Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

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

For the transition period from to


Commission File Number	Exact name of registrant as specified in its charter	I.R.S. Employer Identification Number
000-27441	XM SATELLITE RADIO HOLDINGS INC.	54-1878819
333-39178	XM SATELLITE RADIO INC.	52-1805102

Delaware

(State or other jurisdiction of incorporation or organization of both registrants)

1500 Eckington Place, NE

Washington, DC

20002-2194

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (202) 380-4000

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether each 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):


XM Satellite Radio Holdings Inc.	Large Accelerated Filer x	Accelerated Filer ¨
	Non-Accelerated Filer ¨	Smaller Reporting Company ¨

XM Satellite Radio Inc.	Large Accelerated Filer ¨	Accelerated Filer ¨
	Non-Accelerated Filer x	Smaller Reporting Company ¨

Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

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


(Class)		(Outstanding as of July 31, 2009)
XM SATELLITE RADIO HOLDINGS INC. COMMON STOCK, $0.01 PAR VALUE (all shares are issued to Sirius XM Radio Inc.)		100 SHARES

XM SATELLITE RADIO INC. COMMON STOCK, $0.10 PAR VALUE (all shares are issued to XM Satellite Radio Holdings Inc.)		125 SHARES

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q


Item No.	Description

	PART I – Financial Information

Item 1.	Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008	1
	Consolidated Balance Sheets as of June 30, 2009 (Unaudited) and December 31, 2008	2
	Unaudited Consolidated Statements of Stockholders’ Deficit and Comprehensive Loss for the six months ended June 30, 2009	3
	Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008	4
	Notes to Unaudited Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Material Risk	59
Item 4.	Controls and Procedures	59

	PART II – Other Information
Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults Upon Senior Securities	61
Item 4.	Submission of Matters to a Vote of Security Holders	61
Item 5.	Other Information	61
Item 6.	Exhibits	61
	Signatures	69

PART I: FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS


	Successor Entity						Predecessor Entity
(in thousands)	Three Months Ended June 30, 2009			Six Months Ended June 30, 2009			Three Months Ended June 30, 2008			Six Months Ended June 30, 2008
Revenue:
Subscriber revenue, including effects of rebates	$	291,859		$	579,324		$	291,772		$	575,187
Advertising revenue, net of agency fees		4,807			9,328			10,432			19,550
Equipment revenue		6,107			12,024			7,491			11,812
Other revenue		4,058			8,388			8,340			19,941

Total revenue		306,831			609,064			318,035			626,490
Operating expenses (depreciation and amortization shown separately below) (1):
Cost of services:
Satellite and transmission		11,362			25,468			19,780			39,922
Programming and content		27,893			56,542			49,604			101,166
Revenue share and royalties		46,405			96,021			73,586			142,408
Customer service and billing		31,347			65,105			36,388			70,698
Cost of equipment		3,442			6,907			9,055			17,606
Sales and marketing		26,797			58,510			59,280			108,786
Subscriber acquisition costs		22,226			48,475			69,193			140,717
General and administrative		34,721			66,472			42,015			83,235
Engineering, design and development		6,631			11,383			9,414			20,435
Depreciation and amortization		50,049			104,875			32,438			77,921
Restructuring, impairments and related costs		26,586			26,586			—			—

Total operating expenses		287,459			566,344			400,753			802,894

Income (loss) from operations		19,372			42,720			(82,718	)		(176,404	)
Other income (expense):
Interest and investment income		590			1,119			743			2,419
Interest expense, net of amounts capitalized		(88,118	)		(156,319	)		(30,480	)		(59,807	)
Loss on change in value of embedded derivatives		(19,799	)		(78,003	)		—			—
Loss on extinguishment of debt and credit facilities, net		(107,450	)		(108,076	)		—			—
Gain (loss) on investments		3,147			(3,791	)		(4,373	)		(8,550	)
Other income		839			1,226			1,082			895

Total other expense		(210,791	)		(343,844	)		(33,028	)		(65,043	)

Loss before income taxes		(191,419	)		(301,124	)		(115,746	)		(241,447	)
Income tax expense		(578	)		(1,156	)		(673	)		(1,004	)

Net loss		(191,997	)		(302,280	)		(116,419	)		(242,451	)
Add: net loss attributable to noncontrolling interests		—			—			(3,153	)		(6,390	)

Net loss - XM Satellite Radio Holdings Inc. and Subsidiaries	$	(191,997	)	$	(302,280	)	$	(119,572	)	$	(248,841	)


(1) Amounts related to share-based payment expense included in operating expenses were as follows:
Satellite and transmission	$	297		$	800		$	1,005		$	2,440
Programming and content		1,111			2,509			1,820			4,363
Customer service and billing		327			733			752			1,641
Sales and marketing		1,272			2,601			2,623			6,277
General and administrative		10,497			16,767			5,045			11,566
Engineering, design and development		565			1,522			1,702			4,164

Total share-based payment expense	$	14,069		$	24,932		$	12,947		$	30,451

See accompanying Notes to the unaudited consolidated financial statements.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	June 30, 2009			December 31, 2008
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	414,936		$	206,740
Accounts receivable, net of allowance for doubtful accounts of $6,140 and $6,199, respectively		39,040			52,727
Inventory, net		3,634			4,489
Prepaid expenses		83,553			37,351
Related party current assets		107,142			112,363
Other current assets		59,475			50,412

Total current assets		707,780			464,082
Property and equipment, net		806,320			874,588
FCC license		2,000,000			2,000,000
Restricted investments		250			120,250
Deferred financing fees, net		39,053			30,303
Intangible assets, net		647,936			688,671
Related party long-term assets		118,628			124,607
Other long-term assets		63,250			34,284

Total assets	$	4,383,217		$	4,336,785

LIABILITIES AND STOCKHOLDER’S DEFICIT
Current liabilities:
Accounts payable and accrued expenses	$	200,513		$	237,299
Accrued interest		51,338			50,543
Current portion of deferred revenue		464,664			419,707
Current portion of deferred credit on executory contracts		244,116			234,774
Current maturities of long-term debt		271,279			355,739
Related party current liabilities		114,787			83,930

Total current liabilities		1,346,697			1,381,992
Deferred revenue		162,332			131,255
Deferred credit on executory contracts		918,678			1,037,190
Long-term debt		1,668,834			1,439,102
Long-term related party debt		95,093			—
Deferred tax liability		895,121			886,475
Related party long-term liabilities		21,123			—
Other long-term liabilities		33,070			36,325

Total liabilities		5,140,948			4,912,339

Commitments and contingencies (Note 14)
Stockholder’s deficit:
Common stock, par value $0.01; 1,000 shares authorized; 100 shares issued and outstanding as of June 30, 2009 and December 31, 2008		—			—
Accumulated other comprehensive loss, net of tax		(6,986	)		(7,871	)
Additional paid-in capital		5,989,720			5,870,502
Accumulated deficit		(6,740,465	)		(6,438,185	)

Total stockholder’s deficit		(757,731	)		(575,554	)

Total liabilities and stockholder’s deficit	$	4,383,217		$	4,336,785

See accompanying Notes to the unaudited consolidated financial statements.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S DEFICIT AND COMPREHENSIVE LOSS


	Common Stock			Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholder’s Deficit
(in thousands, except share data)	Shares	Amount		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholder’s Deficit
Balance at December 31, 2008	100	$	—	$	5,870,502	$	(6,438,185	)	$	(7,871	)	$	(575,554	)
Net loss - XM Satellite Radio Holdings Inc. and Subsidiaries	—		—		—		(302,280	)		—			(302,280	)
Other comprehensive income:
Unrealized gain on available-for-sale securities, net of tax	—		—		—		—			548			548
Foreign currency translation adjustment, net of tax	—		—		—		—			337			337

Total comprehensive loss													(301,395	)
Non-cash capital contributions from SIRIUS XM	—		—		119,218		—			—			119,218

Balance at June 30, 2009	100	$	—	$	5,989,720	$	(6,740,465	)	$	(6,986	)	$	(757,731	)

See accompanying Notes to the unaudited consolidated financial statements.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Successor Entity			Predecessor Entity
(in thousands)	Six Months Ended June 30, 2009			Six Months Ended June 30, 2008
Cash flows from operating activities:
Net loss - XM Satellite Radio Holdings Inc. and Subsidiaries	$	(302,280	)	$	(248,841	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		104,875			77,921
Non-cash interest expense		51,522			5,278
Provision for doubtful accounts		8,634			7,476
Amortization of deferred income related to equity method investment		(1,388	)		(4,996	)
Loss on investments		3,791			8,550
Loss on extinguishment of debt and credit facilities, net		108,076			—
Write-down of long-lived assets		26,586			—
Share-based payment expense		24,932			30,451
Loss on change in value of embedded derivatives		78,003			—
Deferred income taxes		1,156			1,004
Other non-cash purchase price adjustments		(85,223	)		—
Other		—			6,360
Changes in operating assets and liabilities:
Accounts receivable		5,053			11,452
Inventory		855			4,268
Related party assets		11,200			3,285
Prepaid expenses and other current assets		1,986			(23,673	)
Restricted investments		—			(120,000	)
Other long-term assets		28,275			307
Accounts payable and accrued expenses		(53,096	)		(34,919	)
Accrued interest		4,950			(920	)
Deferred revenue		53,322			35,637
Related party liabilities		26,196			2,415
Other long-term liabilities		3,979			3,931

Net cash provided by (used in) operating activities		101,404			(235,014	)

Cash flows from investing activities:
Additions to property and equipment		(4,121	)		(27,447	)
Purchase of restricted and other investments		—			(9,450	)
Sale of restricted and other investments		—			25

Net cash used in investing activities		(4,121	)		(36,872	)

Cash flows from financing activities:
Proceeds from exercise of warrants and stock options		—			956
Long-term borrowings, net of costs		387,427			340,634
Related party long-term borrowings, net of costs		95,093			—
Payment of premiums on redemption of debt		(16,572	)		—
Payments to minority interest holder		—			(5,937	)
Repayment of long-term borrowings		(255,035	)		(34,142	)
Repayment of long-term related party borrowings		(100,000	)		—
Other, net		—			(2,458	)

Net cash provided by financing activities		110,913			299,053

Net increase in cash and cash equivalents		208,196			27,167
Cash and cash equivalents at beginning of period		206,740			156,686

Cash and cash equivalents at end of period	$	414,936		$	183,853



Supplemental Disclosure of Cash and Non-Cash Flow Information
Cash paid during the period for:
Interest, net of amounts capitalized	$	102,457		$	55,597
Non-cash investing and financing activities:
Non-cash capital contributions from SIRIUS XM		119,218			—
Property acquired through capital leases		260			4,466
Release of restricted investments		120,000			—

See accompanying Notes to the unaudited consolidated financial statements.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, unless otherwise stated)

(1) Business

We broadcast in the United States our music, sports, news, talk, entertainment, traffic and weather channels for a subscription fee through our proprietary satellite radio system. Our satellite radio system consists of four in-orbit satellites, over 700 terrestrial repeaters that receive and retransmit signals, satellite uplink facilities and studios. Subscribers can also receive certain of our music and other channels over the Internet.

