UNITED STATES
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 June 30, 2005
Commission file number 0-24710

SIRIUS SATELLITE RADIO INC.
(Exact name of registrant as specified in its charter)

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

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

      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 S   No £

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

      Yes S   No £

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

SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

See Notes to Unaudited Consolidated Financial Statements.

1

SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

See Notes to Unaudited Consolidated Financial Statements.

2

SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
(Unaudited)

See Notes to Unaudited Consolidated Financial Statements.

3

SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See Notes to Unaudited Consolidated Financial Statements.

4

SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

1. Business

      We are a leading provider of satellite radio in the United States. We currently offer more than 120 channels-65 channels of commercial-free music and over 55 channels of sports, news, talk, entertainment, traffic and weather programming for a monthly subscription fee of $12.95. We offer discounts for pre-paid, long-term and multiple subscriptions.

      Since inception, we have used substantial resources to develop our satellite radio system. Our satellite radio system consists of our FCC license, satellites, national broadcast studio, terrestrial repeater network, satellite uplink facility and satellite telemetry, tracking and control facilities. On July  1, 2002, we launched our service nationwide.

      As of June 30, 2005, we had 1,814,626 subscribers as compared with 1,143,258 subscribers as of December 31, 2004 and 480,341 subscribers as of June 30, 2004. Our subscriber totals include subscribers under our regular pricing plans, as well as subscribers currently in promotional periods; subscribers that have prepaid, including payments received from automakers for prepaid bundled subscriptions included in the sale or lease price of a new vehicle; and active SIRIUS radios under our agreement with Hertz.

      Our primary source of revenue is subscription fees. We also derive revenues from activation fees, the sale of advertising on our non-music channels and the direct sale of SIRIUS radios and accessories.

2. Principles of Consolidation and Basis of Presentation

      The accompanying unaudited consolidated financial statements of Sirius Satellite Radio Inc. and its subsidiary have been prepared in accordance with U.S. generally accepted accounting principles and the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. All intercompany transactions have been eliminated in consolidation.

      In presenting the unaudited consolidated financial statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Actual results could differ from those estimates. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the consolidated financial statements as of June 30, 2005 and December 31, 2004, and for the three and six months ended June 30, 2005 and 2004, have been recorded. The results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the full year. Our unaudited consolidated financial statements should be read together with our consolidated financial statements and footnotes contained in our Annual Report on Form 10-K for the year ended December 31, 2004.

3. Summary of Significant Accounting Policies

      Stock-Based Compensation

      We have 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 measure of fair value most often employed under SFAS No. 123, “Accounting for Stock-Based Compensation,” and used by us, is the Black-Scholes option valuation model (“Black-Scholes”). Black-Scholes was developed for use in estimating the fair market value of traded options, which have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including the expected

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

stock price volatility. Because our stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair market value estimate, in our opinion, the existing option valuation models do not necessarily provide a reliable single measure of the fair value of our stock-based awards.

      The following table illustrates the effect on net loss and net loss per share had stock-based compensation for employees been recorded based on the fair value method under SFAS No. 123:

      The pro forma stock-based compensation to employees was estimated using Black-Scholes with the following assumptions for each period:

      Research and Development Costs

      Research and development costs are expensed as incurred. Research and development costs for the three months ended June 30, 2005 and 2004 were $8,371 and $5,678, respectively, and $15,828 and $10,041 for the six months ended June 30, 2005 and 2004, respectively, and are included in engineering, design and development expenses in our accompanying unaudited consolidated statements of operations.

      Net (Loss) Income Per Share

      We compute net (loss) income per share in accordance with SFAS No. 128, “Earnings Per Share.” Basic net (loss) income per share is calculated using the weighted average common shares outstanding during each reporting period. Diluted net (loss) income per share adjusts the weighted average common shares outstanding for the potential dilution that could occur if common stock equivalents (convertible debt, warrants, stock options and restricted stock units) were exercised or converted into common stock. Common stock equivalents of approximately 227,000,000 and 233,000,000 for the three and six months ended June 30, 2005, respectively, and 188,000,000 and 170,000,000 for the three and six months ended June 30, 2004, respectively, were not considered in the calculation of diluted net loss per share as the effect would have been anti-dilutive.

6

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

      Comprehensive (Loss) Income

      We report comprehensive (loss) income in accordance with SFAS No. 130, “Reporting Comprehensive Income.” SFAS No. 130 established a standard for reporting and displaying other comprehensive (loss) income and its components within financial statements. Unrealized gains and losses on available-for-sale securities are the only component of our other comprehensive (loss) income. Comprehensive loss for the three months ended June 30, 2005 and 2004 was $177,546 and $136,830, respectively, and $371,134 and $280,908 for the six months ended June 30, 2005 and 2004, respectively.

