 1 and August 1 of each year. The obligations under our 9 ⁵ / 8 % Senior Notes due 2013 are not secured by any of our assets.

           3 ¹ / 4 % Convertible Notes due 2011

          In October 2004, we issued $230,000 in aggregate principal amount of our 3 ¹ / 4 % Convertible Notes due 2011 resulting in net proceeds of $224,813. These notes are convertible, at the option of the holder, into shares of our common stock at any time at a conversion rate of 188.6792 shares of common stock for each $1,000.00 principal amount, or $5.30 per share of common stock, subject to certain adjustments. Our 3 ¹ / 4 % Convertible Notes due 2011 mature on October 15, 2011 and interest is payable semi-annually on April 15 and October 15 of each year. The obligations under our 3 ¹ / 4 % Convertible Notes due 2011 are not secured by any of our assets.

           2 ¹ / 2 % Convertible Notes due 2009

          In February 2004, we issued $250,000 in aggregate principal amount of our 2 ¹ / 2 % Convertible Notes due 2009 resulting in net proceeds of $244,625. In March 2004, we issued an additional $50,000 in aggregate principal amount of our 2 ¹ / 2 % Convertible Notes due 2009 pursuant to an option granted in connection with the initial offering of the notes, resulting in net proceeds of $48,975. These notes are convertible, at the option of the holder, into shares of our common stock at any time at a conversion rate of 226.7574 shares of common stock for each $1,000.00 principal amount, or $4.41 per share of common stock, subject to certain adjustments. Our 2 ¹ / 2 % Convertible Notes due 2009 mature on February 15, 2009 and interest is payable semi-annually on February 15 and August 15 of each year. The obligations under our 2 ¹ / 2 % Convertible Notes due 2009 are not secured by any of our assets.

           3 ¹ / 2 % Convertible Notes due 2008

          In May 2003, we issued $201,250 in aggregate principal amount of our 3 ¹ / 2 % Convertible Notes due 2008 resulting in net proceeds of $194,224. These notes matured on June 1, 2008 and were repaid on such date.

           8 ³ / 4 % Convertible Subordinated Notes due 2009

          In 1999, we issued our 8 ³ / 4 % Convertible Subordinated Notes due 2009. The remaining balance of our 8 ³ / 4 % Convertible Subordinated Notes due 2009 mature on September 29, 2009 and interest is payable semi-annually on March 29 and September 29 of each year. These notes are convertible, at the option of the holder, into shares of our common stock at any time at a conversion rate of 35.134 shares of common stock for each $1,000.00 principal amount, or $28.4625 per share of common stock, subject to certain adjustments. The obligations under our 8 ³ / 4 % Convertible Subordinated Notes due 2009 are not secured by any of our assets.

           Space Systems/Loral Credit Agreement

          In July 2007, we amended and restated our existing Credit Agreement with Space Systems/Loral (the “Loral Credit Agreement”). Under Loral Credit Agreement, Space Systems/Loral has agreed to make loans to us in

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

an aggregate principal amount of up to $100,000 to finance the purchase of our fifth and sixth satellites. Loans made under the Loral Credit Agreement will be secured by our rights under the Satellite Purchase Agreement with Space Systems/Loral, including our rights to these satellites. The loans are also entitled to the benefits of a subsidiary guarantee from Satellite CD Radio, Inc., our subsidiary that holds our FCC license, and any future material subsidiary that may be formed by us. The maturity date of the loans is the earliest to occur of (i) June 10, 2010, (ii) 90 days after the sixth satellite becomes available for shipment and (iii) 30 days prior to the scheduled launch of the sixth satellite. Any loans made under the Loral Credit Agreement generally will bear interest at a variable rate equal to three-month LIBOR plus 4.75%. The daily unused balance bears interest at a rate per annum equal to 0.50%, payable quarterly on the last day of each March, June, September and December. The Loral Credit Agreement permits us to prepay all or a portion of the loans outstanding without penalty. We have not borrowed under the Loral Credit Agreement as of June 30, 2008.

           Covenants and Restrictions

          Our 9 ⁵ / ₈ % Senior Notes due 2013, our Credit Agreement with Space Systems/Loral and our Senior Secured Term Loan require us to comply with certain covenants that restrict our ability to, among other things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) merge or consolidate with another person, (vi) sell, assign, lease or otherwise dispose of all or substantially all of our assets, and (vii) make voluntary prepayments of certain debt, in each case subject to exceptions as provided in the 9 ⁵ / ₈ % Senior Notes due 2013 indenture, the Loral Credit Agreements and the credit agreement governing our Senior Secured Term Loans. If we fail to comply with these covenants, our 9 ⁵ / ₈ % Senior Notes due 2013, our Senior Secured Term Loan and any loans outstanding under the Loral Credit Agreement and our Term Loan could become immediately payable and the Loral Credit Agreement could be terminated. At June 30, 2008, we were in compliance with all such covenants.

8. Stockholders’ Deficit

           Common Stock, par value $0.001 per share

          We are authorized to issue 2,500,000,000 shares of our common stock as of June 30, 2008. As of June 30, 2008, approximately 321,628,000 shares of our common stock were reserved for issuance in connection with outstanding convertible debt, warrants, incentive stock plans and common stock to be granted to third parties upon satisfaction of performance targets. During the six months ended June 30, 2008, employees exercised 103,443 stock options at exercise prices ranging from $1.96 to $3.36 per share, resulting in proceeds to us of $181.

          In January 2004, we signed a seven-year agreement with the NFL. We delivered to the NFL 15,173,070 shares of our common stock valued at $40,967 upon execution of this agreement. These shares of common stock are subject to transfer restrictions which lapse over time. We recognized expense associated with these shares of $219 during the three months ended June 30, 2008 and 2007, and $1,860 during the six months ended June 30, 2008 and 2007. Of the remaining $17,264 in common stock value, $5,852 and $11,412 are included in other current assets and other long-term assets, respectively, on our accompanying unaudited consolidated balance sheet as of June 30, 2008.

           Warrants

          We have issued warrants to purchase shares of our common stock in connection with distribution and programming agreements and certain debt issuances. As of June 30, 2008, warrants to acquire 55,461,000 shares of our common stock with an average exercise price of $3.94 were outstanding. These warrants vest over time or upon the achievement of milestones and expire at various times through June 2014. For the three months ended June 30, 2008 and 2007, we recognized expense of $86 and $750, respectively, and $2,856 and $5,949 for the six months ended June 30, 2008 and 2007, respectively, in connection with these warrants.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

9. Benefit Plans

           Stock-Based Awards

          In January 2003, our board of directors adopted the Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan (the “2003 Plan”), and on March 4, 2003 our stockholders approved this plan. On May 25, 2004, our stockholders approved an amendment to the 2003 Plan to include members of our board of directors as eligible participants. Employees, consultants and members of our board of directors are eligible to receive awards under the 2003 Plan. The 2003 Plan provides for the grant of stock options, restricted stock, restricted stock units and other stock-based awards that the compensation committee of our board of directors may deem appropriate.

          Vesting and other terms of stock-based awards are set forth in the agreements with the individuals receiving the awards. Stock-based awards granted under the 2003 Plan are generally subject to a vesting requirement. Stock-based awards generally expire ten years from the date of grant. Each restricted stock unit entitles the holder to receive one share of our common stock upon vesting.

          As of June 30, 2008, approximately 99,339,000 stock options, shares of restricted stock and restricted stock units were outstanding. As of June 30, 2008, approximately 54,711,000 shares of our common stock were available for grant under the 2003 Plan.