On July 28, 2008 XM Satellite Radio Holdings Inc. (“XM Holdings”) merged with and into Vernon Merger Corporation, a wholly owned subsidiary of Sirius Satellite Radio Inc. (the “Merger”) and, as a result, XM Holdings is now a wholly owned subsidiary of SIRIUS. Sirius Satellite Radio Inc. was later renamed Sirius XM Radio Inc. (“SIRIUS”). The accounting for the Merger has been “pushed-down” in the accompanying unaudited consolidated financial statements. XM, together with its subsidiaries, is operated as an unrestricted subsidiary under SIRIUS’ existing indebtedness. As an unrestricted subsidiary, transactions between the companies are required to comply with various contractual provisions in our debt instruments. For purposes of these Notes to unaudited consolidated financial statements, “we,” “us,” “our,” “the company,” and similar terms refer to XM Satellite Radio Holdings Inc. and its consolidated subsidiaries.

Our satellite radios are primarily distributed through automakers (“OEMs”), retailers and our website. We have agreements with major automakers to offer our satellite radios as factory or dealer-installed equipment in their vehicles. Our radios are also offered to customers of rental car companies.

Our subscriber totals include subscribers under our regular pricing plans; discounted pricing plans; subscribers that have prepaid, including payments either made or due from automakers for prepaid subscriptions included in the sale or lease price of a new vehicle; certain radios activated for daily rental fleet programs; subscribers to XM Radio Online, our Internet service; and certain subscribers to our weather, traffic and data services.

Our primary source of revenue is subscription fees, with most of our customers subscribing on an annual, semi-annual, quarterly or monthly basis. We offer discounts for prepaid and long-term subscriptions as well as discounts for multiple subscriptions. We also derive revenue from activation fees, the sale of advertising on select non-music channels, the direct sale of satellite radios, components and accessories, and other ancillary services, such as our data and weather services.

In certain cases, automakers include a subscription to our radio services in the sale or lease price of vehicles. The length of these prepaid subscriptions varies, but is typically three months. We also reimburse various automakers for certain costs associated with satellite radios installed in their vehicles.

We also have an interest in a satellite radio service offered in Canada through our affiliate, Canadian Satellite Radio Holdings Inc. (“XM Canada”). Subscribers to the XM Canada service are not included in our subscriber count.

XM Satellite Radio Inc. (“XM”) was incorporated on December 15, 1992 in the State of Delaware. XM Satellite Radio Holdings Inc. was formed as a holding company for XM on May 16, 1997.

As of June 30, 2009, the principal differences between the financial conditions of XM Holdings and XM were:

•

the ownership by XM Holdings of the corporate headquarters and data center buildings and the lease of these buildings to XM;

•

XM-1, XM-2, and the transponders of XM-3 and XM-4 are owned by XM; and XM-5 and the bus portions of XM-3 and XM-4 are owned by XM Holdings;

•

the presence at XM Holdings of additional indebtedness, primarily the 10% Convertible Senior Notes due 2009 and 10% Senior PIK Secured Notes due 2011, both of which are not guaranteed by XM;

•

the investment by XM Holdings in XM Canada (including related revenue and deferred income); and

•

the existence of cash balances at XM Holdings.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

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

•

additional rent, less depreciation and amortization expense and less other income, in each case principally related to XM’s rental of its corporate headquarters and data center buildings from XM Holdings, which are intercompany transactions that have been eliminated in XM Holdings’ consolidated financial statements;

•

less interest expense or gains and losses on embedded derivatives, principally related to the additional indebtedness at XM Holdings;

•

less revenue associated with the amortization of deferred income and equity in losses from XM Holdings’ investment in XM Canada;

•

no gains or losses on XM Holdings’ investment in XM Canada; and

•

less interest income because of additional cash balances at XM Holdings.

(2) Principles of Consolidation and Basis of Presentation

Principles of Consolidation

The accompanying unaudited consolidated financial statements of XM Satellite Radio Holdings Inc. and subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles, the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. All intercompany transactions have been eliminated in consolidation.

Basis of Presentation

In presenting unaudited consolidated financial statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Additionally, estimates were used when recording the fair values of our assets acquired and liabilities assumed in the Merger. Estimates, by their nature, are based on judgment and available information. Actual results could differ from those estimates. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of our unaudited consolidated financial statements as of June 30, 2009, the successor period of the three and six months ended June 30, 2009, and the predecessor period of the three and six months ended June 30, 2008, have been made.

XM Holdings operates as an unrestricted subsidiary of SIRIUS under its existing indebtedness. As an unrestricted subsidiary, transactions between the companies are required to comply with various contractual restrictions in our existing debt instruments. SIRIUS allocates certain expenses to us based on the estimated costs incurred by SIRIUS that pertain to us. Additionally, certain costs incurred by us benefit SIRIUS and are allocated to SIRIUS based on estimated costs incurred by us pertaining to SIRIUS. We settle amounts due between the parties on a semi-monthly and monthly basis, except for share-based payment arrangements which are settled at times agreed to between us and SIRIUS. Our financial position, results of operations and cash flows could differ from those that might have resulted had we operated autonomously. As a result of the Merger, certain of our predecessor accounting policies were changed to conform with SIRIUS’ current accounting policies. These changes have not had, and are not expected to have, a significant impact on our unaudited consolidated financial statements.

Interim results are not necessarily indicative of the results that may be expected for a full year. This Quarterly Report on Form 10-Q should be read together with our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 13, 2009.

In connection with the Merger, our assets and liabilities were adjusted to fair value at the acquisition date by application of “push-down” accounting. Accordingly, our financial position and results of operations may not be comparable between the accompanying Successor and Predecessor periods.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

We have evaluated events subsequent to the balance sheet date and prior to filing of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 through August 10, 2009 and determined there have not been any events that have occurred that would require adjustment to our unaudited consolidated financial statements.

(3) Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and related disclosures.

Significant estimates inherent in the preparation of the accompanying unaudited consolidated financial statements include revenue recognition, asset impairment, useful lives of our satellites and valuation allowances against deferred tax assets. Financial market volatility and economic conditions in the United States have impacted and will continue to impact our business. Such conditions could have a material impact to our significant accounting estimates.

Inventory

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

Inventory, net, consists of the following:


	June 30, 2009			December 31, 2008
Raw materials	$	5,734		$	5,781
Finished goods		3,159			6,898
Allowance for obsolescence		(5,259	)		(8,190	)

Total inventory, net	$	3,634		$	4,489

Reclassifications

Certain amounts in our prior period unaudited consolidated financial statements have been reclassified to conform to our current period presentation.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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, delayed 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. In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which provides a detailed example to illustrate key considerations in determining the fair value of a financial asset in an inactive market, and emphasizes the requirements to disclose significant unobservable inputs used as a basis for estimating fair value. 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.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

Neither the partial adoption nor the issuance of FSP 157-3 had any significant impact on our consolidated results of operations or financial position. We adopted the provisions of SFAS No. 157, as amended, on January 1, 2009 as it relates to nonfinancial assets and liabilities, and there has been no impact on our consolidated results of operations or financial position as a result of such action.

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 measures the identifiable assets acquired, the liabilities assumed, and any contingent consideration and contractual contingencies, as a whole, at their fair value as of the acquisition date. Under SFAS No. 141R, all transaction costs are expensed as incurred. SFAS No. 141R rescinded EITF No. 93-07, Uncertainties Related to Income Taxes in a Purchase Business Combination . Under SFAS No. 141R, all subsequent adjustments to uncertain tax positions assumed in a business combination that previously would have impacted goodwill are recognized in the income statement. The guidance in SFAS No. 141R is 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. We adopted SFAS No. 141R effective January 1, 2009, with no impact on our consolidated results of operations or financial position.

In April 2009, the FASB issued FSP No. FAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies , which clarifies the application of SFAS No. 141R to assets and liabilities arising from contingencies in a business combination. FSP No. FAS 141R-1 requires the acquirer to recognize at fair value an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value cannot be determined, the acquirer would apply the recognition criteria in SFAS No. 5, Accounting for Contingencies , and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss, an interpretation of FASB Statement No. 5 , to determine whether the contingency should be recognized as of the acquisition date or after it. The guidance in FSP No. FAS 141R-1 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. FSP No. FAS 141R-1 does not impact the accounting for the Merger.

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

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets . FSP No. FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets . This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008. We adopted FSP No. FAS 142-3 effective January 1, 2009, with no impact on our consolidated results of operations or financial position.

In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) , which amends the accounting requirements for certain convertible debt instruments. Additional disclosures are also required for these instruments. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008. We adopted FSP No. APB 14-1 effective January 1, 2009, with no impact on our consolidated results of operations or financial position.

In June 2008, the FASB ratified EITF No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock , which provides guidance for determining whether an equity-linked financial instrument (or embedded feature) issued by an entity is indexed to the entity’s stock, and therefore would qualify for the first part of the scope exception in paragraph 11(a) of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities . This EITF prescribes a two-step approach under which the entity would evaluate the instrument’s contingent exercise provisions and then the instrument’s settlement provisions, for purposes of evaluating whether the instrument (or embedded feature) is indexed to the entity’s stock. This EITF is effective for financial statements issued for fiscal years beginning after December 15, 2008. We adopted EITF No. 07-5 effective January 1, 2009, with no impact on our consolidated results of operations or financial position.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

In November 2008, the FASB ratified EITF No. 08-6, Equity Method Investment Accounting Considerations , which applies to all investments accounted for under the equity method. The EITF clarifies the accounting for certain transactions and impairment considerations involving these investments. This EITF is effective for financial statements issued for fiscal years beginning after December 15, 2008. We adopted EITF No. 08-6 effective January 1, 2009, with no impact on our consolidated results of operations or financial position.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments , which amend SFAS 107, Disclosures about Fair Value of Financial Instruments , to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP No. FAS 107-1 and APB 28-1 also amend APB 28, Interim Financial Reporting , to require these disclosures in summarized financial information at interim reporting periods. This FSP is effective for interim reporting periods ending after June 15, 2009. We adopted this FSP effective April 1, 2009, with no impact on our consolidated results of operations or financial position.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments , which amend the other-than-temporary impairment guidance in U.S. generally accepted accounting principles for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009. We adopted this FSP effective April 1, 2009, with no impact on our consolidated results of operations or financial position.

In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly , which provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have significantly decreased. If a significant decrease in the volume and level of activity for the asset or liability has occurred, quoted prices may not be determinative of fair value. Consequently, further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with SFAS No. 157. This FSP is effective for interim reporting periods ending after June 15, 2009. We adopted the FSP effective April 1, 2009, with no impact on our consolidated results of operations or financial position.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events , to establish general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 sets the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim or annual financial reporting periods ending after June 15, 2009. We adopted this SFAS No. 165 effective April 1, 2009, with no impact on our consolidated results of operations or financial position.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140 , to improve relevance, representational faithfulness, and comparability of information a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS No. 166 removes the concept of a qualifying special-purpose entity from SFAS No. 140 and removes the exception from applying FASB Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities , to qualifying special-purpose entities. SFAS No. 166 is effective beginning the first annual reporting period that begins after November 15, 2009, as well as for interim periods within that first annual reporting period. We are currently evaluating the impact, if any, that the adoption of SFAS No. 166 will have on our consolidated results of operations and financial position.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) , to improve financial reporting by entities involved with variable interest entities. SFAS No. 167 amends FIN No. 46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis indentifies the primary beneficiary of a variable interest entity as the enterprise that has both the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance; and the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS No. 167 is effective beginning with the first annual reporting period that

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

begins after November 15, 2009, as well as for interim periods within that first annual reporting period. We are currently evaluating the impact that the adoption of SFAS No. 166 will have on our consolidated results of operations and financial position.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles , a replacement of FASB Statement No. 162. SFAS No. 168 does not alter current U.S. GAAP, but rather integrates existing accounting standards with other authoritative guidance. SFAS No. 168 provides a single source of authoritative U.S. GAAP for nongovernmental entities and supersedes all other previously issued non-SEC accounting and reporting guidance. SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009. The adoption of SFAS No. 168 will not have an impact on our results of operations or financial position.

(4) Intangible Assets

Intangible assets consisted of the following:


		June 30, 2009							December 31, 2008
	Weighted Average Useful Lives	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Gross Carrying Value		Accumulated Amortization			Net Carrying Value
Indefinite life intangible assets
FCC licenses	Indefinite	$	2,000,000	$	—		$	2,000,000	$	2,000,000	$	—		$	2,000,000
Trademark	Indefinite		250,000		—			250,000		250,000		—			250,000
Definite life intangible assets
Subscriber relationships	9 years	$	380,000	$	(61,524	)	$	318,476	$	380,000	$	(29,226	)	$	350,774
Proprietary software	6 years		16,552		(5,027	)		11,525		16,552		(2,285	)		14,267
Developed technology	10 years		2,000		(183	)		1,817		2,000		(83	)		1,917
Licensing agreements	9.1 years		75,000		(8,998	)		66,002		75,000		(4,090	)		70,910
Leasehold interests	7.4 years		132		(16	)		116		908		(105	)		803

Total intangible assets		$	2,723,684	$	(75,748	)	$	2,647,936	$	2,724,460	$	(35,789	)	$	2,688,671

Indefinite Life Intangible Assets

We have identified our FCC licenses and our trademark as indefinite life intangibles after considering the expected use of the assets, the regulatory and economic environment within which they are being used, and the effects of obsolescence on their use.

We hold FCC licenses to operate our satellite digital audio radio service and provide ancillary services. Our FCC licenses for our satellites expire in 2013 and 2014. Prior to the expirations, we will be required to apply for a renewal of our FCC licenses. The renewal and extension of our licenses is reasonably certain at minimal cost which is expensed as incurred. The FCC licenses authorize us to use the broadcast spectrum, which is a renewable, reusable resource that does not deplete or exhaust over time.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

In connection with the Merger, $250,000 of the purchase price was allocated to our trademark. As of June 30, 2009 there are no legal, regulatory or contractual limitations associated with our trademark.

We evaluate our indefinite life intangible assets for impairment on an annual basis in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. During the six months ended June 30, 2009, no impairment loss was recorded for intangible assets with indefinite lives.

Definite Life Intangible Assets

Definite life intangible assets consist primarily of subscriber relationships of $380,000 that were fair valued as a result of the Merger. Subscriber relationships are amortized on an accelerated basis over 9 years, which reflects the estimated pattern in which the economic benefits will be consumed. Other definite life intangibles include certain licensing agreements of $75,000, which are being amortized over a weighted average useful life of 9.1 years on a straight-line basis.

Amortization expense for the three and six months ended June 30, 2009 was $19,681 and $40,111. Expected amortization expense for each of the fiscal years through December 31, 2013 and for periods thereafter is as follows:


Year ending December 31,	Amount
Remaining 2009	$	36,475
2010		65,916
2011		58,850
2012		53,420
2013		47,097
Thereafter		136,178

Total intangibles, net	$	397,936

(5) Subscriber Revenue

Subscriber revenue consists of subscription fees, 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:


	Successor Entity						Predecessor Entity
	Three Months Ended June 30, 2009			Six Months Ended June 30, 2009			Three Months Ended June 30, 2008			Six Months Ended June 30, 2008
Subscription fees	$	291,151		$	578,076		$	287,182		$	565,702
Activation fees		818			1,387			5,044			10,188
Effect of rebates		(110	)		(139	)		(454	)		(703	)

Total subscriber revenue	$	291,859		$	579,324		$	291,772		$	575,187

(6) Interest Costs

We capitalize a portion of the interest on funds borrowed to finance the construction costs of our satellites. The following is a summary of our interest costs:


	Successor Entity				Predecessor Entity
	Three Months Ended June 30, 2009		Six Months Ended June 30, 2009		Three Months Ended June 30, 2008		Six Months Ended June 30, 2008
Interest costs charged to expense	$	88,118	$	156,319	$	30,480	$	59,807
Interest costs capitalized		9,942		17,557		2,937		5,823

Total interest costs incurred	$	98,060	$	173,876	$	33,417	$	65,630

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

(7) Property and Equipment

Property and equipment, net, consists of the following:


	June 30, 2009			December 31, 2008
Satellite system	$	490,126		$	490,126
Terrestrial repeater network		41,865			41,850
Leasehold improvements		6,852			6,762
Broadcast studio equipment		7,965			7,804
Capitalized software and hardware		53,341			53,986
Satellite telemetry, tracking and control facilities		33,459			33,542
Furniture, fixtures, equipment and other		26,528			26,076
Land		38,100			38,100
Building		53,790			53,887
Construction in progress - satellite system		179,562			181,856

Total property and equipment		931,588			933,989
Accumulated depreciation and amortization		(125,268	)		(59,401	)

Property and equipment, net	$	806,320		$	874,588

Depreciation and amortization expense on property and equipment was $30,368 and $64,764 for the three and six months ended June 30, 2009, respectively, and $32,438 and $77,921 for the three and six months ended June 30, 2008, respectively.

Satellites

We own four orbiting satellites; two of which, XM-3 and XM-4, currently transmit our signal and two of which, XM-1 and XM-2, serve as in-orbit spares. Our satellites were launched in March 2001, May 2001, February 2005 and October 2006.

Space Systems/Loral has constructed our fifth satellite, XM-5, for use in our system. We have entered into an agreement with Sea Launch to secure a launch for XM-5. In June 2009, Sea Launch filed for bankruptcy protection under Title 11 of the United States Code and as a result, we recorded a charge of $24,196 to Restructuring, impairments and related costs in our unaudited consolidated statements of operations for amounts previously paid, including capitalized interest.

(8) Related Party Transactions

Liberty Media

Liberty Media Corporation and its affiliate, Liberty Media, LLC (collectively, “Liberty Media”), have invested in us in the form of loans. Liberty Media is the holder of SIRIUS’ Convertible Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”), has representatives on SIRIUS’ board of directors and is considered a related party. See Note 11, Debt, to our unaudited consolidated financial statements for further information regarding indebtedness owed to Liberty Media.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

Investment Agreement

On February 17, 2009, SIRIUS entered into an Investment Agreement (the “Investment Agreement”) with Liberty Media. Pursuant to the Investment Agreement, SIRIUS agreed to issue to Liberty Radio, LLC 12,500,000 shares of Series B Preferred Stock with a liquidation preference of $0.001 per share in partial consideration for certain loan investments. The Series B Preferred Stock was issued on March 6, 2009.

As a result of SIRIUS’ issuance of Series B Preferred Stock to Liberty Radio, LLC, we recorded a $113,280 increase to additional paid-in capital.

Loan Investments

On February 17, 2009, XM entered into a Credit Agreement with Liberty Media Corporation, as administrative agent and collateral agent, and Liberty Media, LLC, as lender. On March 6, 2009, XM amended and restated that credit agreement (the “Second-Lien Credit Agreement”) with Liberty Media Corporation. On June 30, 2009, XM terminated the Second-Lien Credit Agreement in connection with the sale of 11.25% Senior Secured Notes due 2013.

On March 6, 2009, XM amended and restated the $100,000 Term Loan, dated as of June 26, 2008 and the $250,000 Credit Agreement, dated as of May 5, 2006. These facilities were combined as term loans into the Amended and Restated Credit Agreement, dated as of March 6, 2009. Liberty Media, LLC, purchased $100,000 aggregate principal amount of such loans from the existing lenders. On June 30, 2009, XM used a portion of the net proceeds from the sale of 11.25% Senior Secured Notes due 2013 to extinguish the Amended and Restated Credit Agreement.

In June 2009, Liberty Media Corporation purchased $100,000 aggregate principal amount of our 11.25% Senior Secured Notes due 2013 as part of the offering of such notes. As of June 30, 2009, we recorded $95,093 as Long-term related party debt related to the 11.25% Notes.

We recognized Interest expense related to Liberty Media of $10,453 and $12,903 for the three and six months ended June 30, 2009, respectively.

XM Canada

In 2005, we entered into agreements to provide XM Canada with the right to offer XM satellite radio service in Canada. The agreements have an initial term of ten years and XM Canada has the unilateral option to extend the term of the agreements for an additional five years at no additional cost beyond the current financial arrangements. XM Canada has expressed its intent to exercise this option at the end of the initial term of the agreements. We have the right to receive a 15% royalty for all subscriber fees earned by XM Canada each month for its basic service and a nominal activation fee for each gross activation of an XM Canada subscriber on XM’s system. XM Canada is obligated to pay us a total of $71,800 for the rights to broadcast and market National Hockey League (“NHL”) games for the 10-year term of our contract with the NHL. In accordance with EITF No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent , we recognize these payments on a gross basis as a principal obligor.

The estimated fair value of deferred revenue from XM Canada as of the Merger date was approximately $34,000, and is being amortized on a straight-line basis over the remaining expected term of the agreements. Subsequent to the Merger date, we began to record additional deferred revenue on our agreements with XM Canada involving royalties on subscriber and activation fees. As of June 30, 2009 and December 31, 2008, the carrying value of Deferred revenue related to XM Canada was $38,212 and $36,002, respectively.

We have extended a Cdn$45,000 standby credit facility to XM Canada which can be utilized to purchase terrestrial repeaters or finance the payment of subscription fees. The facility matures on December 31, 2012 and bears interest at a rate of 17.75% per annum. We have the right to convert unpaid principal amounts into Class A subordinate voting shares of XM Canada at the price of Cdn$16.00 per share. As of June 30, 2009 and December 31, 2008, amounts drawn by XM Canada on this facility in lieu of payment of subscription fees recorded in Related party long-term assets were $12,515 and $8,311, respectively.

In connection with the deferred income related to XM Canada, we recorded amortization of $694 and $1,388 for the three and six months ended June 30, 2009, respectively, and $2,498 and $4,996 for the three and six months ended June 30, 2008, respectively. The royalty fees we earn related to subscriber and activation fees are reported as a component of Other revenue in our unaudited consolidated statements of operations. We recorded royalty fees of $160 and $274 for the three and six months ended June 30, 2009,

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

respectively, and recorded $196 and $347 for the three and six months ended June 30, 2008, respectively. XM Canada pays us a licensing fee and reimburses us for advertising, both of which are reported as a component of Other revenue in our unaudited consolidated statements of operations. We recognized licensing fee revenue of $1,500 and $3,000 for the three and six months ended June 30, 2009, respectively, and $1,500 and $3,000 for the three and six months ended June 30, 2008, respectively. We recognized advertising reimbursements of $367 and $733 for the three and six months ended June 30, 2009, respectively, and $417 and $833 for the three and six months ended June 30, 2008, respectively. As of June 30, 2009 and December 31, 2008, amounts due from XM Canada recorded in Related party current assets were $2,406 and $5,594, respectively. As of June 30, 2009 and December 31, 2008, amounts due from XM Canada (in addition to the amounts drawn on the standby credit facility) recorded in Related party long-term assets were $5,250 and $0, respectively.

General Motors

We have a long-term distribution agreement with General Motors Company (“GM”). GM has a representative on SIRIUS’ board of directors and is considered a related party. During the term of the agreement, GM has agreed to distribute the XM service. To encourage the broad installation of XM radios in GM vehicles, we subsidize a portion of the cost of XM radios and makes incentive payments to GM when the owners of GM vehicles with installed XM radios become subscribers to XM’s service. We also share with GM a percentage of the subscriber revenue attributable to GM vehicles with installed XM radios. As part of the agreement, GM provides certain call-center related services directly to XM subscribers who are also GM customers for which we reimburse GM.

XM makes bandwidth available to OnStar Corporation for audio and data transmissions to owners of XM-enabled GM vehicles, regardless of whether the owner is an XM subscriber. OnStar’s use of our bandwidth must be in compliance with applicable laws, must not compete or adversely interfere with our business, and must meet our quality standards. We also granted to OnStar a certain amount of time to use our studios on an annual basis and agreed to provide certain audio content for distribution on OnStar’s services.

We recorded total revenue from GM, primarily consisting of subscriber revenue, of $6,264 and $13,256 for the three and six months ended June 30, 2009, respectively, and $11,234 and $21,352 for the three and six months ended June 30, 2008, respectively.

We recognized Sales and marketing expense with GM of $7,537 and $15,631 for the three and six months ended June 30, 2009, respectively, and $12,396 and $24,157 for the three and six months ended June 30, 2008, respectively. We recognized Revenue share and royalties expense with GM of $13,982 and $31,655 for the three and six months ended June 30, 2009, respectively, and $36,208 and $67,697 for the three and six months ended June 30, 2008, respectively. We recognized Subscriber acquisition costs with GM of $5,545 and $14,805 for the three and six months ended June 30, 2009, respectively, and recognized $37,677 and $76,608 for the three and six months ended June 30, 2008, respectively.

As of June 30, 2009, amounts due from GM and prepaid expenses with GM recorded in Related party current assets were $9,672 and $92,796, respectively. As of June 30, 2009, prepaid expenses with GM recorded in Related party long-term assets were $100,863. As of December 31, 2008, amounts due from GM and prepaid expenses with GM recorded in Related party current assets were $10,132 and $94,444, respectively. As of December 31, 2008, prepaid expenses with GM recorded in Related party long-term assets were $116,296. As of June 30, 2009 and December 31, 2008, amounts due to GM recorded in Related party current liabilities were $54,329 and $63,023, respectively.

As of June 30, 2009 and December 31, 2008, amounts due to GM recorded in Related party long-term liabilities were $21,123 and $0, respectively.

American Honda

We have an agreement to make a certain amount of our bandwidth available to American Honda. American Honda has a representative on SIRIUS’ board of directors and is considered a related party. American Honda’s use of our bandwidth must be in compliance with applicable laws, must not compete or adversely interfere with our business, and must meet our quality standards. This agreement remains in effect so long as American Honda holds a certain amount of its investment in SIRIUS. In January 2007, we announced a 10-year extension to our arrangement with American Honda to be its supplier of satellite radio and related data services in Honda and Acura vehicles. We also agreed to make incentive payments to American Honda for each purchaser of a Honda or Acura vehicle that becomes a self-paying XM subscriber and share with American Honda a portion of the subscriber revenue attributable to Honda and Acura vehicles with installed XM radios.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

We recorded total revenue from American Honda, primarily consisting of subscriber revenue, of $2,995 and $5,827 for the three and six months ended June 30, 2009, respectively, and $4,746 and $8,861 for the three and six months ended June 30, 2008, respectively.

We recognized Sales and marketing expense with American Honda of $1,414 and $2,745 for the three and six months ended June 30, 2009, respectively, and $1,712 and $3,795 for the three and six months ended June 30, 2008, respectively. We recognized Revenue share and royalties expense with American Honda of $1,530 and $2,965 for the three and six months ended June 30, 2009, respectively, and $866 and $1,525 for the three and six months ended June 30, 2008, respectively.

As of June 30, 2009 and December 31, 2008, amounts due from American Honda recorded in Related party current assets were $2,268 and $2,194, respectively.

As of June 30, 2009 and December 31, 2008, amounts due to American Honda recorded in Related party current liabilities were $3,546 and $4,190, respectively.

SIRIUS

SIRIUS allocates certain expenses to us based on the estimated costs incurred by SIRIUS that pertain to us. Additionally, certain costs incurred by us benefit SIRIUS and are allocated to SIRIUS based on estimated costs incurred by us pertaining to SIRIUS. We settle amounts due between the parties on a semi-monthly and monthly basis, except for share-based payment arrangements which are settled at times agreed to between us and SIRIUS. Our financial position, results of operations and cash flows could differ from those that might have resulted had we operated autonomously.

We recorded total advertising revenue allocated from SIRIUS of $2,282 and $4,848 for the three and six months ended June 30, 2009, respectively.

We recognized total allocated operating expenses with SIRIUS of $47,667 and $90,803 for the three and six months ended June 30, 2009, respectively.

As of June 30, 2009 and December 31, 2008, net costs attributable to these costs recorded in Related party current liabilities were $56,912 and $16,717, respectively.

(9) Investments

Investments consist of the following:


	June 30, 2009		December 31, 2008
Marketable securities	$	11,236	$	10,525
Restricted investments		250		120,250
Embedded derivative accounted for separately from the host contract		3		2
Equity method investments		5,583		8,873

Total investments	$	17,072	$	139,650

XM Canada

We have a 23.33% economic interest in XM Canada. The amount of the Merger purchase price allocated to the fair value of our investment in XM Canada was $41,188. Our investment in XM Canada is recorded using the equity method (on a one-month lag) since we have significant influence, but less than a controlling voting interest in XM Canada. Under this method, our investment in XM Canada is adjusted quarterly to recognize our share of net earnings or losses as they occur, rather than at the time dividends or other distributions are received, limited to the extent of our investment in, advances to, and commitments to fund XM Canada. Our share of net earnings or losses of XM Canada is recorded to Loss on investments in our unaudited consolidated statements of operations. We recorded $4,847 and $943 for the three and six months ended June 30, 2009, respectively, for our share of XM Canada’s net earnings and $4,373 and $8,550 for the three and six months ended June 30, 2008, respectively, for our share of XM Canada’s net loss. During the three and six months ended June 30, 2009, we reduced the carrying value of our investment in XM Canada due to decreases in fair value that were considered to be other than temporary and recorded impairment charges of $1,700 and

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

$4,734, respectively. In addition, during the three and six months ended June 30, 2009, we recorded $666 and $501, respectively, as a foreign exchange gain to Accumulated other comprehensive loss, net of tax.

We hold an investment in Cdn$4,000 face value of 8% convertible unsecured subordinated debentures issued by XM Canada for which the embedded conversion feature is required under SFAS No. 133 to be bifurcated from the host contract. The host contract is accounted for as an available-for-sale security at fair value with changes in fair value recorded to Accumulated other comprehensive loss, net of tax. The embedded conversion feature is accounted for as a derivative at fair value with changes in fair value recorded in earnings as Interest and investment income. As of June 30, 2009, the carrying value of our equity method investment in XM Canada was $5,583, while the carrying values of the host contract and embedded derivative related to our investment in the debentures was $2,623 and $3, respectively. As of December 31, 2008, the carrying value of our equity method investment in XM Canada was $8,873, while the carrying values of the host contract and embedded derivative related to our investment in the debentures was $2,540 and $2, respectively.

Auction Rate Certificates

Auction rate certificates are long-term securities structured to reset their coupon rates by means of an auction. We account for our investment in auction rate certificates as available-for-sale securities. As of June 30, 2009 and December 31, 2008, the carrying value of these securities was $8,613 and $7,985, respectively.

Restricted Investments

Restricted investments relate to deposits placed into escrow for the benefit of third parties pursuant to programming agreements. During the six months ended June 30, 2009, $120,000 of escrowed funds was released to a programming provider. As of June 30, 2009 and December 31, 2008, the carrying value of our long-term restricted investments was $250 and $120,250, respectively.

(10) Fair Value

The following table summarizes the fair value of our financial instruments at June 30, 2009:


	Fair Value Measurements Using
*(in thousands)*	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Value
Assets:
Auction rate securities		N/A		N/A	$	8,613	$	8,613
Debentures and embedded derivatives		N/A		N/A		2,626		2,626

Total assets					$	11,239	$	11,239

Liabilities:
Debt-related embedded derivatives	$	—	$	—	$	100,661	$	100,661

Total liabilities	$	—	$	—	$	100,661	$	100,661

The following table presents the changes in the Level 3 fair-value category for the six months ended June 30, 2009. We classify financial instruments in Level 3 of the fair-value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Thus, the gains and losses presented below include changes in the fair value related to both observable and unobservable inputs. Fair values are determined using lattice models or market quotes. During the three and six months ended June 30, 2009, $19,766 and $77,943 of net unrealized losses were recognized in earnings.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Auction Rate Securities		Debentures and Embedded Derivatives		Debt-Related Embedded Derivatives
Balance at December 31, 2008	$	7,985	$	2,542	$	22,658
Total gains and losses (realized /unrealized)		—		60		78,003
Included in other comprehensive income		628		24		—

Balance at June 30, 2009	$	8,613	$	2,626	$	100,661

As of June 30, 2009 and December 31, 2008, the aggregate carrying value of our long-term debt was $1,934,545 and $1,772,183 (excludes embedded derivatives), respectively; while the aggregate fair value approximated $1,768,705 and $760,897, respectively.

(11) Debt

Our debt consists of the following:


	Conversion Price (per (SIRIUS share)		Long-term debt
	Conversion Price (per (SIRIUS share)		June 30, 2009			December 31, 2008
10% Convertible Senior Notes due 2009	$	10.87		227,515			400,000
Less: discount				(4,658	)		(17,367	)
10% Senior Secured Discount Convertible Notes due 2009	$	0.69		33,249			33,249
Less: discount				(2,932	)		(5,471	)
10% Senior PIK Secured Notes due 2011		N/A		172,485			—
Less: discount				(15,145	)		—
11.25% Senior Secured Notes due 2013		N/A		525,750			—
Less: discount				(25,799	)		—
13% Senior Notes due 2013		N/A		778,500			778,500
Less: discount				(69,627	)		(74,986	)
9.75% Senior Notes due 2014		N/A		5,260			5,260
7% Exchangeable Senior Subordinated Notes due 2014	$	1.875		550,000			550,000
Less: discount				(258,494	)		(270,368	)
Senior Secured Term Loan due 2009		N/A		—			100,000
Senior Secured Revolving Credit Facility due 2009		N/A		—			250,000
Add: premium				—			151
Other debt:
Capital leases		N/A		18,441			23,215
Embedded derivatives				100,661			22,658

Total debt				2,035,206			1,794,841
Less: current maturities				271,279			355,739

Total long-term				1,763,927			1,439,102
Less: related party				95,093			—

Total long-term, excluding related party			$	1,668,834		$	1,439,102

10% Convertible Senior Notes due 2009

We have issued $400,000 aggregate principal amount of 10% Convertible Senior Notes due 2009 (the “10% Convertible Notes”). Interest is payable semi-annually at a rate of 10% per annum. The 10% Convertible Notes mature on December 1, 2009. The 10% Convertible Notes may be converted by the holder, at its option, into shares of SIRIUS’ common stock at a conversion rate of 92.0 shares of SIRIUS common stock per $1,000 principal amount, which is equivalent to a conversion price of $10.87 per share of SIRIUS common stock (subject to adjustment in certain events). As a result of the fair valuation at the acquisition date, we recognized an initial discount of $23,700.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

In February 2009, we exchanged $172,485 aggregate principal amount of the outstanding 10% Convertible Notes for a like principal amount of XM Holdings’ 10% Senior PIK Secured Notes due June 2011. We accounted for the exchange as a modification of debt and recorded $2,008 to General and administrative expense in our unaudited consolidated statements of operations and $10,990 of additional debt discount in our unaudited consolidated balance sheets.

In July 2009, we used a portion of the net proceeds received from the issuance of our 11.25% Senior Secured Notes due 2013 plus cash on hand to purchase at par $179,065 aggregate principal amount of the 10% Convertible Notes. We will record a loss of $3,285 related to the unamortized discount to Loss on extinguishment of debt and credit facilities in our unaudited consolidated statements of operations as a result of this transaction in the third quarter of 2009.

10% Senior Secured Discount Convertible Notes due 2009

XM Holdings (with XM as co-obligors) have outstanding $33,249 aggregate principal amount of 10% Senior Secured Discount Convertible Notes due 2009 (the “10% Discount Convertible Notes”). Interest is payable semi-annually at a rate of 10% per annum. The 10% Discount Convertible Notes mature on December 31, 2009. At any time, a holder of the notes may convert all or part of the accreted value of the notes at a conversion price of $0.69 per share of SIRIUS common stock. The 10% Discount Convertible Notes rank equally in right of payment with all of our other existing and future senior indebtedness, and rank senior in right of payment to all of our existing and future subordinated indebtedness. As a result of the fair valuation at the acquisition date, we recognized an initial discount of $7,324.

10% Senior PIK Secured Notes due 2011

In February 2009, we exchanged $172,485 aggregate principal amount of outstanding 10% Convertible Notes for a like principal amount of XM Holdings’ 10% Senior PIK Secured Notes due June 2011 (the “PIK Notes”). Interest is payable on the PIK Notes semiannually in arrears on June 1 and December 1 of each year at a rate of 10.0% per annum paid in cash from December 1, 2008 to December 1, 2009; at a rate of 10.0% per annum paid in cash and 2.0% per annum paid in kind from December 1, 2009 to December 1, 2010; and at a rate of 10.0% per annum paid in cash and 4.0% per annum paid in kind from December 1, 2010 to the maturity date.

The PIK Notes are fully and unconditionally guaranteed by XM 1500 Eckington LLC and XM Investment LLC (together, the “Subsidiary Guarantors”) and are secured by a first-priority lien on substantially all of the property of the Subsidiary Guarantors. XM Holdings may, at its option, redeem some or all of the PIK Notes at any time at 100% of the principal amount prepaid, together with accrued and unpaid interest, if any.

We paid a fee equal to, at each exchanging noteholders’ election, either (i) 833 shares of SIRIUS’ common stock (the “Structuring Fee Shares”) for every $1 principal amount of 10% Convertible Notes exchanged or (ii) an amount in cash equal to $0.05 for every $1 principal amount of 10% Convertible Notes exchanged. The total number of Structuring Fee Shares delivered was 59,178,819, and the aggregate cash delivered was approximately $5,100.

Amended and Restated Credit Agreement due 2011

In March 2009, we amended and restated the $100,000 Senior Secured Term Loan due 2009, dated as of June 26, 2008 and the $250,000 Senior Secured Revolving Credit Facility due 2009, dated as of May 5, 2006. These facilities were combined as term loans into the Amended and Restated Credit Agreement, dated as of March 6, 2009. Liberty Media LLC (“Liberty”) purchased $100,000 aggregate principal amount of such loans from the lenders.

In June 2009, we used net proceeds from the sale of our 11.25% Senior Secured Notes due 2013 to extinguish the Amended and Restated Credit Agreement. Under the terms of our agreement, we paid a repayment premium of $6,500. We recorded an aggregate loss on extinguishment of the Amended and Restated Credit Agreement of $49,786 consisting primarily of the unamortized discount, deferred financing fees and unaccreted portion of the repayment premium to Loss on extinguishment of debt and credit facilities in our unaudited consolidated statements of operations.

11.25% Senior Secured Notes due 2013

In June 2009, XM issued $525,750 aggregate principal amount of 11.25% Senior Secured Notes due 2013 (the “11.25% Notes”). Interest is payable semi-annually in arrears on June 15 and December 15 of each year at a rate of 11.25% per annum. The 11.25% Notes mature on June 15, 2013. The 11.25% Notes were issued for $499,951, resulting in an original issuance discount of $25,799.

XM Holdings and the domestic subsidiaries of XM that guarantee certain of the indebtedness of XM and its restricted subsidiaries guarantee XM’s obligations under the 11.25% Notes. The 11.25% Notes and related guarantees are secured by

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

first-priority liens on substantially all of the assets of XM Holdings, XM and the guarantors (subject to certain exceptions). XM, at its option, may redeem the 11.25% Notes at a “make-whole” redemption price prior to June 15, 2011, subject to certain restrictions. In addition, prior to June 15, 2011, XM may on any one or more occasions redeem up to 35% of the aggregate principal amount of 11.25% Notes at a redemption price equal to 111.25% of the principal amount of the 11.25% Notes redeemed, plus accrued and unpaid interest, if any, to the date of redemption with the proceeds of certain equity offerings or contributions made to XM with the proceeds from certain equity offerings of its direct or indirect parent.

In June 2009, XM used a portion of the net proceeds from the sale of the 11.25% Notes to repay in full $325,000 principal amount outstanding under the Amended and Restated Credit Agreement. In connection with the sale of the 11.25% Notes, XM terminated the Second-Lien Credit Agreement.

13% Senior Notes due 2013

In July 2008, XM issued $778,500 aggregate principal amount of 13% Senior Notes due 2013 (the “13% Notes”). Interest is payable semi-annually in arrears on February 1 and August 1 of each year at a rate of 13% per annum. The 13% Notes were issued for $700,105, resulting in an original issuance discount of $78,395. The 13% Notes are unsecured and mature on August 1, 2013.

9.75% Senior Notes due 2014

XM has outstanding $5,260 aggregate principal amount of 9.75% Senior Notes due 2014 (the “9.75% Notes”). Interest on the 9.75% Notes is payable semi-annually on May 1 and November 1 at a rate of 9.75% per annum. The 9.75% Notes are unsecured and mature on May 1, 2014. XM, at its option, may redeem the 9.75% Notes at declining redemption prices at any time on or after May 1, 2010, subject to certain restrictions. Prior to May 1, 2010, XM may redeem the 9.75% Notes, in whole or in part, at a price equal to 100% of the principal amount thereof, plus a make-whole premium and accrued and unpaid interest to the date of redemption.

In March 2009, XM executed and delivered a Third Supplemental Indenture (the “9.75% Notes Supplemental Indenture”). The 9.75% Notes Supplemental Indenture amended the indenture to eliminate substantially all of the restrictive covenants, eliminated certain events of default and modified or eliminated certain other provisions contained in the indenture and the 9.75% Notes.

7% Exchangeable Senior Subordinated Notes due 2014

In August 2008, XM issued $550,000 aggregate principal amount of 7% Exchangeable Senior Subordinated Notes due 2014 (the “Exchangeable Notes”). The Exchangeable Notes are senior subordinated obligations of XM and rank junior in right of payment to its existing and future senior debt and equally in right of payment with its existing and future senior subordinated debt. XM Holdings, XM Equipment Leasing LLC and XM Radio Inc. have guaranteed the Exchangeable Notes on a senior subordinated basis. Interest is payable semi-annually in arrears on June 1 and December 1 of each year at a rate of 7% per annum. The Exchangeable Notes mature on December 1, 2014. The Exchangeable Notes are exchangeable at any time at the option of the holder into shares of SIRIUS’ common stock at an initial exchange rate of 533.3333 shares of SIRIUS common stock per $1,000 principal amount of Exchangeable Notes, which is equivalent to an approximate exchange price of $1.875 per share of SIRIUS common stock.

Second-Lien Credit Agreement

In February 2009, we entered into a Credit Agreement (the “Credit Agreement”) with Liberty Media Corporation, as administrative agent and collateral agent. The Credit Agreement provided for a $150,000 term loan. On March 6, 2009, we amended and restated the Credit Agreement (the “Second-Lien Credit Agreement”) with Liberty Media.

In June 2009, we terminated the Second-Lien Credit Agreement in connection with the sale of the 11.25% Notes. We recorded a loss on termination of the Second-Lien Credit Agreement of $57,663 related to deferred financing fees to Loss on extinguishment of debt and credit facilities in our unaudited consolidated statements of operations.

Embedded Derivatives

We issued convertible debt securities, including the 10% Convertible Senior Notes due 2009, the 10% Senior Secured Discount Convertible Notes due 2009 and 7% Exchangeable Senior Subordinated Notes due 2014 containing non-detachable conversion or exchange features. Upon completion of the Merger, these debt agreements were amended such that the settlement of conversion features is into shares of SIRIUS common stock.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

The convertible and exchangeable features are embedded derivatives, and subsequent to the Merger are required to be separated from the host contract for accounting purposes in accordance with SFAS No. 133, Accounting for Hedging and Derivative Instruments . The embedded derivatives are recorded as derivative liabilities and included in our debt balances in our statement of financial position and the changes in fair value of those derivatives are reported as a realized investment gain or loss in the period in which the fair value changes.

Due to the change in fair value of these embedded derivatives, we recognized $19,799 and $78,003 of Loss on change in value of embedded derivatives during the three and six months ended June 30, 2009, respectively. The balance of derivative liabilities was $100,661 and $22,658 as of June 30, 2009 and December 31, 2008, respectively.

Covenants and Restrictions

Our non-convertible debt generally requires compliance 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. XM Holdings operates as an unrestricted subsidiary of SIRIUS for purposes of compliance with the covenants contained in our debt instruments. If we fail to comply with these covenants, our debt could become immediately payable.

At June 30, 2009, we were in compliance with all financial covenants.

(12) Benefit Plans

During the second quarter of 2009, we merged the XM Satellite Radio 401(k) Savings Plan (the “Savings Plan”) into the Sirius Satellite Radio 401(k) Savings Plan (the “Sirius Plan”), which is sponsored by SIRIUS, and transferred the assets held in the Savings Plan to the Sirius Plan. Eligible employees under the Savings Plan became subject to the contribution, matching and vesting rules of the Sirius Plan.

The Sirius Plan allows eligible employees to voluntarily contribute from 1% to 50% of their pre-tax salary subject to certain defined limits. SIRIUS matches 50% of an employee’s voluntary contributions, up to 6% of an employee’s pre-tax salary, in the form of shares of SIRIUS common stock. Matching contributions under the Sirius Plan vest at a rate of 33 ¹ / 3 % for each year of employment and are fully vested after three years of employment.

(13) Income Taxes

We recorded income tax expense of $578 and $1,156 for the three and six months ended June 30, 2009, respectively, and $673 and $1,004 for the three and six months ended June 30, 2008, respectively. Such expense primarily represents the recognition of a deferred tax liability related to the difference in accounting for the FCC license intangible asset, which is amortized over 15 years for tax purposes but is not amortized for book purposes.

(14) Commitments and Contingencies

The following table summarizes our expected contractual cash commitments as of June 30, 2009:


(in thousands)	Remaining 2009		2010		2011		2012		2013		Thereafter		Total
Long-term debt obligations	$	265,509	$	10,886	$	175,268	$	27	$	1,304,250	$	555,260	$	2,311,200
Cash interest payments		119,688		217,430		208,253		199,365		169,791		35,548		950,075
Lease obligations		10,634		18,000		7,229		3,927		1,563		1,986		43,339
Satellite and transmission		44,542		42,267		—		—		—		8,635		95,444
Programming and content		31,220		56,441		110,021		100,326		20,683		14,350		333,041
Satellite performance incentive payments		2,083		4,384		4,695		5,030		5,392		42,831		64,415
Marketing and distribution		13,497		9,888		9,212		9,033		3,000		4,500		49,130
Other		368		664		328		45		—		—		1,405

Total	$	487,541	$	359,960	$	515,006	$	317,753	$	1,504,679	$	663,110	$	3,848,049

Long-term debt obligations. Long-term debt obligations include principal payments on outstanding debt.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

Cash interest payments. Cash interest payments include interest due on outstanding debt through maturity.

Satellite and transmission. We have entered into agreements with third parties to operate and maintain the off-site satellite telemetry, tracking and control facilities and certain components of our terrestrial repeater network. We have also entered into various agreements to design and construct satellites for use in our systems and to launch those satellites.

Space Systems/Loral has constructed a fifth satellite, XM-5, for use in the our system. We have an agreement with Sea Launch to secure a launch for XM-5. In June 2009, Sea Launch filed for bankruptcy protection under Title 11 of the United States Code.

Programming and content. We have entered into various programming agreements. Under the terms of these agreements, we are obligated to provide payments to other entities that may include fixed payments, advertising commitments and revenue sharing arrangements.

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 satellite radios into vehicles they manufacture. In addition, in the event certain new products are not shipped by a distributor to its customers within 90 days of the distributor’s receipt of goods, we have agreed to purchase and take title to the product.

Satellite incentive payments. Boeing Satellite Systems International, Inc., the manufacturer of our four in-orbit satellites, may be entitled to future in-orbit performance payments with respect to two of our four satellites. As of June 30, 2009, we have accrued $28,572 related to contingent in-orbit performance payments for XM-3 and XM-4 based on expected operating performance over their fifteen year design life. Boeing may also be entitled to an additional $10,000 if XM-4 continues to operate above baseline specifications during the five years beyond the satellite’s fifteen year design life.

Operating lease obligations. We have entered into cancelable and non-cancelable operating leases for office space, equipment and terrestrial repeaters. These leases provide for minimum lease payments, additional operating expense charges, leasehold improvements, and rent escalations that have initial terms ranging from one to fifteen years, and certain leases that have options to renew. The effect of the rent holidays and rent concessions are recognized on a straight-line basis over the lease term.

Other. We have entered into various agreements with third parties for general operating purposes. In addition to the minimum 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 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 deposit monies in escrow, which place restrictions on cash and cash equivalents. As of June 30, 2009 and December 31, 2008, $250 and $120,250, respectively, were classified as Restricted investments as a result of obligations under these escrow deposits.

We do not have any other significant off-balance sheet arrangements that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Legal Proceedings

FCC Merger Order. On July 25, 2008, the FCC adopted an order approving the Merger. The order became effective immediately upon adoption. In September 2008, Mt. Wilson FM Broadcasters, Inc. filed a Petition for Reconsideration of this order. This Petition for Reconsideration remains pending.

Copyright Royalty Board Proceeding . In January 2008, the Copyright Royalty Board, or CRB, of the Library of Congress issued its decision regarding the royalty rate payable by XM and SIRIUS under the statutory license covering the performance of sound recordings over their satellite digital audio radio services for the six-year period starting January 1, 2007 and ending December 31, 2012. In July 2009, the United States Court of Appeals for the District of Columbia Circuit confirmed in all material respects the decision of the CRB.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

Atlantic Recording Corporation, BMG Music, Capital Records, Inc., Elektra Entertainment Group Inc., Interscope Records, Motown Record Company, L.P., Sony BMG Music Entertainment, UMG Recordings, Inc., Virgin Records, Inc. and Warner Bros. Records Inc. v. XM Satellite Radio Inc. In May 2006, the plaintiffs filed this action in the United States District Court for the Southern District of New York. The complaint seeks monetary damages and equitable relief, and alleges that XM radios that include advanced recording functionality infringe upon plaintiffs’ copyrighted sound recordings. XM filed a motion to dismiss this matter, and that motion was denied in January 2007. XM has resolved the lawsuit with respect to Universal Music Group, Warner Music Group, Sony BMG Music Entertainment and EMI Group, and each of these parties has withdrawn as a party to the lawsuit, and this lawsuit has been dismissed with respect to such parties.

Music publishing companies and certain other record companies also have filed lawsuits, purportedly on a class basis, with similar allegations. We believe these allegations are without merit and that our products comply with applicable copyright law, including the Audio Home Recording Act. We intend to vigorously defend this matter. There can be no assurance regarding the ultimate outcome of these matters, or the significance, if any, to our business, consolidated results of operations or financial position.

Matthew Enderlin v. XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc. In January 2006, the plaintiff filed this action in the United States District Court for the Eastern District of Arkansas on behalf of a purported nationwide class of all XM subscribers. The complaint alleges that XM engaged in a deceptive trade practices under Arkansas and other state laws by representing that its music channels are commercial-free. The court stayed the litigation and directed the parties to arbitration. XM instituted arbitration with the American Arbitration Association pursuant to the compulsory arbitration clause in its customer service agreement. In July 2009, the arbitrator issued a partial, final arbitration award denying the plantiff’s application to certify the matter as a class action. We believe this matter is without merit and intend to vigorously defend the ongoing arbitration.

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 cash flows, financial position or results of operations.

(15) Condensed Consolidating Financial Information

XM 1500 Eckington LLC, XM Investment LLC, XM Satellite Radio Inc. and its wholly owned subsidiaries, XM Radio Inc. and XM Equipment Leasing LLC (collectively, the “XM Holdings Guarantor Subsidiaries”) are wholly owned subsidiaries of XM Holdings. XM Holdings Guarantor Subsidiaries have fully and unconditionally, jointly and severally, directly or indirectly, guaranteed, on an unsecured basis, certain of the debt issued by XM Holdings.

XM Radio Inc. and XM Equipment Leasing LLC (collectively, the “XM Guarantor Subsidiaries”) are wholly owned subsidiaries of XM. The XM Guarantor Subsidiaries have fully and unconditionally, jointly and severally, directly or indirectly, guaranteed, on an unsecured basis, the debt issued by XM in connection with certain of XM’s financings.

These condensed consolidating financial statements should be read in conjunction with the consolidated financial statements of XM Satellite Radio Holdings Inc. and Subsidiaries.

Basis of Presentation

In presenting our condensed consolidating financial statements of XM Holdings and XM, the equity method of accounting has been applied to (i) XM Holdings’ interests in the XM Holdings Guarantor Subsidiaries, (ii) XM’s interests in the XM Guarantor Subsidiaries and (iii) XM’s interests in the XM Non-Guarantor Subsidiaries, where applicable, even though all such subsidiaries meet the requirements to be consolidated under U.S. generally accepted accounting principles. All intercompany balances and transactions between XM Holdings, the XM Holdings Guarantor Subsidiaries, XM Guarantor Subsidiaries and the Non-Guarantor Subsidiaries have been eliminated, as shown in the column “Eliminations.”

Our accounting bases in all subsidiaries, including goodwill and identified intangible assets, have been “pushed down” to the applicable subsidiaries.

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS

AS OF JUNE 30, 2009


(in thousands)	XM Satellite Radio Inc.			XM Radio Inc.			XM Equipment Leasing LLC			XM Non- Guarantor Subsidiaries		Eliminations			Consolidated XM Satellite Radio Inc.			XM Satellite Radio Holdings Inc.			XM 1500 Eckington LLC			XM Investment LLC			Eliminations			Consolidated XM Satellite Radio Holdings Inc.
Current assets:
Cash and cash equivalents	$	411,809		$	—		$	16		$	—	$	—		$	411,825		$	40		$	2,629		$	442		$	—		$	414,936
Accounts receivable, net		39,040			—			—			—		—			39,040			—			—			—			—			39,040
Due from subsidiaries/affiliates		4,822			648,285			58,433			757,107		(1,468,603	)		44			—			45,888			5,883			(51,815	)		—
Inventory, net		3,634			—			—			—		—			3,634			—			—			—			—			3,634
Prepaid expenses		83,553			—			—			—		—			83,553			—			—			—			—			83,553
Related party current assets		107,004			—			—			—		—			107,004			138			—			—			—			107,142
Other current assets		52,887			—			64			—		—			52,951			5,602			327			(110	)		705			59,475

Total current assets		702,749			648,285			58,513			757,107		(1,468,603	)		698,051			5,780			48,844			6,215			(51,110	)		707,780
Property and equipment, net		519,980			—			(1,528	)		—		—			518,452			216,719			59,470			11,679			—			806,320
Investment in subsidiaries/affiliates		2,739,970			—			—			—		(2,739,970	)		—			(496,396	)		—			—			496,396			—
FCC license		—			2,000,000			—			—		—			2,000,000			—			—			—			—			2,000,000
Restricted investments		250			—			—			—		—			250			—			—			—			—			250
Deferred financing fees, net		39,053			—			—			—		—			39,053			—			—			—			—			39,053
Intangible assets, net		647,936			—			—			—		—			647,936			—			—			—			—			647,936
Related party long-term assets		118,628			—			—			—		—			118,628			—			—			—			—			118,628
Other long-term assets		25,312			—			(100	)		—		—			25,212			34,779			752			(221	)		2,728			63,250

Total assets	$	4,793,878		$	2,648,285		$	56,885		$	757,107	$	(4,208,573	)	$	4,047,582		$	(239,118	)	$	109,066		$	17,673		$	448,014		$	4,383,217

Current liabilities:
Accounts payable and accrued expenses	$	189,715		$	—		$	92		$	—	$	—		$	189,807		$	10,794		$	266		$	87		$	(441	)	$	200,513
Accrued interest		47,022			—			—			—		—			47,022			4,316			—			—			—			51,338
Due to subsidiaries/affiliates		1,554,306			(43,416	)		250			12,089		(1,468,603	)		54,626			8,754			3,493			492			(10,453	)		56,912
Current portion of deferred revenue		461,888			—			—			—		—			461,888			2,776			—			—			—			464,664
Current portion of deferred credit on executory contracts		244,116			—			—			—		—			244,116			—			—			—			—			244,116
Current maturities of long-term debt		41,415			—			—			—		—			41,415			229,864			—			—			—			271,279
Current maturities of long-term related party debt		—			—			—			—		—			—			—			—			—			—			—
Related party current liabilities		57,875			—			—			—		—			57,875			—			—			—			—			57,875

Total current liabilities		2,596,337			(43,416	)		342			12,089		(1,468,603	)		1,096,749			256,504			3,759			579			(10,894	)		1,346,697
Deferred revenue		133,652			—			—			—		—			133,652			28,680			—			—			—			162,332
Deferred credit on executory contracts		918,678			—			—			—		—			918,678			—			—			—			—			918,678
Long-term debt		1,511,494			—			—			—		—			1,511,494			157,340			—			—			—			1,668,834
Long-term related party debt		95,093			—			—			—		—			95,093			—			—			—			—			95,093
Deferred tax liability		103,631			753,292			—			—		—			856,923			76,089			—			—			(37,891	)		895,121
Related party long-term liability		21,123			—			—			—		—			21,123			—			—			—			—			21,123
Other long-term liabilities		37,721			—			—			—		—			37,721			—			(1,315	)		—			(3,336	)		33,070

Total liabilities		5,417,729			709,876			342			12,089		(1,468,603	)		4,671,433			518,613			2,444			579			(52,121	)		5,140,948

Commitments and contingencies Stockholder’s equity (deficit):
Capital stock		—			—			—			—		—			—			—			—			—			—			—
Accumulated other comprehensive loss		—			—			—			—		—			—			(6,986	)		—			—			—			(6,986	)
Additional paid-in-capital		(563,333	)		1,781,641			55,262			691,811		(2,528,714	)		(563,333	)		5,989,719			100,271			16,691			446,372			5,989,720
Retained earnings (deficit)		(60,518	)		156,768			1,281			53,207		(211,256	)		(60,518	)		(6,740,464	)		6,351			403			53,763			(6,740,465	)

Total stockholder’s equity (deficit)		(623,851	)		1,938,409			56,543			745,018		(2,739,970	)		(623,851	)		(757,731	)		106,622			17,094			500,135			(757,731	)

Total liabilities and stockholder’s equity (deficit)	$	4,793,878		$	2,648,285		$	56,885		$	757,107	$	(4,208,573	)	$	4,047,582		$	(239,118	)	$	109,066		$	17,673		$	448,014		$	4,383,217

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES

CONDENSED CONSOLIDATING BALANCE SHEETS

AS OF DECEMBER 31, 2008


*(in thousands)*	XM Satellite Radio Inc.			XM Radio Inc.			XM Equipment Leasing LLC		XM Non- Guarantor Subsidiaries		Eliminations			Consolidated XM Satellite Radio Inc.			XM Satellite Radio Holdings Inc.			XM 1500 Eckington LLC			XM Investment LLC		Eliminations			Consolidated XM Satellite Radio Holdings Inc.
Current assets:
Cash and cash equivalents	$	199,938		$	—		$	15	$	—	$	—		$	199,953		$	5,923		$	760		$	104	$	—		$	206,740
Accounts receivable, net		52,727			—			—		—		—			52,727			—			—			—		—			52,727
Due from subsidiaries/affiliates		554,882			605,231			55,425		742,499		(1,957,994	)		43			—			42,213			5,337		(47,593	)		—
Inventory, net		4,489			—			—		—		—			4,489			—			—			—		—			4,489
Prepaid expenses		37,351			—			—		—		—			37,351			—			—			—		—			37,351
Related party current assets		112,232			—			—		—		—			112,232			131			—			—		—			112,363
Other current assets		50,090			—			64		—		—			50,154			155			258			—		(155	)		50,412

Total current assets		1,011,709			605,231			55,504		742,499		(1,957,994	)		456,949			6,209			43,231			5,441		(47,748	)		464,082
Property and equipment, net		577,368			—			3,912		—		—			581,280			221,011			59,454			12,843		—			874,588
Investment in subsidiaries/affiliates		2,625,148			—			—		—		(2,625,148	)		—			(351,193	)		—			—		351,193			—
FCC license		—			2,000,000			—		—		—			2,000,000			—			—			—		—			2,000,000
Restricted investments		120,250			—			—		—		—			120,250			—			—			—		—			120,250
Deferred financing fees, net		30,303			—			—		—		—			30,303			—			—			—		—			30,303
Intangible assets, net		688,671			—			—		—		—			688,671			—			—			—		—			688,671
Related party long-term assets		124,607			—			—		—		—			124,607			—			—			—		—			124,607
Other long-term assets		12,830			—			—		—		—			12,830			19,400			2,054			—		—			34,284

Total assets	$	5,190,886		$	2,605,231		$	59,416	$	742,499	$	(4,583,142	)	$	4,014,890		$	(104,573	)	$	104,739		$	18,284	$	303,445		$	4,336,785

Current liabilities:
Accounts payable and accrued expenses	$	237,139		$	—		$	97	$	—	$	—		$	237,236		$	153		$	268		$	84	$	(442	)	$	237,299
Accrued interest		47,118			—			—		—		—			47,118			3,425			—			—		—			50,543
Due to subsidiaries/affiliates		1,929,803			271			3,121		26,373		(1,957,994	)		1,574			—			3,669			493		(5,736	)		—
Current portion of deferred revenue		416,931			—			—		—		—			416,931			2,776			—			—		—			419,707
Current portion of deferred credit on executory contracts		234,774			—			—		—		—			234,774			—			—			—		—			234,774
Current portion of long-term debt		135,257			—			—		—		—			135,257			220,482			—			—		—			355,739
Related party current liabilities		83,930			—			—		—		—			83,930			4,057			—			—		(4,057	)		83,930

Total current liabilities		3,084,952			271			3,218		26,373		(1,957,994	)		1,156,820			230,893			3,937			577		(10,235	)		1,381,992
Deferred revenue		101,187			—			—		—		—			101,187			30,068			—			—		—			131,255
Deferred credit on executory contracts		1,037,190			—			—		—		—			1,037,190			—			—			—		—			1,037,190
Long-term debt		1,274,149			—			—		—		—			1,274,149			164,953			—			—		—			1,439,102
Deferred tax liability		134,301			752,174			—		—		—			886,475			—			—			—		—			886,475
Other long-term liabilities		32,805			(38	)		—		—		—			32,767			45,067			(1,315	)		—		(40,194	)		36,325

Total liabilities		5,664,584			752,407			3,218		26,373		(1,957,994	)		4,488,588			470,981			2,622			577		(50,429	)		4,912,339

Commitments and contingencies
Stockholder’s equity (deficit):
Capital stock		—			—			—		—		—			—			—			—			—		—			—
Accumulated other comprehensive loss		—			—			—		—		—			—			(7,871	)		—			—		—			(7,871	)
Additional paid-in-capital		(673,156	)		1,781,641			55,262		691,811		(2,528,715	)		(673,157	)		5,870,502			99,347			17,557		556,253			5,870,502
Retained earnings (deficit)		199,458			71,183			936		24,315		(96,433	)		199,459			(6,438,185	)		2,770			150		(202,379	)		(6,438,185	)

Total stockholder’s equity (deficit)		(473,698	)		1,852,824			56,198		716,126		(2,625,148	)		(473,698	)		(575,554	)		102,117			17,707		353,874			(575,554	)

Total liabilities and stockholder’s equity (deficit)	$	5,190,886		$	2,605,231		$	59,416	$	742,499	$	(4,583,142	)	$	4,014,890		$	(104,573	)	$	104,739		$	18,284	$	303,445		$	4,336,785

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2009 (SUCCESSOR ENTITY)


(in thousands)	XM Satellite Radio Inc.			XM Radio Inc.			XM Equipment Leasing LLC			XM Non- Guarantor Subsidiaries		Eliminations			Consolidated XM Satellite Radio Inc.			XM Satellite Radio Holdings Inc.			XM 1500 Eckington LLC		XM Investment LLC		Eliminations			Consolidated XM Satellite Radio Holdings Inc.
Revenue	$	306,138		$	—		$	—		$	—	$	—		$	306,138		$	694		$	2,566	$	332	$	(2,899	)	$	306,831
Cost of services		120,333			—			9			—		107			120,449			—			—		—		—			120,449
Sales and marketing		26,797			—			—			—		—			26,797			—			—		—		—			26,797
Subscriber acquisition costs		22,226			—			—			—		—			22,226			—			—		—		—			22,226
General and administrative		36,478			—			—			—		—			36,478			130			334		87		(2,308	)		34,721
Engineering, design and development		6,631			—			—			—		—			6,631			—			—		—		—			6,631
Depreciation and amortization		44,907			—			3,441			—		—			48,348			1,092			507		102		—			50,049
Restructuring, impairments and related costs		2,389			—			—			—		—			2,389			24,197			—		—		—			26,586

Total operating expenses		259,761			—			3,450			—		107			263,318			25,419			841		189		(2,308	)		287,459

Income (loss) from operations		46,377			—			(3,450	)		—		(107	)		42,820			(24,725	)		1,725		143		(591	)		19,372
Other income (expense):
Interest and investment income		446			—			—			—		—			446			144			—		—		—			590
Interest expense, net of amounts capitalized		(83,149	)		—			—			—		—			(83,149	)		(4,969	)		—		—		—			(88,118	)
Loss on change in value of embedded derivative		(19,854	)		—			—			—		—			(19,854	)		55			—		—		—			(19,799	)
Loss on extinguishment of debt and credit facilities, net		(107,450	)		—			—			—		—			(107,450	)		—			—		—		—			(107,450	)
Gain (loss) on investments		—			—			—			—		—			—			3,147			—		—		—			3,147
Other income (expense)		(3,770	)		43,686			2,903			14,445		(56,899	)		365			(165,071	)		—		—		165,545			839

Net income (loss) before income taxes		(167,400	)		43,686			(547	)		14,445		(57,006	)		(166,822	)		(191,419	)		1,725		143		164,954			(191,419	)

Benefit from (provision for) income taxes		—			(578	)		—			—		—			(578	)		(578	)		—		—		578			(578	)

Net income (loss)		(167,400	)		43,108			(547	)		14,445		(57,006	)		(167,400	)		(191,997	)		1,725		143		165,532			(191,997	)
Add: net loss attributable to noncontrolling interests		—			—			—			—		—			—			—			—		—		—			—

Net income (loss): XM Satellite Radio Holdings and Subsidiaries	$	(167,400	)	$	43,108		$	(547	)	$	14,445	$	(57,006	)	$	(167,400	)	$	(191,997	)	$	1,725	$	143	$	165,532		$	(191,997	)

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2008 (PREDECESSOR ENTITY)


(in thousands)	XM Satellite Radio Inc.			XM Radio Inc.		XM Equipment Leasing LLC			XM Non- Guarantor Subsidiaries			Eliminations			Consolidated XM Satellite Radio Inc.			XM Satellite Radio Holdings Inc.			Satellite Leasing (702-4), LLT			XM 1500 Eckington LLC		XM Investment LLC		Eliminations			Consolidated XM Satellite Radio Holdings Inc.
Revenue	$	315,537		$	43,840	$	2,740		$	—		$	(46,580	)	$	315,537		$	2,498		$	9,039		$	2,424	$	324	$	(11,787	)	$	318,035
Cost of services		188,295			—		11			—			107			188,413			—			—			—		—		—			188,413
Sales and marketing		59,280			—		—			—			—			59,280			—			—			—		—		—			59,280
Subscriber acquisition costs		69,193			—		—			—			—			69,193			—			—			—		—		—			69,193
General and administrative		43,747			—		—			—			—			43,747			69			—			250		78		(2,129	)		42,015
Engineering, design and development		9,414			—		—			—			—			9,414			—			—			—		—		—			9,414
Depreciation and amortization		30,962			—		2,995			—			—			33,957			48			—			347		154		(2,068	)		32,438


Total operating expenses		400,891			—		3,006			—			107			404,004			117			—			597		232		(4,197	)		400,753

Income (loss) from operations		(85,354	)		43,840		(266	)		—			(46,687	)		(88,467	)		2,381			9,039			1,827		92		(7,590	)		(82,718	)
Other income (expense):
Interest and investment income		856			—		160			14,609			(14,768	)		857			(114	)		—			—		—		—			743
Interest expense, net of amounts capitalized		(46,260	)		—		—			(160	)		14,768			(31,652	)		(515	)		(5,887	)		—		—		7,574			(30,480	)
Loss on extinguishment of debt and credit facilities, net		—			—		—			—			—			—			—			—			—		—		—			—
Gain (loss) on investments		—

Quarterly Report

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