(All dollar amounts referenced in this Item 2 are in thousands, unless otherwise stated)
Special Note Regarding Forward-Looking Statements The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in forward-looking statements made in this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time. Any statements about our beliefs, plans, objectives, expectations, assumptions, future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "intend," "plan," "projection" and "outlook." Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout our Annual Report on Form 10-K for the year ended December 31, 2008 (the "Form 10-K"), and in other reports and documents published by us from time to time, particularly the risk factors described under "Business - Risk Factors" in Item 1A of the Form 10-K.
Among the significant factors that could cause our actual results to differ materially from those expressed in the forward-looking statements are:
• the substantial indebtedness of SIRIUS, XM Holdings and XM;

• the useful life of our satellites, which have experienced component failures including, with respect to a number of satellites, failures on their solar arrays, and, in certain cases, are not insured;

• our dependence upon automakers, many of which have experienced a dramatic drop in sales and are in financial distress, and other third parties, such as manufacturers and distributors of satellite radios, retailers and programming providers; and

• the competitive position of SIRIUS and XM versus other forms of audio and video entertainment including terrestrial radio, HD radio, internet radio, mobile phones, iPods and other MP3 devices, and emerging next-generation networks and technologies.

Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any of these forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise or to assess with any precision the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Executive Summary
We broadcast our music, sports, news, talk, entertainment, traffic and weather channels in the United States on a subscription fee basis through our proprietary satellite radio systems - the SIRIUS system and the XM system. On July 28, 2008, our wholly owned subsidiary, Vernon Merger Corporation, merged (the "Merger") with and into XM Satellite Radio Holdings Inc. and, as a result, XM Satellite Radio Holdings Inc. is now our wholly owned subsidiary. The SIRIUS system consists of four in-orbit satellites, over 125 terrestrial repeaters that receive and retransmit signals, satellite uplink facilities and studios. The XM system consists of four in-orbit satellites, over 650 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, including through an app on the Apple iPhone.
Our satellite radios are primarily distributed through automakers ("OEMs"), retailers and through our websites. We have agreements with every major automaker to offer SIRIUS or XM satellite radios as factory or dealer-installed equipment in their vehicles. SIRIUS and XM radios are also offered to customers of rental car companies.
As of September 30, 2009, we had 18,515,730 subscribers. 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 and dealers for prepaid subscriptions included in the sale or lease price of a vehicle; certain radios activated for daily rental fleet programs; subscribers to SIRIUS Internet Radio and XM Radio Online, our Internet services; and certain subscribers to our weather, traffic, data and video 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 pre-paid and long-term subscriptions as well as discounts for multiple subscriptions on each platform. In 2009, we increased the discounted price for additional subscriptions from $6.99 per month to $8.99 per month. 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 Backseat TV, data and weather services.
In August 2009, we began charging our subscribers a U.S. Music Royalty Fee (the "MRF"). The MRF is $1.98 a month on our base subscriptions and $.97 for plans that are eligible for a second radio discount. The MRF also varies depending upon subscriber package and plan term. Amounts we collect through the MRF are included in Other revenue on our unaudited consolidated statements of operations. The FCC decision approving the Merger permits us to pass through to subscribers increases in music royalties since March 20, 2007, the date we asked the FCC to approve the Merger. The MRF is the implementation of that FCC decision.
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 to twelve months. In many cases, we receive subscription payments from automakers in advance of the activation of our service. We also reimburse various automakers for certain costs associated with satellite radios installed in their vehicles.
We also have an interest in the satellite radio services offered in Canada. Subscribers to the SIRIUS Canada service and the XM Canada service are not included in our subscriber count.
On August 5, 2008, Sirius Satellite Radio Inc. changed its name to Sirius XM Radio Inc. XM Satellite Radio Holdings Inc., together with its subsidiaries, is operated as an unrestricted subsidiary under the agreements governing our existing indebtedness. As an unrestricted subsidiary, transactions between the companies are required to comply with various contractual provisions in our respective debt instruments.
Unaudited Actual and Pro Forma Information Our discussion of our unaudited pro forma information includes non-GAAP financial results that assume the Merger occurred on January 1, 2008. These financial results exclude the impact of purchase price accounting adjustments and refinancing transactions related to the Merger. The discussion also includes the following non-GAAP financial measures: average self-pay monthly churn; conversion rate; average monthly revenue per subscriber, or ARPU; subscriber acquisition cost, or SAC, as adjusted, per gross subscriber addition; customer service and billing expenses, as adjusted, per average subscriber; free cash flow; and adjusted income (loss) from operations. We believe this non-GAAP financial information provides meaningful supplemental information regarding our operating performance and is used for internal management purposes, when publicly providing the business outlook, and as a means to evaluate period-to-period comparisons. Please refer to the footnotes (pages 53 through 62) following our discussion of results of operations for the definitions and a further discussion of the usefulness of such non-GAAP financial information and reconciliation to GAAP.

