(All dollar amounts referenced in this Item 2 are in thousands, unless otherwise stated)

Special Note Regarding Forward-Looking Statements

The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in forward-looking statements made in this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time. Any statements about our beliefs, plans, objectives, expectations, assumptions, future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "intend," "plan," "projection" and "outlook." Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time, particularly the risk factors described under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012 and "Management's Discussion and Analysis of Financial Condition and Results or Operations" herein and in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012.

Among the significant factors that could cause our actual results to differ materially from those expressed in the forward-looking statements are:

? we face substantial competition and that competition is likely to increase over time;

? our business depends in large part upon automakers;

? general economic conditions can affect our business;

? failure of our satellites would significantly damage our business;

? our ability to attract and retain subscribers at a profitable level in the future is uncertain;

? royalties for music rights have increased and may continue to do so in the future;

? our business could be adversely affected if we fail to attract and retain qualified executive officers;

? the unfavorable outcome of pending or future litigation could have a material adverse effect;

? rapid technological and industry changes could adversely impact our services;

? failure of third parties to perform could adversely affect our business;

? changes in consumer protection laws and their enforcement could damage our business;

? failure to comply with FCC requirements could damage our business;

? other existing or future government laws and regulations could harm our business;

? interruption or failure of our information technology and communication systems could negatively impact our results and brand;

? if we fail to protect the security of personal information about our customers, we could be subject to costly government enforcement actions or private litigation and our reputation could suffer;

? we may from time to time modify our business plan, and these changes could adversely affect us and our financial condition;

? our indebtedness could adversely affect our operations and could limit our ability to react to changes in the economy or our industry;

? our broadcast studios, terrestrial repeater networks, satellite uplink facilities or other ground facilities could be damaged by natural catastrophes or terrorist activities;

? our principal stockholder has significant influence over our management and over actions requiring stockholder approval and its interests may differ from the interests of other holders of common stock;

? we are a "controlled company" within the meaning of the NASDAQ listing rules and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements; and

? our business may be impaired by third-party intellectual property rights.

Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any of these forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise or to assess with any precision the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Executive Summary

We broadcast our music, sports, entertainment, comedy, talk, news, traffic and weather channels, as well as infotainment services in the United States on a subscription fee basis through our two proprietary satellite radio systems. Subscribers can also receive our music and other channels, plus new features such as SiriusXM On Demand and MySXM, over the Internet, including through applications for mobile devices.

We have agreements with every major automaker ("OEMs") to offer satellite radios as factory or dealer-installed equipment in their vehicles from which we acquire a majority of our subscribers. We also acquire subscribers through marketing campaigns to owners of factory-installed satellite radios that are not currently subscribing to our services. Additionally, we distribute our satellite radios through retail locations nationwide and through our website. Satellite radio services are also offered to customers of certain daily rental car companies.

As of June 30, 2013, we had 25,068,988 subscribers of which 20,297,736 were self-pay subscribers and 4,771,252 were paid promotional subscribers. Our subscriber totals include subscribers under our regular pricing plans; discounted pricing plans; subscribers that have prepaid, including payments either made or due from automakers for subscriptions included in the sale or lease price of a vehicle; certain radios activated for daily rental fleet programs; subscribers to our Internet services who do not also have satellite radio subscriptions; and certain subscribers to our weather, traffic, data and Backseat TV services.

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

In certain cases, automakers and dealers include a subscription to our radio services in the sale or lease price of new vehicles or previously owned vehicles. The length of these trial subscriptions varies but is typically three to twelve months. We receive subscription payments for these trials from certain automakers. We also reimburse various automakers for certain costs associated with satellite radios installed in their vehicles.

Liberty Media Corporation beneficially owned as of June 30, 2013, directly and indirectly, over 50% of the outstanding shares of our common stock. Liberty Media owns interests in a broad range of media, communications and entertainment businesses, including its subsidiaries, Atlanta National League Baseball Club, Inc. and TruePosition, Inc., its

interests in Charter Communications, Live Nation Entertainment, Barnes & Noble, and minority equity investments in Time Warner Inc. and Viacom.

We also have an equity interest in Sirius XM Canada which offers satellite radio services in Canada. Subscribers to the Sirius XM Canada service are not included in our subscriber count.

We have been discussing with our board of directors the desirability of undertaking a corporate reorganization that would create a new holding company structure pursuant to which: Sirius XM Radio Inc., its business operations and its subsidiaries, would operate as a wholly owned subsidiary of the new holding company. However, no action has yet been taken by our board of directors to approve any reorganization. As a consequence, the timing of any such reorganization, if it were to occur, is uncertain. The business operations of our company - Sirius XM Radio Inc. - and its subsidiaries would not change as a result of the reorganization. As part of such a reorganization, we would form a new parent company, called Sirius XM Holdings Inc. Outstanding shares of our common stock would be automatically converted, on a share for share basis, into identical shares of common stock of Sirius XM Holdings Inc. The certificate of incorporation, the bylaws, the executive officers and the board of directors of the new holding company would be the same as those of our company in effect immediately prior to the reorganization. The common stock of the new holding company would continue to be listed on the NASDAQ Global Select Market.

 Results of Operations 
 

 
Set forth below are our results of operations for the three and six months ended 
 
June 30, 2013 compared with the three and six months ended June 30, 2012. 
 
Unaudited                                          2013 vs 2012 Change          2013 vs 2012 Change 
 
For the Three Months Ended June 30,        For the Six Months Ended June 30,              Three Months                  Six Months 
 
2013                2012               2013                   2012              Amount           %           Amount           % 
 
Revenue: 
 
Subscriber revenue $       814,718       $    730,285     $      1,598,060       $      1,430,526     $     84,433         12  %   $    167,534         12  % 
 
Advertising 
 
revenue                     21,757             20,786               41,968                 39,456              971          5  %          2,512          6  % 
 
Equipment revenue           18,443             16,417               36,599                 33,370            2,026         12  %          3,229         10  % 
 
Other revenue               85,192             70,055              160,881                138,912           15,137         22  %         21,969         16  % 
 
Total revenue              940,110            837,543            1,837,508              1,642,264          102,567         12  %        195,244         12  % 
 
Operating 
 
expenses: 
 
Cost of services: 
 
Revenue share and 
 
royalties                  155,859            135,426              304,390                267,537           20,433         15  %         36,853         14  % 
 
Programming and 
 
content                     70,381             65,169              144,991                135,265            5,212          8  %          9,726          7  % 
 
Customer service 
 
and billing                 80,290             68,679              160,684                134,866           11,611         17  %         25,818         19  % 
 
Satellite and 
 
transmission                19,493             17,551               39,188                 35,661            1,942         11  %          3,527         10  % 
 
Cost of equipment            5,442              7,150               12,469                 12,956           (1,708 )      (24 )%           (487 )       (4 )% 
 
Subscriber 
 
acquisition costs          129,992            119,475              246,103                235,596           10,517          9  %         10,507          4  % 
 
Sales and 
 
marketing                   68,058             57,422              133,956                115,781           10,636         19  %         18,175         16  % 
 
Engineering, 
 
design and 
 
development                 15,052              6,272               29,894                 18,962            8,780        140  %         10,932         58  % 
 
General and 
 
administrative              60,392             65,664              116,732                125,550           (5,272 )       (8 )%         (8,818 )       (7 )% 
 
Depreciation and 
 
amortization                67,415             66,793              134,433                132,910              622          1  %          1,523          1  % 
 
Total operating 
 
expenses                   672,374            609,601            1,322,840              1,215,084           62,773         10  %        107,756          9  % 
 
Income from 
 
operations                 267,736            227,942              514,668                427,180           39,794         17  %         87,488         20  % 
 
Other income 
 
(expense): 
 
Interest expense, 
 
net of amounts 
 
capitalized                (49,728 )          (72,770 )            (95,902 )             (149,742 )         23,042         32  %         53,840         36  % 
 
Loss on 
 
extinguishment of 
 
debt and credit 
 
facilities, net            (16,377 )          (15,650 )            (16,377 )              (25,621 )           (727 )       (5 )%          9,244         36  % 
 
Interest and 
 
investment income 
 
(loss)                         294             (1,728 )              1,932                 (2,871 )          2,022        117  %          4,803        167  % 
 
Other income 
 
(loss)                         256               (173 )                502                   (749 )            429        248  %          1,251        167  % 
 
Total other 
 
expense                    (65,555 )          (90,321 )           (109,845 )             (178,983 )         24,766         27  %         69,138         39  % 
 
Income before 
 
income taxes               202,181            137,621              404,823                248,197           64,560         47  %        156,626         63  % 
 
Income tax 
 
(expense) benefit          (76,659 )        2,996,549             (155,699 )            2,993,747       (3,073,208 )     (103 )%     (3,149,446 )     (105 )% 
 
Net income         $       125,522       $  3,134,170     $        249,124       $      3,241,944     $ (3,008,648 )      (96 )%   $ (2,992,820 )      (92 )% 
 

 
 

 Total Revenue 
 

 
Subscriber Revenue includes subscription, activation and other fees. 
 

 
?            For the three months ended June 30, 2013 and 2012, subscriber 
 
revenue was $814,718 and $730,285, respectively, an increase of 12%, 
 
or $84,433. For the six months ended June 30, 2013 and 2012, 
 
subscriber revenue was $1,598,060 and $1,430,526, respectively, an 
 
increase of 12%, or $167,534. These increases were primarily 
 
attributable to a 9% increase in the daily weighted average number 
 
of subscribers, the impact of the increase in certain of our 
 
subscription rates beginning in January 2012 as more subscribers 
 
migrate to the higher rate, and an increase in subscriptions to 
 
premium services, including data services and Internet streaming. 
 
These increases were partially offset by subscription discounts 
 
offered through customer acquisition and retention programs, and an 
 
increasing number of lifetime subscription plans that have reached 
 
full revenue recognition. 
 

 
 

We expect subscriber revenues to grow based on the growth of our subscriber base, promotions, subscription plan mix, and identification of additional revenue streams from subscribers.

Advertising Revenue includes the sale of advertising on certain non-music channels, net of agency fees. Agency fees are based on a contractual percentage of the gross advertising revenue.

 ?            For the three months ended June 30, 2013 and 2012, advertising 
 
revenue was $21,757 and $20,786, respectively, an increase of 5%, or 
 
$971. For the six months ended June 30, 2013 and 2012, advertising 
 
revenue was $41,968 and $39,456, respectively, an increase of 6%, or 
 
$2,512. These increases were primarily due to a greater number of 
 
spots sold and broadcast, and increases in the rates charged per 
 
spot. 
 

 
 

We expect our advertising revenue to grow as advertisers are attracted to our national platform and growing subscriber base.

Equipment Revenue includes revenue and royalties from the sale of satellite radios, components and accessories.

 ?            For the three months ended June 30, 2013 and 2012, equipment revenue 
 
was $18,443 and $16,417, respectively, an increase of 12%, or 
 
$2,026. For the six months ended June 30, 2013 and 2012, equipment 
 
revenue was $36,599 and $33,370, respectively, an increase of 10%, 
 
or $3,229. These increases were driven by higher OEM production and 
 
mix of royalty eligible vehicles and, to a lesser extent, higher 
 
sales of aftermarket radios to distributors. 
 

 
 

We expect equipment revenue to fluctuate based on OEM production for which we receive royalty payments for our technology and, to a lesser extent, on the volume and mix of equipment sales in our aftermarket and direct to consumer business.

Other Revenue includes amounts earned from subscribers for the U.S. Music Royalty Fee, revenue from our Canadian affiliate and ancillary revenues.

 ?            For the three months ended June 30, 2013 and 2012, other revenue was 
 
$85,192 and $70,055, respectively, an increase of 22%, or $15,137. 
 
For the six months ended June 30, 2013 and 2012, other revenue was 
 
$160,881 and $138,912, respectively, an increase of 16%, or $21,969. 
 
These increases were driven by the U.S. Music Royalty Fee as our 
 
subscriber base increased and subscribers on the 12.5% rate 
 
increased. The increase was also partially driven by higher royalty 
 
revenue from Sirius XM Canada, as their self-pay subscriber base 
 
grew. 
 

 
 

We expect other revenue to increase as our subscriber base drives higher U.S. Music Royalty Fees as more subscribers migrate to the higher rate and as the performance of our Canadian affiliate improves.

 Operating Expenses 
 

 
Revenue Share and Royalties include distribution and content provider revenue 
 
share, advertising revenue share, and broadcast and web streaming royalties. 
 
Advertising revenue share is recognized in revenue share and royalties in the 
 
period in which the advertising is broadcast. 
 

 
?            For the three months ended June 30, 2013 and 2012, revenue share and 
 
royalties were $155,859 and $135,426, respectively, an increase of 
 
15%, or $20,433, and increased as a percentage of total revenue. For 
 
the six months ended June 30, 2013 and 2012, revenue share and 
 
royalties were $304,390 and $267,537, respectively, an increase of 
 
14%, or $36,853, and increased as a percentage of total revenue. 
 
These increases were primarily attributable to greater revenues 
 
subject to royalty and/or revenue sharing arrangements, a 12.5% 
 
increase in the statutory royalty rate for the performance of sound 
 
recordings, and increased OEM revenue share, partially offset by an 
 
increase in the benefit to earnings from the amortization of 
 
deferred credits on executory contracts initially recognized in 
 
purchase price accounting associated with the Merger. 
 

 
 

We expect our revenue share and royalty costs to increase as our revenues grow. Under the terms of the Copyright Royalty Board's decision, we paid royalties of 9.0% and 8.0% of gross revenues, subject to certain exclusions, for the three and six months ended June 30, 2013, and 2012, respectively, and will pay 9.5% in 2014. The deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger are expected to provide increasing benefits to revenue share and royalties through the expiration of the acquired executory contracts in 2013.

Programming and Content includes costs to acquire, create, promote and produce content. We have entered into various agreements with third parties for music and non-music programming that require us to pay license fees and other amounts.

 ?            For the three months ended June 30, 2013 and 2012, programming and 
 
content expenses were $70,381 and $65,169, respectively, an increase 
 
of 8%, or $5,212, but decreased as a percentage of total revenue. 
 
For the six months ended June 30, 2013 and 2012, programming and 
 
content expenses were $144,991 and $135,265, respectively, an 
 
increase of 7%, or $9,726, but decreased as a percentage of total 
 
revenue. These increases were primarily due to reductions in the 
 
benefit to earnings from purchase price accounting adjustments 
 
associated with the Merger attributable to the amortization of the 
 
deferred credit on acquired programming executory contracts and 
 
increased personnel costs. 
 

 
 

Excluding the impact from purchase accounting adjustments, based on our current programming offerings, we expect our programming and content expenses to decrease as agreements expire and are renewed or replaced on cost effective terms, offset by increases as we offer additional programming. The impact of purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on acquired programming executory contracts will continue to decline, in absolute amount and as a percentage of reported programming and content costs, through 2015. Substantially all of the deferred credits on executory contracts will be amortized by the end of 2013.

Customer Service and Billing includes costs associated with the operation and management of third party customer service centers, and our subscriber management systems as well as billing and collection costs, transaction fees and bad debt expense.

 ?            For the three months ended June 30, 2013 and 2012, customer service 
 
and billing expenses were $80,290 and $68,679, respectively, an 
 
increase of 17%, or $11,611, and increased as a percentage of total 
 
revenue. For the six months ended June 30, 2013 and 2012, customer 
 
service and billing expenses were $160,684 and $134,866, 
 
respectively, an increase of 19%, or $25,818, and increased as a 
 
percentage of total revenue. These increases were primarily due to 
 
efforts to improve our customer service experience, resulting in 
 
higher spend on customer service agents, staffing and training, 
 
higher subscriber volume driving increased subscriber contacts, 
 
increased bad debt expense and higher technology costs. 
 

 
 

We expect our customer service and billing expenses to increase as our subscriber base grows and as we continue to improve the customer service experience for our subscribers.

Satellite and Transmission consists of costs associated with the operation and maintenance of our satellites; satellite telemetry, tracking and control systems; terrestrial repeater networks; satellite uplink facilities; broadcast studios; and delivery of our Internet streaming service.

 ?            For the three months ended June 30, 2013 and 2012, satellite and 
 
transmission expenses were $19,493 and $17,551, respectively, an 
 
increase of 11%, or $1,942, but remained flat as a percentage of 
 
total revenue. For the six months ended June 30, 2013 and 2012, 
 
satellite and transmission expenses were $39,188 and $35,661, 
 
respectively, an increase of 10%, or $3,527, but remained flat as a 
 
percentage of total revenue. These increases were primarily due to 
 
increased costs associated with our streaming operations and 
 
in-orbit insurance. 
 

 
 

We expect overall satellite and transmission expenses to increase as we enhance our Internet-based service and add functionality, expand our terrestrial repeater network, launch our FM-6 satellite and incur in-orbit insurance costs.

Cost of Equipment includes costs from the sale of satellite radios, components and accessories and provisions for inventory allowance attributable to products purchased for resale in our direct to consumer distribution channels.

 ?            For the three months ended June 30, 2013 and 2012, cost of equipment 
 
was $5,442 and $7,150, respectively, a decrease of 24%, or $1,708, 
 
and decreased as a percentage of equipment revenue. For the six 
 
months ended June 30, 2013 and 2012, cost of equipment was $12,469 
 
and $12,956, respectively, a decrease of 4%, or $487, and decreased 
 
as a percentage of equipment revenue. These decreases were primarily 
 
due to lower average cost per product sold and lower inventory 
 
reserves, partially offset by higher direct to consumer volume for 
 
the current periods compared to the prior year periods. 
 

 
 

We expect cost of equipment to vary with changes in sales, supply chain management and inventory valuations.

Subscriber Acquisition Costs include hardware subsidies paid to radio manufacturers, distributors and automakers, including subsidies paid to automakers who include a satellite radio and subscription to our service in the sale or lease price of a new vehicle; subsidies paid for chip sets and certain other components used in manufacturing radios; device royalties for certain radios and chip sets; commissions paid to automakers as incentives to purchase, install and activate satellite radios; product warranty obligations; freight; and provisions for inventory allowances attributable to inventory consumed in our OEM and retail distribution channels. The majority of subscriber acquisition costs are incurred and expensed in advance of, or concurrent with, acquiring a subscriber. Subscriber acquisition costs do not include advertising, marketing, loyalty payments to distributors and dealers of satellite radios or revenue share payments to automakers and retailers of satellite radios.

 ?            For the three months ended June 30, 2013 and 2012, subscriber 
 
acquisition costs were $129,992 and $119,475, respectively, an 
 
increase of 9%, or $10,517, but decreased as a percentage of total 
 
. . .