Summary of XM SATELLITE RADIO HOLDINGS INC

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections herein, including statements regarding the development of our business, the markets for our services, our anticipated capital expenditures, and other similar statements are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) which can be identified as any statement that does not relate strictly to historical or current facts. Forward-looking statements use such words as "plans," "expects," "will," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "believes," "anticipates," "intends," "may," "should," "continue," "seek," "could" and other similar reasonable expressions. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. The important factors that could cause actual results to differ materially from those in the forward-looking statements herein (the "Cautionary Statements") include, without limitation, the key factors that have a direct bearing on our future results of operations. These are our significant expenditures and losses, unproven market for our service; health of our satellites; potential need for additional financing, substantial indebtedness, as well as other risks referenced from time to time in filings with the SEC, including our Form 10-K, filed March 15, 2004. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect the occurrence of unanticipated events.

The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included herewith, and with our Management's Discussion and Analysis of Financial Condition and Results of Operations and audited consolidated financial statements and notes thereto for the three-year period ended December 31, 2003, included in our Annual Report on Form 10-K.

This quarterly report on Form 10-Q is filed by XM Satellite Radio Holdings Inc. ("XM"). XM Satellite Radio Inc. ("Inc.") is filing separately. The principal differences between the financial condition of XM and Inc., which are not significant in amount, are:

• the ownership by XM of the corporate headquarters building since August 2001, and the lease of the building from XM by Inc.;

• the presence at XM of additional indebtedness not guaranteed by Inc.; and

• the existence of cash balances at XM.

Accordingly, the results of operations for Inc. and its subsidiaries are substantially the same as the results for XM and its subsidiaries discussed above except that Inc. incurs:

• additional rent, less depreciation and amortization expense and less other income, in each case principally related to Inc.'s rental of its corporate headquarters from XM, which are intercompany transactions that have been eliminated in the XM financial statements;

• less interest expense principally related to the additional indebtedness at XM; and

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

Overview

The highlights for our three- and six-month period ended June 30, 2004 include the following:

• growing the XM business to over 2.1 million subscribers at quarter end, including over 418,000 and 740,000 new subscribers added during the three months and six months ended June 30, 2004, respectively,

• the continued development of innovative retail products at attractive price points and broad OEM factory-installed penetration across numerous vehicle models,

• ending June 30, 2004, with a recurring subscription revenue run rate of $213 million, and

Table of Contents
• continuing to achieve a positive gross margin (calculated as revenues less variable costs, which include revenue share & royalties, customer care & billing operations, cost of equipment and ad sales) during the three months and six months ended June 30, 2004 while containing our fixed costs and reducing our costs to acquire each new subscriber.

The key metrics we use to monitor our business growth and our operational results are: ending subscribers, Average Monthly Subscription Revenue Per Subscriber ("ARPU"), Subscriber Acquisition Cost ("SAC"), Cost Per Gross Addition ("CPGA") and EBITDA, presented as follows:

                                                                         Three Months ended
                                                                              June 30,
                                                                     ---------------------------
                                                                        2004             2003
                                                                     -----------       ---------
Net Subscriber Additions                                                 418,449         209,178

Aftermarket, OEM & Other Subscribers                                   1,705,191         568,140
Subscribers in OEM Promotional Periods(1)                                374,930         116,476
XM Activated Vehicles with Rental Car Companies(2)                        20,231           7,637
                                                                     - --------- -     - ------- -
Total Ending Subscribers(1)(2)(3)                                      2,100,352         692,253

Average Monthly Subscription Revenue Per Subscriber(4)               $      8.63       $    9.32
Average Monthly Subscription Revenue Per Aftermarket, OEM &
Other Subscriber(4)                                                  $      9.26       $    9.84
Average Monthly Subscription Revenue Per Subscriber in OEM
Promotional Periods(4)                                               $      5.78       $    6.74
Average Monthly Subscription Revenue per XM Activated Vehicle
with Rental Car Companies(4)                                         $      9.23       $    0.89
Subscriber Acquisition Costs (SAC)(5)                                $        57       $      80
Cost Per Gross Addition (CPGA)(6)                                    $       101       $     160

EBITDA (in thousands)(7) $ (107,819 ) $ (95,742 )

(1) OEM promotional periods typically range from three months to one year in duration and a portion is paid for by the vehicle manufacturers. At the time of sale, vehicle owners generally receive a 3-month trial subscription and are included in OEM Promotional Subscribers. XM generally receives payment for two months of the 3-month trial subscription from the vehicle manufacturer. Promotional periods generally include the period of trial service plus 30 days to handle the receipt and processing of payments.

