EchoStar CORP - Quarter Report: 2008 September (Form 10-Q)

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
		Disclosure Regarding Forward-Looking Statements			i
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets — September 30, 2008 and December 31, 2007 (Unaudited)			1
		Condensed Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2008 and 2007 (Unaudited)			2
		Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2008 and 2007 (Unaudited)			3
		Notes to Condensed Consolidated Financial Statements (Unaudited)			4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			36
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			50
Item 4.		Controls and Procedures			53
PART II — OTHER INFORMATION
Item 1.		Legal Proceedings			53
Item 1A.		Risk Factors			57
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			58
Item 3.		Defaults Upon Senior Securities		None
Item 4.		Submission of Matters to a Vote of Security Holders		None
Item 5.		Other Information		None
Item 6.		Exhibits			59
		Signatures			60
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-99.1
EX-99.2

PART I — FINANCIAL INFORMATION

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

We make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 throughout this report. Whenever you read a statement that is not simply a statement of historical fact (such as when we describe what we “believe,” “intend,” “plan,” “estimate,” “expect” or “anticipate” will occur and other similar statements), you must remember that our expectations may not be achieved, even though we believe they are reasonable. We do not guarantee that any future transactions or events described herein will happen as described or that they will happen at all. You should read this report completely and with the understanding that actual future results may be materially different from what we expect. Whether actual events or results will conform with our expectations and predictions is subject to a number of risks and uncertainties. The risks and uncertainties include, but are not limited to, the following:

	•		We currently depend on DISH Network for substantially all of our revenue. In addition, a second customer, Bell ExpressVu, accounts for a majority of our revenue that is not from DISH Network. The loss of, or a significant reduction in orders from, or a decrease in selling prices of set-top boxes, transponder leasing, digital broadcast operations and/or other services to DISH Network or Bell ExpressVu would significantly reduce our revenue, adversely impact our results of operations and have a material adverse effect on our results of operations and financial position. Many of our agreements with DISH Network for these services expire on January 1, 2010 and there can be no assurance that we will be able to renew these agreements on substantially similar terms. Our relationship with DISH Network could be terminated or substantially curtailed with little or no advance notice.
	•		Because of our dependence on DISH Network and our expectation that DISH Network will continue to be our primary customer, weaknesses in the economy and other factors adversely affecting DISH Network, may indirectly have an adverse impact on us. For example, the decision by AT&T to terminate its distribution relationship with DISH Network effective January 31, 2009 may reduce the level of subscriber additions at DISH Network and may indirectly cause a reduction in the volume of sales of set-top boxes that we make to DISH Network.
	•		We may not realize the potential benefits that we expect from our separation (“Spin-off”) from DISH Network including the ability to market our products and services to entities that are competitors of DISH Network. Certain of these benefits depend upon market acceptance of our separation from DISH Network, which we cannot predict and which may be affected by significant cross-ownership by Charles W. Ergen, our Chairman and Chief Executive Officer, as well as certain common management and directors among us and DISH Network. There are also negative effects arising from the Spin-off, including loss of access to DISH Network’s financial resources. We may also experience loss of synergies as a result of the Spin-off, particularly as a result of higher administrative and support requirements and additional infrastructure and personnel resources necessary for our operations.
	•		We currently have substantial unused satellite capacity. Future costs associated with this excess capacity will negatively impact our margins if we do not generate revenue to offset these costs. In addition, because a substantial portion of the capacity of each of our AMC-15 and AMC-16 satellites remains without long-term contracts, there is a significant risk that in the future, in addition to reporting lower than expected revenues and profitability, we could be required to record a substantial impairment charge relating to one or both of these satellites. We currently estimate that these potential charges could aggregate up to approximately $200 million, which would have a material adverse effect on our results of operations and financial position.
	•		We have suspended construction of the CMBStar satellite and in future periods may conclude it appropriate to record an impairment charge. During April 2008, we notified the State Administration of Radio, Film and Television of China that we were suspending construction of the CMBStar satellite pending, among other things, further analysis relating to efforts to meet the satellite performance criteria and/or confirmation that alternative performance criteria would be acceptable. We are currently evaluating potential alternative uses for the CMBStar satellite. If these alternative uses are insufficient to recover the carrying value invested to date in the satellite, we may be required to record an impairment charge in a future period relating to the CMBStar satellite. We currently estimate that this potential charge could be as much as $100 million, which would have a material adverse effect on our results of operations and financial position.
	•		We expect to face additional competition from companies, principally located in Asia, which offer low cost set-top boxes, including set-top boxes that are modeled after our products or products of our principal

competitors. The entry of these new competitors may result in pricing pressure in the market. If market prices are substantially reduced by such new entrants, our business, financial condition or results of operations could be materially adversely affected. In particular, it may be difficult for us to make profitable sales in international markets where these new competitors are present and in which we have not previously made sales of set-top boxes, which in turn could harm our long-term growth strategy of expanding into international markets.

	•		Our 2007 combined financial information included in this report is not indicative of our future financial position, future results of operations or future cash flows, nor does it necessarily reflect what our financial position, results of operations or cash flows would have been as a separate company during the periods prior to the Spin-off that are presented in this report. We were not profitable during 2007, as our operations have historically been dedicated primarily to supporting DISH Network and, prior to 2008, we provided our products and services to DISH Network at cost.
	•		We may face actual or perceived conflicts of interest with DISH Network in a number of areas relating to our past, ongoing and future relationships, including (i) cross-officerships, directorships and stock ownership, (ii) related party transactions, and (iii) future business opportunities.
	•		Our ability to grow or maintain our business may be adversely affected by weakening global or domestic economic conditions, wavering consumer confidence, unemployment, tight credit markets, declines in global and domestic stock markets, falling home prices and other factors adversely affecting the global and domestic economy. Unfavorable events in the economy, including a further deterioration in the credit and equity markets, could affect consumer demand for pay-TV services and consequently cause sales of our set-top boxes to decline materially because consumers may delay purchasing decisions or reduce or reallocate their discretionary spending. Adverse economic conditions may also make it more difficult for us to access financing on acceptable terms or at all and may cause us to impair our investment portfolio.
	•		We may use a significant portion of our existing cash and marketable securities to fund stock buyback programs. Our board of directors previously authorized stock repurchases of up to $1.0 billion of our Class A common stock. As of September 30, 2008, we have repurchased 0.6 million shares of our Class A common stock for $15 million. Effective November 6, 2008, our board of directors extended the plan and authorized a reduction in the maximum dollar value of shares that may be repurchased, such that we are currently authorized to repurchase up to $500 million of our outstanding shares through and including December 31, 2009. There can be no assurance however, that we will repurchase any additional Class A common stock through this repurchase program.
	•		We have entered into certain strategic transactions and investments, and we may increase our strategic investment activity in the United States and in international markets. These investments, which we believe could become substantial over time, involve a high degree of risk, are concentrated in a few companies and could expose us to significant financial losses if the underlying ventures are not successful. These investment opportunities may also cause us to defer or suspend share repurchases.
	•		Our business relies on intellectual property, some of which is owned by third parties, the patents and proprietary rights of which we may inadvertently infringe. We may be required to cease developing or marketing infringing products, to obtain licenses from the holders of the intellectual property at a material cost, or to redesign those products in such a way as to avoid infringing the patent claims of others.
	•		We depend on sales of set-top boxes for the majority of our revenue, and if sales of our set-top boxes decline, our business and financial position will suffer. Future demand for our set-top boxes will rely significantly on market acceptance of high definition television, or HDTV.
	•		Our commercial success in selling our set-top boxes to cable operators and other providers of digital television depends significantly on our ability to obtain licenses to use the conditional access systems deployed by these operators in our set-top boxes. The owners of these conditional access systems are in many cases competitors of ours. There can be no assurance we will be able to obtain such licenses on acceptable terms or at all.
	•		The future growth of our set-top box, satellite and transponder leasing, digital broadcast operations, professional services and related businesses, will depend on a number of factors, including: the level of market acceptance and demand for these products and services in domestic and international markets, our ability to introduce new products and services that meet market demand, our ability to develop

relationships with and make sales of these products and services to providers of digital television in international markets and domestic cable operators and other providers of digital television that are competitors of our former parent, DISH Network, our ability to maintain the health, capacity and control of our existing satellite network, the effectiveness of our competitors in developing and offering similar products and services and our ability to hire additional sales personnel to develop and manage new customer relationships.

