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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended March 31, 2005.

XM SATELLITE RADIO HOLDINGS INC.

(Exact name of registrant as specified in its charter)

Commission file number 000-27441

1500 Eckington Place, NE Washington, DC 20002-2194

(Address of principal executive offices) (Zip code)

202-380-4000

(Registrant’s telephone number, including area code)

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

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x    No ¨

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

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

INDEX

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EXPLANATORY NOTE

This quarterly report is filed by XM Satellite Radio Holdings Inc. (the “Company”, “Holdings” or “XM”). Unless the context requires otherwise, the terms “we,” “our” and “us” refer to Holdings and its subsidiaries. Holdings’ principal subsidiary is XM Satellite Radio Inc. (“Inc.”), which is filing a separate quarterly report with the SEC.

This quarterly report and all other reports and amendments filed by us with the SEC can be accessed, free of charge, through our website at http://www.xmradio.com/investor/investor financial and company.html on the same day that they are electronically filed with the SEC.

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PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three-Month Periods ended March 31, 2005 and 2004

See accompanying notes to unaudited condensed consolidated financial statements.

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2005 and December 31, 2004

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See accompanying notes to unaudited condensed consolidated financial statements.

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three-Month Periods ended March 31, 2005 and 2004

See accompanying notes to unaudited condensed consolidated financial statements.

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Nature of Business

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

(2) Principles of Consolidation and Basis of Presentation

The condensed consolidated financial statements include the accounts of XM Satellite Radio Holdings Inc. and its subsidiaries. All significant intercompany transactions and accounts have been eliminated.

In the Company’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring entries, necessary for a fair presentation of the condensed consolidated financial position of XM Satellite Radio Holdings Inc. and its subsidiaries as of March 31, 2005; the results of operations for the three months ended March 31, 2005 and 2004; and cash flows for the three months ended March 31, 2005 and 2004. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the full year. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s 2004 consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K. Certain reclassifications have been made to prior-period amounts to conform with the 2005 presentation.

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

(3) Stock-Based Compensation

At March 31, 2005, the Company had two stock-based employee compensation plans. The Company accounts for the plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123. The following table illustrates the effect on net loss if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. The fair value of options granted during the three month periods ended March 31, 2005 and 2004 was calculated using an assumed volatility of 47% and 106%, respectively.

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In accordance with SFAS No. 123 (Revised 2004), Share Based Payment (“SFAS No. 123R”) and the Securities and Exchange Commission’s rule amending the compliance dates of SFAS No. 123R, we will begin to recognize compensation expense for equity-based compensation using the fair value method in 2006, as discussed on page 25.

(4) Financing Transactions

Long-Term Debt

Long-term debt at March 31, 2005 and December 31, 2004 consisted of the following (in thousands):

The following table presents a summary of the debt activity for the three-month period ended March 31, 2005 (in thousands):

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1.75% Convertible Senior Notes

In November 2004, the Company completed the sale of $300 million aggregate principal amount of its 1.75% Convertible Senior Notes due 2009. In January 2005, an over-allotment option was exercised and an additional $100 million aggregate principal amount of notes were issued. The notes may be converted by the holder, at its option, into shares of the Company’s Class A common stock initially at a conversion rate of 20.0 shares of Class A common stock per $1,000 principal amount, which is equivalent to an initial conversion price of $50.00 per share of Class A common stock (subject to adjustment in certain events), at any time until December 1, 2009. The notes are not redeemable at the Company’s option prior to the stated maturity.

(5) Net Loss Per Common Share

The Company computes net loss per common share in accordance with SFAS No. 128, Earnings Per Share and SEC Staff Accounting Bulletin (“SAB”) No. 98. Under the provisions of SFAS No. 128 and SAB No. 98, basic net loss per common share is computed by dividing the net loss attributable to common stockholders (after deducting preferred dividend requirements) for the period by the weighted average number of common shares outstanding during the period. Diluted net loss attributable per common share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common and dilutive equivalent shares outstanding during the period. The Company has presented historical basic and diluted net loss per common share in accordance with SFAS No. 128. Options, warrants and convertible instruments outstanding as of March 31, 2005 to purchase 123 million shares of common stock (116 million of which were vested) were not included in the computation of diluted loss per common share for the three months ended March 31, 2005 as their inclusion would have been anti-dilutive. Options, warrants and convertible instruments outstanding as of March 31, 2004 to purchase 121 million shares of common stock (114 million of which were vested) were not included in the computation of diluted loss per common share for the three months ended March 31, 2004 as their inclusion would have been anti-dilutive. As the Company had a net loss in each of the periods presented, basic and diluted net loss per common share are the same.

(6) Commitments and Contingencies

(a) DARS License

The Company’s DARS license is valid for eight years upon successful launch and orbital insertion of the satellites and can be extended by the FCC. The DARS license requires that the Company comply with a construction and launch schedule specified by the FCC for each of the two authorized satellites, which has occurred. The FCC has the authority to revoke the authorizations and in connection with such revocation could exercise its authority to rescind the Company’s license. The Company believes that the exercise of such authority to rescind the license is unlikely. If necessary, the Company could seek FCC authority to launch additional satellites for use in its system, which management believes would likely be approved. In February 2004, the Company applied to the FCC for authority to launch and operate XM-3 and XM-4 and to collocate XM Roll with XM Rock at the 115 West Longitude orbital location. The FCC granted this application in January 2005. Additionally, the FCC has not yet issued final rules permitting the Company to deploy its terrestrial repeaters to fill gaps in satellite coverage. The Company is operating its repeaters on a non-interference basis pursuant to a grant of special temporary authority from the FCC. This grant originally expired March 18, 2002. However, on March 11, 2002, the Company applied for an extension of this special temporary authority and the Company can continue to operate its terrestrial repeaters pursuant to the special temporary authority pending a final determination on this extension request. This authority is currently being challenged by operators of terrestrial wireless systems who have asserted that the Company’s repeaters may cause interference. The Company believes it is not likely that an FCC order would materially impact the terrestrial repeater system design currently in operation.

The Company has entered into a Memorandum of Agreement contemplating the establishment of a joint venture entity that would be authorized to provide the XM service in Canada. This entity is in the process of seeking authority from the Canadian government to provide satellite radio service in Canada. XM anticipates that the joint venture, once established, would be independently financed.