Subscriber and Key Operating Metrics. The following tables contain our actual and pro forma subscriber and key operating metrics for the three and nine months ended September 30, 2009 and 2008, respectively:
Unaudited Actual and Pro Forma Quarterly Subscribers and Metrics:

                                                                   Unaudited
                                             Three Months Ended                  Nine Months Ended
                                               September 30,                       September 30,
                                           2009              2008              2009              2008
                                         (Actual)        (Pro Forma)         (Actual)        (Pro Forma)
Beginning subscribers                    18,413,435        18,576,830        19,003,856        17,348,622
Gross subscriber additions                1,606,446         1,843,785         4,325,532         5,997,096
Deactivated subscribers                  (1,504,151 )      (1,499,704 )      (4,813,658 )      (4,424,807 )

Net additions                               102,295           344,081          (488,126 )       1,572,289

Ending subscribers                       18,515,730        18,920,911        18,515,730        18,920,911


Retail                                    7,925,904         9,036,420         7,925,904         9,036,420
OEM                                      10,488,530         9,777,704        10,488,530         9,777,704
Rental                                      101,296           106,787           101,296           106,787

Ending subscribers                       18,515,730        18,920,911        18,515,730        18,920,911


Retail                                     (309,972 )        (149,417 )        (979,298 )        (202,295 )
OEM                                         407,131           492,216           492,692         1,744,436
Rental                                        5,136             1,282            (1,520 )          30,148

Net additions                               102,295           344,081          (488,126 )       1,572,289


Self-pay                                 15,456,748        15,190,588        15,456,748        15,190,588
Paid promotional                          3,058,982         3,730,323         3,058,982         3,730,323

Ending subscribers                       18,515,730        18,920,911        18,515,730        18,920,911


Self-pay                                     35,405           361,438           (92,838 )       1,317,242
Paid promotional                             66,890           (17,357 )        (395,288 )         255,047

Net additions                               102,295           344,081          (488,126 )       1,572,289


Daily weighted average number of
subscribers                              18,393,678        18,710,940        18,514,041        18,187,927




                                                           Unaudited Pro Forma
                                           Three Months Ended               Nine Months Ended
                                             September 30,                    September 30,
                                          2009            2008            2009             2008

Average self-pay monthly churn
(1)(7)                                        2.0 %           1.7 %            2.1 %            1.7 %
Conversion rate (2)(7)                       46.8 %          47.0 %           45.3 %           49.2 %
ARPU (3)(7)                            $    10.87      $    10.51      $     10.67      $     10.53
SAC, as adjusted, per gross
subscriber addition (4)(7)             $       69      $       74      $        63      $        76
Customer service and billing
expenses, as adjusted, per average
subscriber (5)(7)                      $     1.01      $     1.05      $      1.04      $      1.08
Total revenue                          $  629,607      $  612,776      $ 1,842,924      $ 1,792,632
Free cash flow (6)(7)                  $   26,724      $  (97,594 )    $    35,772      $  (577,648 )
Adjusted income (loss) from
operations (8)                         $  106,140      $  (36,851 )    $   347,198      $  (168,096 )
Net loss                               $ (181,935 )    $ (217,010 )    $  (416,090 )    $  (653,867 )

Note: See pages 53 through 62 for footnotes.