          The following table summarizes stock option activity under our stock incentive plans for the six months ended June 30, 2008 (shares in thousands):

          The weighted average grant date fair value of options granted during the six months ended June 30, 2008 and 2007 was $1.73 and $1.89, respectively. The total intrinsic value of stock options exercised during the six months ended June 30, 2008 and 2007 was $120 and $1,136, respectively.

          We recognized stock-compensation expense associated with stock options of $11,468 and $10,596 for the three months ended June 30, 2008 and 2007, respectively, and $22,524 and $21,290 for the six months ended June 30, 2008 and 2007, respectively.

          The following table summarizes the non-vested restricted stock unit activity under our stock incentive plans for the six months ended June 30, 2008 (shares in thousands):

          The weighted average grant date fair value of restricted stock units granted during the six months ended June 30, 2008 and 2007 was $2.87 and $3.58, respectively. The total intrinsic value of restricted stock units that vested during the six months ended June 30, 2008 and 2007 was $8,302 and $7,764, respectively.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

          We recognized stock compensation expense associated with restricted stock units and shares of restricted stock of $1,800 and $2,519 for the three months ended June 30, 2008 and 2007, respectively, and $4,614 and $6,217 for the six months ended June 30, 2008 and 2007, respectively.

          For the three and six months ended June 30, 2008, we also recognized stock compensation expense of $1,510 and $2,970 for restricted stock units expected to be granted for services performed in 2008. For the three and six months ended June 30, 2007, we recognized stock compensation expense of $1,226 and $2,404, respectively, for restricted stock units expected to be granted for services performed in 2007.

           401(k) Savings Plan

          We sponsor the Sirius Satellite Radio 401(k) Savings Plan (the “Plan”) for eligible employees. The Plan allows eligible employees to voluntarily contribute from 1% to 50% of their pre-tax salary subject to certain defined limits. Currently we match 50% of employee voluntary contributions, up to 6% of an employee’s pre-tax salary, in the form of shares of our common stock. Our matching contribution vests at a rate of 33 ¹ / ₃ % for each year of employment and is fully vested after three years of employment. Expense resulting from our matching contribution to the Plan was $364 and $295 for the three months ended June 30, 2008 and 2007, respectively, and $1,229 and $793 for the six months ended June 30, 2008 and 2007, respectively.

          We may also elect to contribute to the profit sharing portion of the Plan based upon the total compensation of all eligible participants. These additional contributions, referred to as profit-sharing contributions, are determined by the compensation committee of our board of directors. Employees are only eligible to receive profit-sharing contributions during any year in which they are employed on the last day of the year. Profit-sharing contribution expense was $1,703 and $1,412 for the three months ended June 30, 2008 and 2007, respectively, and $3,360 and $2,763 for the six months ended June 30, 2008 and 2007, respectively.

10. Income Taxes

          We recorded income tax expense of $543 and $555 for the three months ended June 30, 2008 and 2007, respectively, and $1,086 and $1,110 for the six months ended June 30, 2008 and 2007, respectively. Such expense represents the recognition of a deferred tax liability related to the difference in accounting for our FCC license, which is amortized over 15 years for tax purposes but not amortized for book purposes.

          We provide a valuation allowance for all of our deferred tax assets. Accordingly, unrecognized federal or state income tax positions should not impact the face of our financial statements, but instead would reduce the gross tax benefit. We did not have any unrecognized tax benefits.

11. Commitments and Contingencies

     The following table summarizes our expected contractual cash commitments as of June 30, 2008:

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           Debt Obligations. Long-term debt obligations include principal payments on our outstanding debt.

           Cash Interest Payments. Cash interest payments include interest due on our outstanding debt through maturity.

           Lease Obligations. We have entered into operating leases related to our studios, office space, terrestrial repeaters and equipment.

           Satellite and Transmission. We have entered into agreements with third parties to operate and maintain our off-site satellite telemetry, tracking and control facilities and certain components of our terrestrial repeater network.

          We have also entered into an agreement with Space Systems/Loral to design and construct our fifth and sixth satellites. Construction of our fifth satellite is expected to be completed in the second quarter of 2009. We plan to launch this satellite on a Proton rocket under our contract with International Launch Services. We expect to launch our sixth satellite in the fourth quarter of 2010. In January 2008, we entered into an agreement with International Launch Services to secure two additional satellite launches on Proton rockets. We plan to use one of these rockets to launch our sixth satellite. This agreement provides us the flexibility to defer launch dates if we choose. We also have the ability to cancel the second of these launches upon payment of a cancellation fee.

           Programming and Content. We have entered into agreements with licensors of programming and other content providers and, in certain instances, are obligated to pay license fees and guarantee minimum advertising revenue share.

           Marketing and Distribution. We have entered into various marketing, sponsorship and distribution agreements to promote our brand and are obligated to make payments to sponsors, retailers, automakers and radio manufacturers under these agreements. Certain programming and content agreements also require us to purchase advertising on properties owned or controlled by the licensors. We also reimburse automakers for certain engineering and development costs associated with the incorporation of SIRIUS radios into vehicles they manufacture. In addition, in the event that certain new products are not shipped by our distributor to its customers within 90 days of their receipt of goods, we have agreed to purchase and take title to the product.

           Chip Set Development and Production. We have entered into agreements with third parties to develop, produce and supply chip sets; to develop products; and in certain instances to license intellectual property related to chip sets.

           Other. We have entered into various agreements with third parties for general operating purposes.

          In addition to the contractual cash commitments described above, we have entered into agreements with automakers, radio manufacturers, distributors and others that include per-radio, per-subscriber, per-show and other variable cost arrangements. These future costs are dependent upon many factors including our subscriber growth and are difficult to anticipate; however, these costs may be substantial. We may enter into additional programming, distribution, marketing and other agreements that contain similar provisions.

          We are required under the terms of certain agreements to provide letters of credit and deposit monies in escrow, which place restrictions on our cash and cash equivalents. As of June 30, 2008 and December 31, 2007, $56,000 and $53,000, respectively, was classified as restricted investments as a result of our reimbursement obligations under these letters of credit and escrow deposits.

          We have not entered into any off-balance sheet arrangements or transactions.

           Legal Proceedings

           FCC Matters. In August 2008, we entered into a Consent Decree to settle with the Enforcement Bureau of the Federal Communications Commission outstanding enforcement matters. In 2006, the FCC commenced investigations regarding the compliance of certain radios that include FM transmitters with the Commission’s rules, and the compliance of certain terrestrial repeaters with the special temporary authority granted by the Commission. The Consent Decree terminated these inquiries.

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          As part of the Consent Decree, we agreed, among other things, to:

	•		adopt a comprehensive compliance plan, and take steps to address any potentially non-compliant radios remaining in the hands of consumers;
	•		receive special temporary authority to operate two of our eleven variant terrestrial repeaters. These eleven terrestrial repeaters were shut off by us in October 2006; and
	•		make a voluntary contribution to the United States Treasury of approximately $2,200.

           Copyright Royalty Board Proceeding. In December 2007, the Copyright Royalty Board, or CRB, of the Library of Congress issued its decision regarding the royalty rate payable by us under the statutory license covering the performance of sound recordings over our satellite digital audio radio service for the six-year period starting January 1, 2007 and ending December 31, 2012. Under the terms of the CRB’s decision, we will pay a royalty of 6.0% of gross revenues, subject to certain exclusions, for 2007 and 2008, 6.5% for 2009, 7.0% for 2010, 7.5% for 2011 and 8.0% for 2012. SoundExchange has appealed the decision of the CRB to the United States Court of Appeals for the District of Columbia Circuit.