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(b) Satellite System

Satellite Deployment Plan. The Company launched its first two satellites, XM Rock (XM-2) and XM Roll (XM-1) prior to the commencement of commercial operations in the first half of 2001. These satellites suffer from a progressive solar array power degradation issue that is common to the first six Boeing 702 class satellites in orbit—XM Rock and XM Roll were the fifth and sixth Boeing 702s launched. In February 2005, the Company launched its XM-3 satellite. XM-3 has been placed into one of the Company’s orbital slots and beginning in April 2005 is being used to transmit the XM service. The Company is moving XM Roll to be collocated with XM Rock in the other orbital slot, expected to be completed during the second quarter of 2005. The Company has a fourth satellite (XM-4) under construction; this satellite will be available for launch in early 2006. The Company will launch XM-4 no later than in 2007 to replace the collocated XM-1 and XM-2. During the second quarter, XM is planning to enter into a contract to construct a spare satellite (XM-5), to be completed in late 2007 for use as a ground spare or to be available for launch in the event there is a launch or early operations failure of XM-4.

With this plan and continued monitoring of the power degradation situation in XM-1 and XM-2, the Company believes it will be able to launch additional satellites prior to the time the solar array output power degradation issue might cause the Company’s broadcast signal strength to fall below minimum acceptable levels.

Satellite Insurance Settlements — XM Rock and XM Roll. The Company had secured launch and in-orbit insurance policies with a large group of insurers (both U.S. and foreign) providing coverage for losses relating to XM Rock and XM Roll where such losses arise from an occurrence within the first five years after launch. Under these policies, the aggregate sum insured in the event of constructive total loss of both satellites equaled $400 million ($200 million per satellite), and lesser amounts would be payable in the event of a partial loss. In the event of constructive total loss, the amount of recovery would be reduced by any salvage value, which could include a percentage of the revenues from the Company’s continuing use of the satellites. In September 2001, the Company notified its insurers of a progressive solar array power degradation problem noted above and, in February 2003, the Company filed Proofs of Loss with its insurers.

In July 2004, the Company reached agreement with insurers covering 80 percent of the aggregate sum insured at a settlement rate equal to 44.5 percent of the proportionate amount covered by each of these insurers, representing a total recovery of approximately $142 million from these insurers. This settlement resolves any issues about the amount of loss sustained, includes a waiver by the settling insurance companies of any reductions based on salvage value, terminates any further risk to the settling insurers under the policies and ends any other rights the settling insurers might have with regard to XM Rock and XM Roll or revenues generated by the Company’s continuing use of those satellites. The Company has collected all amounts due under the settlement. The portion of the insurance proceeds related to claim payments was recorded as a reduction to the carrying values of XM Rock and XM Roll.

In August 2004, the Company filed for arbitration to collect the remaining 20 percent of the sum insured utilizing the third-party dispute resolution procedures under the policy. Any amounts received from this arbitration proceeding will be recorded as a reduction to the carrying values of XM Rock and XM Roll.

Satellite Contract—XM Rock and XM Roll. As of March 31, 2005, the Company had paid approximately $627.8 million, including financing charges and interest under the satellite contract related to XM Rock, or XM-2, XM Roll, or XM-1, XM-3 and XM-4. The Company originally entered into its satellite contract in March 1998 with Boeing Satellite Systems International, Inc.(“BSS”), and has subsequently amended the contract, including in July 2003, December 2003, December 2004 and January 2005. Under the satellite contract, BSS has delivered three satellites in-orbit, XM Rock, XM Roll and XM-3, supplied ground equipment and software used in the XM Radio system and provided certain launch and operations support services.

Satellite Contract and Other Costs—XM-3. In February 2005 the Company launched its XM-3 satellite. XM-3 was modified to correct the solar array degradation issues experienced by XM Rock and XM Roll, as well as to optimize XM-3 for the specific orbital slot into which it has been placed. As of March 31, 2005, with respect to XM-3, the Company has deferred costs of $15 million at an interest rate of 8 percent through January 4, 2007. BSS has the right to earn performance incentive payments of up to $25.9 million, excluding interest, based on the in-orbit performance of XM-3 over its design life of fifteen years.

Satellite Insurance—XM-3. The Company acquired launch and in-orbit insurance in January 2005 in connection with the launch of XM-3.

Satellite Contract and Other Costs—XM-4. The Company has committed in its satellite contract with BSS, as amended in July 2003, and by a separate August 2003 contract with Sea Launch Company, LLC (“Sea Launch”), to acquire from BSS a fourth satellite,

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XM-4, which should be available for shipment to the launch services provider in late 2005/early 2006, and from Sea Launch the associated launch services for the satellite. The fixed prices for XM-4 and the associated launch services total $186.5 million, excluding in-orbit performance incentives and financing charges on certain amounts deferred prior to launch. As of March 31, 2005, satellite construction costs aggregating approximately $125.1 million were incurred, of which $11 million were paid, $9.8 million are due in 2005 and $104.3 million are deferred until first quarter 2006. Interest accrued monthly at a rate of 10.75 percent per annum through December 2004 and is payable thereafter on a current basis, pursuant to the December 2003 amendment, which extended the deferral into early 2006 (unless the satellite is launched earlier). Most of the remaining portion of the fixed costs for XM-4 and the associated launch services are payable during construction with the last payment due one month following launch.

After launch of XM-4, BSS has the right to earn performance incentive payments of up to $12 million, plus interest, over the first twelve years of in-orbit life, up to $7.5 million for performance above specification during the first fifteen years of in-orbit life, and up to $10 million for continued high performance across the five year period beyond the fifteen year design life.

Options to Procure Fifth Satellite and Associated Launch Services under the July 2003 Amendment. The Company obtained a fixed price option to acquire a fifth satellite from BSS, on pricing and performance incentive terms similar to those applicable to XM-4; and under the August 2003 contract, the Company obtained a fixed price option for Sea Launch to provide launch services for XM-5.

Satellite Contract—Warrant to BSS. Pursuant to the Company’s satellite contract, it issued a warrant to BSS in July 2003 to purchase 500,000 shares of its Class A common stock at $13.524 per share. The fair value of these warrants was determined to be $5.8 million using a Black-Scholes based methodology and is included in the System Under Construction.

(c) GM Distribution Agreement

The Company has a long-term distribution agreement with OnStar, a subsidiary of General Motors. During the term of the agreement, which expires twelve years from the commencement date of the Company’s commercial operations, GM has agreed to distribute the service to the exclusion of other S-band satellite digital radio services. The Company will also have a non-exclusive right to arrange for the installation of XM radios included in OnStar systems in non-GM vehicles that are sold for use in the United States. The agreement was amended in June 2002 and January 2003 to clarify certain terms in the agreement, including extending the dates when certain initial payments are due to GM and confirming the date of the Company’s commencement of commercial operations, and to provide that the Company may make certain payments to GM in the form of indebtedness or shares of the Company’s Class A common stock. The Company’s total cash payment obligations were not increased. The Company has significant annual fixed payment obligations to GM. As a result of the June 2002 amendment, the Company commenced recognizing these fixed payment obligations for the period ending through November 2005, which approximate $63.6 million, on a straight-line basis. However, due to the January 2003 amendment to the Distribution Agreement and GM’s roll out plans which demonstrated a likelihood of GM exceeding minimum installation targets, in 2003 the Company began prospectively recognizing these fixed payments due under the Distribution Agreement, which approximate $397.3 million, on a straight-line basis through September 2013, the remaining term of the agreement. The Company issued a 10% Senior Secured Discount Convertible Notes due 2009 with an aggregate principal amount of $89.0 million, to OnStar in lieu of making these fixed payments to OnStar for amounts otherwise due in 2003 through 2006. The fixed payments due to be paid in years 2007, 2008 and 2009 are $80.7 million, $106.7 million and $132.9 million, respectively. In February 2004, the Company completed the redemption of the note through repayment of a portion with cash and GM’s conversion of a portion of the principal amount into the Company’s Class A common stock. The Company has recorded $22.3 million of current prepaid expense to related party and $16.7 million of non-current prepaid expense to related party in connection with the guaranteed fixed payments in the condensed consolidated balance sheet at March 31, 2005.