	•		We rely on key personnel including Charles W. Ergen, our chairman and chief executive officer, and other executives, certain of whom will for some period also have responsibilities with DISH Network through their positions at DISH Network or our management services agreement with DISH Network.
	•		Our set-top boxes are extremely complex and can have defects in design, manufacture or associated software. We could incur significant expenses, lost revenue, and reputational harm if we fail to detect or effectively address such issues through design, testing or warranty repairs.
	•		We obtain many components for our set-top boxes from a single supplier or a limited group of suppliers. Our reliance on a single or limited group of suppliers, particularly foreign suppliers, and our reliance on subcontractors, involves several risks. These risks include a potential inability to obtain an adequate supply of required components, and reduced control over pricing, quality, and timely delivery of these components.
	•		If we are unsuccessful in defending against Tivo’s motion for contempt or any subsequent claims that our technology infringes Tivo’s patent, we could be prohibited from distributing DVRs, or be required to modify or eliminate certain user-friendly DVR features that we currently offer to consumers. In that event, we would be at a significant disadvantage to our competitors who could offer this functionality. We could also have to pay substantial additional damages.
	•		The satellite services industry is highly competitive and is characterized by long-term leases and high switching costs. It will be difficult to displace customers from their current relationships with our competitors and we may face competition from others in the future.
	•		Satellites are subject to significant operational risks while in orbit. While we believe that our satellite fleet is generally in good condition, certain satellites in our fleet have experienced malfunctions or anomalies, some of which have had a significant adverse impact on their commercial operation. There can be no assurance that we can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail. Therefore, the loss of a satellite or other satellite malfunctions or anomalies could have a material adverse effect on us.
	•		We are subject to comprehensive governmental regulation by the FCC for our domestic satellite operations. We are also regulated by other federal agencies, state and local authorities and the International Telecommunication Union. Domestic and international regulations regarding the licensing, authorization and operations of satellite communications providers may restrict our satellite services operations.
	•		We do not carry insurance for any of the in-orbit satellites that we will own, and we will bear the risk of any failures of our in-orbit satellites. Because we bear this risk, failures of our in-orbit satellites could have a material adverse effect on our results of operations and financial position.
	•		We may face other risks described from time to time in periodic and current reports we file with the Securities and Exchange Commission (“SEC”).

All cautionary statements made herein should be read as being applicable to all forward-looking statements wherever they appear. In this connection, investors should consider the risks described herein and should not place undue reliance on any forward-looking statements. We assume no responsibility for updating forward-looking information contained or incorporated by reference herein or in other reports we file with the SEC.

In this report, the words “EchoStar,” the “Company,” “we,” “our” and “us” refer to EchoStar Corporation and its subsidiaries, unless the context otherwise requires. “DISH Network” refers to DISH Network Corporation and its subsidiaries, unless the context otherwise requires.

Item 1. FINANCIAL STATEMENTS

ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)

		As of
		September 30,				December 31,
		2008				2007
Assets
Current Assets:
Cash and cash equivalents		$	329,794			$	41,082
Marketable investment securities			633,307				491,185
Trade accounts receivable — DISH Network			491,886				—
Trade accounts receivable — other, net of allowance for uncollectible accounts of $343 and $51, respectively			47,339				34,154
Inventories, net			51,048				21,043
Other current assets			30,252				23,290
Total current assets			1,583,626				610,754
Restricted cash and marketable investment securities			2,846				—
Property and equipment, net of accumulated depreciation of $1,387,087 and $32,857, respectively			1,455,957				213,837
FCC authorizations			69,810				42,873
Intangible assets, net			189,882				71,646
Goodwill			247,053				248,428
Marketable and non-marketable investment securities			321,034				59,160
Other noncurrent assets, net			55,546				14,212
Total assets		$	3,925,754			$	1,260,910
Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities:
Trade accounts payable — DISH Network		$	72,160			$	—
Trade accounts payable — Other			265,901				22,786
Deferred revenue and other			6,913				4,055
Accrued expenses — DISH Network			966				—
Accrued expenses and other			151,552				22,191
Current portion of capital lease obligations, mortgages and other notes payable			51,513				1,365
Total current liabilities			549,005				50,397
Long-term obligations, net of current portion:
Capital lease obligations, mortgages and other notes payable, net of current portion			308,455				2,344
Deferred tax liabilities			86,298				651
Other long-term liabilities			839				—
Total long-term obligations, net of current portion			395,592				2,995
Total liabilities			944,597				53,392
Commitments and Contingencies (Note 11)
Stockholders’ Equity (Deficit):
Preferred Stock, $.001 par value, 20,000,000 shares authorized, none issued and outstanding			—				—
Class A common stock, $.001 par value, 1,600,000,000 shares authorized, 42,278,616 shares and no shares issued, and 41,727,170 shares and no shares outstanding, respectively			42				—
Class B common stock, $.001 par value, 800,000,000 shares authorized, 47,687,039 shares and no shares issued and outstanding, respectively			48				—
Class C common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding			—				—
Class D common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding			—				—
Additional paid-in capital			3,249,848				—
Accumulated other comprehensive income (loss)			409				66,696
Accumulated earnings (deficit)			(254,405	)			—
Owner’s net investment			—				1,140,822
Treasury stock, at cost			(14,785	)			—
Total stockholders’ equity (deficit)			2,981,157				1,207,518
Total liabilities and stockholders’ equity (deficit)		$	3,925,754			$	1,260,910

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Revenue:
Equipment sales — DISH Network		$	461,675			$	342,434			$	1,134,408			$	1,016,247
Equipment sales — other			55,110				61,919				206,883				160,671
Satellite services, digital broadcast operations and other services — DISH Network			91,388				—				276,877				—
Satellite and other services — other			8,000				63				35,916				5,850
Total revenue			616,173				404,416				1,654,084				1,182,768
Costs and Expenses:
Cost of sales — equipment			446,970				378,568				1,146,878				1,116,577
Satellite services, digital broadcast operations and other cost of sales (exclusive of depreciation shown below — Note 12)			52,670				185				162,885				4,444
Research and development expense			10,227				15,653				37,792				44,697
Selling, general and administrative expenses			28,252				7,044				79,921				19,556
General and administrative expenses — DISH Network			6,192				10,192				19,488				33,271
Depreciation and amortization (Note 12)			69,781				1,482				193,767				4,391
Total costs and expenses			614,092				413,124				1,640,731				1,222,936
Operating income (loss)			2,081				(8,708	)			13,353				(40,168	)
Other Income (Expense):
Interest income			21,436				1,919				62,249				2,861
Interest expense			(7,839	)			(248	)			(24,400	)			(785	)
Casualty loss expense (Note 6)			—				—				(12,799	)			—
Unrealized gains (losses) due to changes in the fair value of certain debt and equity investments, net			(162,949	)			—				(182,592	)			—
Other (Note 5)			(155,618	)			1,548				(94,418	)			782
Total other income (expense)			(304,970	)			3,219				(251,960	)			2,858
Income (loss) before income taxes			(302,889	)			(5,489	)			(238,607	)			(37,310	)
Income tax (provision) benefit, net (Note 10)			(5,041	)			(1,161	)			(15,798	)			(2,633	)
Net income (loss)		$	(307,930	)		$	(6,650	)		$	(254,405	)		$	(39,943	)
Denominator for basic and diluted net income (loss) per share — Class A and B common stock:
Denominator for basic net income (loss) per share — weighted-average common shares outstanding			89,884				89,712				89,825				89,712
Denominator for diluted net income (loss) per share — weighted-average common shares outstanding			89,884				89,712				89,825				89,712
Net income (loss) per share — Class A and B common stock:
Basic net income (loss)		$	(3.43	)		$	(0.07	)		$	(2.83	)		$	(0.45	)
Diluted net income (loss)		$	(3.43	)		$	(0.07	)		$	(2.83	)		$	(0.45	)