Subscribers. At September 30, 2009 we had 18,515,730 subscribers, a decrease of 405,181 subscribers, or 2%, from the 18,920,911 subscribers as of September 30, 2008. The decrease was principally the result of 671,341 fewer paid promotional trials due to the decline in North American auto sales. This decline was partially offset by an increase of 266,160 in self-pay subscribers compared to September 30, 2008. Gross subscriber additions decreased approximately 13% and 28% during the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008, respectively. OEM gross subscriber additions decreased due to the decline in North American automobile sales and retail gross subscriber additions decreased due to declines in consumer spending. Deactivation rates for self-pay subscriptions in the quarter increased to 2.0% per month reflecting reductions in consumer discretionary spending, subscriber response to our increase in prices for multi-subscription accounts, channel line-up changes in 2008, the institution of a monthly charge for our streaming service and the introduction of the U.S. Music Royalty Fee. ARPU. ARPU is derived from total earned subscriber revenue and net advertising revenue, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. See accompanying footnotes for more details.
• Three Months: For the three months ended September 30, 2009 and 2008, total ARPU was $10.87 and $10.51, respectively. The increase was driven mainly by the sale of "Best of" programming, increased rates on our multi-subscription packages and revenues earned on our internet packages, partially offset by lower ad revenue.

• Nine Months: For the nine months ended September 30, 2009 and 2008, total ARPU was $10.67 and $10.53, respectively. Increases in subscriber revenue were driven mainly by the sale of "Best of" programming, increased rates on our multi-subscription packages and revenues earned on our internet packages, partially offset by lower ad revenue.

SAC, As Adjusted, Per Gross Subscriber Addition. SAC, as adjusted, per gross subscriber addition is derived from subscriber acquisition costs and margins from the direct sale of radios and accessories, excluding share-based payment expense, divided by the number of gross subscriber additions for the period. See accompanying footnotes for more details.
• Three Months: For the three months ended September 30, 2009 and 2008, SAC, as adjusted, per gross subscriber addition was $69 and $74, respectively. The decrease in SAC was primarily due to lower OEM subsidies and lower aftermarket inventory settlements partially offset by higher OEM subsidies on installations compared to the three months ended September 30, 2008.

• Nine Months: For the nine months ended September 30, 2009 and 2008, SAC, as adjusted, per gross subscriber addition was $63 and $76, respectively. The decrease was primarily driven by fewer OEM installations relative to gross subscriber additions, decreased production of certain radios, lower OEM subsidies and lower aftermarket inventory settlements in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.

Customer Service and Billing Expenses, As Adjusted, Per Average Subscriber. Customer service and billing expenses, as adjusted, per average subscriber is derived from total customer service and billing expenses, excluding share-based payment expense, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. See accompanying footnotes for more details.
• Three Months: For the three months ended September 30, 2009 and 2008, customer service and billing expenses, as adjusted, per average subscriber was $1.01 and $1.05, respectively. The decline was primarily due to decreases in personnel costs and customer call center expenses.

• Nine Months: For the nine months ended September 30, 2009 and 2008, customer service and billing expenses, as adjusted, per average subscriber was $1.04 and $1.08, respectively. The decline was primarily due to decreases in personnel costs and customer call center expenses.

Adjusted Income (Loss) from Operations. We refer to net loss before interest and investment income; interest expense, net of amounts capitalized; income tax expense, loss on extinguishment of debt and credit facilities, net; gain
(loss) on investments, other expense (income), restructuring, impairments and related costs, depreciation and amortization, and share-based payment expense as adjusted income (loss) from operations. See accompanying footnotes for more details.
• Three Months: For the three months ended September 30, 2009 and 2008, our adjusted income (loss) from operations was $106,140 and ($36,851), respectively. Adjusted income (loss) from operations was favorably impacted by an increase of 3%, or $16,831, in revenues and a decrease of 19%, or $126,160, in total expenses included in adjusted income
(loss) from operations. The increase in revenue was due mainly to increased rates on multi-subscription packages, revenues earned on internet packages, the introduction of the U.S. Music Royalty Fee and the sale of "Best of" programming. The decreases in expenses were primarily driven by lower Subscriber acquisition costs, lower Sales and marketing discretionary spend, savings in Programming and content expenses, and lower legal and consulting costs in General and administrative expenses.