           U.S. Electronics Arbitration . In 2006, U.S. Electronics Inc., a former licensed distributor manufacturer of SIRIUS radios, commenced an arbitration proceeding against us. U.S. Electronics alleges that, among other things, we breached our contract; failed to pay monies owed under the contract; tortiously interfered with U.S. Electronics’ relationships with retailers and manufacturers; and otherwise acted in bad faith. U.S. Electronics is seeking between $75,000 and $110,000 in damages. We believe that a substantial portion of these damages are barred by the limitation of liability provisions contained in the contract between us and U.S. Electronics. U.S. Electronics contends that these provisions do not bar its damages because of, among other reasons, our alleged bad faith and tortious conduct. Absent a settlement, we expect the arbitrators to issue a decision in this matter in September 2008.

           Other Matters . In the ordinary course of business, we are a defendant in various lawsuits and arbitration proceedings, including actions filed by former employees, parties to contracts or leases and owners of patents, trademarks, copyrights or other intellectual property. None of these actions are, in our opinion, likely to have a material adverse effect on our business or financial results.

12. Subsequent Events

           General. On July 28, 2008, XM merged with and into Merger Co., our wholly-owned subsidiary, as a result of which XM is now our wholly-owned subsidiary. The merger was effected pursuant to the Merger Agreement, dated as of February 19, 2007, entered into by and among us, XM and Merger Co. For purposes of our outstanding debt instruments, XM constitutes our “unrestricted” subsidiary.

          Pursuant to the Merger Agreement, each outstanding share of the common stock of XM was converted in the Merger into the right to receive 4.6 fully paid and nonassessable shares of our common stock, and each outstanding share of the series A convertible preferred stock of XM was converted in the merger into the right to receive 4.6 fully paid and nonassessable shares of a newly-designated series of our preferred stock.

           Consideration. The fair value of the options issued in exchange for XM options was estimated by using the Black-Scholes option pricing model with market assumptions, including an expected stock price volatility of 58 percent, an expected life of 1-6 years based on the age of the original award, and a risk-free interest rate of 3.36%.

          The table below represents a preliminary allocation of the total consideration to XM’s tangible and intangible assets and liabilities based on our preliminary estimate of their respective fair values as of June 30, 2008.

          Upon completion of the fair value assessment, we anticipate that the ultimate price allocation will differ from the preliminary assessment. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.

          Our common stock will continue to trade on the NASDAQ Global Select Market under the symbol “SIRI”. Following consummation of the Merger, the common stock of XM was delisted from the NASDAQ Global Select Market. On August 5, 2008, we changed our name to Sirius XM Radio Inc.

FCC Conditions

          In order to demonstrate to the FCC that the merger was in the public interest, we and XM represented to the FCC that the combined company will implement a number of voluntary commitments. These programming, minority and public interest, equipment, subscription rates, and other service commitments are summarized as follows:

Programming

           A La Carte Programming: The combined company will offer the following a la carte programming options:

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	•		50 Channels will be available for $6.99 a month and will allow consumers to choose either 50 SIRIUS channels from approximately 100 SIRIUS channels or 50 XM channels from approximately 100 XM channels. Additional channels can be added for 25 cents each, with premium programming priced at additional cost. However, in no event will a customer subscribing to this a la carte option pay more than $12.95 per month for this programming.
	•		100 Channels will be available on an a la carte basis for $14.99 a month. This a la carte option will allow SIRIUS customers to choose from the SIRIUS programming line-up and some of the best of XM’s programming, and XM customers to choose from the XM programming line-up and some of the best of SIRIUS’ programming.

                   Within three months of the consummation of the merger, the first radios capable of offering a la carte programming will be introduced in the retail after-market, likely first with respect to radios offered by us followed thereafter by XM radios, and the combined company will commence offering a la carte programming.

           “Best of Both” Programming: Within three months of the consummation of the merger, we will offer customers the ability to receive the best of both SIRIUS and XM programming. Current XM customers will continue to receive their existing XM service, and be able to obtain select SIRIUS programming. Likewise, current SIRIUS customers will continue to receive their existing SIRIUS service, and be able to obtain select XM programming. This “best of” programming will be the same “best of” programming included as part of the 100 Channel a la carte offering, and will be available at a monthly cost of $16.99.

           Mostly Music or News, Sports and Talk Programming: Within three months of the consummation of the merger, customers will have the option of choosing an option of “mostly music” programming. Subscribers will also be able to choose an option of news, sports and talk programming. Each of these programming options will be available on existing satellite radios at a cost of $9.99 per month.

           Discounted Family-Friendly Programming: Within three months of the consummation of the merger, consumers will be able to purchase a “family-friendly” version of existing SIRIUS or XM programming at a cost of $11.95 a month, representing a discount of $1.00 per month. Current SIRIUS customers will also be able to choose a family-friendly version of SIRIUS programming that includes select XM programming, and current XM customers can choose a family-friendly XM programming option that includes select SIRIUS programming. This programming will cost $14.99 per month, representing a discount of $2.00 per month from the cost of the “best of” programming. These programming options are subject to individual channel changes in the ordinary course of business and, in the case of certain programming, the consent of third-party programming providers.

Public Interest and Qualified Entity Channels.

	•		Within six months of the consummation of the merger, we will set aside four percent of the full-time audio channels on the Sirius platform and on the XM platform, respectively, which currently represents six channels on the Sirius platform and six channels on the XM platform, for noncommercial, educational and informational programming within the meaning of the FCC rules that govern a similar obligation of direct broadcast satellite providers. We and XM will not select a programmer to fill more than one non-commercial, educational or informational channel on each of the Sirius and XM platforms as long as demand for such channels exceeds available supply.
	•		In addition, within four months of the consummation of the merger, the we will enter into long-term leases or other agreements to provide to a Qualified Entity or Entities, defined as an entity or entities that are majority-owned by persons who are African American, not of Hispanic origin; Asian or Pacific Islanders; American Indians or Alaskan Natives; or Hispanics, rights to four percent of the full-time audio channels on the Sirius platform and on the XM platform, respectively, which again currently represents six channels on the Sirius platform and six channels on the XM platform. As digital compression technology enables the company to broadcast additional full-time audio channels, the combined company will ensure that four percent of full-time audio channels on the Sirius platform and the XM platform are reserved for a Qualified Entity or Entities; provided that in no event will we reserve fewer than six channels on the Sirius platform and six channels on the XM platform.

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(Unaudited)

•

The Qualified Entity or Entities will not be required to make any lease payments for such channels. We are willing not to be involved in the selection of the Qualified Entity or Entities. We will have no editorial control over these channels.

Equipment

	•		The combined company, we will offer for license, on commercially reasonable and non-discriminatory terms, the intellectual property we own and control of the basic functionality of satellite radios that is necessary to independently design, develop and have manufactured satellite radios (other than chip set technology, which technology includes its encryption and conditional access keys) to any bona fide third party that wishes to design, develop, have manufactured and distribute subscriber equipment compatible with the Sirius system, the XM system, or both. Chip sets for satellite radios may be purchased by licensees from manufacturers in negotiated transactions with such manufacturers. Such technology license shall contain commercially reasonable terms, including, without limitation, confidentiality, indemnity and default obligations; require the licensee to comply with all existing and applicable law, including FCC rules and regulations and applicable U.S. copyright laws; and require the licensee and qualified manufacturer to satisfy technical and quality assurance standards and tests established by the combined company from time to time and applicable to licensees and qualified manufacturers. The combined company will not enter into any agreement that grants, or that would have the effect of granting, a device manufacturer an exclusive right to manufacture, market and sell equipment that can deliver the company’s satellite radio service.
	•		We will not execute any agreement or take any other action that would bar, or have the effect of barring, a car manufacturer or other third party from including non-interfering HD radio chips, iPod compatibility, or other audio technology in an automobile or audio device.