In order to encourage the broad installation of XM radios in GM vehicles, the Company has agreed to subsidize a portion of the cost of XM radios, and to make incentive payments to GM when the owners of GM vehicles with installed XM radios become subscribers to the Company’s service. The Company must also share with GM a percentage of the subscription revenue attributable to GM vehicles with installed XM radios, which percentage increases until there are more than eight million GM vehicles with installed XM radios (at which point the percentage remains constant). During the second quarter of 2004, a clarification was agreed to by XM and Onstar relating to the implementation of certain aspects of revenue sharing contained within the distribution agreement. Accordingly, the revenue share expense is recognized as the related subscription revenue is earned. The Company recorded $16.8 million of current prepaid expense to related party and $7.2 million of non-current prepaid expense to related party in connection with this revenue sharing arrangement in the condensed consolidated balance sheet at March 31, 2005. As part of the agreement, OnStar provides certain call-center related services directly to XM subscribers who are also OnStar customers and the Company must reimburse OnStar for these XM-related call center services. The agreement is subject to renegotiation at any time based upon the installation of radios that are compatible with a common receiver platform or capable of receiving Sirius Satellite Radio’s service.

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The agreement is subject to renegotiation if as of November 2005, and at two-year intervals thereafter, GM does not achieve and maintain specified installation levels of GM vehicles capable of receiving the Company’s service. The specified installation level of 1,240,000 units by November 2005 was achieved in 2004. The specified installation levels in future years will increase by the lesser of 600,000 units per year or amounts proportionate to target market shares in the satellite digital radio service market. There can be no assurances as to the outcome of any such renegotiations. GM’s exclusivity obligations will discontinue if, by November 2005 and at two-year intervals thereafter, the Company fails to achieve and maintain specified minimum market share levels in the satellite digital radio service market. For the three month periods ended March 31, 2005 and 2004 the Company incurred total costs of $46.5 million and $43.7 million, respectively, under the distribution agreement.

(7) Supplemental Cash Flows Disclosures

The Company paid $15.8 million and $6.3 million for interest, of which $9.2 million and $4.6 million was capitalized, during the three-month periods ended March 31, 2005 and 2004, respectively. Additionally, the Company’s financial results include the following non-cash financing and investing activities (in thousands):

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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 4, 2005. 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, 2004, 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:

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

Overview

The highlights for our three month period ended March 31, 2005 include the following:

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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 Costs (“SAC”), Cost Per Gross Addition (“CPGA”) and EBITDA, presented as follows:

We raised $3.3 billion of equity and debt net proceeds from inception through March 2005 from investors and strategic partners to fund our operations. In January 2005, we raised $98 million of net funds from the exercise of an over-allotment option on our 1.75% convertible senior notes due 2009. 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 received from insurance settlements to fund the construction and launch of XM-4.

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 increasing subscribers and scaling our business while managing growth and containing costs. 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 as well as revenue share arrangements, under which our payments increase as our revenues increase under the terms of those agreements, particularly under our arrangement with General Motors, programming costs, including Major League Baseball, repayment of long-term debt, lease

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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 Liquidity and Capital Resource Requirements.”

Results of Operations

Three-Month Periods ended March 31, 2005 and 2004

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Three Months Ended March 31, 2005 Compared With Three Months Ended March 31, 2004

XM Satellite Radio Holdings Inc. and Subsidiaries

Revenue

Revenue. Our revenue consists of subscription fees for our satellite audio service, activation charges, limited direct sales of radios and merchandise, advertising sales, and revenue from ancillary services. In the three months ended March 31, 2005, we recognized $102.6 million in total revenue, compared to $43.0 million in the three months ended March 31, 2004, an increase of $59.6 million. During the three months ended March 31, 2005, subscription revenue comprised 90.7 percent of our total revenues.

Subscribers. As of March 31, 2005, we had 3,770,264 subscribers, compared to 1,681,903 at March 31, 2004, an increase of 2,088,361 subscribers. Subscribers for the quarter ended March 31, 2005 include 2,197,502 retail, 1,535,991 OEM and 36,771 car rental subscribers. Our subscribers include 3,307,193 self-paying subscribers, 426,300 subscribers in OEM promotional periods (typically ranging from three months to one-year in duration) paid in part by the vehicle manufacturers and 36,771 XM activated vehicles with rental car companies. Additionally, 495,232 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 satellite audio service, either by credit card or by invoice, including those who are currently in promotional periods paid for by vehicle manufacturers, as well as XM activated vehicles for which we have a contractual right

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to receive payment for the use of our satellite audio 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 three-month prepaid trial subscription. XM generally receives 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. The automated activation program provides activated XM radios on dealer lots for test drives. GM and Honda generally indicate the inclusion of three months free of XM service on the window sticker of XM-enabled vehicles. 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 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.” 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 three months ended March 31, 2005 was 60.7 percent.

XM Activated Vehicles with Rental Car Companies. Our subscribers also include 36,771 activated vehicles with rental car companies. For the initial model year 2003 XM-enabled rental vehicles, XM receives payments based on the use of XM service. Customers are charged $2.99 per day per vehicle for use of the XM service, on which XM receives a revenue share. For subsequent model year 2004 and later vehicles, XM receives $10 per subscription per month.