      Marketable Securities

      We account for marketable securities in accordance with the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Marketable securities consist of U.S. government notes, U.S. government agency obligations and certificates of deposit and are classified as available-for-sale securities. Available-for-sale securities are carried at fair market value and unrealized gains and losses are included as a component of stockholders' equity. We recognized a loss on the sale or maturity of marketable securities of $16 for the six months ended June 30, 2005 and a gain on the sale or maturity of marketable securities of $76 for the six months ended June 30, 2004, none of which were recognized during the three months ended June 30, 2005 and 2004. We received proceeds from sales of marketable securities of $4,835 and $25,000 for the six months ended June 30, 2005 and 2004, respectively. Marketable securities held at June 30, 2005 mature within one year from the date of purchase. There were no unrealized holding gains or losses on marketable securities for the six months ended June 30, 2005. We had unrealized holding losses on marketable securities of $24 as of December 31, 2004.

      Restricted Investments

      Restricted investments consist of fixed income securities, which are stated at amortized cost. As of June 30, 2005 and December 31, 2004, long-term restricted investments were $92,615. Short-term restricted investments were $4,706 as of December 31, 2004. Long-term restricted investments included the $85,000 escrow deposit in connection with our National Football League (“NFL”) agreement which is invested under our direction in certificates of deposit and will be drawn by the NFL to pay the rights fees due for the 2006-2007, 2007-2008 and 2008-2009 NFL seasons and certificates of deposit and United States government obligations pledged to secure our reimbursement obligations under letters of credit issued primarily for the benefit of the lessor of our headquarters. As of December 31, 2004, short-term restricted investments included monies deposited in escrow to secure our obligation to reimburse Ford for certain costs incurred in connection with the introduction of SIRIUS radios as a factory option, including costs associated with tooling, facilities, non-recurring engineering, marketing and equipment subsidies. The escrow for Ford was terminated in June 2005.

      Recently Issued Accounting Pronouncements

      In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R revises SFAS No. 123 and supersedes Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” In April 2005, the SEC announced SFAS No. 123R would be effective no later than the beginning of the first fiscal year beginning after June 15, 2005. We will adopt the provisions of SFAS No. 123R effective January 1, 2006. SFAS No. 123R requires all share-based payments to employees to be recognized in the financial statements based on fair value. We currently account for share-based payments to employees using APB No. 25's intrinsic value method. Under SFAS

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

No. 123R we will be required to follow a fair value approach, such as the Black-Scholes or lattice option valuation models, at the date of a stock-based award grant. SFAS No. 123R permits one of two methods of adoption: (1) modified prospective method or (2) modified retrospective method. We plan to adopt SFAS No. 123R using the modified prospective method. This method requires that we recognize compensation expense for all share-based payments granted on or after January 1, 2006 and for all awards granted to employees prior to January 1, 2006 that remain unvested on January 1, 2006. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, which expresses the views of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations. SAB No. 107 provides guidance related to the valuation of share-based payment arrangements for public companies, including assumptions such as guidance related to share-based payment transactions with non-employees, expected volatility, expected term and the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R. The adoption of SFAS No. 123R is expected to have a material impact on our equity granted to third parties and employees included in our consolidated statements of operations in future periods, although it will have no impact on our overall financial position.

Reclassifications

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

4. Subscriber Revenue

      Subscriber revenue consists of subscription fees, non-refundable activation fees and the effects of mail-in rebates. Revenues received from automakers for prepaid subscriptions included in the sale or lease price of a new vehicle are also included in subscriber revenue.

      Subscriber revenue consists of the following:

5. Supplemental Cash Flow Disclosures

      The following represents supplemental cash flow information:

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

6. Long-Term Debt

      Our long-term debt consists of the following:

      3¹⁄4% Convertible Notes due 2011

      In October 2004, we issued $230,000 in aggregate principal amount of our 3¹⁄4% Convertible Notes due 2011 resulting in net proceeds of $224,813. These notes are convertible, at the option of the holder, into shares of our common stock at any time at a conversion rate of 188.6792 shares of common stock for each $1,000.00 principal amount, or $5.30 per share of common stock, subject to certain adjustments. Our 3¹⁄4% Convertible Notes due 2011 mature on October 15, 2011 and interest is payable semi-annually on April 15 and October 15 of each year. The obligations under our 3¹⁄4% Convertible Notes due 2011 are not secured by any of our assets.

      2¹⁄2% Convertible Notes due 2009

      In February 2004, we issued $250,000 in aggregate principal amount of our 2¹⁄2% Convertible Notes due 2009 resulting in net proceeds of $244,625. In March 2004, we issued an additional $50,000 in aggregate principal amount of our 2¹⁄2% Convertible Notes due 2009 pursuant to an option granted in connection with the initial offering of the notes, resulting in net proceeds of $48,975. These notes are convertible, at the option of the holder, into shares of our common stock at any time at a conversion rate of 226.7574 shares of common stock for each $1,000.00 principal amount, or $4.41 per share of common stock, subject to certain adjustments. Our 2¹⁄2% Convertible Notes due 2009 mature on February 15, 2009 and interest is payable semi-annually on February 15 and August 15 of each year. The obligations under our 2¹⁄2% Convertible Notes due 2009 are not secured by any of our assets.