Service to Puerto Rico

          Within three months of the consummation of the merger, we will file the necessary applications to provide the Sirius satellite radio service to the Commonwealth of Puerto Rico using terrestrial repeaters and will, upon grant of the necessary permanent authorizations, promptly introduce such satellite radio service to the Commonwealth.

Interoperable Receivers

          Within nine months of the consummation of the merger, we will offer for sale an interoperable receiver in the retail after-market.

Subscription Rates

          We will not raise the retail price for our basic $12.95 per month subscription package, the a la carte programming packages and the new programming packages described above for thirty six months after consummation of the merger. Six months prior to the expiration of this commitment period, the FCC will seek public comment on whether the cap continues to be necessary. The FCC will then define whether it should be modified, removed or extended. After the first anniversary of the consummation of the merger, we may pass through cost increases incurred since the filing of the combined company’s FCC merger application as a result of statutorily or contractually required payments to the music, recording and publishing industries for the performance of musical works and sound recordings or for device recording fees. We will provide customers, either on individual bills or on the combined company’s website, specific costs passed through to consumers pursuant to the preceding sentence.

Local Programming and Advertising

          We have committed not to originate local programming or advertising through our repeater networks.

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XM Indebtedness

           Second Supplemental Indenture to Indenture for 1.75% Convertible Senior Notes

          On July 28, 2008, we, XM and The Bank of New York Mellon, as trustee, entered into a second supplemental indenture to the indenture governing XM’s 1.75% Convertible Senior Notes due 2009 (the “1.75% Notes”). Pursuant to the second supplemental indenture, the 1.75% Notes became convertible at the option of the holder into shares of our common stock initially at a conversion rate of 92.00 shares of our common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $10.87 per share of our common stock (subject to adjustment in certain events), at any time until December 1, 2009.

           First Supplemental Warrant for Warrant Agreement, dated March 15, 2000

          On July 28, 2008, we, XM and The Bank of New York Mellon entered into a first supplemental warrant to the warrant agreement governing XM’s warrants issued in connection with 14% Senior Secured Notes due 2010 (the “2010 Warrants”). Pursuant to the first supplemental warrant, each of the 2010 Warrants became exercisable for 40.39 shares of our common stock at an exercise price of $9.83 per share and we assumed the covenants, agreements, obligations and undertakings of XM under the warrant agreement and the 2010 Warrants.

           First Supplemental Warrant for Warrant Agreement, dated January 28, 2003

          On July 28, 2008, we, XM and The Bank of New York Mellon entered into a first supplemental warrant to the warrant agreement governing XM’s warrants issued in connection with 14% Senior Secured Discount Notes due 2009 (the “2009 Warrants”). Pursuant to the first supplemental warrant, each of the 2009 Warrants became exercisable for 391.00 shares of our common stock at an exercise price of $0.69 per share and we assumed the covenants, agreements, obligations and undertakings of XM under the warrant agreement and the 2009 Warrants.

           Written Instrument for Common Stock Purchase Warrant, dated June 3, 2005

          On July 28, 2008, we entered into a written instrument to the common stock purchase warrant governing XM’s warrant issued to Space Systems/Loral Inc. (the “SS/L Warrant”). Pursuant to the written instrument, the SS/L Warrant became exercisable for 1,840,000 shares of our common stock at an exercise price of $7.05 per share and we assumed the obligation to deliver to Space Systems/Loral Inc. the shares of stock, securities or assets to which the warrantholder may be entitled under the SS/L Warrant, and all other obligations of XM under the SS/L Warrant.

           Written Instrument for Common Stock Purchase Warrant, dated May 4, 2006

          On July 28, 2008, we entered into a written instrument to the common stock purchase warrant governing XM’s warrant originally issued to Boeing Satellite Systems and currently held by Bank of America, N.A. (the “BofA Warrant”). Pursuant to the written instrument, the BofA Warrant became exercisable for 2,300,000 shares of our common stock at an exercise price of $2.94 per share and we assumed the obligation to deliver to Bank of America, N.A. the shares of stock, securities or assets to which the warrantholder may be entitled under the BofA Warrant, and all other obligations of XM under the BofA Warrant.

           13% Senior Notes due 2014

          On July 31, 2008, XM Escrow LLC (“Escrow LLC”), a Delaware limited liability company and wholly-owned subsidiary of XM, which is our wholly-owned subsidiary, issued $778.5 million aggregate principal amount of 13% Senior Notes due 2014 (the “Senior Notes”). The Senior Notes, offered at a purchase price equal to 89.93% of their principal amount, are senior obligations of XM Satellite Radio Inc. (“XM Inc.”) and rank equally in right of payment with its existing and future senior debt. Interest is payable semi-annually in arrears on February 1 and August 1 at a rate of 13% per annum. The Senior Notes are unsecured and will mature in 2014, with such maturity to occur earlier in 2013, in certain circumstances.

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Escrow LLC merged with and into XM Inc., with XM Inc. being the surviving corporation. Upon this merger, the Senior Notes became obligations of XM Inc. and are guaranteed by XM Holdings, XM Equipment Leasing LLC and XM Radio Inc. The Senior Notes are not guaranteed by Sirius XM Radio Inc. XM Inc., at its option, may redeem the Senior Notes at a “make-whole” redemption price at any time, subject to certain restrictions. The Senior Notes are subject to covenants that, among other things, require XM Inc. to make an offer to repurchase the Senior Notes at 101% of their principal amount in the event of a change of control, and limit the ability of XM Inc. and its restricted subsidiaries to incur additional indebtedness; pay dividends on, redeem or repurchase capital stock; make investments; engage in transactions with affiliates; create certain liens; or consolidate, merge or transfer all or substantially all of its assets and the assets of its restricted subsidiaries.

           7% Exchangeable Senior Subordinated Notes Due 2014

          On August 1, 2008, XM Inc. issued $550 million aggregate principal amount of 7% Exchangeable Senior Subordinated Notes due 2014 (the “Exchangeable Notes”). The Exchangeable Notes, offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act at a purchase price equal to 100% of their principal amount, are senior subordinated obligations of XM Inc. and rank junior in right of payment with its existing and future senior debt and equally in right of payment with its existing and future senior subordinated debt. XM Holdings, XM Equipment LLC and XM Radio Inc. have also guaranteed the Exchangeable Notes on a senior subordinated basis. The Exchangeable Notes are not guaranteed by Sirius XM Radio Inc. Interest is payable semi-annually in arrears on June 1 and December 1 at a rate of 7% per annum. The Exchangeable Notes will be exchangeable at any time at the option of the holder into shares of our common stock, par value $0.001 per share, at an initial exchange rate of 533.3333 shares of common stock per $1,000 principal amount of Exchangeable Notes, which is equivalent to an approximate exchange price of $1.875 per share of common stock. If a fundamental change occurs, and in other circumstances specified in the Exchangeable Notes prior to maturity, holders of the Exchangeable Notes may require XM Inc. to repurchase all or part of their Exchangeable Notes at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, if any. The exchange rate will be increased in relation to exchanges occurring during specified periods following the occurrence of specified corporate transactions involving us or XM Inc.

           Share Lending Agreements

          On July 28, 2008, we agreed to lend Morgan Stanley Capital Services, Inc. an aggregate of 188,399,978 shares of our common stock and to lend UBS AG, London Branch, an aggregate of 74,000,005 shares of our common stock. Each of the share lending agreements will terminate on or about the maturity date of the Exchangeable Notes, or, if earlier, the date as of which the entire principal amount of Exchangeable Notes ceases to be outstanding as a result of exchange, repayment, repurchase, or otherwise. The share lending agreement with Morgan Stanley Capital Services, Inc. is guaranteed by Morgan Stanley.