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

		For the Nine Months
		Ended September 30,
		2008				2007
Cash Flows From Operating Activities:
Net income (loss)		$	(254,405	)		$	(39,943	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization			193,767				4,391
Equity in losses (earnings) of affiliates			3,304				(478	)
Realized and unrealized losses (gains) on investments			230,978				(4,533	)
Impairment on FCC authorizations			38,721				—
Non-cash, stock-based compensation			17,477				2,865
Deferred tax expense (benefit)			(51,634	)			10
Other, net			(1,098	)			850
Change in noncurrent assets			(36,610	)			—
Changes in current assets and current liabilities, net			(107,079	)			2,562
Net cash flows from operating activities			33,421				(34,276	)
Cash Flows From Investing Activities:
Purchases of marketable investment securities			(2,440,917	)			—
Sales and maturities of marketable investment securities			2,439,078				—
Purchases of property and equipment			(147,268	)			(120,076	)
Proceeds from insurance settlement			40,750				—
Change in restricted cash and marketable investment securities			304				—
Purchase of strategic investments and other, included in marketable and non-marketable investment securities			(133,692	)			(40,000	)
Other			(1,012	)			(160	)
Net cash flows from investing activities			(242,757	)			(160,236	)
Cash Flows From Financing Activities:
Repayment of capital lease obligations, mortgages and other notes payable			(37,016	)			—
Contribution of cash and cash equivalents from DISH Network in connection with the Spin-off (Note 1)			544,065				—
Changes in advances from owner			—				198,625
Class A common stock repurchases (Note 9)			(14,785	)			—
Net proceeds from Class A common stock options exercised and Class A common stock issued under the Employee Stock Purchase Plan			5,784				—
Net cash flows from financing activities			498,048				198,625
Net increase (decrease) in cash and cash equivalents			288,712				4,113
Cash and cash equivalents, beginning of period			41,082				29,621
Cash and cash equivalents, end of period		$	329,794			$	33,734
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest		$	24,509			$	138
Cash received for interest		$	17,637			$	974
Cash paid for income taxes		$	23,045			$	91
Vendor financing		$	15,172			$	—
Non-cash investing activities		$	15,862			$	—
Non-cash proceeds from the sale of a company which held certain FCC authorizations		$	132,900			$	—
Net assets contributed in connection with the Spin-off, excluding cash and cash equivalents		$	1,541,682			$	—

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization and Business Activities

Principal Business

The spin-off by DISH Network Corporation (“DISH Network”) of technology and infrastructure assets to EchoStar Corporation (“EchoStar,” the “Company,” “we,” and/or “us”) was completed on January 1, 2008 through a distribution of 100% of the common stock of EchoStar to the holders of DISH Network’s common stock (the “Spin-off”). The Spin-off was made pursuant to a separation agreement by which DISH Network contributed to EchoStar the subsidiaries and assets that operated DISH Network’s set-top box business, satellite services, digital broadcast operations, certain real estate and other assets and liabilities. The Company has received a private letter ruling from the Internal Revenue Service and an opinion from tax counsel indicating that the Spin-off was tax free to the stockholders of DISH Network and EchoStar.

The EchoStar business consists of the following segments:

	•		Equipment sales and digital broadcast operations — Equipment sales include the sales of set-top boxes and related components including Slingboxes to DISH Network and international customers. Digital broadcast operations include satellite uplinking/downlinking, transmission services, signal processing, conditional access management, telemetry, tracking and control, and other services provided primarily to DISH Network.
	•		Satellite Services — Satellite services consists principally of transponder leasing provided primarily to DISH Network, and secondarily to other customers.

The table below summarizes the assets and liabilities which were contributed to us in connection with the Spin-off in addition to the assets included in our historical financial statements. The contribution was accounted for at DISH Network’s historical cost given the nature of the distribution.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

		January 1, 2008
		(In thousands)
Assets
Current Assets:
Cash and cash equivalents		$	544,065
Marketable investment securities			455,935
Trade accounts receivable, net			3,900
Inventories, net			9,957
Other current assets			9,061
Total current assets			1,022,918
Restricted cash and marketable investment securities			3,150
Property and equipment, net			1,302,767
FCC authorizations			123,121
Intangible assets, net			142,898
Other noncurrent assets, net			20,335
Total assets		$	2,615,189
Liabilities
Current Liabilities:
Trade accounts payable		$	—
Deferred revenue and other accrued expenses			11,586
Current portion of capital lease obligations, mortgages and other notes payable			39,168
Total current liabilities			50,754
Long-term obligations, net of current portion:
Capital lease obligations, mortgages and other notes payable, net of current portion			339,542
Deferred tax liabilities			139,146
Total long-term obligations, net of current portion			478,688
Total liabilities			529,442
Net assets contributed		$	2,085,747

2. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these statements do not include all of the information and notes required for complete financial statements prepared under GAAP. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, refer to the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K/A for the year ended December 31, 2007 (“2007 10-K/A”). Certain prior period amounts have been reclassified to conform to the current period presentation. Variable rate demand notes (“VRDNs”), which we previously reported as cash and cash equivalents, are now classified as current marketable investment securities (see Note 5). VRDNs were contributed to us from DISH Network in connection with the Spin-off and we continue to hold VRDNs as of September 30, 2008. We reclassified the allocation of cash and cash equivalents and marketable investment securities to accurately reflect the amounts of each we received from DISH Network in connection with the Spin-off. There was no change in the combined contribution total of $1.0 billion of cash and cash equivalents and current marketable investment securities (see Note 1). As a result of these reclassifications, “Purchases of marketable investment securities” and “Sales and maturities of marketable investment securities” in “Net cash flows from investing activities” and “Contribution of cash and cash equivalents from DISH Network in connection with the Spin-off” in “Net cash flows from financing activities” on our Condensed Consolidated Statements of Cash Flows have been reclassified for all prior periods. The ongoing purchase and sale of VRDNs now appear on our cash flow statement under “Cash flows from investing activities”.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

The unaudited Condensed Consolidated Financial Statements in this quarterly report for the periods presented prior to the Spin-off are presented on a combined basis and principally represent the digital set-top box business and other net assets transferred to us as part of the Spin-off. The assets and liabilities presented have been reflected on a historical basis, as prior to the Spin-off such assets and liabilities were 100% owned by DISH Network. Our historical combined financial statements do not include the satellites, digital broadcast operations assets, certain real estate and other assets and related liabilities that were contributed to us by DISH Network in the Spin-off. Also, the combined financial statements for the periods presented prior to the Spin-off do not include all of the actual expenses that would have been incurred had EchoStar been a stand-alone entity during the periods presented and do not reflect EchoStar’s combined results of operations, financial position and cash flows had we been a stand-alone company during the periods presented. The results of operations and the cash flows for any interim period are not necessarily indicative of the results that may be expected for a fiscal year or any other future period.

Principles of Consolidation

We consolidate all majority owned subsidiaries and investments in entities in which we have controlling influence. For entities that are considered variable interest entities we apply the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51” (“FIN 46R”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for each reporting period. Estimates are used in accounting for, among other things, allowances for uncollectible accounts, inventory allowances, warranty obligations, self-insurance obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair values of financial instruments, fair value of options granted under our stock-based compensation plans, fair value of assets and liabilities acquired in business combinations, capital leases, asset impairments, useful lives of property, equipment and intangible assets, and royalty obligations. Actual results may differ from previously estimated amounts, and such differences may be material to the Condensed Consolidated Financial Statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively beginning in the period they occur.

