Worldspace (WRSPQ) 10-Q 2006 Q3 Quarterly report

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 September 30, 2006

Commission file number 000-51466

WORLDSPACE, INC.

(Exact name of registrant as specified in its charter)

Delaware	52-1732881
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

8515 Georgia Avenue, Silver Spring, MD 20910

(Address of principal executive offices) (Zip code)

301-960-1200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, par value $0.01 per share

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

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨                    Accelerated filer  ¨                    Non-accelerated filer  x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

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

(Class)	(Outstanding as of November 13, 2006)
CLASS A COMMON STOCK, $0.01 PAR VALUE	39,261,602

WORLDSPACE, INC. AND SUBSIDIARIES

INDEX

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations for three and nine-month periods ended September 30, 2006 and 2005	3
	Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005	4
	Condensed Consolidated Statements of Cash Flows for the nine-month period ended September 30, 2006 and 2005	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	31
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults upon Senior Securities	32
Item 4.	Submission of Matters to a Vote of Security Holders	32
Item 5.	Other Information	32
Item 6.	Exhibits	33

EXPLANATORY NOTE

This quarterly report is filed by WorldSpace, Inc. (the “Company”). Unless the context requires otherwise, the terms “we,” “our” and “us” refer to the Company and its subsidiaries.

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

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PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

WORLDSPACE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three-Months and Nine-months ended September 30, 2006 and 2005

	Three months ended September 30,						Nine months ended September 30,
	2006			2005			2006			2005
	(in thousands, except share data)
Revenue
Subscription revenue	$	1,810		$	959		$	5,340		$	2,554
Equipment revenue		659			670			2,433			1,646
Other revenue		874			724			2,810			3,035
Total Revenue		3,343			2,353			10,583			7,235
Operating Expenses
Cost of Services (excludes depreciation, shown separately below)
Satellite and transmission, programming and other		7,300			5,028			21,062			11,898
Cost of equipment		2,674			998			8,144			2,022
Research and development		265			182			756			228
Selling and marketing		5,153			4,426			16,680			6,477
General and administrative		12,566			12,963			40,588			32,467
Stock-based compensation (1)		2,199			9,258			9,386			10,246
Depreciation and amortization		14,602			14,732			44,056			44,136
Total Operating Expenses		44,759			47,587			140,672			107,474
Loss from Operations		(41,416	)		(45,234	)		(130,089	)		(100,239	)
Other Income (Expense)
Gain on extinguishment of debt		—			—			—			14,130
Interest income		2,714			2,044			8,754			3,647
Interest expense		(2,371	)		(2,336	)		(6,996	)		(7,498	)
Other		(327	)		1,389			(3,141	)		2,312
Total Other Income (Expense)		16			1,097			(1,383	)		12,591
Loss Before Income Taxes		(41,400	)		(44,137	)		(131,472	)		(87,648	)
Income Tax Benefit		12,468			28,719			36,686			40,961
Net Loss	$	(28,932	)	$	(15,418	)	$	(94,786	)	$	(46,687	)
Loss per share—basic and diluted	$	(0.77	)	$	(0.48	)	$	(2.54	)	$	(1.78	)
Weighted Average Number of Shares Outstanding		37,584,541			32,024,046			37,253,549			26,159,693
(1)    Allocation of stock based compensation to operating expenses:
Satellite, transmission, programming and other	$	161		$	110		$	507		$	110
Selling, general and administrative	$	2,038		$	9,148		$	8,879		$	10,136

See accompanying notes to unaudited condensed consolidated financial statements.

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WORLDSPACE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2006 and December 31, 2005

	September 30, 2006			December 31, 2005
	Unaudited
	(in thousands, except share data)
Assets
Current Assets
Cash and cash equivalents	$	33,666		$	36,925
Marketable securities		156,291			239,048
Accounts receivable, net		2,299			3,000
Prepaid expenses		7,127			4,486
Inventory, net		4,090			4,922
Other current assets		3,026			2,370
Total Current Assets		206,499			290,751
Restricted Cash and Investments		6,560			4,588
Property and Equipment, net		18,031			16,811
Satellites and Related Systems, net		358,913			397,463
Deferred Financing Costs, net		12,528			13,667
Other Assets		1,748			1,207
Total Assets	$	604,279		$	724,487
Liabilities and Shareholders’ Deficit
Current Liabilities
Accounts payable	$	12,360		$	19,631
Accrued expenses		18,308			14,407
Income taxes payable		19,000			20,000
Accrued purchase commitment		13,165			11,954
Accrued interest		1,958			1,953
Deferred tax liability		1,475			1,998
Other current liabilities		426			—
Total Current Liabilities		66,692			69,943
Long-term Debt, net of discount		155,295			155,000
Deferred Tax Liability		139,347			175,566
Other Liabilities		3,341			2,256
Contingent Royalty Obligation		1,814,175			1,814,175
Total Liabilities		2,178,850			2,216,940
Commitments and Contingencies
Minority Interest in Subsidiary		420			—
Shareholders’ Deficit
Preferred Stock, $.01 par value; 25,000,000 shares authorized; no shares issued and outstanding as of September 30, 2006		—			—
Class A Common stock, $.01 par value; 200,000,000 shares and 100,000,000 shares authorized; 37,689,572 shares and 19,365,332 shares issued and outstanding as of September 30, 2006 and December 31, 2005, respectively		377			194
Class B Common stock, $.01 par value; 75,000,000 shares authorized; 0 and 17,426,443 shares issued and outstanding as of September 30, 2006 and December 31, 2005, respectively		—			174
Additional paid-in capital		712,793			717,718
Deferred compensation		—			(16,621	)
Accumulated other comprehensive loss (income)		(66	)		(609	)
Accumulated deficit		(2,288,095	)		(2,193,309	)
Total Shareholders’ Deficit		(1,574,991	)		(1,492,453	)
Total Liabilities and Shareholders’ Deficit	$	604,279		$	724,487

See accompanying notes to unaudited condensed consolidated financial statements.

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WORLDSPACE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended September 30, 2006 and 2005

	Nine months ended September 30,
	2006			2005
	(in thousands)
Cash Flows from Operating Activities
Net loss	$	(94,786	)	$	(46,687	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		44,056			44,136
Gain on extinguishment of debt		—			(14,130	)
Amortization of deferred financing costs		1,139			677
Loss on disposal of assets		1,693			6,291
Adjustment to cost basis of satellite and related systems		—			5,834
Stock-based compensation		9,386			10,246
Deferred tax benefit		(36,686	)		(40,961	)
Other		58			(411	)
Changes in assets and liabilities:
Accounts receivable and other assets		(1,763	)		(9,940	)
Accounts payable and accrued expenses		(3,369	)		(38,235	)
Accrued interest		5			(10,801	)
Other liabilities		1,616			(8,379	)
Net Cash Used in Operating Activities		(78,651	)		(88,230	)
Cash Flows from Investing Activities
Purchase of property and equipment, net		(5,675	)		(11,500	)
Purchase of satellite and related systems		(2,744	)		(1,964	)
Purchase of marketable securities		(358,987	)		(579,759	)
Maturities of marketable securities		441,744			346,325
Net Cash (Used in) Provided by Investing Activities		74,338			(246,898	)
Cash Flows from Financing Activities
Proceeds from exercise of employee stock options		2,206			—
Proceeds from sale of common stock, net of expenses		—			243,712
Proceeds from the conversion of long-term debt		—			7,000
Minority interest, net		420			—
Proceeds from the issuance of notes payable		400			—
Increase in restricted cash, net		(1,972	)		(6,899	)
Net Cash Provided by Financing Activities		1,054			243,813
Net Decrease in Cash and Cash Equivalents		(3,259	)		(91,315	)
Cash and Cash Equivalents,beginning of period		36,925			154,362
Cash and Cash Equivalents,end of period	$	33,666		$	63,047
Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes	$	1,127		$	—
Cash paid for interest	$	5,796		$	5,818

See accompanying notes to unaudited condensed consolidated financial statements.

5

WORLDSPACE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(A) Organization

WorldSpace, Inc. (WSI) was organized on July 29, 1990, and incorporated in the State of Maryland on November 5, 1990. WorldSpace, Inc. and Subsidiaries (the Company) is engaged in the design, development, construction, deployment and financing of a satellite-based radio and data broadcasting service, which serve areas of the world where traditional broadcast media or internet services are limited. The Company, which operates in 10 countries, has one satellite in orbit over Africa, another over Asia and a completed third satellite currently in storage. This satellite, which can be used to replace either of the Company’s two operational satellites or may also be modified and launched to provide DARS in Western Europe.

During March 2004, the Company began generating sales in India related to its satellite-based radio and data broadcasting service and exited the development stage, as defined by Statement of Financial Accounting Standards (SFAS) No. 7,Accounting and Reporting by Development Stage Enterprises.

In December 2004, WorldSpace International Network, Inc. (WIN), a wholly owned subsidiary of the Company, was merged into WSI. Immediately following the merger, WSI was merged into a newly created company of the same name incorporated in the State of Delaware.

(B) Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts of WorldSpace, Inc. and its majority and wholly-owned controlled subsidiaries. The equity method of accounting is used to account for investments in enterprises over which the Company has significant influence, but of which it has less than 50 percent ownership. All significant intercompany transactions and balances have been eliminated in consolidation.