Reorganization of our Board of Directors

          On July 28, 2008, effective immediately prior to the effective time of the Merger, Joseph P. Clayton, Warren N. Lieberfarb and Michael McGuiness resigned from our board of directors, with Mr. Clayton also resigning as chairman of our board of directors.

          On the same date, effective as of the effective time of the Merger, as approved by resolutions of our board of directors and pursuant to the Merger Agreement, the number of directors on our board of directors was increased from eight to twelve. Effective at the same time, each of the following former members of the XM board of directors was elected to our board of directors:

Joan Amble
Eddy Hartenstein
Chet Huber
John Mendel
Gary Parsons
Jack Shaw
Jeff Zients

          Also effective at the same time, our board of directors appointed Gary Parsons as Chairman of our board of directors pursuant to the Merger Agreement. As of the time of the filing of this Report, the newly-elected directors

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

have not been appointed to any committees of our board of directors and we have not determined to which committees, the newly-elected directors may be appointed.

Amendment to our Certificate of Incorporation

          On July 28, 2008, we amended our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of our common stock to 4,500,000,000, and the total number of shares that we have the authority to issue to 4,550,000,000. On the same date and as contemplated by the Merger Agreement, we amended our Amended and Restated Bylaws to provide that, for a period of two years following the completion of the merger, (i) any termination or replacement of either our chief executive officer or chairman of the board of directors as of the completion of the merger (or such individual’s successor) or (ii) any sale, transfer or other disposition of assets, rights or properties which are material, individually or in the aggregate, to us (or the execution of any agreement to take any such action), will require the prior approval of a majority of the independent directors on our board of directors.

          Also on the same date, as contemplated by the Merger Agreement and as approved by our board of directors, we created a new series of Series A Convertible Preferred Stock, par value $0.001 per share (the “Series A Convertible Preferred Stock”), which has the same powers, designations, preferences, rights and qualifications, limitations and restrictions as the series A convertible preferred stock of XM, except that such preferred stock has the right to vote with the holders of the our common stock as a single class, with each share of preferred stock having 1/5th of a vote.

          On August 5, 2008, we changed our name from Sirius Satellite Radio Inc. to Sirius XM Radio Inc. The name change was effected pursuant to Section 253 of the Delaware General Corporation Law by merging a wholly-owned subsidiary (formed solely for the purpose of implementing the name change) into us. We are the surviving corporation and, in connection with the merger, we have amended our Amended and Restated Certificate of Incorporation to change our name to Sirius XM Radio Inc. pursuant to the Certificate of Ownership and Merger filed with the Secretary of State of the State of Delaware.

Pro Forma Financial Statements

          The unaudited pro forma condensed combined statement of income as of June 30, 2008 and for the fiscal year ended December 31, 2007, the unaudited pro forma combined balance sheet as of June 30, 2008, and accompanying notes are filed as Exhibit 99.1 and incorporated herein by reference.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

           (All dollar amounts are in thousands, unless otherwise stated)

Special Note Regarding Forward-Looking Statements

          The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in forward-looking statements made in this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time. Any statements about our beliefs, plans, objectives, expectations, assumptions, future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “intend,” “plan,” “projection” and “outlook.” Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout our Annual Report on Form 10-K for the year ended December 31, 2007 (the “Form 10-K”), in Part II, Item 1A of this Report and in other reports and documents published by us from time to time, particularly the risk factors described under “Business—Risk Factors” in Item 1A of the Form 10-K and any updates thereof in Part II Item 1A of the Form 10-Q.

          Among the significant factors that could cause our actual results to differ materially from those expressed in the forward-looking statements are:

	•		our merger with XM Satellite Radio Holdings Inc. (“XM”), including the uncertainties relating to the indebtedness of XM; the possibility that the anticipated benefits of the merger may not be fully realized or may take longer to realize; and the risks associated with the undertakings made to the FCC and it affects on our business in the future;
	•		the useful life of our satellites, which have experienced circuit failures on their solar arrays and other component failures and are not insured;
	•		our dependence upon third parties, including manufacturers and distributors of SIRIUS radios, retailers, automakers and programming providers; and
	•		our competitive position versus other forms of audio and video entertainment including terrestrial radio, HD radio, internet radio, mobile phones, iPods and other MP3 devices, and emerging next generation networks and technologies.

          Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any of these forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise or to assess with any precision the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Executive Summary

          We are a satellite radio provider in the United States. We currently broadcast over 130 channels of programming to listeners across the country. We offer 69 channels of 100% commercial-free music and feature 65 channels of sports, news, talk, entertainment, traffic and weather for a monthly subscription fee of $12.95.

          We broadcast through our proprietary satellite radio system, which currently consists of three orbiting satellites, 124 terrestrial repeaters that receive and retransmit our signal, a satellite uplink facility and our studios. Subscribers receive our service through SIRIUS radios, which are sold by automakers, consumer electronics retailers and mobile audio dealers and through our website. Subscribers can also receive our music channels and certain other channels over the Internet.

          SIRIUS Canada Inc., a Canadian corporation owned by us, Canadian Broadcasting Corporation and Standard Broadcasting Corporation, received a license from the Canadian Radio-television and Telecommunications Commission to offer a satellite radio service in Canada. SIRIUS Canada offers 120 channels of commercial-free music and news, sports, talk and entertainment programming, including 11 channels of Canadian content. Subscribers to the SIRIUS Canada service are not included in our subscriber count.

          SIRIUS radios are primarily distributed through retailers; automakers, or OEMs; and through our website. SIRIUS radios can be purchased at major retailers, including Best Buy; Circuit City; Crutchfield; Costco; Target; Wal-Mart; and on an exclusive basis through RadioShack. On June 30, 2008, SIRIUS radios were available at more than 20,000 retail locations. We have exclusive agreements with Aston Martin, Audi, Automobili Lamborghini, Bentley, BMW, Chrysler, Dodge, Ford, Jaguar, Jeep, Kia, Land Rover, Lincoln, Maybach, Mazda, Mercedes-Benz, Mercury, MINI, Mitsubishi, Rolls-Royce, Volvo, and Volkswagen to offer SIRIUS radios as factory or dealer-installed equipment in their vehicles. SIRIUS has relationships with Toyota and Scion to offer SIRIUS radios as dealer-installed equipment, and a relationship with Subaru to offer SIRIUS radios as factory or dealer-installed equipment. We also have relationships with Toyota, and Scion to offer SIRIUS radios as factory or dealer-installed equipment. As of June 30, 2008, SIRIUS radios were available as a factory-installed option in 126 vehicle models and as a dealer-installed option in 45 vehicle models. SIRIUS radios are also offered to renters of Hertz vehicles at airport locations nationwide.

          As of June 30, 2008, we had 8,924,139 subscribers compared with 8,321,785 subscribers as of December 31, 2007 and 7,142,538 subscribers as of June 30, 2007. Our subscriber totals include subscribers under our regular pricing plans; subscribers that have prepaid, including payments received from automakers for prepaid subscriptions included in the sale or lease price of a new vehicle; active SIRIUS radios under our agreement with Hertz; and subscribers to SIRIUS Internet Radio, our Internet service.

          Our primary source of revenue is subscription fees, with most of our customers subscribing to SIRIUS on either an annual, semi-annual, quarterly or monthly basis. We offer discounts for pre-paid and long-term subscriptions as well as discounts for multiple subscriptions. Currently we receive an average of approximately eight months of prepaid revenue per subscriber upon activation. We also derive revenue from backseat TV, data services, activation fees, the sale of advertising on select non-music channels and the direct sale of SIRIUS radios and accessories. We believe our ability to attract and retain subscribers depends in large part on creating and sustaining distribution channels for SIRIUS radios, the strength of the SIRIUS brand, and on the quality and entertainment value of our programming

          In certain cases, automakers include a subscription to our radio service in the sale or lease price of vehicles. The length of these prepaid subscriptions varies, but is typically six months to one year. In many cases, we receive subscription payments from automakers in advance of the activation of our service. We also reimburse various automakers for certain costs associated with SIRIUS radios installed in their vehicles.