Comprehensive Income (Loss)

The components of comprehensive income (loss) are as follows:

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
						(In thousands)
Net income (loss)		$	(307,930	)		$	(6,650	)		$	(254,405	)		$	(39,943	)
Foreign currency translation adjustments			(1,037	)			(162	)			(1,821	)			694
Unrealized holding gains (losses) on available-for-sale securities			(53,557	)			38,751				(153,720	)			42,412
Recognition of previously unrealized (gains) losses on available-for-sale securities included in net income (loss)			100,728				—				101,548				(3,048	)
Deferred income tax (expense) benefit			—				—				20,485				—
Comprehensive income (loss)		$	(261,796	)		$	31,939			$	(287,913	)		$	115

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

“Accumulated other comprehensive income (loss)” presented on the accompanying Condensed Consolidated Balance Sheets consists of the accumulated net unrealized gains (losses) on available-for-sale securities and foreign currency translation adjustments, net of deferred taxes.

		Accumulated
		Other
		Comprehensive
		Income
		(In thousands)
Balance, December 31, 2007		$	66,696
Accumulated other comprehensive income adjustments in connection with the Spin-off			(32,779	)
Foreign currency translation			(1,821	)
Change in unrealized holding gains (losses) on available-for-sale securities, net			(52,172	)
Deferred income tax (expense) benefit			20,485
Balance, September 30, 2008		$	409

Basic and Diluted Income (Loss) Per Share

Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS 128”) requires entities to present both basic earnings per share (“EPS”) and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options were exercised.

The number of shares presented for the three and nine months ended September 30, 2008 represents the actual weighted-average number of shares outstanding for the period. Prior to January 1, 2008, we were a wholly-owned subsidiary of DISH Network and had only a nominal number of shares outstanding. Accordingly for all periods prior to the completion of the Spin-off on January 1, 2008, basic and diluted earnings per share are computed using EchoStar’s shares outstanding as of January 1, 2008. The potential dilution from stock options exercisable into common stock was computed using the treasury stock method based on the average market value of our Class A common stock. The following table reflects the basic and diluted weighted-average shares outstanding used to calculate basic and diluted earnings per share. Earnings per share amounts for all periods are presented below in accordance with the requirements of SFAS 128.

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
		(In thousands)
Numerator:
Numerator for basic and diluted net income (loss) per share — Net income (loss)		$	(307,930	)		$	(6,650	)		$	(254,405	)		$	(39,943	)
Denominator:
Denominator for basic and diluted net income (loss) per share — weighted-average common shares outstanding			89,884				89,712				89,825				89,712
Net income (loss) per share — Class A and B common stock:
Basic net income (loss)		$	(3.43	)		$	(0.07	)		$	(2.83	)		$	(0.45	)
Diluted net income (loss)		$	(3.43	)		$	(0.07	)		$	(2.83	)		$	(0.45	)

As of September 30, 2008, there were 4.6 million stock incentive awards outstanding not included in the above denominator as their inclusion would have been antidilutive.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Vesting of options and rights to acquire shares of our Class A common stock granted pursuant to our long-term incentive plans is contingent upon meeting certain long-term goals which have not yet been achieved. As a consequence, the following are not included in the diluted EPS calculation:

		As of
		September 30, 2008
		(In thousands)
Performance based options			1,910
Restricted performance units			114
Total			2,024

New Accounting Pronouncements

Revised Business Combinations

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R replaces SFAS 141 and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. SFAS 141R also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement is effective for fiscal years beginning after December 15, 2008. We do not expect the adoption of SFAS 141R to have a material impact on our financial position or results of operations.

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This standard is effective for fiscal years beginning after December 15, 2008. We do not expect the adoption of SFAS 160 to have a material impact on our financial position or results of operations.

3. Stock-Based Compensation

Stock Incentive Plans

In connection with the Spin-off, as provided in DISH Network’s existing stock incentive plans and consistent with the Spin-off exchange ratio, each DISH Network stock option was converted into two options as follows:

•		an adjusted DISH Network stock option for the same number of shares that were exercisable under the original DISH Network stock option, with an exercise price equal to the exercise price of the original DISH Network stock option multiplied by 0.831219.
•		a new EchoStar stock option for one-fifth of the number of shares that were exercisable under the original DISH Network stock option, with an exercise price equal to the exercise price of the original DISH Network stock option multiplied by 0.843907.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Similarly, each holder of DISH Network restricted stock units retained his or her DISH Network restricted stock units and received one EchoStar restricted stock unit for every five DISH Network restricted stock units that they held.

Consequently, the fair value of the DISH Network stock award and the new EchoStar stock award immediately following the Spin-off was equivalent to the fair value of such stock award immediately prior to the Spin-off.

We maintain stock incentive plans to attract and retain officers, directors and key employees. Awards under these plans include both performance and non-performance based equity incentives. As of September 30, 2008, we had outstanding under our stock incentive plans options to acquire 6.3 million shares of our Class A common stock and 0.3 million restricted stock awards. Stock options granted through September 30, 2008 were granted with exercise prices equal to or greater than the market value of our Class A common stock at the date of grant and with a maximum term of ten years. Historically, our options have been subject to vesting, typically at the rate of 20% to 25% per year, however, some options have been granted with immediate vesting and other options vest only upon the achievement of certain company-wide objectives. As of September 30, 2008, we had 9.5 million shares of our Class A common stock available for future grant under our stock incentive plans.

As of September 30, 2008, the following stock incentive awards were outstanding:

As of September 30, 2008

EchoStar Awards

DISH Network Awards

Restricted

Restricted

Stock

Stock

Stock

Stock

Stock Incentive Awards Outstanding

Options

Units

Options

Units

Held by EchoStar employees

3,072,456

237,656

5,530,638

1,188,332

Held by DISH Network employees

3,199,525

90,481

N/A

N/A

Total

6,271,981

328,137

5,530,638

1,188,332

We are responsible for fulfilling all stock incentive awards related to EchoStar common stock and DISH Network is responsible for fulfilling all stock incentive awards related to DISH Network common stock regardless of whether such stock incentive awards are held by our or DISH Network’s employees. Notwithstanding the foregoing, based on the requirements of Statement of Financial Accounting Standards No. 123R, “Share-Based Payments” (“SFAS 123R”), our stock-based compensation expense, resulting from awards outstanding at the Spin-off date, is based on the stock incentive awards held by our employees regardless of whether such awards were issued by EchoStar or DISH Network. Accordingly, stock-based compensation that we expense with respect to DISH Network stock incentive awards is included in “Additional paid-in capital” on our Condensed Consolidated Balance Sheets.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Stock Award Activity

Our stock option activity (including performance and non-performance based options) for the nine months ended September 30, 2008 was as follows:

		For the Nine Months
		Ended September 30, 2008
						Weighted-
						Average
						Exercise
		Options				Price
Total options outstanding, beginning of period			4,182,755			$	22.96
Granted			2,493,500				29.36
Exercised			(202,355	)			23.88
Forfeited and cancelled			(201,919	)			27.97
Total options outstanding, end of period			6,271,981				25.31
Performance based options outstanding, end of period *			1,909,500				16.65
Total options exercisable at end of period			1,285,109				29.14

We realized $2 million of tax benefits from stock options exercised during the nine months ended September 30, 2008. Based on the closing market price of our Class A common stock on September 30, 2008, the aggregate intrinsic value of our outstanding stock options was $19 million. Of that amount, options with an aggregate intrinsic value of $2 million were exercisable at the end of the period.