      3¹⁄2% Convertible Notes due 2008

      In May 2003, we issued $201,250 in aggregate principal amount of our 3¹⁄2% Convertible Notes due 2008 resulting in net proceeds of $194,224. These notes are convertible, at the option of the holder, into shares of our common stock at any time at a conversion rate of 724.6377 shares of common stock for each $1,000.00 principal amount, or $1.38 per share of common stock, subject to certain adjustments. Our 3¹⁄2% Convertible Notes due 2008 mature on June 1, 2008 and interest is payable semi-annually on June 1 and December 1 of each year. The obligations under our 3¹⁄2% Convertible Notes due 2008 are not secured by any of our assets.

      During the six months ended June 30, 2005, we issued 1,597,826 shares of our common stock in exchange for $2,177 in aggregate principal amount of our 3¹⁄2% Convertible Notes due 2008, including accrued interest. In January 2004, we issued 56,409,853 shares of our common stock in exchange for $69,000 in aggregate principal amount of our 3¹⁄2% Convertible Notes due 2008, including accrued interest. In connection with these transactions, we incurred debt conversion costs

9

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

of $19,592 for the six months ended June 30, 2004. No debt conversion costs were recognized for the three and six months ended June 30, 2005.

7. Stockholders' Equity

      Common Stock, par value $0.001 per share

      We are authorized to issue 2,500,000,000 shares of our common stock. As of June 30, 2005, approximately 505,057,000 shares of our common stock were reserved for issuance in connection with outstanding convertible debt, warrants and incentive stock plans.

      During the six months ended June 30, 2005, employees exercised 4,429,766 stock options at exercise prices ranging from $0.67 to $5.08 per share, resulting in proceeds to us of $6,289. Of this amount, $6,104 was collected as of June 30, 2005.

      In October 2004, we sold 25,000,000 shares of our common stock resulting in net proceeds of $96,025.

      In January 2004, we signed a seven-year agreement with the NFL. We delivered to the NFL 15,173,070 shares of our common stock valued at $40,967 upon execution of this agreement. These shares of common stock are subject to certain transfer restrictions which lapse over time. We recognized $1,860 and $293 of expense associated with these shares during the six months ended June 30, 2005 and 2004, respectively. Of the remaining $34,822 in common stock value, $5,852 and $28,970 are included in other current assets and other long-term assets, respectively, on our accompanying unaudited consolidated balance sheet as of June 30, 2005.

      Warrants

      In June 2004, we issued DaimlerChrysler AG warrants to purchase up to 21,500,000 shares of our common stock at an exercise price of $1.04 per share. These warrants vest based on the achievement of various performance milestones, including the volume thresholds contained in our agreement with DaimlerChrysler. These warrants replaced warrants issued to DaimlerChrysler AG in October 2002.

      In February 2004, we announced an agreement with RadioShack Corporation to distribute, market and sell SIRIUS radios. In connection with this agreement, we issued RadioShack warrants to purchase up to 10,000,000 shares of our common stock. These warrants have an exercise price of $5.00 per share and vest and become exercisable if RadioShack achieves activation targets during the five-year term of the agreement.

      In January 2004, we signed an agreement with Penske Automotive Group, Inc., United Auto Group, Inc., Penske Truck Leasing Co. L.P. and Penske Corporation (collectively, the “Penske companies”). In connection with this agreement, we agreed to issue the Penske companies warrants to purchase up to 38,000,000 shares of our common stock at an exercise price of $2.392 per share. Two million of these warrants vested upon issuance. The balance of these warrants vest over time and upon achievement of certain milestones by the Penske companies. In January 2005, Penske exercised 2,400,000 vested warrants in a series of cashless exercises. In connection with these transactions, we issued 1,655,070 shares of our common stock.

      In January 2004, we issued the NFL warrants to purchase 50,000,000 shares of our common stock at an exercise price of $2.50 per share. Of these warrants, 16,666,665 vest upon the delivery to us of media assets by the NFL and its member clubs, and 33,333,335 of these warrants will be earned by the NFL or its member clubs as we acquire subscribers which are directly trackable through their efforts.

10

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

      In March 2003, we also issued warrants to purchase 45,416,690 shares of our common stock in exchange for all of our outstanding 9.2% Series A Junior Cumulative Convertible Preferred Stock and 9.2% Series B Junior Cumulative Convertible Preferred Stock held by affiliates of Apollo Management, L.P. (“Apollo”). Warrants to purchase 27,250,013 shares of our common stock had an exercise price of $1.04 per share, and warrants to purchase 18,166,677 shares of our common stock had an exercise price of $0.92 per share. Apollo exercised all of its warrants prior to their expiration on March 7, 2005 in a series of cashless exercises. In connection with these transactions, we issued 39,538,505 shares of our common stock.

      Warrants to acquire shares of our common stock were outstanding as follows (shares in thousands):

      We recognized expense of $24,528 and $6,107 in connection with warrants for the three months ended June 30, 2005 and 2004, respectively, and $46,024 and $15,378 for the six months ended June 30, 2005 and 2004, respectively.

8. Benefit Plans

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

      Vesting and other terms of stock-based awards are set forth in the agreements with the individuals receiving the awards. Stock-based awards granted under the 2003 Plan are generally subject to a vesting requirement that includes one or all of the following: (1) over time, generally three to five years from the date of grant; (2) on a specific date in future periods, with acceleration to earlier periods if performance criteria are satisfied; or (3) as certain performance targets set at the time of grant are achieved. Stock-based awards generally expire ten years from the date of grant. Each restricted stock unit entitles the holder to receive one share of our common stock upon vesting.