          On July 28, 2008, XM merged (the “Merger”) with and into Vernon Merger Corporation (“Merger Co.”), our wholly-owned subsidiary, as a result of which XM is now our wholly-owned subsidiary. For purposes of our outstanding debt instruments, XM constitutes our “unrestricted” subsidiary. The Merger was effected pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of February 19, 2007, entered into by and among us, XM and Merger Co. The information presented in this Report does not give effect to the Merger; refer to Note 12 “Subsequent Events” for further details. On August 5, 2008, we changed our name to Sirius XM Radio Inc.

Results of Operations

          Our discussion of our results of operations, along with the selected financial information in the tables that follow, includes the following non-GAAP financial measures: average monthly churn; average monthly revenue per subscriber, or ARPU; SAC, as adjusted, per gross subscriber addition; customer service and billing expenses, as adjusted, per average subscriber; free cash flow; and adjusted loss from operations. We believe these non-GAAP financial measures provide meaningful supplemental information regarding our operating performance and are used for internal management purposes, when publicly providing the business outlook, and as a means to evaluate period-to-period comparisons. Please refer to the footnotes following our discussion of results of operations for the definitions and further discussion of usefulness of such non-GAAP financial measures.

          Certain amounts in the prior unaudited consolidated financial statements have been reclassified to conform to the current period presentation. Specifically, during the first six months of 2008, we reclassified equipment related retention costs from cost of equipment to sales and marketing expense. Equipment related retention costs are associated with efforts to retain existing subscribers that we believe will result in higher revenue and lower churn.

Subscribers and Key Operating Metrics:

          The following table contains a breakdown of our subscribers for the three and six months ended June 30, 2008 and 2007:

           Subscribers. We ended the second quarter of 2008 with 8,924,139 subscribers, an increase of 7% since December 31, 2007 and 25% from the 7,142,538 subscribers as of June 30, 2007. Since June 30, 2007, we added 312,168 net subscribers from our retail channel and 1,469,433 net subscribers from our OEM channel, resulting in a 7% and 53% increase in our retail and OEM subscribers, respectively.

The following table presents our key operating metrics for the three and six months ended June 30, 2008 and 2007:

           ARPU. Total ARPU for the three months ended June 30, 2008 was $10.49 compared to $10.71 for the three months ended June 30, 2007. The decrease was driven by an increase in the mix of prepaid subscriptions on vehicles that have not been sold to a consumer; a decline in net advertising revenue per average subscriber as subscriber growth exceeded the growth in ad revenues; offset by the effects of rebates.

          We expect ARPU to fluctuate based on the growth of our subscriber base, promotions, rebates offered to subscribers and corresponding take-rates, plan mix, subscription prices, advertising sales and the identification of additional revenue from subscribers.

           SAC, As Adjusted, Per Gross Subscriber Addition. SAC, as adjusted, per gross subscriber addition was $78 and $107 for the three months ended June 30, 2008 and 2007, respectively. The decrease was primarily driven by lower retail and OEM subsidies due to better product economics.

          We expect SAC, as adjusted, per gross subscriber addition to decline as the costs of subsidized components of SIRIUS radios decrease in the future. If competitive forces or changes in retailer promotional strategies require us to increase hardware subsidies or promotions, SAC, as adjusted, per gross subscriber addition may increase. Our SAC, as adjusted, per gross subscriber addition will continue to be impacted by our increasing mix of OEM gross subscriber additions.

           Customer Service and Billing Expenses, As Adjusted, Per Average Subscriber. Customer service and billing expenses, as adjusted, per average subscriber declined 18% to $0.86 for the second quarter of 2008 compared with $1.05 for the second quarter of 2007. The decline was primarily due to efficiencies across a larger subscriber base.

          We expect customer service and billing expenses, as adjusted, per average subscriber to decrease on an annual basis as our subscriber base grows due to scale efficiencies in call center and other customer care and billing operations. Our customer service and billing expenses, as adjusted, per average subscriber are generally lower in the first three quarters of our fiscal year and increase in the fourth quarter due to the holiday selling season.

           Adjusted Loss from Operations. For the three months ended June 30, 2008 and 2007, adjusted loss from operations was $23,785 and $79,299, respectively, a decrease of $55,514. The decrease was primarily driven by an increase in total revenue of $56,590 as a result of a 25% increase in our subscriber base and a $24,273 improvement in subscriber acquisition costs which more than offset an increase in revenue share and royalties.

           Net Loss. For the three months ended June 30, 2008 and 2007, net loss was $83,899 and $134,147, respectively, a decrease of $50,248. The decrease was primarily driven by an increase in total revenue of $56,590 as a result of a 25% increase in our subscriber base.

Three and Six Months Ended June 30, 2008 Compared with Three and Six Months Ended June 30, 2007

           Total Revenue

           Subscriber Revenue. Subscriber revenue includes subscription fees, activation fees and the effects of rebates.

	•		Three Months: For the three months ended June 30, 2008 and 2007, subscriber revenue was $266,518 and $209,635, respectively, an increase of 27% or $56,883. The increase was attributable to the growth of subscribers to our service.
	•		Six Months: For the six months ended June 30, 2008 and 2007, subscriber revenue was $522,158 and $400,431, respectively, an increase of 30% or $121,727. The increase was attributable to the growth of subscribers to our service.

     The following table contains a breakdown of our subscriber revenue for the periods presented:

          Future subscriber revenue will be dependent upon, among other things, the growth of our subscriber base, promotions, rebates offered to subscribers and corresponding take-rates, plan mix, subscription prices and the identification of additional revenue streams from subscribers.

           Advertising Revenue. Advertising revenue includes the sale of advertising on our non-music channels, net of agency fees. Agency fees are based on a stated percentage per the advertising agreements applied to gross billing revenue.

	•		Three Months: For the three months ended June 30, 2008 and 2007, net advertising revenue was $8,332 and $9,177, respectively, which represents a decrease of $845. The decrease was driven by lower advertising spot sales compared to the three months ended June 30, 2007.
	•		Six Months: For the six months ended June 30, 2008 and 2007, net advertising revenue was $16,740 and $15,898, respectively, which represents an increase of $842. The increase was a result of increased advertiser interest through sales efforts in the first six months of 2008 as compared to the first six months of 2007.

          We expect advertising revenue to grow as our subscribers increase, as we continue to improve brand awareness and content, and as we increase the size and effectiveness of our advertising sales force. Advertising revenue is also subject to fluctuation based on the overall advertising environment.

           Equipment Revenue. Equipment revenue includes revenue from the direct sale of SIRIUS radios and accessories through our direct to consumer distribution channel.

	•		Three Months: For the three months ended June 30, 2008 and 2007, equipment revenue was $7,956 and $6,255, respectively, which represents an increase of $1,701. The increase was the result of higher sales through our direct to consumer distribution channel, offset by the effects of promotional discounts.
	•		Six Months: For the six months ended June 30, 2008 and 2007, equipment revenue was $14,019 and $10,926, respectively, which represents an increase of $3,093. The increase was the result of higher sales through our direct to consumer distribution channel, offset by the effects of promotional discounts.

          We expect equipment revenue to increase as we introduce new products and as sales grow through our direct to consumer distribution channel.