The balance sheet and operating results of our foreign operations are consolidated using the local currencies of the countries in which they are located as the functional currency. The balance sheet accounts are translated at exchange rates in effect at the end of the period, and income statement accounts are translated at average exchange rates during the period. The resulting translation gains and losses are included as a separate component of stockholders’ equity. Foreign currency transaction gains and losses are included in our income statement in the period in which they occur.

In the Company’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring entries, necessary for a fair presentation of the consolidated financial position of WorldSpace, Inc. and its subsidiaries as of September 30, 2006; the results of operations for the three and nine month periods ended September 30, 2006 and 2005; and cash flows for the nine months ended September 30, 2006 and 2005. Certain reclassifications have been made to the 2005 financial statements to conform to the 2006 presentation.

These financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K.

Revenue Recognition

Revenue from the Company’s principal activities, subscription audio services and capacity leasing, is recognized as the services are provided. Revenue from subscribers, which is generally billed in advance, consists of fixed charges for service, which are recognized as the service is provided, and non-refundable activation fees

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are recognized ratably over the estimated term of the subscriber relationship. Direct activation costs are expensed as incurred. Advertising revenue is recognized in the period in which the spot announcement is broadcast. Revenue from the sale of satellite radio receivers is recognized when the product is shipped. Promotions and Discounts are treated as an offset to revenue during the period of promotion. Sales incentives, consisting of discounts to subscribers, offset earned revenue. The Company’s current policy is not to accept product returns, but if in the future, the Company were to accept product returns that are not covered under the manufacturers warranty, a sales return allowance will be established based on the guidance provided under Statement of Financial Accounting Standards (“SFAS”) No. 48. “Revenue Recognition When a Right of Return Exists” and Staff Accounting Bulletin, Topic 13A-4b.

Marketable Securities

The Company accounts for marketable securities in accordance with the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company has determined that all of its investments are marketable securities to be classified as “Held-to-Maturity”. Held-to-Maturity securities are recorded at amortized cost. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in the “Interest income” line item on the accompanying consolidated statements of operations. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as held-to-maturity are included in the “Interest income” line item on the consolidated statements of operations.

We invest in highly-liquid, short-term marketable securities. As of September 30, 2006 the weighted average maturity of the marketable securities portfolio was 26 days. The unrealized losses on the marketable securities, if accounted under “Available for Sale” category, would be reported in the stockholders’ equity in the accompanying consolidated balance sheets under the caption “Accumulated Other Comprehensive Income” to an extent of $85,000.

Cash and Cash Equivalents

All liquid investments, defined as having initial maturities of three months or less, have been classified as cash equivalents. Cash equivalents, as of September 30, 2006 and December 31, 2005, consisted primarily of demand deposits and money market instruments. Cash balances in individual banks exceed insurable amounts.

Restricted Cash and Investments

Cash and investments that are committed to support letters-of-credit issued pursuant to trade and lease agreements have been classified as restricted cash and investments in the accompanying consolidated balance sheets.

Inventories

Inventories are stated at the lower of cost or market value using the first in, first out (FIFO) method of accounting. Inventories primarily consist of satellite radio receivers manufactured to the Company’s specifications by independent third parties. Provisions have been recognized to reduce excess or obsolete inventories to their estimated net realizable value. The Company periodically evaluates inventory levels on hand as to potential obsolescence based on current and future selling prices. The Company capitalized certain costs related to the development of new receiver models.

(C) Stock-Based Compensation

In accordance with SFAS No. 123 (Revised 2004),Share Based Payment (“SFAS No. 123R”) and the Securities and Exchange Commission’s rule amending the compliance dates of SFAS No. 123R, the Company

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began to recognize compensation expense for equity-based compensation using the fair value method in 2006 using the “Modified Prospective Method”. This method allows the Company to apply the fair value provisions of SFAS No. 123R only on the future share-based payment arrangements and unvested portion of prior awards at the adoption date.

The Modified Prospective Method allows the Company to account for the stock-based awards issued prior to the adoption of fair value provisions under SFAS No. 123R using the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and the disclosure provisions of SFAS No. 148,Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123.

At September 30, 2006, the Company has a stock-based employee compensation plan which is described below. The compensation cost charged against income under the plan was $2.2 million and $9.4 million for the three month and nine month periods ending September 30, 2006. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $0 for the three and nine month periods ending September 30, 2006.

2005 Incentive Award Plan

On July 7, 2005, the Company’s shareholders approved the 2005 Incentive Award Plan (‘The Plan’). The Plan provides for the grant of up to 5,625,000 shares of our Class A Common Stock for stock based awards to employees, consultants and directors of the Company and its subsidiaries and affiliates. The Company granted employees restricted stock awards and stock options under this plan. The stock award program offers employees the opportunity to earn shares of our stock over time, rather than options that give employees the right to buy stock at a pre-determined price. Option awards are generally granted with an exercise price of the Company’s stock at the date of grant; those option awards generally vest based on 3 years of continuous service and have 10-year contractual terms.

The fair value of each option award is estimated on the date of grant using Black-Scholes option pricing model (closed model) that uses the assumptions noted in the following table. Because closed models incorporate assumptions for inputs, those inputs are disclosed. Expected volatilities are based on historical volatility of the stock price of similar entities, for a period not less than the required service period, since the Company does not have a historical volatility equal to the required service period. The Company uses historical data to estimate option exercise and employee termination within the valuation model based on the employee’s career level, historical exercise behavior and other factors for valuation purposes. The expected term of options and other awards granted is derived from the guidance provided under Staff Accounting Bulletin No. 107 (“SAB 107”),“Share Based Payment”, and represents the period of time that stock based awards are expected to be outstanding. The risk-free rate for periods within the contractual life of the awards is based on the U.S. Treasury yield curve in effect at the time of grant.

	2006
Expected volatility	88% – 105	%
Weighted-average volatility	96	%
Expected dividends	0	%
Risk-free rate	5.1	%
Expected term	6.0 years

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Summary of option activity:

Summary of the status of the Company’s stock option awards and units as of January 1, 2006 and changes during the nine month period ending September 30, 2006 is presented below:

	Number of options	Weighted average exercise price		Weighted average contractual life remaining	Aggregate intrinsic value
Non-qualified stock options:
Outstanding as of January 1, 2006	17,559,152	$	6.25	4.60 Years	$	145,208,581
Granted	1,206,028	$	6.28	7.79 Years		—
Exercised	304,184	$	5.66	2.38 Years	$	1,537,781
Forfeited/expired	159,250	$	6.07	2.49 Years	$	74,869
Outstanding at September 30, 2006	18,301,746	$	6.26	4.25 Years	$	2,868,079
Exercisable at September 30, 2006	17,323,461	$	6.22	3.95 Years	$	2,868,079

The weighted-average grant-date fair value of options granted during the three and nine month periods ending September 30, 2006 was $0 and $4.29. The total grant-date fair value of all stock based awards issued during the three and nine month periods ending September 30, 2006 was $0 million and $8.1 million.

Cash received from the exercise of stock options under all share-based payment arrangements for the three month periods ending September 30, 2006 and 2005 was $0. Cash received from the exercise of stock options under all share-based payment arrangements for the nine month periods ending September 30, 2006 and 2005 was $1.7 million and $0, respectively. The actual tax benefit realized for the tax deductions from option exercise of the share-based arrangements totaled $0, for the three and nine month periods ending September 30, 2006 and 2005.

Summary of the status of the Company’s nonvested restricted share awards and units as of January 1, 2006 and changes during the nine month period ending September 30, 2006 is presented below:

	Shares	Aggregate Grant Date Fair Value		Weighted average grant date fair value
Nonvested restricted shares:
Nonvested at January 1, 2006	1,842,133	$	38,666,372	$	20.99
Granted	437,597	$	2,916,642	$	6.67
Vested	593,613	$	12,459,937	$	20.99
Forfeited/Expired	67,873	$	1,424,654	$	20.99
Nonvested at September 30, 2006	1,618,244	$	27,698,423	$	17.12

Summary of the status of the Company’s nonvested stock options as of January 1, 2006 and changes during the nine month period ending September 30, 2006 is presented below:

	Shares	Aggregate Grant Date Fair Value		Weighted average grant date fair value
Nonvested stock options:
Nonvested at January 1, 2006	44,485	$	431,109	$	9.69
Granted	1,206,028	$	5,169,535	$	4.29
Vested	257,306	$	585,826	$	2.28
Forfeited	14,922	$	136,568	$	9.15
Nonvested at September 30, 2006	978,285	$	4,878,251	$	4.99

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As of September 30, 2006, there was $12.2 million of total unrecognized compensation related to restricted stock awards, units and options granted under the plan. That cost is expected to be recognized over a weighted-average period of 2.1 years. A total of 1,667 stock options and 281,113 restricted shares were vested during the three month period ending September 30, 2006.

Warrant issued to XM Satellite Radio

On July 18, 2005, the Company issued to XM Satellite Radio (“XM”) 1,562,500 shares of Class A Common Stock for an aggregate purchase price of $25 million. In connection with this transaction, the Company entered into a global satellite radio cooperation agreement on receiver technology, terrestrial repeater technology, OEM and third party distribution relationships, content opportunities and new applications and services. In connection with this transaction, the Company also granted to XM, a performance-based warrant to purchase 1,785,714 shares of Class A Common Stock. Half of the warrant shares will vest upon the Company obtaining an operational chipset developed with substantial support from XM under the cooperation agreement. The remaining warrant shares vest upon the Company’s design for deployment of a terrestrial repeater network utilizing and relying on XM software, XM know-how in utilizing the software of others or XM support personnel under the cooperation agreement. This warrant expires on July 17, 2008.