• Nine Months: For the nine months ended September 30, 2009 and 2008, our adjusted income (loss) from operations was $347,198 and ($168,096), respectively. Adjusted income (loss) from operations was favorably impacted by an increase of 3%, or $50,292, in revenues and a decrease of 24%, or $465,002, in total expenses included in adjusted income
(loss) from operations. The increase in revenue was due mainly to an increase in weighted average subscribers as well as increased rates on multi-subscription packages, revenues earned on internet packages, the introduction of the U.S. Music Royalty Fee and the sale of "Best of" programming. The decreases in expenses were primarily driven by lower Subscriber acquisition costs, lower Sales and marketing discretionary spend, savings in Programming and content expenses, and lower legal and consulting costs in General and administrative expenses.

Unaudited Pro Forma Results of Operations. Set forth below are certain pro forma items that give effect to the Merger as if it had occurred on January 1, 2008. The pro forma information below does not give effect to any adjustments as a result of the purchase price accounting for the Merger, or the goodwill impairment charge taken during 2008. See footnote 8 (pages 54 to 55) for a reconciliation of net loss to adjusted income (loss) from operations.

                                                           Unaudited Pro Forma
                                           Three Months Ended               Nine Months Ended
                                             September 30,                    September 30,
                                          2009            2008            2009             2008
Revenue:
Subscriber revenue, including
effects of rebates                     $  587,442      $  572,355      $ 1,740,477      $ 1,669,700
Advertising revenue, net of agency
fees                                       12,418          17,867           37,287           54,156
Equipment revenue                          10,506          12,856           31,343           38,687
Other revenue                              19,241           9,698           33,817           30,089

Total revenue                             629,607         612,776        1,842,924        1,792,632

Operating expenses:
Satellite and transmission                 18,676          25,136           57,077           76,336
Programming and content                    93,230         131,630          277,614          341,422
Revenue share and royalties               123,531         120,800          362,463          355,251
Customer service and billing               55,795          58,857          173,517          177,159
Cost of equipment                          11,944          16,179           27,988           48,020
Sales and marketing                        52,827          78,178          152,039          260,583
Subscriber acquisition costs              109,384         132,477          274,082          444,396
General and administrative                 48,481          75,981          142,812          215,440
Engineering, design and development         9,599          10,389           28,134           42,121
Depreciation and amortization              47,997          64,111          145,596          196,051
Share-based payment expense                18,799          29,809           71,301           99,673
Restructuring, impairments and
related costs                               2,554           7,430           30,167            7,457

Total operating expenses                  592,817         750,977        1,742,790        2,263,909

Income (loss) from operations              36,790        (138,201 )        100,134         (471,277 )
Other expense                            (217,610 )       (77,086 )       (512,880 )       (178,777 )

Loss before income taxes                 (180,820 )      (215,287 )       (412,746 )       (650,054 )
Income tax expense                         (1,115 )        (1,723 )         (3,344 )         (3,813 )

Net loss                               $ (181,935 )    $ (217,010 )    $  (416,090 )    $  (653,867 )