           Operating Expenses

           Satellite and Transmission. Satellite and transmission expenses consist of costs associated with the operation and maintenance of our satellites; satellite telemetry, tracking and control system; terrestrial repeater network; satellite uplink facility; and broadcast studios.

	•		Three Months: For the three months ended June 30, 2008 and 2007, satellite and transmission expenses were $7,451 and $7,337, respectively, which represents an increase of $114. Excluding stock-based compensation of $759 and $621 for the three months ended June 30, 2008 and 2007, respectively, satellite and transmission expenses decreased $24 from $6,716 to $6,692. As of June 30, 2008 and 2007, we had 124 and 127 terrestrial repeaters, respectively, in operation.
	•		Six Months: For the six months ended June 30, 2008 and 2007, satellite and transmission expenses were $15,275 and $15,323, respectively, which represents a decrease of $48. Excluding stock-based compensation of $1,555 and $1,277 for the six months ended June 30, 2008 and 2007, respectively, satellite and transmission expenses decreased $326 from $14,046 to $13,720. As of June 30, 2008 and 2007, we had 124 and 127 terrestrial repeaters, respectively, in operation.

          Future increases in satellite and transmission expenses will primarily be attributable to the addition of new terrestrial repeaters and maintenance costs of existing terrestrial repeaters. We expect to deploy additional terrestrial repeaters in 2008. Such expenses may also increase in future periods if we decide to reinstate our in-orbit satellite insurance.

           Programming and Content. Programming and content expenses include costs to acquire, create and produce content and on-air talent costs. We have entered into various agreements with third parties for music and non-music programming. These agreements require us to pay license fees, share advertising revenue; purchase advertising on media properties owned or controlled by the licensor and pay other guaranteed amounts. Purchased advertising is recorded as a sales and marketing expense in the period the advertising is broadcast.

	•		Three Months: For the three months ended June 30, 2008 and 2007, programming and content expenses were $55,247 and $54,311, respectively, which represents an increase of $936. Excluding stock-based compensation of $1,160 and $1,215 for the three months ended June 30, 2008 and 2007, respectively, programming and content expenses increased $991 from $53,096 to $54,087. This increase of $991 was primarily attributable to license fees associated with new programming and compensation related costs for additions to headcount.
	•		Six Months: For the six months ended June 30, 2008 and 2007, programming and content expenses were $116,939 and $114,309, respectively, which represents an increase of $2,630. Excluding stock-based compensation of $3,949 and $4,150 for the six months ended June 30, 2008 and 2007, respectively, programming and content expenses increased $2,831 from $110,159 to $112,990. This increase of $2,831 was primarily attributable to license fees associated with new programming and compensation related costs for additions to headcount.

          Our programming and content expenses, excluding stock-based compensation expense, will increase as we continue to develop and enhance our channels. We regularly evaluate programming opportunities and may choose to acquire and develop new content or renew current programming agreements in the future at higher costs.

           Revenue Share and Royalties. Revenue share and royalties include distribution and content provider revenue share, residuals and broadcast and webstreaming royalties. Residuals are monthly fees paid based upon the number of subscribers using a SIRIUS radio purchased from a retailer. Advertising revenue share is recorded to revenue share and royalties in the period the advertising is broadcast.

•

Three Months: For the three months ended June 30, 2008 and 2007, revenue share and royalties were $49,723 and $29,841, respectively, which represents an increase of $19,882. This increase was attributable to the determination by the Copyright Royalty Board in January 2008 of the royalty rate under the statutory license covering the performance of sound recordings. The 25% growth in our revenues also contributed to the increase in revenue share and royalties.

•

Six Months: For the six months ended June 30, 2008 and 2007, revenue share and royalties were $92,043 and $56,975, respectively, which represents an increase of $35,068. This increase was attributable to the determination by the Copyright Royalty Board in January 2008 of the royalty rate under the statutory license covering the performance of sound recordings. The 29% growth in our revenues also contributed to the increase in revenue share and royalties.

          We expect revenue share to increase as we continue to experience revenue growth and expand our distribution of SIRIUS radios through automakers. In addition, we expect broadcast and webstreaming royalties, which are typically variable in nature, to increase as our subscriber base grows.

           Customer Service and Billing. Customer service and billing expenses include costs associated with the operation of our customer service centers and subscriber management system as well as bad debt expense.

	•		Three Months: For the three months ended June 30, 2008 and 2007, customer service and billing expenses were $22,865 and $21,618, respectively, which represents an increase of $1,247. Excluding stock-based compensation of $265 and $178 for the three months ended June 30, 2008 and 2007, respectively, customer service and billing expenses increased $1,160 from $21,440 to $22,600. This increase of $1,160 was primarily due to higher call center operating costs necessary to accommodate the increase in our subscriber base and higher total transaction fees on the larger base. Customer service and billing expenses, excluding stock-based compensation, increased 5% compared with an increase in subscribers of 25% year over year.
	•		Six Months: For the six months ended June 30, 2008 and 2007, customer service and billing expenses were $49,786 and $43,471, respectively, which represents an increase of $6,315. Excluding stock-based compensation of $541 and $377 for the six months ended June 30, 2008 and 2007, respectively, customer service and billing expenses increased $6,152 from $43,094 to $49,246. This increase of $6,152 was primarily due to higher call center operating costs necessary to accommodate the increase in our subscriber base and higher total transaction fees on the larger base. Customer service and billing expenses, excluding stock-based compensation, increased 14% compared with an increase in subscribers of 25% year over year.

          We expect our customer care and billing expenses, excluding stock-based compensation expense, to increase as our subscriber base grows due to increased call center operating costs, transaction fees necessary to serve a larger subscriber base and bad debt expense.

           Cost of Equipment. Cost of equipment includes costs for SIRIUS radios and accessories sold through our direct to consumer distribution channel.

	•		Three Months: For the three months ended June 30, 2008 and 2007, cost of equipment was $6,647 and $7,386, respectively, which represents a decrease of $739. The decrease was primarily attributable to a decline in per unit costs.
	•		Six Months: For the six months ended June 30, 2008 and 2007, cost of equipment was $14,234 and $13,843, respectively, which represents an increase of $391. The increase was primarily attributed to higher sales volume, offset by a decline in per unit costs.

          We expect cost of equipment to increase in the future as we introduce new products and as sales through our direct to consumer distribution channel grow.

           Sales and Marketing. Sales and marketing expenses include costs for advertising, media and production, including promotional events and sponsorships; cooperative marketing; customer retention and compensation. Cooperative marketing costs include fixed and variable payments to reimburse retailers and automakers for the cost of advertising and other product awareness activities.

•

Three Months: For the three months ended June 30, 2008 and 2007, sales and marketing expenses were $49,133 and $46,864, respectively, which represents an increase of $2,269. Excluding stock-based compensation of $2,464 and $2,849 for the three months ended June 30, 2008 and 2007, respectively, sales and marketing expenses increased $2,654, from $44,015 to $46,669. This increase was primarily attributable to equipment related retention costs associated with efforts to retain existing subscribers

that we believe will result in higher revenue and lower churn. This was offset by lower consumer advertising and reduced cooperative marketing spend with our channel partners.

•

Six Months: For the six months ended June 30, 2008 and 2007, sales and marketing expenses were $87,598 and $87,861, respectively, which represents a decrease of $263. Excluding stock-based compensation of $7,704 and $8,493 for the six months ended June 30, 2008 and 2007, respectively, sales and marketing expenses increased $526 from $79,368 to $79,894. This increase was primarily attributable to equipment related retention costs associated with efforts to retain existing subscribers that we believe will result in higher revenue and lower churn. This was offset by lower consumer advertising and reduced cooperative marketing spend with our channel partners.