      As of June 30, 2005, approximately 114,332,000 stock options, shares of restricted stock and restricted stock units were outstanding. Approximately 96,793,000 shares of our common stock were available for grant under the 2003 Plan as of June 30, 2005.

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

      Stock Options

      During the six months ended June 30, 2005, we granted 1,107,467 non-qualified stock options at fair market value on the date of grant with an average exercise price of $5.42 per share.

      We recorded additional deferred compensation of $207 during the six months ended June 30, 2005 in connection with stock options granted. As of June 30, 2005 and December 31, 2004, we had $4,179 and $7,363, respectively, of deferred compensation in connection with stock options granted to employees below fair market value at the date of grant and stock options granted to members of our board of directors. Such deferred compensation is being amortized to expense over the vesting period. We also record expense for stock options granted to consultants based on fair value at the date of grant as determined in accordance with SFAS No. 123. We recognized stock compensation expense associated with stock options of $4,578 and $2,810 for the three months ended June 30, 2005 and 2004, respectively, and $8,708 and $7,314 for the six months ended June 30, 2005 and 2004, respectively. Stock compensation expense associated with stock options for the three and six months ended June 30, 2005 includes a charge of $479 for an employee that was deemed to benefit from the modification of a stock-based award resulting in a new measurement date. Expense associated with stock options is recorded as a component of equity granted to third parties and employees in our accompanying unaudited consolidated statements of operations.

      Restricted Stock Units and Restricted Stock

      During the six months ended June 30, 2005, we granted 1,060,586 restricted stock units, with a grant date fair value of $6.00 per share.

      In November 2004, we granted 3,000,000 shares of restricted common stock. The restrictions applicable to these shares lapse in equal installments on November 18 of each of the next five years beginning on November 18, 2005.

      We recorded additional deferred compensation of $12,119 during the six months ended June 30, 2005 in connection with restricted stock units granted. As of June 30, 2005 and December 31, 2004, we had $34,060 and $43,600, respectively, of deferred compensation associated with restricted stock and restricted stock units. Such deferred compensation is being amortized to expense over the vesting period and is recorded as a component of equity granted to third parties and employees in our accompanying unaudited consolidated statements of operations. We recognized stock compensation expense associated with these restricted stock units and shares of restricted stock of $9,795 and $3,180 for the three months ended June 30, 2005 and 2004, respectively, and $19,096 and $6,559 for the six months ended June 30, 2005 and 2004, respectively. For the three and six months ended June 30, 2005, we also recognized stock compensation expense of $773 and $1,611, respectively, for restricted stock units expected to be granted in February 2006 for services performed in 2005.

      401(k) Savings Plan

      We sponsor the Sirius Satellite Radio 401(k) Savings Plan (the “Plan”) for eligible employees. The Plan allows eligible employees to voluntarily contribute from 1% to 50% of their pre-tax salary subject to certain defined limits. Currently we match 50% of employee voluntary contributions, up to 6% of an employee's pre-tax salary, in the form of shares of our common stock. Our matching contribution vests at a rate of 33¹⁄3% for each year of employment and is fully vested after three years of employment. Expense resulting from our matching contribution to the Plan was $249 and $182 for the three months ended June 30, 2005 and 2004, respectively, and $548 and $364 for the six months ended June 30, 2005 and 2004, respectively.

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

      We may also elect to contribute to the profit sharing portion of the Plan based upon the total compensation of all participants eligible to receive an allocation. These additional contributions, referred to as profit-sharing contributions, are determined by the compensation committee of our board of directors. Employees are only eligible to share in profit-sharing contributions during any year in which they are employed on the last day of the year. Profit-sharing contribution expense was $1,088 and $2,089 for the three and six months ended June 30, 2005, respectively.

9. Income Taxes

      We recorded income tax expense of $560 for each of the three months ended June 30, 2005 and 2004 and $1,120 and $3,081 for the six months ended June 30, 2005 and 2004, respectively. Such expense represents the recognition of a deferred tax liability related to the difference in accounting for our FCC license, which is amortized over 15 years for tax purposes but not amortized for book purposes.

10. Commitments and Contingencies

      We have entered into various contracts, which have resulted in significant cash obligations in future periods. The following table summarizes our expected contractual cash commitments as of June 30, 2005:

      Lease Obligations

      We have entered into operating leases related to our national broadcast studio, office space, terrestrial repeaters and equipment.

      Satellite and Transmission

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

      Programming and Content

      We have entered into agreements with licensors of programming and other content providers and, in certain instances, are obligated to pay license fees and guarantee minimum advertising revenue share. In addition, we have agreements with various rights organizations pursuant to which we pay royalties for public performances of music.

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

      Customer Service and Billing

      We have entered into agreements with third parties to provide customer service, billing and subscriber management services.

      Marketing and Distribution

      We have entered into various marketing, sponsorship and distribution agreements to promote our brand and are obligated to make payments to sponsors, retailers, automakers and radio manufacturers under these agreements. In addition, certain programming and content agreements require us to purchase advertising on properties owned or controlled by the licensors. We have also agreed to reimburse automakers for certain engineering and development costs associated with the incorporation of SIRIUS radios into vehicles they manufacture.