Our restricted stock award activity (including performance and non-performance based options) for the nine months ended September 30, 2008 was as follows:

		For the Nine Months
		Ended September 30, 2008
						Weighted-
		Restricted				Average
		Stock				Grant Date
		Awards *				Fair Value
Total restricted stock awards outstanding, beginning of period			343,386			$	29.69
Granted			—				—
Exercised			(6,000	)			26.30
Forfeited and cancelled			(9,249	)			31.22
Total restricted stock awards outstanding, end of period			328,137				29.72
Restricted performance units outstanding, end of period *			114,137				26.38

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Long-Term Performance-Based Plans

We have two long-term, performance-based stock incentive plans, the 1999 LTIP and the 2005 LTIP. The 1999 LTIP provided stock options to key employees which vest over five years at the rate of 20% per year. Exercise of the options is also contingent on achieving a company-specific goal in relation to an industry-related metric prior to December 31, 2008. The 2005 LTIP provides stock options and restricted performance units, either alone or in combination, which vest over seven years at the rate of 10% per year during the first four years, and at the rate of 20% per year thereafter. Exercise of the options is also subject to a performance condition that a company-specific goal is achieved prior to March 31, 2015.

Contingent compensation related to the 1999 LTIP and the 2005 LTIP will not be recorded on our financial statements unless and until the achievement of the performance condition is probable. The competitive nature of our industry and certain other factors can significantly impact achievement of the goal. Consequently, while it was determined that achievement of either of the goals was not probable as of September 30, 2008, that assessment could change with respect to either goal at any time. In accordance with SFAS 123R, if all of the awards under each plan were vested and each goal had been met during the nine months ended September 30, 2008, we would have recorded total non-cash, stock-based compensation expense for our employees as indicated in the table below. If the goals are met and there are unvested options at that time, the vested amounts would be expensed immediately on our Condensed Consolidated Statements of Operations, with the unvested portion recognized ratably over the remaining vesting period. During the nine months ended September 30, 2008, if we had determined each goal was probable, we would have recorded total non-cash, stock-based compensation expense for our employees as indicated in the table below.

		Total								Vested Portion
		1999 LTIP				2005 LTIP				1999 LTIP				2005 LTIP
		(In thousands)
DISH Network awards held by EchoStar employees		$	10,470			$	18,425			$	10,470			$	5,277
EchoStar awards held by EchoStar employees			2,126				3,741				2,126				1,072
Total		$	12,596			$	22,166			$	12,596			$	6,349

Of the 6.3 million options and 0.3 million restricted stock awards outstanding under our stock incentive plans as of September 30, 2008, the following awards were outstanding pursuant to the 1999 LTIP and the 2005 LTIP:

		As of
		September 30, 2008
						Weighted-
						Average
Long-Term Performance-Based Plans		Stock Awards				Exercise Price
1999 LTIP options			1,019,600			$	8.84
2005 LTIP options			889,900				25.60
2005 LTIP restricted performance units			114,137
Total			2,023,637

No awards were granted under the 1999 LTIP or 2005 LTIP during the nine months ended September 30, 2008.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Stock-Based Compensation

Total non-cash, stock-based compensation expense, net of related tax effects, for all of our employees is shown in the following table for the three and nine months ended September 30, 2008 and 2007 and was allocated to the same expense categories as the base compensation for such employees:

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
		(In thousands)
Satellite services, digital broadcast operations and other cost of sales		$	124			$	—			$	358			$	—
Research and development expense			1,377				425				4,511				1,234
Selling, general and administrative expenses			2,518				106				6,099				540
Total non-cash, stock based compensation		$	4,019			$	531			$	10,968			$	1,774

As of September 30, 2008, our total unrecognized compensation cost related to our non-performance based unvested stock options was $55 million and includes compensation expense that we will recognize for DISH Network stock options held by our employees as a result of the Spin-off. This cost is based on an estimated future forfeiture rate of approximately 1.1% per year and will be recognized over a weighted-average period of approximately three years. Share-based compensation expense is recognized based on awards ultimately expected to vest and is reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Changes in the estimated forfeiture rate can have a significant effect on share-based compensation expense since the effect of adjusting the rate is recognized in the period the forfeiture estimate is changed.

The fair value of each award for the three and nine months ended September 30, 2008 was estimated at the date of the grant using a Black-Scholes option pricing model with the following assumptions:

		For the Three				For the Nine
		Months Ended				Months Ended
		September 30, 2008				September 30, 2008
Risk-free interest rate			3.15	%			2.74% — 3.42	%
Volatility factor			24.90	%			19.98% — 24.90	%
Expected term of options in years			6.1				6.0 — 6.1
Weighted-average fair value of options granted			$7.63				$7.63 — $9.29

We do not currently plan to pay dividends on our common stock, and therefore the dividend yield percentage is set at zero. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Consequently, our estimate of fair value may differ from other valuation models. Further, the Black-Scholes model requires the input of highly subjective assumptions. Changes in the subjective input assumptions can materially affect the fair value estimate. Therefore, we do not believe the existing models provide as reliable a single measure of the fair value of stock-based compensation awards as a market-based model would.

We will continue to evaluate the assumptions used to derive the estimated fair value of options for our stock as new events or changes in circumstances become known.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

4. Inventories

Inventories consist of the following:

		As of
		September 30,				December 31,
		2008				2007
		(In thousands)
Finished goods		$	24,290			$	16,969
Raw materials			17,253				4,042
Work-in-process			10,531				205
Subtotal			52,074				21,216
Inventory allowance			(1,026	)			(173	)
Inventories, net		$	51,048			$	21,043

5. Marketable and Non-Marketable Investment Securities

Fair Value Measurements

Effective January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis. SFAS 157 establishes a new framework for measuring fair value and expands related disclosures. Broadly, the SFAS 157 framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. SFAS 157 establishes market or observable inputs as the preferred source of values, followed by unobservable inputs or assumptions based on hypothetical transactions in the absence of market inputs.

	•		Level 1, defined as observable inputs being quoted prices in active markets for identical assets;
	•		Level 2, defined as observable inputs including quoted prices for similar assets; and
	•		Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring assumptions based on the best information available.

Investments in Debt and Equity Securities

We have investments in various debt and equity instruments including corporate bonds, corporate equity securities, government bonds, and VRDNs. VRDNs are long-term floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All of the put options are secured by a pledged liquidity source. While they are classified as marketable investment securities, VRDNs can be liquidated per the put option on a same day or on a five business day settlement basis. As of September 30, 2008 and December 31, 2007, we held VRDNs with fair values of $454 million and zero, respectively.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Our assets measured at fair value on a recurring basis were as follows (in thousands):

		Total Fair Value as of
		September 30, 2008																December 31,
		Total				Level 1				Level 2				Level 3				2007
Current:
Marketable investment securities — non strategic		$	522,170			$	519,683			$	2,487			$	—			$	—
Marketable investment securities — strategic			111,137				111,137				—				—				491,185
Current marketable investment securities			633,307				630,820				2,487				—				491,185
Noncurrent:
Marketable and non-marketable investment securities			275,914				30,000				205,035				40,879				—
Total marketable investment securities		$	909,221			$	660,820			$	207,522			$	40,879			$	491,185

In connection with the Spin-off, we received a contribution of $456 million of marketable investment securities from DISH Network (see Note 1). In addition, as of September 30, 2008, we held approximately $235 million of publicly traded investment securities which are reported as non-current in “Marketable and non-marketable investments securities” on our Condensed Consolidated Balance Sheets. Of this amount, $207 million were previously included in “Marketable investment securities” at December 31, 2007.

Changes in Level 3 instruments are as follows (in thousands):

		Level 3
		Investment
		Securities
Balance as of January 1, 2008		$	—
Net realized/unrealized gains/(losses) included in earnings			(28,858	)
Net realized/unrealized gains/(losses) included in other comprehensive income			—
Purchases, issuances and settlements, net			69,737
Balance as of September 30, 2008		$	40,879

Marketable Investment Securities

Changes in the fair value of marketable investment securities accounted for at fair value are recognized as unrealized gains and losses on our Condensed Consolidated Statements of Operations. Interest income on fair value method debt investment securities is recorded in “Interest income” on our Condensed Consolidated Statements of Operations. Changes in the fair value of marketable investment securities accounted for as available-for-sale are reported at fair value with the related temporary unrealized gains and losses reported as a separate component of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit),” net of related deferred income tax on our Condensed Consolidated Balance Sheets.