(2) Rental car activity commenced in late June 2003.

(3) Ending subscribers-We consider subscribers to be those who are receiving and have agreed to pay for our service, either by credit card or by invoice, including those that are currently in promotional periods paid in part by vehicle manufacturers, as well as XM activated radios in vehicles for which we have a contractual right to receive payment for the use of our service. Radios that are revenue generating are counted individually as subscribers. Promotional periods generally include the period of trial service plus 30 days to handle the receipt and processing of payments.

(4) Average Monthly Subscription Revenue per Subscriber-Please see definition and further discussion under Average Monthly Subscription Revenue Per Subscriber on page 18.

(5) SAC-Please see definition and further discussion under Subscriber Acquisition Costs on page 21.

(6) CPGA-Please see definition and further discussion under Cost Per Gross Addition on page 21.

(7) EBITDA-Please see definition and further discussion under EBITDA on page 22.

We raised $2.8 billion of equity and debt net proceeds from inception through June 2004 from investors and strategic partners to fund our operations. In January 2004, we raised $177 million of net funds from the sale of Class A common stock. In April 2004, we raised $195 million of net funds from the issuance of our Senior Secured Floating Rate Notes due 2009. In addition, in April 2004, we received approximately $32 million in cash proceeds in connection with GM's exercise of a warrant to purchase 10 million shares of our Class A common stock at an exercise price $3.18 per share. Provided that we meet the revenue, expense and cash flow projections of our business plan, we expect to be fully funded with no need to raise additional financing to continue operations. Our business plan contemplates the use of cash on hand and to be received from insurance settlements to fund the construction and launch of XM-3 and of XM-4.

Table of Contents

From January 1, 2004 to June 30, 2004, we eliminated $478.6 million carrying value of indebtedness including accrued interest, or approximately $487.2 million face value at maturity, through the issuance of $287.3 million of cash and $20.9 million shares of Class A common stock. These transactions also eliminated approximately $704 million in future interest, dividends, accretion and principal payments as well as 27 million shares of incremental dilution.

We will continue to incur operating losses until we substantially increase the number of our subscribers and increase our cash flow sufficient to cover operating costs. We are focused on managing growth and containing costs while increasing subscribers and scaling up our businesses. We also have significant outstanding contracts and commercial commitments that need to be paid in cash or through credit facilities over the next several years, including to fund subsidies and distribution costs, under which our payments increase as our revenues increase under the terms of those agreements, particularly under our arrangement with General Motors, as further described in Note 7 to the condensed consolidated financial statements, programming costs, repayment of long-term debt, lease payments and service payments. Our ability to become profitable also depends upon other factors identified below under the heading "Liquidity and Capital Resources-Future Operating and Capital Resource Requirements."