Highlights for the Three Months Ended September 30, 2009. Our revenue grew 3%, or $16,831, in the three months ended September 30, 2009 compared to the same period in 2008. Subscriber revenue increased 3%, or $15,087, in the three months ended September 30, 2009 compared to the same period in 2008. The increase in subscriber revenue was driven by the sale of "Best of" programming and the rate increases to our multi-subscription and internet packages. Advertising revenue decreased 30%, or $5,449, in the three months ended September 30, 2009 compared to the same period in 2008. The decrease in advertising revenue was driven by the current economic environment. Equipment revenue decreased 18%, or $2,350, in the three months ended September 30, 2009 compared to the same period in 2008. The decrease in equipment revenue was driven by declines in sales through our direct to consumer distribution channel. Other revenue increased 98%, or $9,543, in the three months ended September 30, 2009 compared to the same period in 2008. The increase in other revenue was driven by the U.S. Music Royalty Fee introduced this quarter. The overall increase in revenue, combined with a decrease of 19%, or $126,160, in adjusted operating costs (total operating expense excluding restructuring, impairments and related costs, depreciation and amortization and share-based payment expense), resulted in improved adjusted income (loss) from operations of $106,140 in the three months ended September 30, 2009 compared to ($36,851) in the same period in 2008.

Satellite and transmission costs decreased 26%, or $6,460, in the three months ended September 30, 2009 compared to the same period in 2008 due to reductions in maintenance costs, repeater lease expense and personnel costs. Programming and content costs decreased 29%, or $38,400, in the three months ended September 30, 2009 compared to the same period in 2008, due mainly to a $27,500 one-time payment recognized in 2008 to a programming provider upon completion of the Merger, reductions in personnel and on-air talent costs as well as savings on certain content agreements. Revenue share and royalties increased 2%, or $2,731, in the three months ended September 30, 2009 compared to the same period in 2008 primarily due to an increase in our revenues and an increase in the statutory royalty rate for the performance of sound recordings. Customer service and billing costs decreased 5%, or $3,062, in the three months ended September 30, 2009 compared to the same period in 2008 primarily due to decreases in personnel costs and customer call center expenses. Cost of equipment decreased 26%, or $4,235, in the three months ended September 30, 2009 compared to the same period in 2008 as a result of a decrease in our direct to customer sales and lower inventory write-downs.
Sales and marketing costs decreased 32%, or $25,351, and decreased as a percentage of revenue to 8% from 13% in the three months ended September 30, 2009 compared to the same period in 2008 due to reduced advertising and cooperative marketing spend as well as reductions to personnel costs and third party distribution support expenses. Subscriber acquisition costs decreased 17%, or $23,093, and decreased as a percentage of revenue to 17% from 22% in the three months ended September 30, 2009 compared to the same period in 2008. This improvement was driven by fewer OEM installations relative to gross subscriber additions, decreased production of certain radios, lower OEM subsidies and lower aftermarket inventory reserves as compared to the three months ended September 30, 2008. Subscriber acquisition costs also decreased as a result of the 13% decline in gross additions during the three months ended September 30, 2009 compared to the three months ended September 30, 2008.
General and administrative costs decreased 36%, or $27,500, in the three months ended September 30, 2009 compared to the same period in 2008 mainly due to the absence of certain legal and regulatory charges incurred in 2008 and lower personnel costs. Engineering, design and development costs decreased 8%, or $790, in the three months ended September 30, 2009 compared to the same period in 2008, due to lower costs associated with manufacturing of radios, OEM tooling and manufacturing, and personnel.
Restructuring, impairments and related costs decreased 66%, or $4,876, in the three months ended September 30, 2009 compared to the same period in 2008 mainly due to fewer restructuring charges associated with the Merger. Other expenses increased 182%, or $140,524, in the three months ended September 30, 2009 compared to the same period in 2008 driven mainly by the Loss on extinguishment of debt and credit facilities of $138,053, and an increase in Interest expense of $11,554, offset by an increase of $7,491 in Gain on investments. The Loss on the extinguishment of debt and credit facilities was incurred on the full repayment of SIRIUS' LM Credit Agreement. Interest expense increased due primarily to the issuance of XM's 13% Senior Notes due 2013 and the 7% Exchangeable Senior Subordinated Notes due 2014 in the third quarter of 2008.
Highlights for the Nine Months Ended September 30, 2009. Our subscriber revenue . . .