Declines in the fair value of an available-for-sale investment security which are determined to be “other than temporary” are recognized in the Condensed Consolidated Statements of Operations in the “Other” component of “Other Income (Expense),” thus establishing a new cost basis for the investment. We evaluate our available-for-sale investment securities portfolio on a quarterly basis to determine whether declines in the fair value of these securities are other than temporary. This quarterly evaluation consists of reviewing, among other things, the fair value of our marketable investment securities compared to the carrying amount, the historical volatility of the price of each security and any market and company-specific factors related to each security. Generally, absent specific factors to the contrary, declines in the fair value of investments below cost basis for a continuous period of less than six months are considered to be temporary. Declines in the fair value of investments for a continuous period of six to nine months are evaluated on a case by case basis to determine whether any company or market-specific factors exist which would indicate that such declines are other than temporary. Declines in the fair value of investments below cost basis for a

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

continuous period greater than nine months are considered other than temporary and are recorded as charges to earnings, absent specific factors to the contrary.

For the equity securities that are not publicly traded, it is not practical to regularly estimate the fair value of the investments; however, these investments are subject to an evaluation for other than temporary impairment on a quarterly basis. This quarterly evaluation consists of reviewing, among other things, company business plans and current financial statements, if available, for factors that may indicate an impairment of our investment. Such factors may include, but are not limited to, cash flow concerns, material litigation, violations of debt covenants and changes in business strategy. The fair value of these equity investments is not estimated unless there are identified changes in circumstances that may indicate an impairment exists and these changes are likely to have a significant adverse effect on the fair value of the investment.

We also have an investment in non-marketable convertible debt which is included in “Marketable and non-marketable investment securities” on our Condensed Consolidated Balance Sheets. The fair value of this debt is determined each reporting period based upon inputs other than quoted market prices that are observable for the debt, either directly or indirectly, with changes in fair value recorded as unrealized gains and losses on our Condensed Consolidated Statements of Operations. The fair value analysis takes into consideration the price of the underlying company stock as well as changes in the credit market, including yield curves and interest rates.

Our ability to realize value from our strategic investments in companies that are not publicly traded depends on the success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans. Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them.

Current “Marketable Investment Securities”

As of September 30, 2008 and December 31, 2007, we had accumulated unrealized losses of less than $1 million, net of related tax effect, and unrealized gains of $64 million, net of related tax effect, respectively, as a part of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit).” As of September 30, 2008, a full valuation allowance has been established against the deferred tax assets associated with these unrealized capital losses.

Our strategic marketable investment securities are highly speculative and are concentrated in a small number of companies. Additionally, during the nine months ended September 30, 2008 our strategic investments have experienced and continue to experience volatility. If the fair value of our strategic marketable investment securities portfolio, accounted for as available-for-sale, does not remain above cost basis or if we become aware of any market or company-specific factors that indicate that the carrying value of certain of our securities is impaired, we may be required to record charges to earnings in future periods equal to the amount of the decline in fair value. During October 2008, the value of our current strategic marketable investment securities of $111 million declined in excess of 20%.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Marketable Investment Securities in a Loss Position. The following table reflects the length of time that the individual securities, accounted for as available-for-sale, have been in an unrealized loss position, aggregated by investment category. The unrealized losses on our investments in corporate equity securities represent investments in the common stock of three companies in the technology industry and one in the communications industry. We are not aware of any specific factors which indicate the unrealized loss in these investments is due to anything other than temporary market fluctuations.

As of September 30, 2008

Primary

Less than Six Months

Six to Nine Months

Nine Months or More

Investment

Reason for

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Category

Unrealized Loss

Value

Loss

Value

Loss

Value

Loss

(In thousands)

Equity securities

Temporary market fluctuations

$

21,777

$

(4,927

)

$

—

$

—

$

—

$

—

Non-Current “Marketable and Non-Marketable Investment Securities”

We account for our unconsolidated debt and equity investments under the fair value, equity or cost method of accounting. Non-majority owned investments are generally accounted for using the equity method when we have the ability to significantly influence the operating decisions of the issuer. However, when we believe the fair value method of accounting provides more meaningful information to our investors, we elect the fair value method for certain investments in affiliates whose equity is publicly traded. When we do not have the ability to significantly influence the operating decisions of an issuer, the cost method is used.

These debt and equity investments are included in “Marketable and non-marketable investment securities” on our Condensed Consolidated Balance Sheets and detailed by accounting method below.

		As of
		September 30,				December 31,
		2008				2007
		(In thousands)
Fair value method *		$	275,914			$	—
Cost method			28,389				39,046
Equity method			16,731				20,114
Total		$	321,034			$	59,160

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

“Other” income and expense on our Condensed Consolidated Statements of Operations includes other changes in the carrying amount of our current and non-current marketable investment securities and other items as follows:

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
						(In thousands)
Gain on sale of a company which held certain FCC authorizations		$	—			$	—			$	67,624			$	—
Impairment on FCC authorizations (Note 7)			(38,720	)			—				(38,720	)			—
Gains (losses) on exchanges/sale of marketable investment securities			(30,284	)			—				14,969				1,984
Other than temporary impairments on marketable investment securities			(70,435	)			—				(116,507	)			—
Other than temporary impairments on non-marketable investment securities			(10,000	)			—				(10,000	)			—
Equity in earnings (losses) of affiliates			(1,716	)			1,602				(6,934	)			(4,177	)
Other			(4,463	)			(54	)			(4,850	)			2,975
Total		$	(155,618	)		$	1,548			$	(94,418	)		$	782

Master Investment Agreement with TerreStar

On February 7, 2008, we completed several transactions under a Master Investment Agreement, dated as of February 5, 2008 between us, TerreStar Corporation (“TerreStar”) and TerreStar Networks, Inc. (“TerreStar Networks”). Under the Master Investment Agreement, we acquired $50 million in aggregate principal amount of TerreStar Networks’ 6¹/2% Senior Exchangeable Paid-in-Kind Notes due June 15, 2014 (“Exchangeable Notes”). In addition, we acquired $50 million aggregate principal amount of TerreStar Networks’ 15% Senior Secured Paid-in-Kind Notes due February 15, 2014 (“15% PIK Notes”).

The Exchangeable Notes are guaranteed by TerreStar License Inc. and TerreStar National Services, Inc. and mature on June 15, 2014. The Exchangeable Notes are exchangeable for shares of TerreStar common stock based on a conversion price of $5.57 per share. TerreStar Networks may be obligated to repurchase all or part of the Exchangeable Notes under certain circumstances, including upon a change of control of TerreStar Networks. Interest on the Exchangeable Notes is payable in additional Exchangeable Notes through March 2011 and cash thereafter. Additional cash interest may be payable in the event that certain milestones are not satisfied.

We also entered into a Purchase Money Credit Agreement with TerreStar Networks and Harbinger Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund LP (collectively, “Harbinger”), in which we and Harbinger each committed to provide up to $50 million in secured financing, the proceeds of which may be advanced to TerreStar Networks from time to time as required for TerreStar Networks to make required payments in connection with a communications satellite to be constructed and launched for TerreStar Networks. Pursuant to a Security Agreement, dated as of February 5, 2008, from TerreStar Networks in favor of US Bank National Association, as Collateral Agent, TerreStar Networks granted a security interest to the Collateral Agent in certain of TerreStar Networks’ assets to be financed by the proceeds of the loan, including, among other things, the communications satellite and related raw materials, work-in-progress, and finished goods. As of September 30, 2008, we had advanced approximately $17 million to TerreStar Networks under the terms of this agreement.

Also, on February 5, 2008, we entered into a Spectrum Agreement (“Spectrum Agreement”) with TerreStar, which provided for the lease to TerreStar of our holdings of 1.4 GHz spectrum along with an option for TerreStar to acquire the company through which we held these licenses in exchange for the issuance of 30 million shares of TerreStar’s common stock (“Common Stock”). On June 10, 2008, TerreStar completed the acquisition of the company under the Spectrum Agreement and issued 30 million shares of Common Stock to us. The $68 million gain resulting from our sale of the company which held certain FCC authorizations was recorded in “Other” on our Condensed Consolidated Statements of Operations.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

We have two representatives on TerreStar’s board of directors and have the ability to exert significant influence. We currently account for all of our investments in TerreStar using the fair value method of accounting as we believe that the fair value approach provides our investors with the most meaningful information. All of our investments in TerreStar are included in “Marketable and non-marketable investment securities” on our Condensed Consolidated Balance Sheets.

We rely on TerreStar’s management to provide us with accurate summary financial information. We are not aware of any errors in or possible misstatements of the financial information provided to us that would have a material effect on our Condensed Consolidated Financial Statements. The following tables provide summarized financial information for TerreStar:

		As of
		September 30,				December 31,
Balance Sheets (unaudited)		2008				2007
		(In thousands)
Assets
Current assets		$	307,789			$	107,558
Noncurrent assets			1,193,981				1,135,665
Total assets		$	1,501,770			$	1,243,223
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities		$	45,431			$	52,611
Long-term liabilities			880,371				753,254
Minority interest			—				12,141
Cumulative preferred dividend			408,500				408,500
Stockholders’ equity (deficit)			167,468				16,717
Total liabilities and stockholders’ equity (deficit)		$	1,501,770			$	1,243,223

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
Statement of Operations (unaudited)		2008				2007				2008				2007
						(In thousands)
Operating expenses		$	31,876			$	34,557			$	156,350			$	123,817
Net income (loss)		$	(64,220	)		$	(54,135	)		$	(225,509	)		$	(177,893	)
Net income (loss) available to common stockholders		$	(71,219	)		$	(61,224	)		$	(246,358	)		$	(198,855	)

Restricted Cash and Marketable Investment Securities

As of September 30, 2008, restricted cash and marketable investment securities included amounts required for our letters of credit.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

6.

Property and Equipment

Property and equipment consist of the following:

		Depreciable				As of
		Life				September 30,				December 31,
		(In Years)				2008				2007
						(In thousands)
Land			—			$	31,517			$	2,509
Buildings and improvements			1-40				212,920				17,482
Furniture, fixtures, equipment and other			1-10				693,745				41,292
Satellites:
EchoStar III			12				234,083				—
EchoStar IV — fully depreciated			N/A				78,511				—
EchoStar VI			12				244,305				—
EchoStar VIII			12				175,801				—
EchoStar IX			12				127,376				—
EchoStar XII			10				190,051				—
Satellites acquired under capital leases			10				551,628				—
Construction in process			—				303,107				185,411
Total property and equipment						$	2,843,044			$	246,694
Accumulated depreciation							(1,387,087	)			(32,857	)
Property and equipment, net						$	1,455,957			$	213,837

The majority of the increase in property and equipment in the table above is associated with the assets contributed to us in connection to the Spin-off (see Note 1).

“Construction in process” consists of the following:

		As of
		September 30,				December 31,
		2008				2007
		(In thousands)
Progress amounts for satellite construction and launch costs		$	258,817			$	185,411
Digital broadcast equipment			40,540				—
Software and other			3,750				—
Construction in progress		$	303,107			$	185,411

Satellites

In connection with the Spin-off, DISH Network contributed six of its owned satellites and two of its satellite lease agreements to us. The two leased satellites are accounted for as capital leases pursuant to Statement of Financial Accounting Standards No. 13, “Accounting for Leases” (“SFAS 13”) and are depreciated over the ten-year terms of the satellite service agreements.

We believe that overall our satellites are generally in good condition. Prior to 2008, certain of these satellites have experienced anomalies, some of which have had a significant adverse impact on their commercial operation. There can be no assurance future anomalies will not cause further losses, which could impact the remaining life or commercial operation of any of these satellites. See discussion of evaluation of impairment in “Long-Lived Assets” below. Certain of these anomalies are discussed below.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

EchoStar III

EchoStar III was originally designed to operate a maximum of 32 DBS transponders in CONUS, which provides service to the entire continental United States, at approximately 120 watts per channel, switchable to 16 transponders operating at over 230 watts per channel, and was equipped with a total of 44 traveling wave tube amplifiers (“TWTAs”) to provide redundancy. As a result of past TWTA failures, only 18 transponders are currently available for use. Due to redundancy switching limitations and specific channel authorizations, we can only operate on 15 of our 19 FCC authorized frequencies at the 61.5 degree location. While we do not expect a large number of additional TWTAs to fail in any year, and the failures have not reduced the original minimum 12-year design life of the satellite, it is likely that additional TWTA failures will occur from time to time in the future and those failures will further impact commercial operation of the satellite.

EchoStar IV

EchoStar IV currently operates at the 77 degree orbital location, which is licensed by the government of Mexico. The satellite was originally designed to operate a maximum of 32 DBS transponders in CONUS at approximately 120 watts per channel, switchable to 16 transponders operating at over 230 watts per channel. As a result of past TWTA failures, only six transponders are currently available for use and the satellite has been fully depreciated. There can be no assurance that further material degradation, or total loss of use, of EchoStar IV will not occur in the immediate future. Based on a recent analysis of the remaining fuel life, EchoStar IV is not expected to be in operation beyond 2009.

EchoStar VI

EchoStar VI was originally equipped with 108 solar array strings, approximately 102 of which are required to assure full power availability for the original minimum 12-year useful life of the satellite. Prior to 2008, EchoStar VI experienced anomalies resulting in the loss of 22 solar array strings, reducing the number of functional solar array strings to 86. While the useful life of the satellite has not been affected, commercial operability has been reduced. The satellite was designed to operate 32 DBS transponders in CONUS at approximately 125 watts per channel, switchable to 16 transponders operating at approximately 225 watts per channel. The power reduction resulting from the solar array failures currently limits us to operation of a maximum of 25 transponders in standard power mode, or 12 transponders in high power mode. The number of transponders to which power can be provided is expected to decline in the future at the rate of approximately one transponder every three years.

EchoStar VIII

EchoStar VIII was designed to operate 32 DBS transponders in CONUS at approximately 120 watts per channel, switchable to 16 transponders operating at approximately 240 watts per channel. EchoStar VIII also includes spot-beam technology. This satellite has experienced several anomalies since launch, but none have impacted commercial operation or reduced the 12-year estimated useful life of the satellite.

EchoStar IX

EchoStar IX was designed to operate 32 fixed satellite service (“FSS”) band transponders in CONUS at approximately 110 watts per channel, along with transponders that can provide services in the Ka-Band (a “Ka-band payload”). The satellite also includes a C-band payload which is owned by a third party. Prior to 2007, EchoStar IX experienced the loss of one of its three momentum wheels, two of which are utilized during normal operations. A spare wheel was switched in at the time and the loss did not reduce the 12-year estimated useful life of the satellite. During 2007, the satellite experienced anomalies resulting in the loss of three solar array strings. The anomalies have not impacted commercial operation of the satellite to date.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

EchoStar XII

EchoStar XII was designed to operate 13 DBS transponders at 270 watts per channel in CONUS mode, or 22 spot beams using a combination of 135 and 65 watt TWTAs. We currently operate the satellite in spot beam/CONUS hybrid mode. EchoStar XII has a total of 24 solar array circuits, approximately 22 of which are required to assure full power for the original minimum 12-year design life of the satellite. Prior to 2008, eight solar array circuits on EchoStar XII have experienced anomalous behavior resulting in both temporary and permanent solar array circuit failures. Although the design life of the satellite has not been affected, these circuit failures have resulted in a reduction in power to the satellite which will preclude us from using the full complement of transponders on EchoStar XII for the 12-year design life of the satellite.

AMC-14

In connection with the Spin-off, DISH Network contributed its AMC-14 satellite services contract to us. During March 2008, AMC-14 experienced a launch anomaly and failed to reach its intended orbit. SES Americom subsequently declared the AMC-14 satellite a total loss due to a lack of viable options to reposition the satellite to its proper geostationary orbit. Therefore, we have no obligation to make any future monthly lease payments to SES Americom with respect to the satellite. However, we did make up-front payments with respect to the satellite prior to launch and recorded capitalized interest and insurance costs related to the satellite. These amounts, net of insurance proceeds of $41 million, totaled $13 million and were written-off during the first quarter of 2008. The insurance proceeds were collected during the second quarter of 2008.

AMC-16

DISH Network contributed its AMC-16 satellite services contract to us in connection with the Spin-off. During the first quarter of 2008, SES Americom notified us that the satellite had experienced an anomaly and is no longer capable of operating at full capacity. Pursuant to the satellite services agreement, we are entitled to a reduction of our monthly recurring payment in the event of a partial loss of satellite capacity. Effective October 1, 2008, the monthly recurring payment has been reduced and as a result our capital lease obligation and the corresponding asset value will be lowered by approximately $5 million.

CMBStar

We have suspended construction of the CMBStar satellite and in future periods may conclude it appropriate to record an impairment charge. During April 2008, we notified the State Administration of Radio, Film and Television of China that we were suspending construction of the CMBStar satellite pending, among other things, further analysis relating to efforts to meet the satellite performance criteria and/or confirmation that alternative performance criteria would be acceptable. We are currently evaluating potential alternative uses for the CMBStar satellite. If these alternative uses are insufficient to recover the carrying value invested to date in the satellite, we may be required to record an impairment charge in a future period relating to the CMBStar satellite. We currently estimate that this potential charge could be as much as $100 million, which would have a material adverse effect on our results of operations and financial position.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Long-Lived Satellite Assets

We account for impairments of long-lived satellite assets in accordance with the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 requires a long-lived asset or asset group to be tested for recoverability whenever events or changes in circumstance indicate that its carrying amount may not be recoverable. Based on the guidance under SFAS 144, we evaluate our satellites for recoverability at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. While certain of the anomalies discussed above, and previously disclosed, may be considered to represent a significant adverse change in the physical condition of a particular satellite, based on the redundancy designed within each satellite, these anomalies are not considered to be significant events that would require evaluation for impairment recognition pursuant to the guidance under SFAS 144.

In connection with the Spin-off, we performed an impairment analysis in accordance with SFAS 144 and currently expect the undiscounted cash flows of each satellite to be greater than the current carrying amounts. Should we be unable to achieve our business plan, or if conditions require us to change that plan, one or more of our satellites could become partially or fully impaired, which could have a material adverse effect on our results of operations and financial position.

A substantial portion of the capacity of our AMC-15 and AMC-16 satellites remain without long-term contracts. There is a significant risk that in the future we could be required to record a substantial impairment charge relating to these satellites. We currently estimate that these potential charges could aggregate up to approximately $200 million.

7. Goodwill, FCC Authorizations and Intangible Assets

Goodwill and FCC Authorizations

We account for our goodwill and intangible assets in accordance with the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), which requires goodwill and intangible assets with indefinite useful lives not be amortized, but to be tested for impairment annually or whenever indicators of impairments arise. Intangible assets that have finite useful lives continue to be amortized over their estimated useful lives. Generally, we have determined that our FCC licenses have indefinite useful lives due to the following:

	•		FCC spectrum is a non-depleting asset;
	•		replacement satellite applications are generally authorized by the FCC subject to certain conditions, without substantial cost under a stable regulatory, legislative and legal environment;
	•		maintenance expenditures in order to obtain future cash flows are not significant; and
	•		we intend to use these assets indefinitely.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Prior to September 30, 2008, we held certain FCC licenses with an aggregate carrying amount of $43 million in our Satellite Services operating segment. Recent weakening in domestic economic conditions has resulted in a triggering event requiring us to perform an impairment review of these assets. As a result of this review, during the three months ended September 30, 2008, we recorded a pre-tax impairment charge of $39 million in “Other” expense on our Condensed Consolidated Statements of Operations. We used Level 3 inputs, as defined by SFAS 157, in a discounted cash flow model to determine our estimates of fair value.

Intangible Assets

As of September 30, 2008 and December 31, 2007, our identifiable intangibles subject to amortization consisted of the following:

		As of
		September 30, 2008								December 31, 2007
		Intangible				Accumulated				Intangible				Accumulated
		Assets				Amortization				Assets				Amortization
		(In thousands)
Contract-based		$	190,566			$	(70,946	)		$	4,640			$	(373	)
Customer relationships			23,600				(7,867	)			23,600				(1,967	)
Technology-based			69,797				(15,268	)			50,297				(4,551	)
Total		$	283,963			$	(94,081	)		$	78,537			$	(6,891	)

Amortization of these intangible assets, recorded on a straight line basis over an average finite useful life primarily ranging from approximately three to 20 years, was $8 million for the three months ended September 30, 2008 and $24 million for the nine months ended September 30, 2008.

Estimated future amortization of our identifiable intangible assets as of September 30, 2008 is as follows (in thousands):

For the Years Ending December 31,
2008 (remaining three months)		$	8,044
2009			32,176
2010			30,209
2011			24,028
2012			23,182
2013			23,174
Thereafter			49,069
Total		$	189,882

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

8. Long-Term Debt

Capital Lease Obligations, Mortgages and Notes Payable

Capital lease obligations, mortgages and notes payable consist of the following:

		As of
		September 30,				December 31,
		2008				2007
		(In thousands)
Capital lease obligations:
Satellites financed under capital lease obligations		$	341,706			$	—
Other equipment financed under capital lease obligations			8,206				—
8% note payable for EchoStar IX satellite vendor financing, payable over 14 years from launch			7,577				—
Other mortgages and notes payable in installments through 2017 with interest ranging from 4% to 20%			2,479				3,709
Total		$	359,968			$	3,709
Less current portion			(51,513	)			(1,365	)
Capital lease obligations, mortgages and other notes payable, net of current portion		$	308,455			$	2,344

Capital Lease Obligations

In connection with the Spin-off, the satellite lease contracts for AMC-15 and AMC-16 were contributed to EchoStar. These satellites are accounted for as capital leases pursuant to SFAS 13 and are depreciated over the ten-year terms of the satellite service agreements.

AMC-15. AMC-15, an FSS satellite, commenced commercial operation during January 2005. This lease is renewable by us on a year-to-year basis following the initial ten-year term, and provides us with certain rights to lease capacity on replacement satellites.

AMC-16. AMC-16, an FSS satellite, commenced commercial operation during February 2005. This lease is renewable by us on a year-to-year basis following the initial ten-year term, and provides us with certain rights to lease capacity on replacement satellites.

ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Future minimum lease payments under these capital lease obligations, together with the present value of the net minimum lease payments as of September 30, 2008 are as follows (in thousands):

For the Years Ended December 31,
2008 (remaining three months)		$	25,469
2009			90,546
2010			86,664
2011			86,351
2012			86,351
2013			86,351
Thereafter			81,673
Total minimum lease payments			543,405
Less: Amount representing lease of the orbital location and estimated executory costs (primarily insurance and maintenance) including profit thereon, included in total minimum lease payments			(89,967	)
Net minimum lease payments			453,438
Less: Amount representing interest			(103,526	)
Present value of net minimum lease payments			349,912
Less: Current portion			(49,609	)
Long-term portion of capital lease obligations		$	300,303