          We expect sales and marketing expenses, excluding stock-based compensation expense, to increase as we continue to build brand awareness through national advertising and promotional activities and expand our subscriber retention efforts.

           Subscriber Acquisition Costs. Subscriber acquisition costs include hardware subsidies paid to radio manufacturers, distributors and automakers, including subsidies paid to automakers who include a SIRIUS radio and a prepaid subscription to our service in the sale or lease price of a new vehicle; subsidies paid for chip sets and certain other components used in manufacturing radios; commissions paid to retailers and automakers as incentives to purchase, install and activate SIRIUS radios; product warranty obligations; provisions for inventory allowance; and compensation costs associated with stock-based awards granted in connection with certain distribution agreements. Subscriber acquisition costs do not include advertising, loyalty payments to distributors and dealers of SIRIUS radios and revenue share payments to automakers and retailers of SIRIUS radios.

	•		Three Months: For the three months ended June 30, 2008 and 2007, subscriber acquisition costs were $81,392 and $105,665, respectively, which represents a decrease of 23% or $24,273. Excluding stock-based compensation of $0 and $7 for the three months ended June 30, 2008 and 2007, respectively, subscriber acquisition costs decreased 23%, or $24,266, from $105,658 to $81,392. This decrease of $24,266 was primarily attributable to lower retail and OEM subsidies due to better product economics.
	•		Six Months: For the six months ended June 30, 2008 and 2007, subscriber acquisition costs were $171,216 and $205,782, respectively, which represents a decrease of 17% or $34,566. Excluding stock-based compensation of $14 and $1,887 for the six months ended June 30, 2008 and 2007, respectively, subscriber acquisition costs decreased 16%, or $32,693, from $203,895 to $171,202. This decrease of $32,693 was primarily driven by lower retail and OEM subsidies due to better product economics.

          We expect total subscriber acquisition costs, excluding stock-based compensation expense, to decrease as increases in our gross subscriber additions are offset by continuing declines in the costs of subsidized components of SIRIUS radios. We intend to continue to offer subsidies, commissions and other incentives to acquire subscribers.

           General and Administrative. General and administrative expenses include rent and occupancy, finance, legal, human resources, information technology and investor relations costs.

	•		Three Months: For the three months ended June 30, 2008 and 2007, general and administrative expenses were $42,467 and $38,471, respectively, which represents an increase of $3,996. Excluding stock-based compensation of $11,457 and $11,163 for the three months ended June 30, 2008 and 2007, respectively, general and administrative expenses increased $3,702 from $27,308 to $31,010. This increase of $3,702 was primarily the result of higher litigation related costs and compensation-related costs to support the growth of our business.
	•		Six Months: For the six months ended June 30, 2008 and 2007, general and administrative expenses were $91,246 and $73,814, respectively, which represents an increase of $17,432. Excluding stock-based compensation of $23,455 and $23,103 for the six months ended June 30, 2008 and 2007, respectively, general and administrative expenses increased $17,079 from $50,711 to $67,790. This increase of $17,079 was primarily a result of higher litigation related costs and compensation-related costs to support the growth of our business.

          We expect our general and administrative expenses, excluding stock-based compensation expense, to increase in future periods as a result of higher personnel, information technology, and facilities costs to support the growth of our business and increased litigation costs.

          Future expense associated with stock-based compensation is contingent upon a number of factors, including the number of stock-based awards granted, the price of our common stock, assumptions used in estimating the fair value of stock-based awards, estimates for forfeitures, vesting provisions and the timing as to when certain performance criteria are met, and could materially change.

           Engineering, Design and Development. Engineering, design and development expenses include costs to develop our future generation of chip sets and new products, research and development for broadcast infrastructure, and costs associated with the incorporation of SIRIUS radios into vehicles manufactured by automakers.

	•		Three Months: For the three months ended June 30, 2008 and 2007, engineering, design and development expenses were $9,028 and $11,250, respectively, which represents a decrease of $2,222. Excluding stock-based compensation of $1,046 and $984 for the three months ended June 30, 2008 and 2007, respectively, engineering, design and development expenses decreased $2,284 from $10,266 to $7,982. This decrease of $2,284 was primarily attributable to reduced OEM and product development costs.
			Six Months: For the six months ended June 30, 2008 and 2007, engineering, design and development expenses were $17,684 and $23,661, respectively, which represents a decrease of $5,977. Excluding stock-based compensation of $2,195 and $1,990 for the six months ended June 30, 2008 and 2007, respectively, engineering, design and development expenses decreased $6,182 from $21,671 to $15,489. This decrease of $6,182 was primarily attributable to reduced OEM and product development costs.

          We expect engineering, design and development expenses, excluding stock-based compensation expense, to continue to fluctuate based on the nature and timing of engineering, design and development activities.

           Other Income (Expense)

           Interest and Investment Income. Interest and investment income includes realized gains and losses, dividends and interest income, including amortization of the premium and discount arising at purchase.

	•		Three Months: For the three months ended June 30, 2008 and 2007, interest and investment income was $1,425 and $4,753, respectively, which represents a decrease of $3,328. The decrease was primarily attributable to lower interest rates in 2008 and a lower cash balance.
	•		Six Months: For the six months ended June 30, 2008 and 2007, interest and investment income was $4,227 and $10,795, respectively, which represents a decrease of $6,568. The decrease was primarily attributable to lower interest rates in 2008 and a lower cash balance.

           Interest Expense. Interest expense includes interest on outstanding debt, reduced by interest capitalized in connection with the construction of our new satellite and launch vehicle.

	•		Three Months: For the three months ended June 30, 2008 and 2007, interest expense was $16,745 and $15,750, respectively, which represents an increase of $995. Interest expense was slightly higher than the second quarter 2007 due to the incurrence of the $250,000 Senior Secured Term Loan in June 2007. Interest expense was offset by the capitalized interest associated with satellite construction and the related launch vehicle.
	•		Six Months: For the six months ended June 30, 2008 and 2007, interest expense was $34,421 and $30,942, respectively, which represents an increase of $3,479. The increase was primarily due to the incurrence of the $250,000 Senior Secured Term Loan in June 2007. Interest expense was offset by the capitalized interest associated with satellite construction and the related launch vehicle.

                     Income Taxes

           Income Tax Expense. Income tax expense represents the recognition of a deferred tax liability related to the difference in accounting for our FCC license, which is amortized over 15 years for tax purposes but not amortized for book purposes in accordance with U.S. generally accepted accounting principles.

	•		Three Months: We recorded income tax expense of $543 and $555 for the three months ended June 30, 2008 and 2007, respectively.
	•		Six Months: We recorded income tax expense of $1,086 and $1,110 for the six months ended June 30, 2008 and 2007, respectively.

Footnotes to Results of Operations

(1)

Average monthly churn represents the average amount of deactivations for the quarter divided by the average subscriber balance for the quarter.

(2)

ARPU is derived from total earned subscriber revenue and net advertising revenue divided by the daily weighted average number of subscribers for the period. ARPU is calculated as follows:

(3)

SAC, as adjusted, per gross subscriber addition is derived from subscriber acquisition costs and margins from the direct sale of SIRIUS radios and accessories, excluding stock-based compensation divided by the number of gross subscriber additions for the period. SAC, as adjusted, per gross subscriber addition is calculated as follows:

(4)

Customer service and billing expenses, as adjusted, per average subscriber is derived from total customer service and billing expenses, excluding stock-based compensation, divided by the daily weighted average number of subscribers for the period. Customer service and billing expenses, as adjusted, per average subscriber is calculated as follows:

(5)

Free cash flow is derived from cash flow provided by (used in) operating activities, capital expenditures and restricted and other investment activity. Free cash flow is calculated as follows: