MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), we are hereby providing cautionary statements identifying important factors that could cause our actual results to differ materially from those projected in forward-looking statements (as such term is defined in the Reform Act) made in this report. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, 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") are not historical facts and may be forward-looking and, accordingly, such statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Accordingly, any such statements are qualified in their entirety by reference to, and are accompanied by, the factors discussed in our Annual Report on Form 10-K for the year ended December 31, 1998. Among the key factors that have a direct bearing on our future results of operations are the potential risk of delay in implementing our business plan; possible increased costs of construction and launch of necessary satellites; dependence on Space Systems/Loral, Inc. and Lucent Technologies, Inc.; risk of launch failure; unproven market for our proposed service; unproven applications of existing technology; and our need for substantial additional financing.

OVERVIEW

CD Radio was organized in May 1990 and is in its development stage. Our principal activities to date have included technology development, obtaining regulatory approval for the CD Radio service, commencement of construction of four satellites, acquisition of content for our programming, strategic planning, market research, recruitment of our management team and securing financing for working capital and capital expenditures. We do not expect to generate any revenues from operations until the first quarter of 2001, at the earliest, and we expect that positive cashflow from operations will not be generated until the third quarter of 2001, at the earliest. In addition, we require additional capital to complete development and commence commercial operations of CD Radio. We cannot assure you that we will ever commence operations, that we will attain any particular level of revenues or that we will achieve profitability.

Upon commencing commercial operations, we expect our primary source of revenues to be monthly subscription fees. We currently anticipate that our subscription fee will be approximately $9.95 per month to receive CD Radio broadcasts, with a one time, modest activation fee per subscriber. In addition, we expect to derive additional revenues from directly selling or bartering advertising on our non-music channels. We do not intend to manufacture the consumer electronic devices necessary to receive CD Radio and thus will not receive any revenues from their sale. Although we hold patents covering some of the technology which may be used in these consumer electronic devices, we expect to license our technology to manufacturers at no charge.

We expect that the operating expenses associated with commercial operations will consist primarily of marketing, sales, programming, maintenance of the satellite and broadcasting system and general and administrative costs. Costs to acquire programming are expected to include payments to build and maintain an extensive music library and royalty payments for broadcasting music (calculated based on a percentage of revenues). Marketing, sales, general and administrative costs are expected to consist primarily of advertising costs, salaries of employees, rent and other administrative expenses. We expect to have approximately 150 employees by the time we commence commercial operations.

In addition to funding initial operating losses, we require funds for working capital, interest and financing costs on borrowings and capital expenditures in the near term.

RESULTS OF OPERATIONS

We recorded net losses of $10,444,000 and $5,838,000 for the three months ended March 31, 1999 and 1998, respectively. Our total operating expenses were $11,875,000 and $2,333,000 for the three months ended March 31, 1999 and 1998, respectively.

Engineering design and development costs were $6,911,000 and $379,000 for the three months ended March 31, 1999 and 1998, respectively. Engineering costs increased in the 1999 quarter primarily due to payments to Lucent in connection with the chip set development effort and payments to consumer electronic manufacturers in connection with receiver development efforts.

General and administrative expenses increased for the three months ended March 31, 1999 to $4,964,000 from $1,954,000 for the three months ended March 31, 1998. General and administrative expenses increased due to the occupancy of our new offices and broadcast studios and the growth of our management team and the workforce necessary to develop and commence the broadcast of CD Radio. The major components of general and administrative expenses in the 1999 quarter were salaries and employment related costs (28%), rent and occupancy costs (30%) and legal and regulatory fees (15%), while in the 1998 quarter the major components were salaries and employment related costs (27%), rent and occupancy costs (5%), and legal and regulatory fees (14%). The remaining portion of general and administrative expenses (27% in the 1999 quarter and 54% in the 1998 quarter) consists of other costs such as insurance, market research, consulting, travel, depreciation and supplies, with no such amount exceeding 10% of the total.

The increase of interest and investment income to $2,864,000 for the three months ended March 31, 1999, from $2,318,000 in the three months ended March 31, 1998, was the result of a higher average balances of cash and marketable securities during the first quarter of 1999. The additional cash and marketable securities were obtained from the stock sales during the fourth quarter of 1998.

Interest expense, net of capitalized interest, was $1,433,000 in the 1999 quarter compared with $5,823,000 in the 1998 quarter and capitalized interest was $10,127,000 and $277,000, respectively. Gross interest expense was $11,560,000 in the 1999 quarter and $6,100,000 in the 1998 quarter. This increase was primarily due to interest expense on the short-term notes payable and the deferred satellite payments, neither of which were outstanding in the 1998 quarter.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1999, we had a total of cash, cash equivalents and marketable securities of $208,227,000 and working capital of $104,489,000 compared with cash, cash equivalents and marketable securities of $265,623,000 and working capital of $180,966,000 at December 31, 1998. The decrease in these balances was primarily the result of payments for satellite construction, launch vehicles and services, payments under our agreement with Lucent and other engineering agreements and other operating expenses exceeding interest and investment income during the period.

FUNDING REQUIREMENTS

We require near-term funding to continue building the CD Radio system. We believe we can fund our planned operations and the construction of our satellite system into the first quarter of 2000 from our existing working capital. We estimate that we will require approximately $1,138 million to develop and commence commercial operations by the end of the fourth quarter of 2000. Of this amount, we have raised, have access to or have identified sources for approximately $890 million, leaving anticipated additional cash needs of approximately $248 million to fund our operations through the end of the fourth quarter of 2000. We anticipate additional cash requirements of approximately $100 million to fund our operations through the first full year of commercial operations. We expect to finance the remainder of our funding requirements through the future issuance of debt or equity securities, or a combination of debt and equity securities.

To build and launch the satellites necessary for the operations of CD Radio, we entered into the Loral Satellite Contract. The Loral Satellite Contract provides for Loral to construct, launch and deliver three satellites, in-orbit and checked-out, to construct for us a fourth satellite for use as a ground spare and to become our launch service provider. We are committed to make aggregate payments of approximately $718 million under the Loral Satellite Contract. We also intend to enter into an amendment to the Loral Satellite Contract pursuant to which we will purchase $15 million of long-lead time parts for a fifth satellite. As of March 31, 1999, $261 million of this obligation had been satisfied. Under the Loral Satellite Contract, with the exception of a payment made to Loral in March 1993, payments are made in installments that commenced in April 1997 and will end in December 2003. Approximately half of these payments are contingent upon Loral meeting specified milestones in the construction of our satellites.

If there is a satellite launch failure, we will be required to pay Loral the deferred amount for the affected satellite no later than 120 days after the date of the failure. If we elect to put one of our first three satellites into ground storage, rather than having it shipped to the launch site, the deferred amount for that satellite will become due within 60 days of this election.

We will also require funds for working capital, interest on borrowings, acquisition of programming, financing costs and operating expenses until some time after the commencement of commercial operations of CD Radio. We expect our interest expense will increase significantly when compared to our 1998 interest expense as we complete our planned financings.

We cannot be sure that we will be able to obtain additional financing on favorable terms, or at all, or that we will be able to do so in a timely fashion. The agreements and instruments governing our existing indebtedness contain, and documents governing any indebtedness incurred in the future are expected to contain, provisions limiting our ability to incur additional indebtedness. If additional financing were not available on a timely basis, we would be required to delay satellite and/or launch vehicle construction to conserve cash and to fund continued operations, which would cause delays in the commencement of operations and increase costs.

The amount and timing of our actual cash requirements will depend upon numerous factors, including costs associated with the construction and deployment of our satellite system and the rate of growth of our business after commencing service, costs of financing and the possibility of unanticipated costs. Additional funds would be required if there are delays, cost overruns, unanticipated expenses, launch failures, launch services or satellite system change orders, or any shortfalls in estimated levels of operating cash flow.

SOURCES OF FUNDING

To date, we have funded our capital needs through the issuance of debt and equity. As of March 31, 1999, we had received a total of $441 million in equity capital, $192 million of our equity capital was received in 1997 as a result of the issuance of 5,400,000 shares of 5% Delayed Preferred Stock, resulting in net proceeds of $121 million, and 4,955,488 shares of Common Stock, resulting in net proceeds of $71 million. A total of 1,905,488 shares of our Common Stock, were sold to Loral Space & Communications, Ltd. in August 1997 and 3,050,000 shares of Common Stock were sold to the public in November 1997. In November 1997, we exchanged 1,846,799 shares of our newly issued 10 1/2% Series C Preferred Stock for all of the outstanding shares of 5% Delayed Preferred Stock. On November 2, 1998, we sold an additional 5,000,000 shares of Common Stock to Prime 66 Partners, L.P. resulting in net proceeds of $98 million and on December 23, 1998, we sold 1,350,000 shares of 9.2% Series A Junior Cumulative Convertible Preferred Stock to Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. (the "Apollo Investors"), resulting in net proceeds of $129 million, and the Apollo Investors granted us an option to sell them an additional 650,000 shares of 9.2% Series B Junior Cumulative Convertible Preferred Stock for an estimated net proceeds of $63 million. As long as there has been no material adverse change to our business, management or financial condition, and subject to satisfying customary conditions, we may exercise our option to require Apollo Investors to purchase the 9.2% Series B Junior Cumulative Convertible Preferred Stock at any time before September 30, 1999.

In November 1997, we received net proceeds of $116 million from the issuance of 12,910 Units, each Unit consisting of $20,000 aggregate principal amount at maturity of 15% Senior Discount Notes due 2007 (the "Senior Discount Notes") and a warrant to purchase additional Senior Discount Notes with an aggregate principal amount at maturity of $3,000. All warrants were exercised in 1997. The aggregate value at maturity of the Senior Discount Notes is $297 million. The Senior Discount Notes mature on November 15, 2007 and the first cash interest payment is due in June 2003. The indenture governing the Senior Discount Notes contains some limitations on our ability to incur additional indebtedness. The Senior Discount Notes are secured by a pledge of the stock of Satellite CD Radio, Inc., the subsidiary that holds our FCC license.

On July 28, 1998, we entered into a credit agreement with a group of financial institutions, including Bank of America as agent and a lender, under which the lenders agreed to provide us a term loan facility in an aggregate principal amount of up to $115 million. The proceeds of the loans under this credit agreement are being used to fund a portion of the progress payments required to be made by us under the Loral Satellite Contract for the purchase of launch services and to pay interest, fees and other expenses related to this credit facility. The loans under this credit agreement are due on the earlier of February 29, 2000 and ten days prior to the launch of our second satellite. As of March 31, 1999, we had borrowed $79.8 million under this credit facility; substantially all of which was used to make progress payments under the Loral Satellite Contract.

In connection with our existing credit facility, Loral agreed with Bank of America that at maturity of the loans (including maturity as a result of an acceleration), upon the occurrence of our bankruptcy or upon the occurrence of an event of default by Loral under its agreement with Bank of America, Loral will repurchase from the lenders the loans at a price equal to the principal amount of the loans plus accrued and unpaid interest. In exchange for providing this credit support, Loral receives a fee from us equal to 1.25% per annum of the outstanding amount of the loans from time to time.

We have also entered into an agreement with Bank of America under which Bank of America has agreed to attempt to arrange a syndicate of lenders to provide us with a second term loan facility in the aggregate principal amount of $225 million. It is anticipated that a portion of the proceeds of these loans would be used to repay amounts outstanding under our existing credit agreement and for other general corporate purposes. Bank of America has not committed to provide these loans. The closing of this facility is expected to be conditioned on the satisfaction of specific significant conditions and there is no assurance that such loans will be arranged or the terms of these loans will be acceptable to us. If we are unable to close this facility, we will seek to repay our existing loans from the proceeds of the sale of debt securities, equity securities, or a combination of debt and equity securities.

Our 9.2% Series A Junior Cumulative Convertible Preferred Stock and our 9.2% Series B Junior Cumulative Convertible Preferred Stock (collectively, the "Junior Preferred Stock") are convertible into shares of Common Stock at a price of $30 per share. The Junior Preferred Stock is callable by us beginning November 15, 2001 if the current market price, as defined in the Certificate of Designation of the Junior Preferred Stock, of our Common Stock exceeds $60 per share for a period of 20 consecutive trading days, and in all events will be callable beginning November 15, 2003 at a price of 100% and must be redeemed by us on November 15, 2011. Dividends on the Junior Preferred Stock are payable in-kind or in cash annually, at our option. Holders of the Junior Preferred Stock have the right to vote, on an as-converted basis, on matters in which the holders of our Common Stock have the right to vote.

SS/L has agreed to defer a total of $50 million of the payments under the Loral Satellite Contract originally scheduled for payment in 1999. These deferred amounts bear interest at 10% per annum and all interest on these deferred amounts will accrue until December 2001, at which time interest will be payable quarterly in cash. The principal amounts of the deferred payments under the Loral Satellite Contract are required to be repaid in six installments between June 2002 and December 2003. As collateral security for these deferred payments, we have agreed to grant Loral a security interest in our terrestrial repeater network.

OTHER MATTERS- THE YEAR 2000 ISSUE

The Year 2000 Issue will test the capability of business processes to function correctly. The Year 2000 Issue is the result of computer programs being written using two digits (rather than four) to define a year, which could result in miscalculations or system failures resulting from recognition of a date occurring after December 31, 1999 as falling in the year 1900 (or another year in the 1900s) rather than the year 2000 or thereafter. We have undertaken an effort to identify and mitigate The Year 2000 Issue in our information systems, products, suppliers and facilities. Our approach to the Year 2000 Issue can be separated into four phases: (1) define/measure-identify and inventory possible sources of Year 2000 Issues; (2) analyze-determine the nature and extent of Year 2000 Issues and develop project plans to address those issues; (3) improve-execute project plans and perform a majority of the testing; and (4) control-complete testing, continue monitoring readiness and complete necessary contingency plans. The first three phases of the program have been completed for a substantial majority of our mission-critical activities. Management plans to have nearly all significant information system and facilities through the control phase of the program by mid-1999.

We have also communicated with our significant vendors and suppliers to determine the extent to which we are vulnerable to the failure of these parties to remedy Year 2000 Issues. We can give no assurance that failure to address the Year 2000 Issues by third parties on whom our systems and business processes rely would not have a material adverse effect on our operations or financial condition.

The total Year 2000 Issue remediation expenditures are expected to be approximately $100,000 of which 25% was spent by March 31, 1999. Substantially all of the remainder is expected to be spent in 1999. The activities involved in the Year 2000 effort necessarily involve estimates and projections of activities and resources that will be required in the future. These estimates and projections could change as work progresses.