Subscription Revenue. Subscription revenue was $93.0 million for the three months ended March 31, 2005 compared to $39.8 million for the three months ended March 31, 2004, an increase of $53.2 million. Subscription revenue consists primarily of our monthly subscription fees for our satellite audio service charged to consumers, commercial establishments and fleets, which are recognized as the service is provided. Revenues received from vehicle manufacturers for promotional service programs are included in subscription revenue. At the time of sale, vehicle owners generally receive a three-month trial subscription and are included in OEM promotional subscribers. Beginning in 2004, a standard promotion of three months free was placed on the window sticker of all XM-enabled GM vehicles. We generally receive payment for two months of the three-month trial subscription period from the vehicle manufacturer. For the three months ended March 31, 2005, subscription revenue included $6.8 million from related parties for subscription fees paid under certain promotional agreements, compared with $5.6 million for the three months ended March 31, 2004. Our subscriber arrangements are generally cancelable without penalty. Promotions and discounts are treated as a reduction to revenue during the period of the promotion. Sales incentives, consisting of rebates to subscribers, offset revenue. Discounts on equipment sold with service are allocated to equipment and service based on relative fair value. In February 2005, we announced that we are expanding our basic service package and that the monthly subscription price for our basic service increased to $12.95 from $9.99 beginning in April 2005. Existing customers could lock in a discounted rate by signing up for a pre-paid plan of up to five years prior to mid-April 2005. The expanded basic service now includes the internet service XM Radio Online (previously $3.99 per month) and the High Voltage Channel (previously $1.99 per month), both of which were premium services prior to this change.

Average Monthly Subscription Revenue Per Subscriber. Average monthly subscription revenue per subscriber (ARPU) was approximately $8.84 for the three months ended March 31, 2005 and approximately $8.66 for the three months ended March 31, 2004. ARPU from our aftermarket, OEM and other subscribers was $9.25 for the three months ended March 31, 2005, compared to $9.39 the three months ended March 31, 2004. The difference from our retail rate of $9.99 is due primarily to multi-year prepayment plan and family plan discounts. ARPU from our OEM promotional subscribers was $5.61 for the three months ended March 31, 2005, compared to $5.96 for the three months ended March 31, 2004. ARPU from our rental car fleet subscribers was $9.87 for the three months ended March 31, 2005, compared to $7.72 for the three months ended March 31, 2004. Average monthly subscription revenue per subscriber is derived from the total of earned subscription revenue (net of promotions and rebates) divided by the monthly weighted average number of subscribers for the period reported. Average monthly revenue per subscriber is a measure of operational performance and not a measure of financial performance under generally accepted accounting principles. Average monthly revenue per subscriber will fluctuate based on promotions implemented in 2005, as well as the adoption rate of multiyear prepayment plans, multiradio discount plans (such as the family plan) and premium services. We expect that average monthly revenue per subscriber will increase in 2005. The increase in the monthly subscription price takes effect for all billing cycles on or after April 2, 2005, and therefore, will be implemented over time.

Activation Revenue. Activation revenue is comprised of one-time activation charges billed to customers. Activation fees are non-refundable, and are recognized on a pro-rata basis over the estimated 40-month life of the subscriber relationship. This estimate may be further refined in the future as additional historical data becomes available. During the three months ended March 31, 2005, we recognized $2.0 million in activation revenue compared to $0.9 million in the three months ended March 31, 2004, an increase of

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$1.1 million due to an increase in subscribers. The growth in activation revenue will be impacted by the amount of discounts given as a result of the competitive environment, as well as changes, if any, in the estimated life of the subscriber relationship.

Merchandise Revenue. Merchandise revenue is comprised of revenues from direct sales of radios and XM merchandise. Through December 31, 2004, the direct sales of radios have generally been for promotional purposes. During the three months ended March 31, 2005, we recognized $3.1 million in merchandise revenue compared to $0.7 million during the three months ended March 31, 2004. We expect revenue from the sale of merchandise to increase proportionately with the increase in direct sales promotional activities as well as XM-owned kiosk sales.

Net Ad Sales Revenue. Advertising revenue consists of sales of advertisements and program sponsorships on the XM network to advertisers that are recognized in the period in which they are broadcast. Advertising revenue includes advertising aired in exchange for goods and services (barter), which is recorded at fair value. Advertising revenue is presented net of agency commissions in the results of operations, which is consistent with industry practice. In the three-month period ended March 31, 2005, we recognized $3.1 million in net advertising revenue compared to $1.0 million during the three-month period ended March 31, 2004. These amounts are net of agency commissions, which were $0.4 million during the three-month period ended March 31, 2005, compared to $0.1 million during the three-month period ended March 31, 2004. The increase in net advertising revenue is due primarily to a net increase in the number of advertisers from the increased demand for advertising on the XM network that results from our subscriber growth, listenership and audience reach. During the three-month period ended March 31, 2005, we recognized $0.3 million in advertising barter revenue compared to $0.2 million during the three-month period ended March 31, 2004. For the three-month period March 31, 2005, advertising revenue included $0.6 million from sales of advertisements to related parties compared with $0.1 million in the three-month period ended March 31, 2004.

Other Revenue. Other revenue earned during the three-month period ended March 31, 2005 consists primarily of revenue from ancillary services, including production recording services, weather data services, streaming only and NavTraffic only services. We recognized $1.3 million of other revenue during the three-month period ended March 31, 2005 compared with $0.7 million during the three-month period ended March 31, 2004. The increase is due to increases in production recording services, streaming, NavTraffic and weather revenue.

Operating Expenses

Total Operating Expenses. Total operating expenses were $207.8 million for the three-month period ended March 31, 2005 compared to $160.8 million in the three-month period ended March 31, 2004, an increase of $47.0 million. The increase was due to an increase in cost of revenue of $26.6 million attributable to increased sales, an increase in marketing expenses of $26.5 million primarily due to increased distribution expenses as a result of the growth in subscribers as well as our efforts to attract and acquire new subscribers, an increase of $1.4 million in general & administrative expense due to professional fees and payroll costs, offset in part by a decrease of $7.4 million in depreciation & amortization.

Cost of Revenue. Cost of revenue includes revenue share & royalties, customer care & billing costs, costs of radios associated with direct sales of radios, costs directly associated with sales of advertising, satellite & terrestrial operating costs, as well as costs related to broadcast & operations and programming & content. These combined costs were $74.3 million for the three-month period ended March 31, 2005, up from $47.7 million in the three-month period ended March 31, 2004, an increase of $26.6 million.

Revenue Share & Royalties. Revenue share & royalties includes performance rights obligations to composers, artists, and copyright owners for public performances of their creative works broadcast on XM, and royalties paid to radio technology providers and revenue share expenses associated with manufacturing and distribution partners and content providers. These costs were $19.1 million in the three-month period ended March 31, 2005 compared to $15.5 million in the three-month period ended March 31, 2004. This increase of $3.6 million was a result of our growth in subscriber base and revenues. We expect these total costs to continue to increase as subscriber growth continues.

Customer Care & Billing Operations. Customer care & billing operations expense includes expenses from outsourced customer care functions as well as internal IT costs associated with front office applications. These expenses were $15.4 million during the three-month period ended March 31, 2005, compared with $7.1 million during the three-month period ended March 31, 2004, an increase of $8.3 million. This increase was primarily driven by the increase in subscriber call volumes and transaction processing fees resulting from the growth in subscribers. We expect customer care & billing operations expense in total to continue to increase as we continue to add subscribers, but we expect the average cost per subscriber to decrease.

Cost of Merchandise. During the three-month period ended March 31, 2005, we incurred $3.1 million relating to promotional radios, radio kits and XM merchandise that we sold directly to subscribers, compared to $1.6 million in the three-month period ended March 31, 2004. We expect the cost of merchandise to increase during 2005 as we increase direct sales of merchandise.

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Ad Sales. Ad sales expense was $2.1 million in the three-month period ended March 31, 2005 compared to $1.3 million in the three-month period ended March 31, 2004, an increase of $0.8 million. The increase in ad sales expense is due primarily to an increase in staffing and marketing costs to support ad sales growth. We expect ad sales costs to increase in support of expected advertising revenue growth.

Satellite & Terrestrial. Satellite & terrestrial includes: telemetry, tracking and control of our two satellites, in-orbit satellite insurance and incentive payments, satellite uplink, and all costs associated with operating our terrestrial repeater network such as power, maintenance and lease payments. These expenses were $8.7 million in the three-month period ended March 31, 2005, compared with $9.4 million in the three-month period ended March 31, 2004, a decrease of $0.7 million. The decrease is driven by decrease in in-orbit satellite insurance expense resulting from the partial settlement of insurance claims on XM Rock and XM Roll. We launched our XM-3 satellite during the three months ended March 31, 2005, and it was placed into service in April 2005. Satellite & Terrestrial expense is expected to increase in future periods due to the operation of a third satellite.

Broadcast & Operations

Broadcast. Broadcast expenses include costs associated with the management and maintenance of the systems, software, hardware, production and performance studios used in the creation and distribution of XM-original and third party content. The advertising trafficking (scheduling and insertion) functions are also included. Broadcast costs were $3.6 million for the three-month period ended March 31, 2005, compared to $2.7 million in the three-month period ended March 31, 2004, an increase of $0.9 million. The increase is primarily due to increased costs associated with enhancements to and maintenance of the broadcast systems infrastructure. Broadcast costs are expected to increase with new content initiatives.

Operations. Operations, which includes facilities and information technology expense, was $4.8 million in the three-month period ended March 31, 2005, compared with $3.0 million in the three-month period ended March 31, 2004, an increase of $1.8 million. The increase is mainly due to an increase in the general operating costs associated with the corporate facility and infrastructure.

Programming & Content. Programming & content includes the creative and production costs associated with our over 150 channels of XM-original and third party content. This includes costs of programming staff and fixed payments for third party content. Programming & content expense was $17.5 million during the three-month period ended March 31, 2005, compared with $7.2 million during the three-month period ended March 31, 2004, an increase of $10.3 million. The increase is due to staffing and content related expenses in support of programming initiatives launched subsequent to the first quarter of 2004, including Major League Baseball (MLB), Opie and Anthony, XM Public Radio and Instant Traffic and Weather. Programming and content expenses are expected to increase in future periods as a result of programming initiatives. Our MLB programming launched in mid-February 2005, and therefore, subsequent quarters will include a full quarter of MLB programming expense. We paid $50 million for the 2005 season and will pay $60 million per season thereafter. Our MLB seasons run for the twelve month period beginning in February.

Research & Development. Research & development includes the costs of new product development, chipset design, and engineering. These combined expenses were $6.1 million in the three-month period ended March 31, 2005, compared with $6.2 million in the three-month period ended March 31, 2004, a decrease of $0.1 million. For the three-month period ended March 31, 2005, research and development expense included $1.3 million of costs relating to the development of future telematics applications associated with a related party compared with $2.5 million during the three-month period ended March 31, 2004. Research and development expenses are expected to increase as we accelerate the development of future telematics applications and new products, including interoperable radios.

General & Administrative. General & administrative expense was $7.3 million during the three-month period ended March 31, 2005, as compared with $5.9 million during the three-month period ended March 31, 2004, an increase of $1.4 million. The increase in general & administrative expense is primarily due to an increase in professional fees and an increase in payroll and payroll related costs associated with the increase in headcount to support the growth of our business.

Marketing. Marketing includes the costs of retention & support, subsidies & distribution, advertising & marketing, and amortization of our liability to GM. These combined costs were $88.1 million for the three-month period ended March 31, 2005, compared to $61.6 million in the three-month period ended March 31, 2004, an increase of $26.5 million. Marketing expense increased primarily due to increases in subsidies & distribution of $13.3 million and advertising & marketing of $11.5 million.

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Retention & Support. Personnel-related expenses comprise the majority of retention and support in 2005. In the three-month period ended March 31, 2005, these costs were $4.5 million compared to $2.8 million in the three-month period ended March 31, 2004, an increase of $1.7 million. The increase in retention and support expense is primarily due to an increase in payroll and payroll related costs associated with the increase in headcount to support the growth of our business.

Subsidies & Distribution. We currently provide incentives and subsidies for the manufacture, purchase, installation and activation of XM radios to attract and retain our manufacturing and distribution partners. Our subsidy & distribution costs are significant and totaled approximately $48.1 million during the three-month period ended March 31, 2005, compared with $34.8 million during the three-month period ended March 31, 2004, an increase of $13.3 million. This increase is primarily due to the increase in subscribers, new activations, and GM vehicles equipped with XM radios. Subsidy and distribution expense will increase as the number of XM radios that are manufactured, installed and activated increase; however, we expect that the cost per new subscriber may fluctuate from period to period based on the timing of promotions and contracts. We expect SAC to decline in 2005 as compared to 2004.

Subscriber Acquisition Costs. We consider subscriber acquisition costs to include radio manufacturer subsidies, certain sales, activation and installation commissions, and hardware-related promotions. These costs are reported in Subsidies & Distribution. The negative margins from equipment sales are also included in subscriber acquisition costs. Subscriber acquisition costs do not include on-going loyalty payments to retailers and distribution partners, payments under revenue sharing arrangements with radio manufacturers and distributors and certain guaranteed payments to GM. During the three months ended March 31, 2005 and 2004 we incurred SAC expenses of $43.7 million, and $31.8 million, respectively. SAC for the three months ended March 31, 2005 and 2004 was $52 and $67, respectively. The decline in SAC for the three-month period ended March 31, 2005 as compared to the three month period ended 2004 is due to the combined impacts of the decline in manufacturer subsidies and the increase in the number of activations. The timing of promotions and new contracts may cause SAC to fluctuate from period to period. We expect SAC to decline in 2005 as compared to 2004.

Advertising & Marketing. Activities comprising these expenses include media, advertising, events and direct marketing programs. Advertising & marketing costs were $26.2 million during the three-month period ended March 31, 2005, compared with $14.7 million during the three-month period ended March 31, 2004, an increase of $11.5 million. The increase is primarily due to our increased retail marketing and media advertising expenses.

Cost Per Gross Addition. We consider CPGA to include the amounts in SAC, as well as advertising, media and other discretionary marketing expenses. In our condensed consolidated financial statements, SAC costs are captured in Subsidies & Distribution and the negative margins from equipment sales, while CPGA costs are primarily captured by the combination of Subsidies & Distribution, Advertising & Marketing, plus the negative margins from equipment sales. CPGA does not include marketing staff (included in Retention & Support) or the amortization of the GM guaranteed payments (included in Amortization of GM Liability). During the three-month periods ended March 31, 2005, and 2004, we incurred CPGA expenses of $74.1 million and $50.2 million, respectively. CPGA for the three-month periods ended March 31, 2005 and 2004 was $90 and $106, respectively. CPGA declined for the three-month period ended March 31, 2005 as compared to the three-month period ended March 31, 2004 primarily due to the combined impacts of subscriber additions increasing at a faster rate than our discretionary advertising and marketing expenses as well as the change in the mix of subscribers acquired. The timing of our media campaigns and discretionary advertising spending may cause CPGA to fluctuate from period to period. The costs to acquire subscribers vary by distribution channel, and a change in the mix of subscribers from higher cost distribution channels to lower cost distribution channels will have a favorable impact on CPGA. We expect CPGA to decline in 2005 as compared to 2004.

Amortization of GM Liability. These costs include the amortization of annual fixed guaranteed payment commitments to General Motors, aggregating to $439.0 million, under our long-term distribution agreement with the OnStar division of GM providing for the installation of XM radios in GM vehicles. Amortization of the GM liability was $9.3 million for the three-month periods ended March 31, 2005 and 2004.

Depreciation & Amortization. Depreciation & amortization expense was $32.1 million during the three-month period ended March 31, 2005, compared with $39.5 million during the three-month period ended March 31, 2004, a decrease of $7.4 million. The decrease was primarily due to lower depreciation on XM Rock and XM Roll as a result of recording approximately $134 million of insurance proceeds as a reduction to the carrying values of our satellites in August 2004 (See “Liquidity and Capital Resources—Future Operating Liquidity and Capital Resource Requirements” below). XM-3 was placed into operation in April 2005, and therefore, depreciation will increase in future periods.

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Interest Income. Interest income was $4.0 million during the three-month period ended March 31, 2005, compared with $1.1 million during the three-month period ended March 31, 2004, an increase of $2.9 million. The increase was primarily attributable to higher average balances of cash and cash equivalents in the three-month period ended March 31, 2005 as well as higher yields on our investments due to market conditions.

Interest Expense. Interest expense was $20.0 million during the three-month period ended March 31, 2005, compared with $28.1 million during the three-month period ended March 31, 2004, a decrease of $8.1 million. The decrease in interest expense is primarily due to the de-leveraging of higher interest rate debt by the issuance of new debt and an increase in capitalization of interest costs due to increased capital expenditures for the system under construction.

Other Income. Other income was $2.0 million during the three-month period ended March 31, 2005, compared with $0.4 million during the three-month period ended March 31, 2004, an improvement of $1.6 million, which is primarily attributable to a payment from a third party for the lease termination of rental office space in our corporate headquarters. Other income for the three-month period ended March 31, 2005 consists primarily of income from rental of office space in our corporate headquarters to third parties.

Provision for Deferred Income Taxes. We recorded a provision for deferred income taxes expense of $0.6 million and $25.6 during the three-month period ended March 31, 2005 and 2004, respectively. During the three months ended March 31, 2004, we recorded a deferred tax liability related to indefinite lived assets that are amortized and deducted for tax purposes but are not amortized under generally accepted accounting principles. During the three months ended March 31, 2005, we recorded tax expense related to the amortization of the indefinite lived assets for tax purposes.

Net Loss. Net loss for the three-month period ended March 31, 2005 was $119.9 million, compared with $170.1 million for the three-month period March 31, 2004, a decrease of $50.2 million. The decrease primarily reflects the growth in our revenue and decreases in the provision for deferred income taxes and interest expense, offset in part by an increase in operating expenses due to our subscriber growth.

EBITDA. 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. EBITDA during the three-month period ended March 31, 2005 was $(71.3) million, compared with $(78.0) million during the three-month period ended March 31, 2004. The decreased loss reflects our revenue growth and margin improvement as well as a decline in the costs to acquire each new subscriber, offset in part by an increase in operating costs as a result of our subscriber growth. 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 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 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. The reconciliation of net loss to EBITDA is as follows (in thousands):

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Liquidity and Capital Resources

Overview

At March 31, 2005, we had total cash and cash equivalents of $647.4 million and working capital of $351.2 million. Cash and cash equivalents decreased $70.4 million during the three months ended March 31, 2005. The decrease resulted from $91.1 million used by operating activities and $77.1 million used in investing activities, offset in part by $97.8 million provided by financing activities. The proceeds from financing activities resulted primarily from the issuance of $100 million of 1.75% convertible senior notes from an over-allotment option that was exercised in January 2005. Investing activities consisted primarily of capital expenditures for the construction and launch of XM-3 and the construction of XM-4, computer systems infrastructure and broadcast facilities, and the construction of the backup uplink facility. Cash flows used in operating activities includes the net loss of $119.9 million, offset in part by the net cash provided by our operating assets and liabilities and the non-cash expenses included in the net loss. Cash flows used in operating activities includes over $70 million of prepayments for programming and other operating expenses.

The weighted average payment plans that our subscribers have elected result in 8.6 months of advance billing. Multi-year and other prepayment plans provide significant cash flows for us. During the three months ended March 31, 2005, the increase in deferred revenue provided $70.9 million of cash from operations. We expect the amount of deferred revenue will continue to increase as the number of subscribers who pay in advance increases including from subscribers who “locked in” at the time of the rate increase.

By comparison, at March 31, 2004, we had total cash and cash equivalents of $ 385.2 million, and working capital of $257.1 million. Cash and cash equivalents decreased $33.1 million during the three months ended March 31, 2004. The decrease resulted from $31.8 million used in operating activities and $109.9 million used in investing activities, offset by $108.6 million provided by financing activities. The proceeds from financing activities resulted primarily from the issuance of 7.0 million shares of Class A common stock in January 2004 that yielded gross proceeds of $185.5 million, offset in part by the repayment of $81.2 million of related party debt, and payments of $1.0 million related to capital lease and mortgage obligations. The financing activities completed during the quarter are more fully discussed below. Investing activities consisted primarily of capital expenditures for the construction and launch of XM-3 and computer systems infrastructure. Cash flows used in operating activities includes the net loss of $170.1 million and the net cash used by our operating assets and liabilities, offset in part by non-cash expenses included in the net loss.

Sources of Cash

We raised $3.5 billion of equity and debt gross proceeds from inception through March 31, 2005 from investors and strategic partners to fund our operations. This includes $100.0 million of gross funds raised in the January 2005 financing transaction.

January 2005 Issuance of Additional Notes

In January 2005, an over-allotment option was exercised on our 1.75% convertible senior notes due in 2009 and an additional $100 million aggregate principal amount of notes were issued. The notes may be converted by the holder, at its option, into shares of our Class A common stock initially at a conversion rate of 20.0 shares of Class A common stock per $1,000 principal amount, which is equivalent to an initial conversion price of $50.00 per share of Class A common stock (subject to adjustment in certain events), at any time until December 1, 2009. The notes are not redeemable at the Company’s option prior to the stated maturity.

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Uses of Cash

Our cash used during the three months ended March 31, 2005 consisted primarily of funding operating expenses and funding the launch of XM-3.

Warrant Exchanges

In the three months ended March 31, 2005, we entered into agreements with certain holders of Class A common stock warrants to exchange approximately 32,000 warrants convertible into 2.7 million shares of Class A common stock for 2.5 million shares of Class A common stock and received $16,000 in cash proceeds from the exercise of 61 warrants converted into 5,185 shares of Class A common stock. As a result of our financings and other issuances of securities, the conversion price of the Series C preferred stock issued in August 2000 has been adjusted from $8.78 at December 31, 2004 to $8.74 at March 31, 2005, the exercise price of the warrants sold in March 2000 remained at $45.23 and the number of warrant shares remained at 8.78. The exercise price of the warrants sold in January 2003 remained at $3.18 and the number of warrant shares remained at 85. There was no impact on the condensed consolidated statement of operations as a result of the adjustments to these prices.

Commitments

We have entered into certain programming and marketing agreements that broaden our content offering and increase our brand awareness. Under these agreements, we are obligated to make payments that total $75.4 million in the remaining nine months of 2005, $93.3 million in 2006, $103.3 million in 2007, $95.0 million in 2008, $82.4 million in 2009 and $200.3 million in 2010 and beyond. These payments include fixed payments, advertising commitments and revenue sharing arrangements. The Company has a multi-year agreement with Major League Baseball to broadcast MLB games live nationwide and those payments are included in the above disclosure of our commitments. The Company will pay up to $50 million for 2005 and $60 million per year thereafter through 2012, with $120 million to be deposited into escrow in connection with the signing of the agreement. MLB has the option to extend the agreement for the 2013, 2014 and 2015 seasons at the same $60 million annual compensation rate. The Company paid $10 million to MLB in October 2004. The Company will also make incentive payments to MLB for XM subscribers obtained through MLB and baseball club verifiable promotional programs. No stock or warrants were included in this agreement.

Future Operating Liquidity and Capital Resource Requirements

Our funding requirements are based on our current business plan, which in turn is based on our operating experience to date and our available resources. We are pursuing a business plan designed to increase subscribers and revenues while reducing or maintaining subscriber acquisition costs. Our plan contemplates our focusing on the new automobile market where we have relationships with automobile manufacturers, the continuing introduction of lower-priced and more user-friendly radio technology in the retail aftermarket and the use of our most productive distribution channels.

We expect that our future working capital, capital expenditures, and debt service requirements will be satisfied from existing cash, cash equivalents, and short-term investments and by cash generated from operations. Our business plan contemplates the use of cash on hand and received from insurance settlements to fund the construction and launch of XM-4.

Provided that we meet the revenue, expense and cash flow projections of our business plan, we expect to be fully funded and will not need to raise additional financing to continue operations. Our business plan is based on estimates regarding expected future costs and expected revenue. Our costs may exceed or our revenues may fall short of our estimates, our estimates may change, and future developments may affect our estimates. Any of these factors may increase our need for funds, which would require us to seek additional financing to continue implementing our current business plan.

In addition, we may seek additional financing to undertake initiatives not contemplated by our current business plan or obtain additional cushion against possible shortfalls. We may pursue a range of different sizes or types of financing as opportunities arise, particularly the sale of additional equity and debt securities. We have and may continue to take advantage of opportunities to reduce our level of indebtedness and preferred stock in exchange for issuing common or other equity securities, if these transactions can be completed on favorable terms.

In the event of unfavorable future developments, such as adverse developments in the debt and equity market of the type experienced during much of 2001 and 2002, we may not be able to raise additional funds on favorable terms or at all. Our ability to obtain additional financing depends on several factors, including future market conditions; our success or lack of success in developing, implementing and marketing our satellite radio service; our future creditworthiness; and restrictions contained in agreements with our investors or lenders. Additional financings could increase our level of indebtedness or result in further dilution to

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our equity holders. If we fail to obtain necessary financing on a timely basis, a number of adverse effects could occur, or we may have to revise our business plan.

Satellite System

Satellite Deployment Plan. We launched our first two satellites, XM Rock (XM-2) and XM Roll (XM-1) prior to the commencement of commercial operations in the first half of 2001. These satellites suffer from a progressive solar array power degradation issue that is common to the first six Boeing 702 class satellites in orbit—XM Rock and XM Roll were the fifth and sixth Boeing 702s launched. In February 2005 we launched our XM-3 satellite. XM-3 has been placed into one of our orbital slots and beginning in April 2005 is being used to transmit the XM service. We are moving XM Roll to be collocated with XM Rock in the other orbital slot, expected to be completed during the second quarter of 2005. We have a fourth satellite (XM-4) under construction; this satellite will be available for launch in early 2006. We will launch XM-4 no later than in 2007 to replace the collocated XM-1 and XM-2. During the second quarter, XM is planning to enter into a contract to construct a spare satellite (XM-5) to be completed in late 2007 for use as a ground spare or to be available for launch in the event there is a launch or early operations failure of XM-4.

With this plan and continued monitoring of the power degradation situation in XM-1 and XM-2, we believe we will be able to launch additional satellites prior to the time the solar array output power degradation issue might cause our broadcast signal strength to fall below minimum acceptable levels.

Satellite Insurance Settlements — XM Rock and XM Roll. We had secured launch and in-orbit insurance policies with a large group of insurers (both U.S. and foreign) providing coverage for losses relating XM Rock and XM Roll where such losses arise from an occurrence within the first five years after launch. Under these policies, the aggregate sum insured in the event of constructive total loss of both satellites equaled to $400 million ($200 million per satellite), and lesser amounts would be payable in the event of a partial loss. In the event of constructive total loss, the amount of recovery would be reduced by any salvage value, which could include a percentage of the revenues from our continuing use of the satellites. In September 2001, we notified our insurers of a progressive solar array power degradation problem noted above and, in February 2003, we filed Proofs of Loss with our insurers.