The Company accounted for the warrant under the guidance provided by Emerging Issues Task Force Issue No. 96-18 (“EITF 96-18”),“Accounting for Equity instruments that are issued to other than employees for acquiring, or in conjunction with selling, goods or services”. The Company used Black-Scholes model for calculating the fair value. The following table illustrates the major assumptions used to calculate the fair value:

	2006
Expected volatility	88% – 104	%
Weighted-average volatility	96	%
Expected dividends	0	%
Risk-free rate	5.1	%
Expected term	3.2 years

Using the assumptions mentioned in the table above, the Company earlier re-valued the warrant at $1.9 million, which would have been expensed over the term that the performance is expected to be provided, which the Company estimated to be 2.5 years starting January 1, 2006. During the three months ended September 30, 2006, the Company determined that due to technological differences in developing customized chip-set and terrestrial repeater networks, the likelihood of warrants vesting to XM is not probable and therefore ceased to record expense related to this warrant. In addition, the Company reversed $0.4 million of Research and Development expense earlier recorded for the six month period ending June 30, 2006, during the three month period ended September 30, 2006.

(D) Debt

Long-Term Debt

Long-term debt at September 30, 2006 and December 31, 2005 consisted of the following (in thousands):

	September 30, 2006			December 31, 2005
Convertible promissory notes	$	155,000		$	155,000
Discount on convertible promissory notes		(105	)		—
Notes payable		400			—
	$	155,295		$	155,000

The convertible promissory notes were issued on December 31, 2004 and mature on December 31, 2014, and are convertible into reserved Class A shares of the Company’s common stock at $13.52 per share. Interest payments are due quarterly or may be added to the principal balance outstanding, at the option of the Company.

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The related registration rights agreement provides that beginning 180 days after an IPO of the Company’s common stock, declared effective by the Securities and Exchange Commission (SEC) on August 3, 2005, the investors have the right to demand that the Company file up to three registration statements with the SEC at any time during the period defined in the related registration rights agreement, in order to sell some or all of the Class A Common Stock received upon any conversion of the convertible promissory notes.

Following a change of control (as defined in the Notes) the holders of the Notes may require us to redeem the Notes at a price equal to 100% of the principal amount plus any accrued and unpaid interest, unaccrued interest until December 31, 2007 and any late charges, subject to certain conditions. In addition, upon conversions in connection with certain transactions, including certain changes in control, holders of the Notes will be entitled to receive a make-whole premium, to be either paid in cash or stock, as calculated in the Notes. On August 19, 2006, the Company filed a registration statement on Form S-3, covering the shares of common stock issuable upon conversion of the notes, which was declared effective by the SEC on October 18, 2006.

The Company evaluates the provisions of the Notes periodically to determine whether any provisions would be considered embedded derivatives that would require bifurcation under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). Since the shares of common stock underlying the Notes have been registered during the period ending September 30, 2006, they are readily convertible to cash or shares of our Class A Common Stock. The registration with the SEC of the shares of common stock underlying the convertible notes payable satisfied the provisions for net settlement under SFAS No. 133. The Company therefore has determined that our Notes contain an embedded conversion feature which required bifurcation from the notes. The Company has bifurcated the fair value of the embedded derivative from the Notes Payable and included under “Other Liabilities” with an offset recorded as a discount to the notes payable which would be amortized as interest expense over the remaining life of the embedded derivative feature using a straight line method. The fair value of the embedded derivative was valued on September 30, 2006 at $131,000 and would be revalued each reporting period with the change in the fair value recorded as other income or expense in the statement of operations. The Company recorded $26,000 in interest expense related to the discount on notes payable for the three months ended September 30, 2006.

In June 2006, we received $200,000 from the Montgomery County of the State of Maryland under the Economic Development Fund as a contingent loan. This loan could be converted into a grant if the company maintains a specified number of employees on a particular maturity date and is in compliance with certain other terms of the agreement. The loan has a 5% annual interest rate. At September 30, 2006, under the terms of the loan, the company was contingently obligated to repay the loan principal together with accrued interest.

In August 2006, we received $200,000 from the Department of Business and Economic Development of the State of Maryland as a contingent loan. This loan could be converted into a grant if the company maintains a specified number of employees on a particular maturity date and is in compliance with certain other terms of the agreement. The loan has a 3% annual interest rate. At September 30, 2006, under the terms of the loan, the company was contingently obligated to repay the loan principal together with accrued interest.

Line-of-Credit

In July 2006, WorldSpace Africa Limited, a wholly owned subsidiary of the Company, established a KES (Kenyan Schillings) 26 million (approximately US$355,000) line-of-credit to purchase inventory with a bank in Kenya. This line-of-credit is collateralized by funds of a corresponding amount deposited in a call deposit account with the same bank.

(E) Provision for Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109,Accounting for Income, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or income tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and the tax basis of assets and

11

liabilities, using enacted tax rates for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the sum of taxes payable for the period and the change during the period in deferred tax assets and liabilities.

(F) Net Loss Per Share

The Company computes net loss per share in accordance with SFAS No. 128,Earnings Per Share and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). Basic loss per share is computed by dividing net loss by the weighted-average number of outstanding shares of common stock. Diluted loss per share is computed by dividing net loss by the weighted-average number of shares adjusted for the potential dilution that could occur if stock options, warrants and other convertible securities were exercised or converted into common stock.

For the three and nine month periods ended September 30, 2006 and 2005, options, warrants and other convertible securities to purchase approximately 33.4 and 31.4 million shares of common stock, respectively, were outstanding, but not included in the computation of diluted earnings per share, because the effect would be anti-dilutive.

(G) Commitments and Contingencies

Leases

The Company leases office space under non-cancelable operating leases that expire through 2016. As of September 30, 2006, minimum annual rental commitments under these leases are:

	(in thousands)
October – December 2006	$	1,497
2007		3,302
2008		2,792
2009		2,341
2010		2,315
Thereafter		4,175
	$	16,422

The Company entered into a sub-lease agreement in July, 2006. The Company sub-leased approximately 10,064 sq.ft. for 60 months. The minimum annual rent on these premises is $0.3 million and is being recorded as an offset to minimum annual rental commitments as disclosed in the preceding table.

Litigation, Claims and Income Taxes

The Company is subject to various claims and assessments. In the opinion of management, these matters will not have a material adverse impact on the Company’s financial position or results of operations. In evaluating the exposure associated with various tax filing positions, the Company accrues charges for probable exposures. Based on annual evaluations of tax positions, the Company believes it has appropriately accrued for probable exposures.

Design and Production Agreement

The Company is committed to purchasing 722,445 satellite radio receiver chipsets for approximately $18.2 million at September 30, 2006. The Company has recorded a liability equal to the excess of the aggregate purchase price over the expected sales price, of $13.2 million and $12.0 million at September 30, 2006 and December 31, 2005, respectively, as accrued purchase commitment in the accompanying consolidated balance sheets. The difference between the liability at September 30, 2006 and December 31, 2005 is the result of changes in the exchange rates of foreign currencies.

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(H) Contingent Royalty Obligation

Effective December 31, 2004 the Company restructured $1,553 million of notes payable and advances. Under the terms of the agreements, the ongoing obligations of the Company to the lender were set forth in a separate Royalty Arrangement (Royalty Agreement), under which the Company is required to pay the lender 10 percent of earnings before interest, taxes, depreciation, and amortization, if any, for each year through 2015 in exchange for the lender releasing all claims. The Company is subject to certain covenants regarding the disposition of assets, liquidation of the Company, reporting, and distributions or payments to certain current shareholders. The Royalty Agreement also requires the Company to have a segregated reserve, to be funded each quarter in any year in which payment under the Royalty Agreement is projected, at the rate of 25 percent of the estimated annual payment. In addition, 80 percent of the annual payment is required to be made within 60 days after year-end, and the remaining portion within 180 days following year-end. Even though management is satisfied that the debt may not be reinstated, in accordance with SFAS No. 15,Accounting by Debtors and Creditors for Trouble Debt Restructuring,the debt restructuring is not considered an extinguishment of debt because the future payments under the agreement are indeterminate. Accordingly, the carrying value of the debt and accrued interest of $1,814 million is shown as a contingent royalty obligation on the accompanying balance sheets.

(I) Minority Interest

The Company’s Italian subsidiary, WorldSpace Italia S.r.l., is a majority-owned subsidiary of the Company’s European holding company, Viatis Satellite Radio. WorldSpace Italia’s other partner is New Satellite Radio S.r.l., an Italian company whose primary shareholder is Class Editori S.p.A., a media and broadcast corporation based in Milan. New Satellite Radio holds a 35 percent interest in WorldSpace Italia S.r.l., and has contributed $0.9 million towards capital investment. The net outstanding minority interest of New Satellite Radio S.r.l., as of September 30, 2006 was $0.4 million and is separately classified in the accompanying unaudited condensed consolidated balance sheets.

(J) Conversion of Class B Common Stock

On August 24, 2006, the Company received notice from The Nasdaq Stock Market (“NASDAQ”) that for the last ten consecutive trading days, the market value of the Company’s Class A Common Stock had been below the minimum $50,000,000 requirement for continued inclusion on The Nasdaq Global Market under Marketplace Rule 4450(b)(1)(A).

In response to this notification, the Company and Yenura Pte. Ltd. (“Yenura”), the Company’s largest stockholder, agreed that Yenura would exchange its equity holdings in the Company consisting of all of the outstanding shares of the Company’s Class B Common Stock, par value, $.01 per share, for shares of Class A Common Stock. The exchange was on a share-for-share basis. This transaction resulted in the issuance of an additional 17,426,443 shares of Class A Common Stock which are listed on The Nasdaq Global Market.

(K) ESPN—WorldSpace content sharing agreement

The Company has signed an exclusive broadcast license agreement with ESPN STAR Sports to provide subscribers with live audio coverage of cricket, further enhancing its content offering and providing consumers with a truly unique listening experience. Under terms of the agreement, PLAY, the WORLDSPACE-branded all sports channel for South Asia and the Middle East, will have exclusive broadcasting rights throughout South Asia for 12 tours and over 200 days of cricket comprising both test matches and one-day internationals. Three of the 12 tours include India, the Company’s primary market in the Asia region. Coverage begins November 19, 2006 with India’s tour of South Africa, and runs through February 2008, with conclusion of the India-Sri Lanka-Australia Triangular Series in Australia.

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(L) Enterprise Resource Planning (ERP) Application Implementation

The Company formally completed the implementation of the global ERP application during the three month period ending September 30, 2006. The total cost of implementing the financial, accounting, inventory, global customer care and billing systems was $3.3 million. The Company also signed an agreement with the vendors of the enterprise resource planning system which provides for maintenance, upgrades and technical support for 4 years at a cost of $7.1 million to be paid in equal annual installments.

(M) Recent Accounting Pronouncements

In June 2006, the FASB Emerging Issues Task Force issued EITF No. 06-3,How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation), which states that a company should disclose its accounting policy (i.e., gross or net presentation) regarding presentation of taxes within the scope of this Issue. If taxes included in gross revenues are significant, a company should disclose the amount of such taxes for each period for which an income statement is presented. The consensus would be effective for the first annual or interim reporting period beginning after December 15, 2006. The disclosures are required for annual and interim financial statements for each period for which an income statement is presented. The Company will adopt this Interpretation effective January 1, 2007. Based on the Company’s current evaluation of this Issue, the Company does not expect the adoption of EITF No. 06-3 to have a significant impact on its consolidated results of operations or financial position.

In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Statement shall be effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2006. The Company will adopt this Interpretation effective January 1, 2007. The Company has not completed its evaluation of the impact of FIN 48 on its statement of operations and statement of position.

In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 expresses the SEC staff’s views regarding the process of quantifying financial statement misstatements. These interpretations were issued to address diversity in practice and the potential under current practice for the build up of improper amounts on the balance sheet. SAB 108 expresses the SEC staff’s view that a registrant’s materiality evaluation of an identified unadjusted error should quantify the effects of the error on each financial statement and related financial statement disclosures and that prior year misstatements should be considered in quantifying misstatements in current year financial statements. SAB 108 also states that correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such correction may be made the next time the registrant files the prior year financial statements. Registrants electing not to restate prior periods should reflect the effects of initially applying the guidance in SAB 108 in their annual financial statements covering the first fiscal year ending after November 15, 2006. The cumulative effect of the initial application should be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year and the offsetting adjustment should be made to the opening balance of retained earnings for that year. Registrants should disclose the nature and amount of each individual error being corrected in the cumulative adjustment. The disclosure should also include when and how each error arose and the fact that the errors had previously been considered immaterial. The SEC staff encourages early application of the guidance in SAB 108 for interim periods of the first fiscal year ending after November 15, 2006. The Company does not expect the implementation of SAB 108 to have a material effect on its financial statements.

In October 2006, the FASB has issued FASB Staff Position (FSP) 123R-5, “Amendment of FASB Staff Position FAS 123(R)-1.” This FSP addresses whether a modification of an instrument in connection with an

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equity restructuring should be considered a modification for purposes of applying FSP FAS 123(R)-1, “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R).” The provisions in this FSP are effective for the first reporting period beginning after October 10, 2006. Based on the current evaluation of this interpretation, the Company does not expect the adoption of FSP 123R-5 to have a significant impact on its consolidated results of operations or financial position.

In September 2006, The Financial Accounting and Standards Board has issued FAS 157, Fair Value Measurements (“SFAS 157”), which provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for more information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect that fair-value measurements have on earnings. SFAS 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact, if any, of SFAS 157 on its results of operations and financial position.

(N) Geographic Areas

The following tables present summary operating information by geographic segment for the three and Nine months ended September 30, 2006 and 2005:

	Geographical Area Data
	Three months ended September 30,				Nine months ended September 30,
	2006		2005		2006		2005
	(in thousands)
Revenue
United States	$	752	$	996	$	2,153	$	3,083	(1)
France		238		212		1,381		1,120
Kenya		385		212		1,021		640
South Africa		193		184		623		685
Singapore		14		18		45		43
India		1,698		593		5,102		1,267
Other foreign countries		63		138		258		397
	$	3,343	$	2,353	$	10,583	$	7,235

(1) Customers from which 10 percent or more of revenue is derived includes $0.6 million from USAID

Long-lived Segment Assets

	September 30, 2006		December 31, 2005
	(in thousands)
United States	$	373,184	$	410,866
Foreign countries		3,760		3,408

Excludes deferred financing costs, restricted cash and investments and investments in affiliates and other assets.

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Item 2. Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included herewith, and with our Management’s Discussion and Analysis of Financial Condition and Results of Operations and audited Consolidated Financial Statements and Notes thereto for the year ended December 31, 2005, which is included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 31, 2006.

Executive Summary

Our third quarter 2006 highlights include the following:

• Added 40,195 subscribers globally, including 37,685 subscribers in India on a gross basis. On a net basis, we added 16,866 subscribers globally, 18,568 subscribers in India.

• Signed exclusive broadcast license agreement with ESPN STAR Sports for live audio broadcast of cricket outside India.

• Launched new marketing campaign, centered around our new brand ambassador in India.

• Launched in 12 new markets extending WorldSpace presence to 36 cities and towns in India, with 88 million people, including approximately 48 million in the top three economic segments.

• Continued expansion of our distribution and geographic presence in India, including at the end of the quarter having over 1,467 retail points of presence in 36 cities, and 6 WorldSpace lounges.

• Expanded our programming content offering by launching new Indian Channels, including the launch of Falak, India’s first exclusive 24-hour Urdu channel.

During the third quarter, management focused, among other things, on addressing the issues that negatively affected the second quarter subscriber counts, launching a new marketing campaign, making changes in sales channel incentives, and improving customer-facing operations to better manage churn, especially in India.

We expect a continuous decline in churn rate as our operations gain more traction in India through the ongoing improvements to our customer-facing operations and our marketing campaign. Approximately 85% of our subscriber base was in six-month or longer plans as of September 30, 2006.

In general, the third quarter of 2006 was a relatively challenging quarter for the satellite radio industry. Among other challenges, our industry faces increased competition from a number of technologies affecting the daily lives of consumers including the continued growth in Internet usage, the increase in the number of new terrestrial radio stations approved in India, and the overwhelming popularity of iPods^™ and other digital audio recording and listening devices. To address these challenges, we have been working on a number of initiatives to enhance the value of our service, including acquiring rights to exclusive global content and developing niche WorldSpace-branded programming in an effort to appeal to a wider audience and enhance the quality and variety of programming for subscribers.

Looking ahead, we remain optimistic that we will obtain the necessary licenses to launch a mobile service using the AsiaStar satellite and a terrestrial network in India. We expect to have a mobile unit in full production during the first half of 2007 in anticipation of the timing of the repeater license and build out. We have also been working on preserving our financial resources through effective cost management. WorldSpace continues to be well positioned with a number of assets and real market opportunities to capitalize on our existing infrastructure. We have been having ongoing discussions with potential strategic partners around the world who can assist with the operational execution of our real market opportunities and/or make financial investment in support of these opportunities.

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Summary Operating Metrics

The key metrics we use to monitor our business growth and our operational results are: ending subscribers, Average Monthly Subscription Revenue Per Subscriber (“ARPU”), Subscriber Acquisition Cost (“SAC”), Cost Per Gross Addition (“CPGA”) and EBITDA presented as follows:

	Three months ended September 30,						Nine months ended September 30,
	2006			2005			2006			2005
Net Subscriber Additions		16,866			11,141			61,525			40,801
India		18,568			7,737			63,491			27,335
ROW (5)		(1,702	)		3,404			(1,966	)		13,466
Total EOP Subs		176,831			75,071			176,831			75,071
India		138,065			35,670			138,065			35,670
ROW (5)		38,766			39,401			38,766			39,401
ARPU (1)		3.58			4.43			3.86			4.83
ARPU (India)		2.93			2.73			2.97			2.56
ARPU (ROW) (5)		5.74			5.86			6.27			6.49
SAC (2)		37			27			40			11
SAC(India)		38			38			41			23
SAC(ROW) (5)		5			5			0			0
CPGA (3)		137			407			134			200
CPGA(India)		126			508			126			310
CPGA(ROW) (5)		271			202			240			78
EBITDA (4) (in thousands)	$	(27,141	)	$	(29,113	)	$	(89,174	)	$	(39,661	)

(1) Average Monthly Subscription Revenue Per Subscriber (“ARPU”)—Please see further discussion under Average Monthly Subscription Revenue Per Subscriber under “Managements Discussion and Analysis of Financial Condition” and Results of Operations

(2) SAC—Please see further discussion under Subscriber Acquisition Cost under “Managements Discussion and Analysis of Financial Condition and Results of Operations” and “Results of Operations—Cost of services”

(3) CPGA—Please see further discussion under Cost Per Gross Addition under “Managements Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Operating expense”

(4) EBITDA—We refer to net loss before interest income, interest expense, income taxes, depreciation and amortization as “EBITDA”. EBITDA is not a measure of financial performance under generally accepted accounting principles. We believe EBITDA is often a useful measure of a company’s operating performance and is a significant basis used by our management to measure the operating performance of our business. Because we have funded and completed the build-out of our system through the raising and expenditure of large amounts of capital, our results of operations reflect significant charges for depreciation, amortization and interest expense. EBITDA, which excludes this information, provides helpful information about the operating performance of our business, apart from the expenses associated with our physical plant or capital structure. EBITDA is frequently used as one of the bases for comparing businesses in our industry, although our measure of EBITDA may not be comparable to similarly titled measures of other companies. EBITDA does not purport to represent operating loss or cash flow from operating activities, as those terms are defined under generally accepted accounting principles and should not be considered as an alternative to those measurements as an indicator of our performance.

(5) ROW—Rest of World: All other operating regions excluding India.

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	Three months ended September 30,
	2006			2005
Reconciliation of Net Loss to EBITDA (in thousands):
Net Loss as reported	$	(28,932	)	$	(15,418	)
Addback non-EBITDA items included in net loss:
Interest income		(2,714	)		(2,044	)
Interest expense		2,371			2,336
Depreciation & amortization		14,602			14,732
Income taxes benefit		(12,468	)		(28,719	)
EBITDA	$	(27,141	)	$	(29,113	)
	Nine months ended September 30,
	2006			2005
Reconciliation of Net Loss to EBITDA (in thousands):
Net Loss as reported	$	(94,786	)	$	(46,687	)
Addback non-EBITDA items included in net loss:
Interest income		(8,754	)		(3,647	)
Interest expense		6,996			7,498
Depreciation & amortization		44,056			44,136
Income taxes benefit		(36,686	)		(40,961	)
EBITDA	$	(89,174	)	$	(39,661	)

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Results of Operations

WORLDSPACE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three-Months and Nine-Months ended September 30, 2006 and 2005

	Three months ended September 30,						Nine months ended September 30,
	2006			2005			2006			2005
	(in thousands, except share data)
Revenue
Subscription revenue	$	1,810		$	959		$	5,340		$	2,554
Equipment revenue		659			670			2,433			1,646
Other revenue		874			724			2,810			3,035
Total Revenue		3,343			2,353			10,583			7,235
Operating Expenses
Cost of Services (excludes depreciation, shown separately below)
Satellite and transmission, programming and other		7,300			5,028			21,062			11,898
Cost of equipment		2,674			998			8,144			2,022
Research and development		265			182			756			228
Selling and marketing		5,153			4,426			16,680			6,477
General and administrative		12,566			12,963			40,588			32,467
Stock-based compensation (1)		2,199			9,258			9,386			10,246
Depreciation and amortization		14,602			14,732			44,056			44,136
Total Operating Expenses		44,759			47,587			140,672			107,474
Loss from Operations		(41,416	)		(45,234	)		(130,089	)		(100,239	)
Other Income (Expense)
Gain on extinguishment of debt		—			—			—			14,130
Interest income		2,714			2,044			8,754			3,647
Interest expense		(2,371	)		(2,336	)		(6,996	)		(7,498	)
Other		(327	)		1,389			(3,141	)		2,312
Total Other Income (Expense)		16			1,097			(1,383	)		12,591
Loss Before Income Taxes		(41,400	)		(44,137	)		(131,472	)		(87,648	)
Income Tax Benefit		12,468			28,719			36,686			40,961
Net Loss	$	(28,932	)	$	(15,418	)	$	(94,786	)	$	(46,687	)
Loss per share—basic and diluted	$	(0.77	)	$	(0.48	)	$	(2.54	)	$	(1.78	)
Weighted Average Number of Shares Outstanding		37,584,541			32,024,046			37,253,549			26,159,693
(1)    Allocation of stock based compensation to operating expenses:
Satellite, transmission, programming and other	$	161		$	110		$	507		$	110
Selling, general and administrative	$	2,038		$	9,148		$	8,879		$	10,136

See accompanying notes to unaudited condensed consolidated financial statements.

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Results of Operations

Three months ended September 30, 2006 compared with Three months ended September 30, 2005

Revenue

The table below presents our operating revenue for the three months ended September 30, 2006 and 2005, together with the relevant percentage of total revenue represented by each revenue category.

	Three months ended September 30,
	2006				2005
			Percent of total				Percent of total
	($ in thousands)
Revenue:
Subscription	$	1,810	54.1		$	959	40.8
Equipment sales		659	19.7			670	28.5
Other		874	26.2			724	30.7
Total revenue	$	3,343	100	%	$	2,353	100	%

Total revenue for the three months ended September 30, 2006 was $3.3 million, an increase of 42.1% compared with $2.4 million for the three months ended September 30, 2005. This was primarily due to increased revenue from subscribers to our DARS service and related equipment sales. The mix of our revenue changed during 2005 as we emerged from development stage and deployed newly acquired financial resources to implement our India-focused subscription sales business plan.

Subscription revenue. Subscription revenue for the three months ended September 30, 2006 was approximately $1.8 million, an increase of 88.7 % compared with $1.0 million generated in the three months ended September 30, 2005. This increase in subscription revenues was primarily due to the increase in our paying subscribers.

Average Monthly Subscription Revenue Per Subscriber (ARPU).

Blended ARPU (for India and ROW) was $3.58 for the three months ended September 30, 2006 and $4.43 for the three months ended September 30, 2005. The reduction in blended ARPU for 2006 compared to 2005 resulted from the shift of the subscribers’ weighting to India where single market ARPU is lower than other markets. ARPU from India was $2.93 for the three months ended September 30, 2006, and $2.73 for the three months ended September 30, 2005. In July 2005, we increased the annual subscription pricing by 50% to Rs. 1,800 (approximately $40) from Rs. 1,200 (approximately $27). The increase in the monthly subscription price took effect for all billing cycles on or after July 7, 2005. We expect total blended ARPU to continue to decrease in 2006 as we expect the majority of our subscribers to come from our India market relative to other regions (where we sell a global subscription package ranging from $5.00 per month to $9.99 per month).

Equipment sales revenue. Equipment sales revenue was approximately $0.7 million for the three months ended September 30, 2006, a slight decrease 1.6 % compared with $0.7 million for the three months ended September 30, 2005. Equipment sales revenue remained relatively flat as increased unit sales in India of approximately 37,000 receivers in the three months ended September 30, 2006, compared with approximately 9,000 receivers sold in the three months ended September 30, 2005, were offset by a significantly lower selling price to our distributors.

Other revenue. Other revenue for the three months ended September 30, 2006 was $0.9 million, an increase of 20.7 % compared with $0.7 million for the three months ended September 30, 2005. This increase was

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primarily due to an increase of miscellaneous operating income, offset by a reduction in government services revenue. Other revenue primarily consists of capacity lease revenue, data subscription revenue, government services revenue, and miscellaneous operating income.

Capacity lease revenue. Satellite capacity leasing revenue for the three months ended September 30, 2006 was $0.2 million, a 52.2% increase compared with $0.1 million for the three months ended September 30, 2005, due to a settlement with a broadcaster from a prior year.

Government services revenue. Government services revenue for the three months ended September 30, 2006 was negligible compared with $0.3 million for the three months ended September 30, 2005. Government services revenues decreased as we completed the Pakistan Education Initiative (PEI) contract in September 2005.

Miscellaneous other revenue. Other revenue (including licensing/manufacturing income and syndication income) for the three months ended September 30, 2006 was $0.6 million, an increase of 148.3 % compared with $0.3 million, in the three months ended September 30, 2005. This increase was principally due to increase in syndication revenue from XM Satellite Radio.

Cost of services

The table below presents our costs of services for the three months ended September 30, 2006 and 2005, together with the percentages of total cost of services represented by each category.

	Three months ended September 30,
	2006				2005
			Percent of total				Percent of total
	($ in thousands)
Cost of services:
Engineering & broadcast operations	$	4,295	43.0		$	3,579	59.4
Content & programming		2,593	26.0			1,141	18.9
Customer care, billing & collection		404	4.0			132	2.2
Cost of equipment		2,674	26.8			998	16.6
Other cost of services		8	0.1			176	2.9
Total cost of services	$	9,974	100	%	$	6,026	100	%

Total cost of services for the three months ended September 30, 2006 was $10.0 million, a 65.5 % increase compared with $6.0 million in the three months ended September 30, 2005. This increase was primarily due to increases in the content & programming, and cost of equipment.

Engineering and broadcast operations. Engineering and broadcast expense, including the cost of operating our two satellites, ground control systems and telecommunications links as well as our in-orbit insurance, for the three months ended September 30, 2006 was $4.3 million, an increase of 20.0 % compared with $3.6 million in the three months ended September 30, 2005. This increase was primarily due to an increase in satellite insurance, and increased expenditure for new product development.

Content and programming. Content and programming expense, which includes content production, music royalties and other content acquisition costs, for the three months ended September 30, 2006 was $2.6 million, an increase of 127.2 % compared with $1.1 million for the three months ended September 30, 2005. These expenses increased as we increased staffing levels to support the launch of live programming and additional channels specifically for the Indian market. New channels included Falak, India’s first exclusive 24-hour Urdu channel. We also increased payments for music rights royalties due to the addition of a Bollywood content license expense, PPL license expenses and changes in other content royalties (IFPI, PRS London). We expect increased

21

music royalties in 2006 as we have obtained the exclusive rights for live audio broadcast of cricket outside of India. We expect content costs to continue to increase in 2006 as we launch additional channels for India and other markets, and introduce several channels programmed in a live format. We intend to launch several additional channels for our India market including regional music and lifestyle programs in Gujarati, and Marathi, and retro-hits music, business, comedy, children and educational channels.

Customer care, billing & collection. Customer care, billing and collections expense for the three months ended September 30, 2006 was $0.4 million, an increase of 206.1 % compared to $0.1 million for the three months ended September 30, 2005. This increase was due to increased volume of subscriber related activities. Call center activities have been outsourced to a third party and the expenses related to these activities are expected to increase as we continue to add subscribers throughout 2006.

Cost of Equipment. Cost of equipment for the three months ended September 30, 2006 was $2.7 million, an increase of 167.9 % compared with $1.0 million, in the three months ended September 30, 2005. Cost of equipment increased due to an increased number of receivers being sold in India as we focused on ramping up subscriptions in that market. We expect this trend to continue as we continue to increase our subscribers additions throughout 2006.

Subscriber Acquisition Cost (SAC)

Total blended SAC (for India and ROW) calculated based on unit sales to our distributors, was approximately $37 per subscriber for the three months ended September 30, 2006 and $27 for the three months ended September 30, 2005. SAC for India, was approximately $38 per subscriber for the three months ended September 30, 2006 and approximately $38 per subscriber for the three months ended September 30, 2005.

Other cost of services. Other cost of services for the three months ended September 30, 2006 was minimal, compared with $0.2 million in the three months ended September 30, 2005. This decrease was due to factors which we do not believe to be operationally significant.

Operating expense

The table below presents our operating expense for the three months ended September 30, 2006 and 2005, together with the relevant percentage increase (decrease) year-over-year.

	Three months ended September 30,
	2006		2005		Percent increase (decrease)
	($ in thousands)
Operating expense:
Cost of services	$	9,974	$	6,026	65.5
Research and development		265		182	45.6
Selling and marketing		5,153		4,426	16.4
General & administrative		12,566		12,963	(3.1	)
Stock-based compensation		2,199		9,258	(76.2	)
Depreciation and amortization		14,602		14,732	(0.9	)
Total operating expense:	$	44,759	$	47,587	(5.9	)%

Total operating expense for the three months ended September 30, 2006 was $44.8 million, a 5.9% decrease compared with $47.6 million for the three months ended September 30, 2005. This decrease was primarily due to increases in our cost of services (discussed above), and selling and marketing, partially offset by a decrease in

22

stock-based compensation. Our increase in research & development expense is due to increased expenditure for receiver development. Our selling and marketing expense for the three months ended September 30, 2006 was $5.2 million, an increase of 16.4% compared with $4.4 million in the three months ended September 30, 2005. This increase was primarily due to increased marketing activity as we ramped up our advertising presence in our launched markets. Our general and administrative expense for the three months ended September 30, 2006 was $12.6 million, decreasing 3.1% from $13.0 million for the three months ended September 30, 2005. This minor decrease was due to lower legal consulting costs. Our stock based compensation expense was $2.2 million in the three months ended September 30, 2006 a decrease of 76.2% compared with $9.3 million in the three months ended September 30, 2005. The Company granted certain key executives restricted stock awards, in connection with our initial public offering in August 2005, effective August 3, 2005, which vested over a six month period. This vesting period has been extended through January 3, 2007, hence the reduction in stock option expense related to these options for this period compared to last year. Depreciation and amortization expense for the three months ended September 30, 2006 and the three months ended September 30, 2005 remained relatively constant at $14.6 million and $14.7 million respectively.

Cost Per Gross Addition (CPGA)

Total blended CPGA expense (for India and ROW) was approximately $5.4 million for the three months ended September 30, 2006 and approximately $4.9 million for the three months ended September 30, 2005. Total CPGA expense for India was approximately $4.7 million for the three months ended September 30, 2006 and approximately $4.1 million for the three months ended September 30, 2005. Unit blended CPGA (for India and ROW), was approximately $137 for the three months ended September 30, 2006 and approximately $407 for the three months ended September 30, 2005. CPGA for India, was approximately $126 for the three months ended September 30, 2006 and approximately $508 for the three months ended September 30, 2005. CPGA has decreased due an increase in marketing spend amortized over a larger number of gross subscriber additions. Going forward, we continue to expect CPGA to decline as we amortize our fixed sales & marketing expenditure over an increasing number of gross subscriber additions.

Other income (expense)

Interest income. Interest income for the three months ended September 30, 2006 was $2.7 million, an increase of 32.8 % compared with $2.0 million in the three months ended September 30, 2005. This increase was due to increased average cash balances invested in marketable securities as a result of our 2005 financing activities and higher interest rates on investments.

Interest expense. Interest expense for the three months ended September 30, 2006 was $2.4 million, remaining relatively flat compared to the three months ended September 30, 2005.

Other income (expense). Other expense for the three months ended September 30, 2006 was $0.3 million compared with other income of $1.4 million recorded in the three months ended September 30, 2005. This decrease was due to a write-off of leasehold improvements in 2005.

Income tax

During the three months ending September 30 2006, the Company recorded an income tax benefit of $12.5 million compared to $28.7 million for the three months ending September 30, 2005. This benefit is the result of (1) current period operating losses, partially offset by stock option shortfalls where the actual tax benefit from stock option exercises and vesting of restricted stock was less than the amount previously accrued for book purposes in 2006 and (2) reduction in our corporate effective tax rate by approximately 2% following the move of our headquarters from Washington, D.C. to Silver Spring, M.D. in September 2005.

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Nine months ended September 30, 2006 compared with nine months ended September 30, 2005

Revenue

The table below presents our operating revenue for the nine months ended September 30, 2006 and 2005, together with the relevant percentage of total revenue represented by each revenue category.

	Nine months ended September 30,
	2006				2005
			Percent of total				Percent of total
	($ in thousands)
Revenue:
Subscription	$	5,340	50.5		$	2,554	35.3
Equipment sales		2,433	23.0			1,646	22.8
Other		2,810	26.5			3,035	41.9
Total revenue:	$	10,583	100	%	$	7,235	100	%

Total revenue for the nine months ended September 30, 2006 was $10.6 million, a 46.3 % increase compared with $7.2 million for the nine months ended September 30, 2005. This was primarily due to increased revenue from subscribers to our DARS service and equipment sales, offset by a reduction in other revenues. The mix of our revenue changed during 2005 as we emerged from development stage and deployed newly acquired financial resources to implement our India-focused subscription sales business plan.

Subscription revenue. Subscription revenue for the nine months ended September 30, 2006 was approximately $5.3 million, an increase of 109.1% compared with $2.6 million generated in the nine months ended September 30, 2005. This increase in subscription revenues was primarily due to the increase in our paying subscribers. We expect to increase subscription revenues in 2006 as we expand our subscriber base in India.

Average Monthly Subscription Revenue Per Subscriber (ARPU).

Blended ARPU (for India and ROW) was $3.86 for the nine months ended September 30, 2006 and $4.83 for the nine months ended September 30, 2005. The reduction in blended ARPU for 2006 compared to 2005 resulted from the shift of the subscribers’ weighing to India where single market ARPU is lower than other markets. ARPU from India was $2.97 for the nine months ended September 30, 2006, and $2.56 for the nine months ended September 30, 2005. In July 2005, we increased the annual subscription pricing by 50% to Rs. 1,800 (approximately $40) from Rs. 1,200 (approximately $27). The increase in the monthly subscription price took effect for all billing cycles on or after July 7, 2005. We expect total blended ARPU to decrease for 2006 as we expect the majority of our subscribers to come from our India market relative to other regions (where we sell a global subscription package ranging from $5.00 per month to $9.99 per month).

Equipment sales revenue. Equipment sales revenue was approximately $2.4 million for the nine months ended September 30, 2006, an increase of 47.8 % compared with $1.6 million for the nine months ended September 30, 2005. This increase was primarily due to increased unit sales in India. We sold approximately 117,000 receivers in the nine months ended September 30, 2006, compared with approximately 26,000 receivers sold in the nine months ended September 30, 2005.

Other revenue. Other revenue for the nine months ended September 30, 2006 was $2.8 million, a decrease of 7.4% compared with $3.0 million for the nine months ended September 30, 2005. This decrease was primarily due to a reduction in government services revenue offset by an increase in miscellaneous other revenue. Other revenue primarily consists of capacity lease revenue, government services revenue, data subscription revenue, licensing/manufacturing income and syndication income.

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Capacity lease revenue. Satellite capacity leasing revenue for the nine months ended September 30, 2006 was $0.7 million, a decrease of 24.5% compared with $0.9 million for the nine months ended September 30, 2005. This decrease was a result of a reduction in the number of broadcasters contracting to use our satellite capacity for their broadcasts as we shifted focus toward acquiring new subscribers and away from the capacity leasing business.

Government services revenue. Government services revenue for the nine months ended September 30, 2006 was $0.1 million, a decrease of 86.6 % compared with $1.1 million for the nine months ended September 30, 2005. Government services revenues decreased as we completed the Pakistan Education Initiative (PEI) contract in September 2005, partially offset by the entry into a government contract in the third quarter.

Miscellaneous other revenue. Other revenue (including licensing/manufacturing income and syndication income) for the nine months ended September 30, 2006 was $2.0 million, an increase of 91.2 % compared with $1.0 million, in the nine months ended September 30, 2005. This increase was principally due to revenue from a contract with the European Union, a new data service contract launched in the fourth quarter of 2005, an increase in syndication revenues from XM Radio, and a litigation settlement from a former broadcaster.

Cost of services

The table below presents our costs of services for the nine months ended September 30, 2006 and 2005, together with the relevant percentages of total cost of services for each cost category.

	Nine months ended September 30,
	2006				2005
			Percent of total				Percent of total
	($ in thousands)
Cost of services:
Engineering & broadcast operations	$	12,210	41.8		$	7,962	57.2
Content & programming		6,665	22.8			2,885	20.7
Customer care, billing & collection		1,487	5.1			284	2.0
Cost of equipment		8,144	27.9			2,022	14.5
Other cost of services		700	2.4			767	5.6
Total cost of services:	$	29,206	100	%	$	13,920	100	%

Total cost of services for the nine months ended September 30, 2006 was $29.2 million, an increase of 109.8% compared with $13.9 million in the nine months ended September 30, 2005. This increase was primarily due to increases in the engineering and broadcast operations, cost of equipment, and content & programming.

Engineering and broadcast operations. Engineering and broadcast expense, including the cost of operating our two satellites, ground control systems and telecommunications links as well as our in-orbit insurance, for the nine months ended September 30, 2006 was $12.2 million, an increase of 53.4 % compared with $8.0 million in the nine months ended September 30, 2005. This increase was primarily due to an increase in in-orbit insurance as we renewed policies on our AfriStar and AsiaStar satellites in April 2005, and increased spending on product development efforts, offset by a pricing adjustment related to satellite monitoring services provided by a vendor.

Content and programming. Content and programming expense, which includes content production, music royalties and other content acquisition costs, for the nine months ended September 30, 2006 was $6.7 million, an increase of 131.0 % compared with $2.9 million for the nine months ended September 30, 2005. These expenses increased as we increased staffing levels to support the launch of live programming and additional channels specifically for the Indian market. New channels included PLAY, the first 24 hour sports talk channel in that

25

market, and Falak, India’s first 24 hour Urdu channel. We also increased payments for music rights royalties due

to the addition of a Bollywood content license expense, PPL license expenses and changes in other content royalties (IFPI, PRS London). We expect increased music royalties in 2006 as we have obtained the exclusive rights for live audio broadcast of cricket outside of India. We also expect content production costs to continue to increase in 2006 as we launch additional channels for India and other markets, and introduce several channels programmed in a live format. We intend to launch several additional channels for our India market including regional music and lifestyle programs in Gujarati, and Marathi, and business, comedy, children and educational channels.

Customer care, billing & collection. Customer care, billing and collections expense for the nine months ended September 30, 2006 was $1.5 million, an increase of 423.6 % compared to $0.3 million for the nine months ended September 30, 2005. This increase was due to increased volume of subscriber related activities. These expenses are expected to increase as we continue to add subscribers throughout 2006.

Cost of Equipment. Cost of equipment for the nine months ended September 30, 2006 was $8.1 million, an increase of 302.8 % compared with $2.0 million, in the nine months ended September 30, 2005. Cost of equipment increased due to an increased number of receivers being sold in India as we focused on ramping up subscriptions in that market. We expect this trend to continue as we continue to increase our subscriber additions throughout 2006.

Subscriber Acquisition Cost (SAC)

Total blended SAC (for India and ROW) calculated based on unit sales to our distributors, was approximately $40 per subscriber for the nine months ended September 30, 2006 and $11 for the nine months ended September 30, 2005. SAC for India, was approximately $41 per subscriber for the nine months ended September 30, 2006 and approximately $23 per subscriber for the nine months ended September 30, 2005.

Other cost of services. Other cost of services remained relatively flat for the nine months ended September 30, 2006 and 2005.

Operating expense

The table below presents our operating expense for the nine months ended September 30, 2006 and 2005, together with the relevant percentage increase (decrease) year-over-year.

	Nine Months Ended September 30,
	2006		2005		Percent increase (decrease)
Operating expense:
Cost of Services	$	29,206	$	13,920	109.8
Research and development		756		228	231.6
Selling and marketing		16,680		6,477	157.5
General & administrative		40,588		32,467	25.0
Stock-based compensation		9,386		10,246	(8.4	)
Depreciation and amortization		44,056		44,136	(.2	)
Total operating expense:	$	140,672	$	107,474	30.9	%

Total operating expense for the nine months ended September 30, 2006 was $140.7 million, an increase of 30.9% compared with $107.5 million for the nine months ended September 30, 2005. This increase was primarily due to increases in our cost of services (discussed above), selling and marketing, and general and administrative expense. Our increase in research & development expense is due to increase in receiver product

26

development activities. Our selling and marketing expense for the nine months ended September 30, 2006 was $16.7 million, an increase of 157.5% compared with $6.5 million in the nine months ended September 30, 2005. This increase was primarily due significantly increased marketing activity as we ramped up our advertising presence in our launched markets. Our general and administrative expense for the nine months ended September 30, 2006 was $40.6 million, an increase of 25.0 % compared with $32.5 million in the nine months ended September 30, 2005. This increase was primarily due to a $3.6 million increase in headcount expense as we increased staffing to execute on our business plan, and a $4.9 million increase in outside services (primarily temporary consultants, and technical & regulatory services), offset by a $1.0 million reduction in facilities expense as we moved into our Silver Spring headquarters. Our stock based compensation expense was $9.4 million in the nine months ended September 30, 2006 a decrease of 8.4 % compared with $10.2 million in the nine months ended September 30, 2005. Depreciation and amortization expense for the nine months ended September 30, 2006 and the nine months ended September 30, 2005 remained relatively constant at approximately $44.1 million.

Cost Per Gross Addition (CPGA)

Total blended CPGA expense (for India and ROW) was approximately $16.2 million for the nine months ended September 30, 2006 and approximately $6.8 million for the nine months ended September 30, 2005. Total CPGA expense for India was approximately $14.5 million for the nine months ended September 30, 2006 and approximately $5.6 million for the nine months ended September 30, 2005. Unit blended CPGA (for India and ROW), was approximately $134 for the nine months ended September 30, 2006 and approximately $200 for the nine months ended September 30, 2005. CPGA for India, was approximately $126 for the nine months ended September 30, 2006 and approximately $310 for the nine months ended September 30, 2005. Unit CPGA has decreased due to marketing expenditure being spread over a larger number of gross subscriber additions.

Other income (expense)

Interest income. Interest income for the nine months ended September 30, 2006 was $8.8 million, an increase of 140.0 % compared with $3.6 million in the nine months ended September 30, 2005. This increase was due to increased average cash balances as a result of our recent financing activities and higher interest rates.

Interest expense. Interest expense for the nine months ended September 30, 2006 was $7.0 million, a decrease of 6.7 % compared with $7.5 million in the nine months ended September 30, 2005. This decrease was primarily due to the extinguishments of debt related to the Alcatel settlement in the nine months ended September 30, 2005.

Other income (expense). Other expense for the nine months ended September 30, 2006 was $3.1 million compared with Other income of $2.3 million recorded in the nine months ended September 30, 2005. This increase was due to a write-off of leasehold improvements, and foreign currency fluctuation adjustment under a contract where our payment obligation was denominated in Euros.

Income tax

During the nine months ending September 30 2006, the Company recorded an income tax benefit of $36.7 million compared to $41.0 million for the nine months ending September 30, 2005. This benefit is the result of (1) current period operating losses, partially offset by stock option shortfalls where the actual tax benefit from stock option exercises and vesting of restricted stock was less than the amount previously accrued for book purposes (2) release of a partial valuation allowance against certain foreign net operating losses (3) an adjustment associated with Internal Revenue code, Section 162(m) limitation and (4) reduction in our corporate effective tax rate by approximately 2% following the move of our headquarters from Washington, D.C. to Silver Spring, M.D. in September 2005.

27

LIQUIDITY AND CAPITAL RESOURCES

Overview

As of September 30, 2006, we had cash and cash equivalents of $33.7 million, and marketable securities of $156.3 million. Cash and cash equivalents and marketable securities decreased $86.0 million during the nine months ended September 30, 2006. This decrease resulted from $78.7 million used in operating activities, $74.3 million provided by investing activities, and $1.1 million provided by financing activities. Cash flows used in operations includes the net loss of $94.8 million and $3.5 million used in working capital partially offset by $19.6 million in non cash expenses included in net loss. Cash flows provided by investing activities consisted mainly of $82.8 million in net sales of marketable securities partially offset by $5.7 million used for the purchase of property and equipment and $2.7 million used for purchase of satellite and related systems. Cash flows provided by Financing activities consisted of $2.2 million from the proceeds from exercise of employee stock options, $0.4 million from net minority interest contributions, offset by a $2.0 million increase in restricted cash for certain lease obligations.

Historical sources of cash

We raised $1.8 billion of equity and debt net proceeds from inception through August 3, 2005 from investors and strategic partners to fund our operations.

IPO

On August 3, 2005, we agreed to sell 11,500,000 shares of common stock at a price to the public of $21.00 per share in our initial public offering. The aggregate gross proceeds to us from the public offering were approximately $241.5 million. We incurred expenses of approximately $20.5 million of which approximately $16.9 million represented underwriting discounts and commissions and approximately $3.6 million represented expenses related to the offering. Net proceeds to us from the offering were $221.0 million.

XM Investment

On July 18, 2005, we issued XM Satellite Radio 1,562,500 shares of Class A common stock for an aggregate purchase price of $25 million. The net proceeds after deducting expenses were $22.5 million.

Uses of Cash

Our cash used during the three months ended September 30, 2006 consisted primarily of funding operating expenses and working capital.

Future Operating Liquidity and Capital Resource Requirements

Based upon our current plans, we believe that our cash, cash equivalents and marketable securities will be sufficient to cover our estimated funding needs for at least the next 12 months. Our financial projections are based on assumptions which we believe are reasonable but contain significant uncertainties.

We currently intend to use our existing cash reserves to execute our business plan, which for India, includes the build-out of a terrestrial repeater network, service launch in key cities and marketing expenses related to subscriber acquisitions; for Italy, contemplates service launch and technology related expenses; for the Middle East, involves minimal terrestrial repeater capital expense for a network in Bahrain; and for China, other Western Europe markets and other selected markets within our coverage area, includes limited business development expenses. We expect that the majority of our expenditures in 2006 will be directed towards sales and marketing activities, including developing subscriber operations, increasing content and programming development, capital expenditures, operating and corporate expenses including interest, tax payments, research, development and

28

manufacture of our mobile receivers and terrestrial repeaters. We are currently reviewing our business plan for potential modifications that could result in the reduction of cash expenditures over the next 12 months.

Our business is in its early stages, and we regularly evaluate our plans and strategy. These evaluations may result in changes to our plans and strategy, some of which may be material and significantly change our cash requirement. Our business plan is based on estimates regarding expected future costs and expected revenue. Our costs may exceed or our revenues may fall short of our estimates, our estimates may change, and future developments may affect our estimates. Furthermore, we will require additional cash to fully launch our business in China and Western Europe and fund the cost to modify and launch our spare satellite.

Any of these factors may increase our need for funds, which would require us to seek additional financing to continue implementing our current business plan. However, there can be no assurance that we will be successful in securing financing or that it will be available to us at attractive terms.

Our ability to obtain the financing in the future will depend on several factors, including future market conditions; our success in developing, implementing and marketing our satellite radio service, our future creditworthiness and restrictions contained in agreements with our investors or lenders. If we fail to obtain any necessary financing on a timely basis or on attractive terms, our results of operations could be materially adversely affected. Additional financings could also increase our level of indebtedness or result in further dilution to existing shareholders.

Capital expenditures

We have spent approximately $747 million on capital expenditures related to the development and launch of our satellites, for our ground systems and for property and equipment. We may spend additional amounts to enhance our infrastructure with terrestrial repeaters depending on licenses and business requirement, if supported by an appropriate business model and funding of such projects. We expect to start our terrestrial repeater network build-out in key metropolitan areas in India next year, assuming we obtain the necessary regulatory approvals, and the total cost to cover these major metropolitan areas we currently estimate to be approximately $20 million. This amount will need to be reviewed as we conduct actual testing, including further topographical analysis. We also expect to start our terrestrial repeater build out in Bahrain; however we do not expect this cost to be significant. Over the next 12 months we also anticipate technology and terrestrial repeater development expenses associated with rolling out our services in Italy. We estimate those expenses to be approximately $20 million. This amount will need to be reviewed as we conduct actual testing as in India. Until we receive the final approvals from China’s regulatory agencies, we will not start the build-out of a terrestrial repeater network in China. We do not envision this project starting in the next 12 months. We expect the total network in China to cost a similar amount as India in its initial stages. Our future capital expenditures will depend on our business strategy and our response to business opportunities and trends in our industry and our markets.

29

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency

As a global company, we are exposed to foreign currency risks that arise from normal business operations. These risks include the translation of local currency balances of our foreign subsidiaries, intercompany balances between subsidiaries that operate in different functional currencies and transactions with customers, suppliers and employees that are denominated in foreign currencies. Our objective is to minimize our exposure to these risks through our normal operating activities and, where appropriate, to have these transactions denominated in United States dollars. For the Nine months ended September 30, 2006, approximately 56% of our total revenues and 23% of total operating expenses were denominated in foreign currencies. For the Nine months ended September 30, 2005, approximately 57% of our total revenues and 48% of total operating expenses were denominated in foreign currencies. The following table shows approximately the split of these foreign currency exposures by principal currency:

	Foreign Currency Exposure at September 30, 2006
	Euro		Indian Rupee		Kenyan Shilling		South African Rands		Other		Total Exposure
Total Revenues (Nine months ended September 30, 2006)	21	%	51	%	15	%	9	%	4	%	100	%
Total Cost of Revenues and Operating Expenses (Nine months ended September 30, 2006)	18	%	68	%	5	%	3	%	6	%	100	%

For fiscal 2005, approximately 51% of our total revenues and 17% of our total operating expenses were denominated in foreign currencies.

Interest Rates

Our market risk from changes in interest rates is not material because our long-term debt consists of the Convertible Notes and notes payable, both of which have a fixed interest rate.

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Item 4. Controls and Procedures

We maintain disclosure controls and procedures that have been designed to ensure that information related to the Company is recorded, processed, summarized and reported on a timely basis. The Company has established a Disclosure Committee that is responsible for accumulating potentially material information regarding the Company’s activities and considering the materiality of this information. The Disclosure Committee is also responsible for making recommendations regarding disclosure and communicating this information to our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. The Company’s Disclosure Committee comprises our senior legal official, chief financial officer, chief operating officer, corporate controller, head of internal audit and certain other members of the Company’s finance department.

Evaluation of the Company’s disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, as required by Rule 13a-15 of the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting. The Company has instituted control improvements, including hiring additional key accounting personnel and instituting a greater level of internal control consciousness. In addition, during the quarter ended September 30, 2006, the Company added further controls by implementing additional review procedures over the selection, application and monitoring of appropriate accounting policies, and increasing oversight of its overseas subsidiaries. There have been no additional changes in its respective internal control over financial reporting during the quarter ended September 30, 2006, that have materially affected, or are reasonably likely to materially affect, our respective internal control over financial reporting.

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Part II—Other Information

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) See information included in the Company’s Current Reports on Form 8-K filed on August 30, 2006 and September 13, 2006, respectively.

(b) Use of proceeds.

On August 3, 2005, the Company’s registration statement on Form S-1 (Commission File No. 333-124044) became effective. The aggregate proceeds of the offering were $249.2 million, of which the aggregate gross proceeds to the Company were approximately $241.5 million. Net proceeds to the Company were approximately $221.0 million. The Company incurred expenses in connection with the offering of $20.5 million which included direct payments of: (i) $3.4 million in legal, accounting and printing fees; (ii) $16.9 million in underwriters’ discounts, fees and commissions payable by the Company and (iii) $0.2 million in miscellaneous expenses. None of the offering expenses were paid to directors, officers, ten percent stockholders or affiliates of the Company.

As of September 30, 2006, the Company held approximately $196.5 million of the net proceeds from the offering, of which $156.3 million are invested in short-term marketable securities and money market instruments and $40.2 million are held as demand deposits and restricted cash with various banks. The Company has utilized $24.5 million of the net proceeds towards the following expenditures:

(1) Capital expenditures to an extent of $1.4 million;

(2) Income taxes to an extent of $1.0 million;

(3) Sales and marketing expenditures to an extent of $5.2 million; and

(4) Cost of goods sold, general and administrative expenses to an extent of $16.9 million.

(c) Not applicable.

Item 3. Defaults Upon Senior Securities

(a) Not applicable.

(b) Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

(a) Not applicable.

(b) Not applicable.

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Item 6. Exhibits

10.1	Conversion Agreement dated August 29, 2006 among the Company and Yenura Pte. Ltd.
31.1	Certification of the Chief Executive Officer of WorldSpace, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of the Chief Financial Officer of WorldSpace, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of the Chief Executive Officer of WorldSpace, Inc. pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer of WorldSpace, Inc. pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

WORLDSPACE, INC. (Registrant)
By:	/s/    NOAH A. SAMARA
	Noah A. Samara Chairman, Chief Executive Officer and President
	/s/    SRIDHAR GANESAN
	Sridhar Ganesan Executive Vice President—Chief Financial Officer

Dated: November 14, 2006

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EXHIBIT INDEX

Exhibit No.
10.1	Conversion Agreement dated August 29, 2006 among the Company and Yenura Pte. Ltd.
31.1	Certification of the Chief Executive Officer of WorldSpace, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of the Chief Financial Officer of WorldSpace, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of the Chief Executive Officer of WorldSpace, Inc. pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2	Certification of the Chief Financial Officer of WorldSpace, Inc. pursuant to Section 906 of Sarbanes-Oxley Act of 2002

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