Table of Contents

Results of Operations



         Three-Month and Six-Month Periods ended June 30, 2004 and 2003



                                                   Three Months ended June 30,                Six Months ended June 30,
                                               -----------------------------------        ----------------------------------
                                                    2004                 2003                 2004                 2003
                                               --------------        -------------        -------------        -------------
                                                              (in thousands, except share and per share data)
Revenue:
Subscription                                   $       48,643        $      16,117        $      88,404        $      27,707
Activation                                              1,058                  394                1,925                  689
Equipment                                               1,054                1,017                1,733                1,609
Net ad sales                                            1,407                  599                2,397                1,047
Other revenue                                             820                  194                1,488                  321
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
Total revenue                                          52,982               18,321               95,947               31,373
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
Operating expenses:
Cost of revenue (excludes depreciation &
amortization, shown below):
Revenue share & royalties                              10,479                5,490               25,957                9,479
Customer care & billing operations                      8,975                5,588               16,060               10,635
Cost of equipment                                       1,771                1,855                3,367                2,968
Ad sales                                                1,357                  561                2,644                  998
Satellite & terrestrial                                 9,822               10,001               19,233               22,572
Broadcast & operations:
Broadcast                                               2,436                1,891                5,099                4,457
Operations                                              3,049                3,218                6,034                5,984
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
Total broadcast & operations                            5,485                5,109               11,133               10,441
Programming & content                                   7,116                5,261               14,340               10,048
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
Total cost of revenue                                  45,005               33,865               92,734               67,141
Research & development (excludes
depreciation and amortization, shown
below)                                                  6,731                2,919               12,901                5,386
General & administrative (excludes
depreciation and amortization, shown
below)                                                  6,527                5,554               12,392               14,572
Marketing (excludes depreciation and
amortization, shown below)
Retention & support                                     3,124                7,427                5,923               11,879
Subsidies & distribution                               35,303               19,594               70,082               31,316
Advertising & marketing                                20,340               16,691               35,019               28,192
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
Marketing                                              58,767               43,712              111,024               71,387
Amortization of GM liability                            9,313                9,313               18,626               16,939
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
Total marketing                                        68,080               53,025              129,650               88,326
Depreciation & amortization                            39,557               39,788               79,038               79,548
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
Total operating expenses                              165,900              135,151              326,715              254,973
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
Operating loss                                       (112,918 )           (116,830 )           (230,768 )           (223,600 )
Interest income                                         1,086                  573                2,165                1,125
Interest expense                                      (19,225 )            (26,889 )            (47,346 )            (50,688 )
Other expense                                         (34,458 )            (18,710 )            (34,072 )            (14,975 )
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
Net loss before income taxes                         (165,515 )           (161,856 )           (310,021 )           (288,138 )
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
Provision for deferred income taxes                      (579 )                -                (26,152 )                -
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
Net Loss                                             (166,094 )           (161,856 )           (336,173 )           (288,138 )
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
8.25% Series B and C preferred stock
dividend requirement                                   (2,149 )             (4,689 )             (4,504 )             (9,691 )
Series B preferred stock retirement gain                  -                  1,941                  -                  8,761
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
Net loss attributable to common
stockholders                                   $     (168,243 )      $    (164,604 )      $    (340,677 )      $    (289,068 )
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
Basic and diluted net loss per share           $        (0.84 )      $       (1.38 )      $       (1.80 )      $       (2.65 )
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
Weighted average shares used in computing
net loss per share - basic and diluted            200,616,663          119,427,014          189,740,108          109,097,888
                                               -- ----------- -      - ----------- -      - ----------- -      - ----------- -
EBITDA (1)                                     $     (107,819 )      $     (95,752 )      $    (185,802 )      $    (159,027 )
XM subscriptions (end of period) (2)                2,100,352              692,253            2,100,352              692,253

(1) Net loss before interest income, interest expense, income taxes, depreciation and amortization is commonly referred to in our business as "EBITDA." EBITDA is not a measure of financial performance under generally accepted accounting principles. Consistent with regulatory requirements, EBITDA includes Other Income (Expense). We believe EBITDA is often a useful measure of a company's operating performance and is a significant basis used by our management to measure the operating performance of our business. Because we have funded and completed the build-out of our system through the raising and

Table of Contents
expenditure of large amounts of capital, our results of operations reflect significant charges for depreciation, amortization and interest expense. EBITDA, which excludes this information, provides helpful information about the operating performance of our business, apart from the expenses associated with our physical plant or capital structure. EBITDA is frequently used as one of the bases for comparing businesses in our industry, although our measure of EBITDA may not be comparable to similarly titled measures of other companies. EBITDA does not purport to represent operating loss or cash flow from operating activities, as those terms are defined under generally accepted accounting principles, and should not be considered as an alternative to those measurements as an indicator of our performance.

                                                      Three Months ended June 30,
                                                    --------------------------------
                                                         2004               2003
                                                    --------------       -----------
 Reconciliation of Net Loss to EBITDA
 Net loss as reported                               $     (166,094 )     $  (161,856 )
 Add back non-EBITDA items included in net loss:
 Interest income                                            (1,086 )            (573 )
 Interest expense                                           19,225            26,889
 Depreciation & amortization                                39,557            39,788
 Provision for deferred income taxes                           579               -
                                                    -- ----------- --    -- -------- -
 EBITDA                                             $     (107,819 )     $   (95,752 )
                                                    -- ----------- --    -- -------- -