      Chip Set Development and Production

      We have entered into agreements with third parties to develop, produce and supply chip sets, and in certain instances to license intellectual property related to such chip sets. Certain of these agreements require that we also purchase a minimum quantity of chip sets.

      Joint Development Agreement

      Under the terms of a joint development agreement with XM Radio, the other holder of a FCC satellite radio license, each party is obligated to fund one half of the development cost for a unified standard for satellite radios. The costs related to the joint development agreement are being expensed as incurred to engineering, design and development expense in our accompanying unaudited consolidated statements of operations. We are currently unable to determine the expenditures necessary to complete this process, but they may be significant.

      Other Commitments

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

      We are required under the terms of certain agreements to provide letters of credit and deposit monies in escrow, which place restrictions on our cash and cash equivalents. As of June 30, 2005 and December 31, 2004, $92,615 and $97,321, respectively, were classified as restricted investments as a result of our reimbursement obligations under these letters of credit and escrow arrangements.

      As of June 30, 2005, we have not entered into any off-balance sheet arrangements or transactions.

11. Subsequent Event

      In August 2005, we agreed to sell $500,000 in aggregate principal amount of our 9⁵⁄8% Senior Notes due 2013 in a private transaction exempt from registration under the Securities Act of 1933 pursuant to Rule 144A.

14

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
             (All dollar amounts are in thousands, unless otherwise stated)

Special Note Regarding Forward-Looking Statements

      The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in forward-looking statements made in this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time. Any statements about our beliefs, plans, objectives, expectations, assumptions, future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “intends,” “plans,” “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, 2004 (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 Part I 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:

      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 currently broadcast more than 120 channels of programming to listeners across the country. We offer 65 channels of 100% commercial-free music and feature over 55 channels of sports, news, talk, entertainment, traffic and weather for a monthly subscription fee of $12.95. We offer discounts for pre-paid, long-term and multiple subscriptions.

      Since inception, we have used substantial resources to develop our satellite radio system. Our satellite radio system consists of our FCC license, satellites, national broadcast studio, terrestrial repeater network, satellite uplink facility and satellite telemetry, tracking and control facilities. On July 1, 2002, we launched our service nationwide.

      Our primary source of revenue is subscription fees. We also derive revenue from activation fees, the sale of advertising on our non-music channels and from the direct sale of SIRIUS radios and accessories. Currently we receive an average of approximately nine months of prepaid revenue per subscriber upon activation.

      Our cost of services includes expenses for satellite and transmission, programming and content, customer service and billing, and costs associated with the sale of equipment. Satellite and

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transmission expenses currently consist of costs associated with the operation and maintenance of our satellite telemetry, tracking and control system, terrestrial repeater network, satellite uplink facility and national broadcast studio. Programming and content expenses include costs to acquire, create and produce content, on-air talent costs and broadcast royalties. Customer service and billing expenses include costs associated with the operation of our customer service centers and subscriber management system.

      As of June 30, 2005, we had 1,814,626 subscribers compared with 1,143,258 subscribers as of December 31, 2004 and 480,341 subscribers as of June 30, 2004. Our subscriber totals include subscribers under our regular pricing plans, as well as subscribers currently in promotional periods; subscribers that have prepaid, including payments received from automakers for prepaid subscriptions included in the sale or lease price of a new vehicle; and active SIRIUS radios under our agreement with Hertz.

      The following tables contain a breakdown of our subscribers and other metrics which we use to measure our operating performance:

Subscribers:

Metrics:

(footnotes continued on next page)

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(footnotes continued from previous page)

      Costs associated with acquiring subscribers are generally incurred and expensed in advance of acquiring a subscriber and are recognized as subscriber acquisition costs. We acquire a large percentage of our annual gross subscriber additions in the fourth quarter of our fiscal year in connection with holiday sales. As a result, our subscriber acquisition costs per gross subscriber addition are generally higher in the first three quarters of our fiscal year with a decline in the fourth quarter as we experience higher activation rates.

      SIRIUS radios are primarily distributed through retailers and automakers. SIRIUS radios are available for sale at national and regional retailers, including Best Buy, Circuit City, RadioShack, Wal-Mart, Crutchfield, Office Depot, Sears, Target, Ultimate Electronics, Tweeter Home Entertainment Group, Good Guys, Kmart and DISH Network outlets. On June 30, 2005, SIRIUS radios were available at over 25,000 retail locations. SIRIUS radios are also offered to renters of Hertz vehicles at many airport locations nationwide. In addition, we have agreements with Ford Motor Company (“Ford”), DaimlerChrysler Corporation (“DaimlerChrysler”), Mitsubishi Motors North America, BMW of North America, LLC, Nissan North America, Inc., Volkswagen of America, Inc. and Porsche Cars North America, Inc. that contemplate the manufacture and sale of vehicles that include SIRIUS radios. We believe our ability to attract and retain subscribers depends in large part on creating and sustaining distribution channels for SIRIUS radios and on the quality and entertainment value of our programming. We expect to concentrate our future efforts on: enhancing and refining our programming, whether through additional agreements with third parties or our own creative efforts; introducing SIRIUS radios with new features and functions; and expanding the distribution of SIRIUS radios through arrangements with automakers and through additional retail points-of-sale.

      We have principally funded our operations through the sale of debt and equity securities. In 2004, we raised additional net proceeds of $614,438 through the offering of 25,000,000 shares of our common stock, $230,000 in aggregate principal amount of our 3¹⁄4% Convertible Notes due 2011 and $300,000 in aggregate principal amount of our 2¹⁄2% Convertible Notes due 2009. Such offerings have better positioned us to continue to meet our business plan. In August 2005, we agreed to sell $500,000 in aggregate principal amount of our 9⁵⁄8% Senior Notes due 2013 in a private transaction exempt from registration under the Securities Act of 1933 pursuant to Rule 144A.

      We have incurred operating losses since inception and expect to continue to incur operating losses until the number of our subscribers increases substantially and we develop cash flows sufficient to cover our operating costs. We also have significant commitments over the next several years, including subsidies and distribution costs, programming costs, repayment of long-term debt and lease payments, as further described under the heading “Contractual Cash Commitments.” Our ability to become profitable also depends upon other factors identified under the heading “Liquidity and Capital Resources.”

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Results of Operations

Three Months Ended June 30, 2005 Compared with the Three Months Ended June 30, 2004

      Total Revenue

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

      As of June 30, 2005, we had 1,814,626 subscribers compared with 1,143,258 subscribers at December 31, 2004 and 480,341 subscribers as of June 30, 2004. Our subscriber totals include subscribers under our regular pricing plans, as well as subscribers currently in promotional periods; subscribers that have prepaid, including payments received from automakers for subscriptions included in the sale or lease price of a new vehicle; and active SIRIUS radios under our agreement with Hertz.

      Subscriber revenue increased $36,672 to $49,622 for the three months ended June 30, 2005 from $12,950 for the three months ended June 30, 2004. The increase in total subscriber revenue was attributable to the growth of subscribers to our service. We added 365,931 net new subscribers during the three months ended June 30, 2005 compared with 128,678 net new subscribers during the three months ended June 30, 2004.

      The following table contains a breakdown of our subscriber revenue:

      Future subscriber revenue will be dependent upon, among other things, the growth of our subscriber base, promotions and mail-in rebates offered to subscribers and the identification of additional revenue streams from subscribers.

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

      Advertising revenue increased $922 to $1,052 for the three months ended June 30, 2005 from $130 for the three months ended June 30, 2004. The increase was a direct result of an increase in rates and the number of spots sold. Advertising revenue is dependent on the availability of advertising inventory to sell.

      We expect advertising revenue to grow as our subscriber base increases and we continue to improve brand awareness and content.

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      ARPU. Average monthly revenue per subscriber, or ARPU, is derived from total earned subscriber revenue and net advertising revenue divided by the daily weighted average number of subscribers for the period. Set forth below is a table showing the calculation of ARPU:

      The decrease in ARPU to $10.50 for the three months ended June 30, 2005 from $10.65 for the three months ended June 30, 2004 is primarily attributable to the effects of subscription plan mix and the timing of the commencement of revenue recognition for prepaid subscriptions, offset by the effects of overall improvement in our Hertz program and increased advertising revenue.

      Future ARPU will be dependent upon the amount and timing of promotions, mail-in rebates offered to subscribers, the identification of additional revenue streams from subscribers and the sale of advertising on our non-music channels.

      Equipment Revenue. Equipment revenue includes revenue from the direct sale of SIRIUS radios and accessories.

      Equipment revenue increased $1,363 to $1,503 for the three months ended June 30, 2005 from $140 for the three months ended June 30, 2004. The increase was the result of increased sales through our direct to consumer distribution channel.

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

      Operating Expenses

      Satellite and Transmission. Satellite and transmission expenses consist of in-orbit satellite insurance and costs associated with the operation and maintenance of our satellite telemetry, tracking and control system, terrestrial repeater network, satellite uplink facility and national broadcast studio.

      Satellite and transmission expenses decreased $1,515 to $6,668 for the three months ended June 30, 2005 from $8,183 for the three months ended June 30, 2004. The decrease was primarily attributable to a $2,211 reduction in satellite insurance costs. Effective August 2004, we discontinued our in-orbit satellite insurance. This decision was made after a review of the health of our satellite constellation; the exclusions from coverage contained in the available insurance; the costs of the available insurance; the practices of other satellite companies as to in-orbit insurance; and the likelihood that a catastrophic failure of one or more of our satellites may not be covered by the available insurance or would fall within a policy exclusion. Such decrease was offset primarily by increased costs associated with the use of security software to prevent the theft of our service and additions to our personnel. As of June 30, 2005, we had 140 terrestrial repeaters in operation as compared with 134 terrestrial repeaters as of June 30, 2004.

      Future increases in satellite and transmission expenses will be primarily attributable to the addition of new terrestrial repeaters and maintenance costs of existing terrestrial repeaters. In addition, such expenses may also increase in future periods if we decide to reinstate our in-orbit satellite insurance or launch new satellites.

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

      Programming and content expenses increased $5,742 to $16,147 for the three months ended June 30, 2005 from $10,405 for the three months ended June 30, 2004. The increase was primarily attributable to an increase in personnel-related costs and license fees associated with sports related programming initiatives, such as the NBA and college sports. We also incurred additional on-air talent costs due to the expansion of our programming line-up and variable broadcast royalties as a result of the increase in our subscriber base.

      We anticipate that our programming and content expenses will increase significantly as we continue to develop and enhance our channels. Our agreement with Martha Stewart beginning in the third quarter of 2005, and our agreements with Howard Stern and NASCAR beginning in 2006 and 2007, respectively, will significantly increase our programming and content expenses. We regularly evaluate new programming opportunities and may choose to acquire and develop new content or renew current programming agreements in the future at substantial cost.

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

      Customer service and billing expenses increased $3,209 to $7,738 for the three months ended June 30, 2005 from $4,529 for the three months ended June 30, 2004. The increase was primarily due to increased customer service representative costs and credit card fees necessary to support the growth of our subscriber base and telecommunications charges as a result of the expansion and growth of our call centers to accommodate the increase in our subscriber base. Customer service and billing expenses increased 71% compared with an increase in our end of period subscribers of 278% as of June 30, 2005 as compared with June 30, 2004. Customer service and billing expenses per average subscriber per month for the three months ended June 30, 2005 was $1.60 compared with $3.69 for the three months ended June 30, 2004.

      We expect our customer care and billing expenses to increase and our costs per subscriber to decrease as our subscribers grow.

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

      Cost of equipment increased $1,547 to $1,952 for the three months ended June 30, 2005 from $405 for the three months ended June 30, 2004. The increase in cost of equipment was attributable to increased sales from our direct to consumer distribution channel, offset by reductions in the per unit costs of SIRIUS radios and accessories.

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

      Sales and Marketing. Sales and marketing expenses include advertising media and production costs and distribution costs. Advertising media and production costs primarily include promotional events, sponsorships, media, advertising production and market research. Distribution costs primarily include the costs of residuals, market development funds, revenue share and in-store merchandising. Residuals are monthly fees paid based upon the number of subscribers using a SIRIUS radio purchased from a retailer. Market development funds are fixed and variable payments to reimburse retailers and radio manufacturers for the cost of advertising and other product awareness activities.

      Sales and marketing expenses decreased $1,204 to $33,862 for the three months ended June 30, 2005 from $35,066 for the three months ended June 30, 2004. Advertising media and production costs decreased primarily due to additional costs incurred in 2004 for our NFL marketing campaign. Distribution costs decreased primarily as a result of costs associated with the

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commencement of our sales efforts with RadioShack in June 2004, offset by increased retail residuals and OEM revenue share as a result of an increase in subscribers of 278% from 480,341 as of June 30, 2004 to 1,814,626 as of June 30, 2005. The overall decreases in advertising media and production costs and distribution costs were offset by additional personnel-related costs to support our growth.

      We expect sales and marketing expenses to increase in the future as we continue to build brand awareness through national advertising and promotional activities and expand the distribution of SIRIUS radios. Beginning in 2007, our agreement with NASCAR will increase our sponsorship costs included in sales and marketing expense.

      Subscriber Acquisition Costs. Subscriber acquisition costs include hardware subsidies paid to radio manufacturers and automakers, including subsidies paid to automakers who have agreed to include a SIRIUS radio and a prepaid subscription to our service in the sale or lease price of a new vehicle; subsidies paid to chip set manufacturers; and commissions paid to retailers and automakers as incentives to purchase, install and activate SIRIUS radios. The majority of subscriber acquisition costs are incurred and expensed in advance of acquiring a subscriber. Subscriber acquisition costs do not include advertising, loyalty payments to distributors and dealers of SIRIUS radios and revenue share payments to automakers and manufacturers of SIRIUS radios. Subscriber acquisition costs also do not include amounts capitalized in connection with our agreement with Hertz, as we retain ownership of the SIRIUS radios used by Hertz.

      Subscriber acquisition costs increased $33,982 to $68,693 for the three months ended June 30, 2005 from $34,711 for the three months ended June 30, 2004, an increase of 98%. Over the same period, gross subscriber additions increased 190% from 149,164 for the three months ended June 30, 2004 to 432,687 for the three months ended June 30, 2005. The increase in subscriber acquisition costs was attributable to subsidies for higher shipments of SIRIUS radios and chip sets to accommodate the growth of our subscriber base and commissions resulting from the increase in gross subscriber additions.

      Subscriber acquisition costs per gross subscriber addition were $160 and $234 for the three months ended June 30, 2005 and 2004, respectively. The decline was primarily attributable to the reduction in hardware subsidy rates as we continue to reduce manufacturing and chip set costs.