In July 2004, we reached agreement with insurers covering 80 percent of the aggregate sum insured at a settlement rate equal to 44.5 percent of the proportionate amount covered by each of these insurers, representing a total recovery of approximately $142 million from these insurers. This settlement resolves any issues about the amount of loss sustained, includes a waiver by the settling insurance companies of any reductions based on salvage value, terminates any further risk to the settling insurers under the policies and ends any other rights the settling insurers might have with regard to XM Rock and XM Roll or revenues generated by our continuing use of those satellites. The Company has collected all amounts due under the settlement. The portion of the insurance proceeds related to claim payments was recorded as a reduction to the carrying values of XM Rock and XM Roll.

In August 2004, we filed for arbitration to collect the remaining 20 percent of the sum insured utilizing the third-party dispute resolution procedures under the policy. Any amounts received from this arbitration proceeding will be recorded as a reduction to the carrying values of XM Rock and XM Roll.

Satellite Contract—XM Rock and XM Roll. As of March 31, 2005, we had paid approximately $627.8 million, including financing charges and interest under the satellite contract related to XM Rock, or XM-2, XM Roll, or XM-1, XM-3 and XM-4. We originally entered into our satellite contract in March 1998 with BSS, and have subsequently amended the contract, including in July 2003, December 2003, December 2004 and January 2005. Under the satellite contract, BSS has delivered three satellites in-orbit, XM Rock, XM Roll and XM-3, supplied ground equipment and software used in the XM Radio system and provided certain launch and operations support services.

Satellite Contract and Other Costs—XM-3. In February 2005, we launched our XM-3 satellite. XM-3 was modified to correct the solar array degradation issues experienced by XM Rock and XM Roll, as well as to optimize XM-3 for the specific orbital slot into which it has been placed. As of March 31, 2005, with respect to XM-3, we have deferred costs of $15 million at an interest rate of 8% through January 4, 2007. BSS has the right to earn performance incentive payments of up to $25.9 million, excluding interest, based on the in-orbit performance of XM-3 over its design life of fifteen years.

Satellite Insurance—XM-3. We acquired launch and in-orbit insurance in January 2005 in connection with the launch of XM-3.

Satellite Contract and Other Costs—XM-4. We have committed in our satellite contract with BSS, as amended in July 2003, and by a separate August 2003 contract with Sea Launch, to acquire from BSS a fourth satellite, XM-4, which should be available for shipment to the launch services provider in late 2005/early 2006, and from Sea Launch the associated launch services for the satellite. The fixed prices for XM-4 and the associated launch services total $186.5 million, excluding in-orbit performance incentives and financing charges on certain amounts deferred prior to launch. As of March 31, 2005, satellite construction costs aggregating

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approximately $125.1 million were incurred, of which $11 million were paid, $9.8 million are due in 2005 and $104.3 million are deferred until first quarter 2006. Interest accrued monthly at a rate of 10.75 percent per annum through December 2004 and is payable thereafter on a current basis, pursuant to the December 2003 amendment, which extended the deferral into early 2006 (unless the satellite is launched earlier). Most of the remaining portion of the fixed costs for XM-4 and the associated launch services are payable during construction with the last payment due one month following launch.

After launch of XM-4, BSS has the right to earn performance incentive payments of up to $12 million, plus interest, over the first twelve years of in-orbit life, up to $7.5 million for performance above specification during the first fifteen years of in-orbit life, and up to $10 million for continued high performance across the five year period beyond the fifteen year design life.

Options to Procure Fifth Satellite and Associated Launch Services under the July 2003 Amendment. We obtained a fixed price option to acquire a fifth satellite from BSS, on pricing and performance incentive terms similar to those applicable to XM-4; and under the August 2003 contract, we obtained a fixed price option for Sea Launch to provide launch services for XM-5.

Satellite Contract—Warrant to BSS. Pursuant to our satellite contract, we issued a warrant to BSS in July 2003 to purchase 500,000 shares of its Class A common stock at $13.524 per share. The fair value of these warrants was determined to be $5.8 million using a Black-Scholes based methodology and is included in the System Under Construction balance as of March 31, 2005.

Related Party Transactions

We developed strategic relationships with certain companies that were instrumental in the construction and development of our system. In connection with our granting to them of large supply contracts, some of these strategic companies have become large investors in us and have been granted rights to designate directors or observers to our board of directors. The negotiation of these supply contracts and investments primarily occurred at or prior to the time these companies became related parties.

We are a party to a long-term distribution agreement with OnStar Corporation, a subsidiary of General Motors that provides for the installation of XM radios in General Motors vehicles, as further described in Note 6 to the condensed consolidated financial statements. In connection with the development of our terrestrial repeater network, we were a party to a contract with Hughes Electronics Corporation. DIRECTV has provided consulting services in connection with the development of our customer care center and billing operations. Hughes Electronics Corporation and DIRECTV ceased to be a related party during the three-month period ended March 31, 2004. We have arrangements with American Honda relating to the promotion of the XM Service to new car buyers, the use of bandwidth on the XM System and the development of telematics services and technologies. We have an agreement with OnStar to make available use of our bandwidth. Clear Channel Communications provides certain programming services to us. In the past, we had a sponsorship agreement with Clear Channel Entertainment to advertise our service at Clear Channel Entertainment concerts and venues. Premiere Radio Networks, a subsidiary of Clear Channel Communications, has in the past served as one of our advertising sales representatives. We also run advertisements on a spot and network basis on radio stations owned by Clear Channel. In addition, we lease four sites for our terrestrial repeaters from Clear Channel Communications. Clear Channel Communications ceased to be a related party during the second quarter of 2004.

As of March 31, 2005, we are engaged in activities with GM and Honda to jointly promote new car buyers to subscribe to the XM service. At March 31, 2005, there were 416,198 subscribers in promotional periods (typically ranging from three months to one year in duration) paid for by the vehicle manufacturers. These subscriptions are included in our quarter-end subscriber total. Subscriber revenues received from GM and Honda for these programs are recorded as related party revenue.

GM is one of our shareholders and Chester A. Huber, Jr., the president of OnStar, is a member of our board of directors. Hughes Electronics was one of our largest shareholders until January 2004 and was a subsidiary of GM until December 2003. Jack Shaw, a member of our board of directors, was Chief Executive Officer of Hughes Electronics Corporation until December 2003. Thomas G. Elliott, a member of our board of directors, is Executive Vice President, Automobile Operations of American Honda Motor Company. DIRECTV, a subsidiary of Hughes Electronics, was a holder of our Series C preferred stock until January 2003.

We had the following amounts due from related parties at March 31, 2005 and December 31, 2004 (in thousands):

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We had the following amount as related party prepaid expense at March 31, 2005 and December 31, 2004 (in thousands):

We had the following amounts outstanding to related parties at March 31, 2005 and December 31, 2004 (in thousands):