                                                       Six Months ended June 30,
                                                     ------------------------------
                                                         2004               2003
                                                     -------------       ----------
  Reconciliation of Net Loss to EBITDA
  Net loss as reported                               $    (336,173 )     $ (288,138 )
  Add back non-EBITDA items included in net loss:
  Interest income                                           (2,165 )         (1,125 )
  Interest expense                                          47,346           50,688
  Depreciation & amortization                               79,038           79,548
  Provision for deferred income taxes                       26,152              -
                                                     -- ---------- --    - -------- -
  EBITDA                                             $    (185,802 )     $ (159,027 )
                                                     -- ---------- --    - -------- -

(2) We consider subscribers to be those who are receiving and have agreed to pay for our service, either by credit card or by invoice, including those that are currently in promotional periods paid in part by vehicle manufacturers, as well as XM activated radios in vehicles for which we have a contractual right to receive payment for the use of our service. Radios that are revenue generating are counted individually as subscribers. Promotional periods generally include the period of trial service plus 30 days to handle the receipt and processing of payments.

Three months Ended June 30, 2004 Compared With Three Months Ended June 30, 2003

XM Satellite Radio Holdings Inc. and Subsidiaries

Revenue

Revenue. Our revenue consists of subscription fees, activation charges, limited direct sales of radios, advertising sales, and revenue earned from royalties and invoice fees. In the three months ended June 30, 2004, we recognized $53.0 million in total revenue, compared to $18.3 million in three months ended June 30, 2003, an increase of $34.7 million. During the three month period ended June 30, 2004, subscription revenue comprised over 91% of our total revenues.

Subscribers. As of June 30, 2004, we had 2,100,352 subscribers, compared to 692,253 at June 30, 2003, an increase of 1,408,099 subscribers. Our subscribers include 1,705,191 self-paying subscribers, 374,930 subscribers in OEM promotional periods (typically ranging from three months to one-year in duration) paid in part by the vehicle manufacturers and 20,231 XM activated vehicles with rental car companies. Additionally, family plan subscriptions at a multi-unit rate of $6.99 per radio per month are included in our total subscriber count. We consider subscribers to be those who are receiving and have agreed to pay for our service, either by credit card or by invoice, including those who are currently in promotional periods paid in part by vehicle manufacturers, as well as XM activated vehicles for which we have a contractual right to receive payment for the use of our service. Radios that are revenue generating are counted individually as subscribers.

OEM Promotional Subscribers. OEM Promotional Subscribers are subscribers who have either a portion or all of their subscription fee paid for by an OEM for a fixed period following the initial purchase or lease of the vehicle. Currently, at the

time of sale, vehicle owners generally receive a 3-month prepaid trial subscription. XM generally receives two months of the 3-month

Table of Contents

trial subscription from the vehicle manufacturer. The automated activation program provides activated XM radios on dealer lots for test drives. GM and Honda generally indicate the inclusion of 3 months free of XM service on the window sticker of XM-enabled vehicles. We measure the success of these programs based on the percentage that elect to receive the XM service and convert to self-paying subscribers after the initial promotion period-we refer to this as the "conversion rate".

The OEMs started to offer promotional programs in late 2002. At that time, the XM enabled vehicles were delivered to the dealers with inactive radios. Dealers or vehicle purchasers were required to call XM to activate a radio similar to an aftermarket consumer customer; not all XM-enabled vehicles were activated for the promotional subscription period. To streamline the process, in late September 2003 we began implementing an interim auto activation program whereby the XM radios are being activated automatically upon delivery of the car to the dealer. In the first quarter of 2004, we started activating XM radios at the completion of the car manufacturing process, which further reduces manual intervention in the process. Under our OEM promotional programs that ran from late 2002 through mid September 2003 (the primary program was the GM triple-play promotion), subscribers were included in our OEM promotional subscriber count from the time of sign up on the system until such time as they transferred into our Aftermarket, OEM and other subscriber count or were deactivated for non-payment in accordance with our normal collection procedures. Under the auto-activation programs, subscribers are included in our OEM promotional subscriber count from the time of vehicle purchase or lease, through the period of trial service plus an additional 30 days. We measure conversion rate three months after the period in which the trial service ends. Based on our experience it may take up to 90 days after the trial service ends for subscribers to respond to our marketing communications.

The conversion rate for the GM triple-play program that ran through mid September 2003 averaged approximately 70%. The conversion rate for the quarter . . .