      We expect total subscriber acquisition costs to increase in the future as our gross subscriber additions increase and we continue to offer subsidies, commissions and other incentives to acquire subscribers. However, we anticipate that the costs of certain subsidized components of SIRIUS radios will decrease in the future as manufacturers experience economies of scale in production and we secure additional manufacturers of these components. We expect subscriber acquisition costs per gross subscriber to remain relatively consistent in the third quarter of 2005 with the second quarter of 2005 and to decline in the fourth quarter of 2005, reflecting the effects of reductions in hardware subsidy rates for future generation product and the impact of inventory sell-through for holiday sales. If competitive forces require us to increase hardware subsidies or promotions, subscriber acquisition costs per gross subscriber addition could increase.

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

      General and administrative expenses increased $2,788 to $14,120 for the three months ended June 30, 2005 from $11,332 for the three months ended June 30, 2004. The increase was primarily a result of additional personnel-related costs and rent and occupancy costs to support the growth of our business.

      We expect our general and administrative expenses to increase in future periods for increased personnel-related, services and facility costs to support our growth.

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

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      Engineering, design and development expenses increased $5,869 to $11,786 for the three months ended June 30, 2005 from $5,917 for the three months ended June 30, 2004. The increase was primarily attributable to additional personnel-related costs to support research and development efforts, costs associated with tooling and manufacturing upgrades at DaimlerChrysler and Ford to support factory installations of SIRIUS radios, and product development costs for our next generation of products.

      We expect our engineering, design and development expenses to increase in future periods as automakers continue their efforts to incorporate SIRIUS radios across a broad range of their vehicles and as we develop future generations of chip sets and new products and services.

      Equity Granted to Third Parties and Employees. Equity granted to third parties and employees expense includes the costs associated with warrants, stock options, restricted stock, restricted stock units and other stock-based awards granted to third parties pursuant to programming, sales and marketing and distribution agreements; employees; members of our board of directors; consultants; and employee benefit plans.

      Equity granted to third parties and employees expense for warrants increased $18,421 to $24,528 for the three months ended June 30, 2005 from $6,107 for the three months ended June 30, 2004. This increase is primarily attributable to expense accrued based on certain distribution partners' performance toward achieving eligible vehicle, subscriber activation and delivery milestones. Expense associated with warrants that have not yet vested may change in future periods as a result of price changes in our common stock.

      Equity granted to third parties and employees expense for stock options, restricted stock, restricted stock units and other stock-based awards increased $10,311 to $16,483 for the three months ended June 30, 2005 from $6,172 for the three months ended June 30, 2004. The increase was primarily attributable to expense associated with restricted stock units which accelerate to earlier periods as performance targets for fiscal periods are met, grants of stock-based awards and modifications of existing stock-based awards. The remaining increase was primarily related to expense accrued for 2005 profit sharing and for restricted stock units granted or that we expect to grant for services performed in 2004 and 2005, respectively.

      Future expense associated with equity granted to third parties and employees is contingent upon a number of factors, including the price of our common stock, valuation assumptions, vesting provisions and the timing as to when certain performance criteria are met, and could materially change. Beginning January 1, 2006, we are required to adopt Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-Based Payment.” We plan to adopt SFAS No. 123R using the modified prospective method. This method requires that we recognize compensation expense for all share-based payments granted on or after January 1, 2006 and for all awards granted to employees prior to January 1, 2006 that remain unvested on January 1, 2006. The adoption of SFAS No. 123R is expected to have a material impact on our equity granted to third parties and employees expense included on our consolidated statements of operations, although such impact cannot be quantified at this time because it will depend on share-based payments granted in the future.

      Other Income (Expense)

      Interest and Investment Income. Interest and investment income includes interest on our cash and cash equivalents, marketable securities, and restricted investments and net gains on the sale of marketable securities.

      Interest and investment income increased $2,844 to $4,790 for the three months ended June 30, 2005 from $1,946 for the three months ended June 30, 2004. The increase was primarily attributable to the increase in our average cash and cash equivalents balance resulting from funds raised through offerings of debt securities and an increase in the average interest rate.

      Interest Expense. Interest expense includes interest on outstanding debt and debt conversion costs. Debt conversion costs represent the loss associated with debt exchanged and are calculated as the difference between the fair market value of additional shares issued in excess of the fair

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market value of the amount of shares that would have been issued under original conversion ratios.

      Interest expense increased $1,932 to $7,201 for the three months ended June 30, 2005 from $5,269 for the three months ended June 30, 2004. The increase was primarily due to the issuance of our 3¹⁄4% Convertible Notes due 2011 in October 2004.

      Income Tax Expense

      Income Tax Expense. We recorded income tax expense of $560 for the three months ended June 30, 2005 and 2004. This expense represents the recognition of a deferred tax liability related to the difference in accounting for our FCC license, which is amortized over 15 years for tax purposes but not amortized for book purposes under U.S. generally accepted accounting principles.

Results of Operations

Six Months Ended June 30, 2005 Compared with the Six Months Ended June 30, 2004

      Total Revenue

      Subscriber Revenue. Subscriber revenue increased $69,374 to $91,526 for the six months ended June 30, 2005 from $22,152 for the six months ended June 30, 2004. The increase in total subscriber revenue was attributable to the growth of subscribers to our service. We added 671,368 net new subscribers during the six months ended June 30, 2005 compared with 219,280 net new subscribers during the six months ended June 30, 2004.

      The following table contains a breakdown of our subscriber revenue: