SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549


                                 FORM 10-Q


                 Quarterly Report Under Section 13 or 15(d)
                   of the Securities Exchange Act of 1934


                    For Quarter Ended September 30, 1998
                       Commission File Number 1-4929




                             COMSAT CORPORATION
                           6560 Rock Spring Drive
                             Bethesda, MD 20817
                               (301) 214-3000



               District of Columbia                 52-0781863
          (State or other jurisdiction of        (I.R.S. Employer
           incorporation or organization)       Identification No.)





     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  twelve (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 ninety (90)
days. Yes [X] No [ ]

52,535,109  shares of the Registrant's  common stock were outstanding as of
September 30, 1998.

<PAGE>



PART I.   FINANCIAL INFORMATION

ITEM 1.   INTERIM FINANCIAL STATEMENTS FOR THE CORPORATION (UNAUDITED)

                    COMSAT CORPORATION AND SUBSIDIARIES
                  Condensed Consolidated Income Statements

<TABLE>
<CAPTION>
<S>                                                        <C>                 <C>                 <C>              <C>

                                                             Three Months Ended September 30,   Nine Months Ended September 30,
                                                             --------------------------------   -------------------------------
In thousands, except per share amounts                             1998                1997              1998             1997
-------------------------------------------------------------------------------------------------------------------------------

REVENUES                                                     $  158,415          $  145,332         $ 454,177       $  421,300
                                                             -----------         -----------        ----------      -----------

Operating expenses:
    Cost of services                                             73,853              72,677          205,727           197,382
    Depreciation and amortization                                56,676              47,222          163,727           135,531
    Research and development                                      1,713               2,381            6,060             6,175
    General and administrative                                    6,296               5,399           18,148            17,996
    Impairment of long-lived assets                              14,000                   -           14,000                 -
    Merger costs                                                  3,500                   -            3,500                 -
                                                             -----------         -----------        ---------       -----------
    Total operating expenses                                    156,038             127,679          411,162           357,084
                                                             -----------         -----------       ----------       -----------

OPERATING INCOME                                                  2,377              17,653           43,015            64,216

Other income (expense), net                                      (1,021)              7,140           (4,861)            7,866
Interest expense, net of amounts capitalized                     (6,088)            (11,190)         (30,144)          (31,028)
                                                             -----------         -----------       ----------       -----------
Income (loss) from continuing operations before taxes and
    extraordinary item                                           (4,732)             13,603            8,010            41,054
Income tax benefit (expense)                                     11,301              (4,208)           6,483           (14,462)
                                                             -----------         -----------       ----------       -----------

INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM       6,569               9,395           14,493            26,592

Loss from discontinued operations, net of tax                         -             (30,207)               -           (59,068)
                                                             -----------         -----------       ----------       -----------
Income (loss) before extraordinary item                           6,569             (20,812)          14,493           (32,476)
Extraordinary loss from early extinguishment of debt
  (net of tax)                                                        -                   -                -            (3,946)
                                                             -----------         -----------       ----------       -----------

NET INCOME (LOSS)                                            $    6,569          $  (20,812)       $  14,493        $  (36,422)
                                                             ===========         ===========       ==========       ===========

EARNINGS (LOSS) PER COMMON SHARE - BASIC:
    Income from continuing operations before 
      extraordinary item                                     $     0.13          $     0.19        $    0.28        $     0.55
    Loss from discontinued operations                                 -               (0.61)               -             (1.22)
    Extraordinary loss                                                -                  -                 -             (0.08)
                                                             -----------         -----------       ----------       -----------
    Net income (loss)                                        $     0.13          $    (0.42)       $    0.28        $    (0.75)
                                                             ===========         ===========       ==========       ===========

EARNINGS (LOSS) PER COMMON SHARE - ASSUMING DILUTION:
    Income from continuing operations before 
    extraordinary item                                       $     0.12          $     0.19        $    0.27        $     0.53
    Loss from discontinued operations                                 -               (0.60)               -             (1.19)
    Extraordinary loss                                                -                   -                -             (0.08)
                                                             -----------         -----------       ----------       -----------
    Net income (loss)                                        $     0.12          $    (0.41)       $    0.27        $    (0.74)
                                                             ===========         ===========       ==========       ===========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                     2
</TABLE>

<PAGE>



                    COMSAT CORPORATION AND SUBSIDIARIES
                   Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S>                                                                             <C>             <C>


                                                                                 September 30,   December 31,
In thousands                                                                              1998           1997
--------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
    Cash and cash equivalents                                                      $    11,205    $     5,757
    Receivables                                                                        138,047        147,621
    Other                                                                               50,104         22,387
    Net assets of discontinued operations                                                    -        142,484
                                                                                   ------------   ------------
       Total current assets                                                            199,356        318,249
                                                                                   ------------   ------------

Property and equipment (net of accumulated depreciation
    of $1,317,688 in 1998 and $1,161,242 in 1997)                                    1,373,367      1,359,293
Investments                                                                            100,682         91,543
Other assets                                                                           141,571        125,690
                                                                                   ------------   ------------
    TOTAL ASSETS                                                                   $ 1,814,976    $ 1,894,775
                                                                                   ============   ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
    Current maturities of long-term debt                                           $    13,785    $    13,785
    Commercial paper                                                                    11,117        149,506
    Accounts payable and accrued liabilities                                            90,670         89,772
    Due to related parties                                                              28,734         34,664
    Other                                                                               13,740          8,919
                                                                                   ------------   ------------
       Total current liabilities                                                       158,046        296,646
                                                                                   ------------   ------------

Long-term debt                                                                         451,587        461,960
Deferred income taxes and investment tax credits                                       125,289        121,749
Accrued post-retirement benefit costs                                                   49,032         49,246
Other long-term liabilities                                                            180,778        178,903
Preferred securities issued by subsidiary                                              200,000        200,000

STOCKHOLDERS' EQUITY:
    Common stock                                                                       427,204        366,901
    Retained earnings                                                                  233,380        226,785
    Treasury stock                                                                      (2,905)        (1,758)
    Unearned compensation                                                               (5,004)        (4,739)
    Accumulated other comprehensive loss                                                (2,431)          (918)
       Total stockholders' equity                                                      650,244        586,271
                                                                                   ------------   ------------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                     $ 1,814,976    $  1,894,775
                                                                                   ============   ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                     3
</TABLE>

<PAGE>



                    COMSAT CORPORATION AND SUBSIDIARIES
                Condensed Consolidated Cash Flow Statements

<TABLE>
<CAPTION>
<S>                                                                               <C>                <C>

                                                                                   Nine Months Ended September 30,
                                                                                   -------------------------------
In thousands                                                                                1998             1997
------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                                                 $   14,493      $   (36,422)
    Adjustments to reconcile net income (loss) to cash flow of
    continuing operations:
       Depreciation and amortization                                                     163,727          135,531
       Impairment loss and write-off of investment                                        15,950                -
       Extraordinary loss from early extinguishment of debt                                    -            3,946
       Loss from discontinued operations                                                       -           59,068
    Changes in operating assets and liabilities                                            7,970          (26,890)
    Other                                                                                   (232)           5,379
                                                                                      -----------     ------------
       Net cash provided by continuing operations                                        201,908          140,612
       Net cash provided (used) by discontinued operations                               105,292          (27,690)
                                                                                      -----------     ------------
    Net cash provided by operating activities                                            307,200          112,922
                                                                                      -----------     ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                                                  (194,260)        (191,585)
    Investments in unconsolidated businesses                                              (6,634)          (9,831)
    Proceeds from sale of investments                                                      1,700            9,060
    Proceeds from note on sale of investment                                                   -           15,655
    Decrease (increase) in INTELSAT ownership                                               (722)          23,024
    Decrease in Inmarsat ownership                                                         5,910                -
    Proceeds from sale of land, net                                                            -            9,293
    Other                                                                                  3,800           (4,254)
                                                                                      -----------     ------------
    Net cash used in investing activities                                               (190,206)        (148,638)
                                                                                      -----------     ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Common stock issued                                                                   44,278           12,605
    Cash dividends paid                                                                   (7,769)         (14,476)
    Repayment/extinguishment of long-term debt                                            (9,549)        (110,952)
    Net short-term borrowings (repayments)                                              (138,506)         117,634
    Proceeds from sale-leaseback financing, net                                                -           34,343
    Other                                                                                      -           (3,736)
                                                                                      -----------     ------------
    Net cash provided (used) by financing activities                                    (111,546)          35,418
                                                                                      -----------     ------------

Net increase (decrease) in cash and cash equivalents                                       5,448             (298)
Cash and cash equivalents, beginning of period                                             5,757            7,659
                                                                                      -----------     ------------

Cash and cash equivalents, end of period                                              $   11,205      $     7,361
                                                                                      ===========     ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                     4
</TABLE>

<PAGE>



                    COMSAT CORPORATION AND SUBSIDIARIES
      Notes to Condensed Consolidated Financial Statements (Unaudited)

1.   FINANCIAL STATEMENT PRESENTATION

     The accompanying unaudited condensed consolidated financial statements
     have been prepared by COMSAT  Corporation  (COMSAT or the corporation)
     pursuant to the rules and  regulations  of the Securities and Exchange
     Commission (the SEC). These financial statements should be read in the
     context of the financial  statements  and notes thereto filed with the
     SEC in the  corporation's  1997  Annual  Report on Form 10-K.  Certain
     information and footnote  disclosures  normally  included in financial
     statements  prepared in accordance with generally accepted  accounting
     principles have been condensed or omitted. The accompanying  condensed
     consolidated   financial   statements   reflect  all  adjustments  and
     disclosures  which, in the opinion of management,  are necessary for a
     fair  presentation.  All such  adjustments  are of a normal  recurring
     nature.  The results of  operations  for the  interim  periods are not
     necessarily indicative of the results of the entire year.

2.   AGREEMENT AND PLAN OF MERGER WITH LOCKHEED MARTIN CORPORATION

     COMSAT,  Lockheed  Martin  Corporation  (Lockheed  Martin)  and  Deneb
     Corporation,  a wholly-owned  subsidiary of Lockheed  Martin,  entered
     into an  Agreement  and  Plan of  Merger  (the  Merger  Agreement)  on
     September 18, 1998. Under the terms of the Merger Agreement,  Lockheed
     Martin will acquire all of the outstanding common stock of COMSAT in a
     two-step  transaction.  See  "Management's  Discussion and Analysis --
     Outlook" below. In connection  with the  transaction,  the corporation
     incurred  costs of $3.5  million in the third  quarter for  investment
     banking and other professional services.

3.   DISCONTINUED OPERATIONS

     The corporation began accounting for Ascent  Entertainment Group, Inc.
     (Ascent), its former entertainment  subsidiary,  and substantially all
     of  the  assets  and  operations  of  COMSAT  RSI,  Inc.  (CRSI),  its
     manufacturing  subsidiary,  as  discontinued  operations in the second
     quarter of 1997.

     The income (loss) from discontinued operations, net of tax, for Ascent
     and CRSI for the three and nine  months  ended  September  30, 1997 is
     summarized below:


<TABLE>
<CAPTION>
<S>                                                                          <C>             <C>

                                                                           Period Ended September 30, 1997
In millions                                                                  Three Months      Nine Months
----------------------------------------------------------------------------------------------------------
CRSI                                                                          $    (30.2)     $     (30.0)
Ascent                                                                                 -            (29.1)
                                                                              -----------     ------------
Total                                                                         $    (30.2)     $     (59.1)
                                                                              ===========     ============



                                     5
</TABLE>

<PAGE>



     COMSAT RSI, INC.

     On February 25, 1998, the corporation  sold  substantially  all of the
     assets of JEFA Wireless  Systems (JEFA),  a wholly owned subsidiary of
     CRSI  engaged  in  the   wireless   communications   integration   and
     intelligent   transportation   systems   business,   in   a   separate
     transaction.  Pursuant to the sale agreement, the corporation assigned
     to the buyer its  rights in  certain  contracts  and made a payment of
     $4.7 million, net of a working capital adjustment at closing.

     On June 25, 1998, the corporation  completed the sale of substantially
     all of  CRSI  to a  subsidiary  of TBG  Industries,  Inc.  for  $116.5
     million.  After  adjusting  for  changes  in  inter-company  loans and
     advances, COMSAT received cash proceeds of $111.9 million.

     Certain  of CRSI's  assets  were  excluded  from the  sale,  including
     Electromechanical Systems, Incorporated (EMS) and CRSI's 53% ownership
     interest  in  Plexsys  International  Corporation  (Plexsys).  Plexsys
     ceased doing business on July 1, 1998. The corporation has written-off
     its  investment in Plexsys and certain  amounts owed to it by Plexsys.
     Such  amounts  were  included  in the  corporation's  1997  loss  from
     discontinued  operations.  COMSAT  also will  retain  and  complete  a
     long-term  construction  contract for a radio  astronomy  telescope in
     Green Bank, West Virginia.

     Discontinued  operations  include  management's  best estimates of the
     amounts  expected to be realized on the sale of net assets,  operating
     results through anticipated disposal dates, facility closure costs and
     the estimated costs to complete the long-term contract retained by the
     corporation.   The  net  assets   excluded   from  the  sale   include
     management's  estimate of the amount to be realized from a $29 million
     claim,  which is currently in  arbitration,  for work performed on the
     long-term  construction  cntract.  These  estimates  could  change  as
     additional  costs are  incurred  to  complete  the  disposals  and the
     long-term   construction   contract   and  upon   resolution   of  the
     arbitration.

     The  net  assets   excluded  from  the  sale   primarily   consist  of
     receivables, fixed assets and accounts payable. At September 30, 1998,
     such amounts are presented, net of discontinued operation reserves, in
     other current assets ($12.7 million) and other assets ($7.7 million).

     ASCENT ENTERTAINMENT GROUP, INC.

     The  corporation  distributed  its 80.67% interest in Ascent through a
     tax-free   dividend  to   shareholders   on  June  27,  1997.   COMSAT
     shareholders  of record on June 19, 1997 received 0.4888 of a share of
     Ascent  common  stock for each  share of COMSAT  common  stock  owned.
     Ascent was accounted for as a discontinued  operation beginning on May
     15,  1997,  the date on which  the  corporation's  Board of  Directors
     adopted  a  formal  plan to  effect  the  distribution.  The  tax-free
     dividend of approximately  $195 million was recorded as a reduction of
     COMSAT's consolidated retained earnings.


                                     6

<PAGE>



4.   CHANGE IN SATELLITE ACCOUNTING POLICIES

     Effective  January 1, 1998,  the  corporation  changed its  accounting
     policy  with  respect to the cost of  satellites  lost at launch or in
     orbit.  Such  costs  will be  expensed  in the  period  in  which  the
     satellite is lost at launch or  experiences  a total failure in orbit.
     Previously,  the costs of failed  satellites were amortized over their
     original useful lives. Partial in-orbit failures will be evaluated for
     impairment  according  to the  provisions  of  Statement  of Financial
     Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
     Long-lived  Assets to be Disposed of." Also effective January 1, 1998,
     the  corporation   changed  its  accounting  policy  with  respect  to
     satellite  performance  incentive  payments paid to  manufacturers  to
     capitalize  the net present  value of such costs as a component of the
     cost of the  satellite.  Previously,  certain of these  payments  were
     expensed as paid.  These changes did not have a material effect on the
     corporation's financial statements.

5.   SATELLITE INSURANCE PROCEEDS

     The  INTELSAT  801  satellite  suffered a damaged  solar array  during
     in-orbit  testing  following  its launch in the first quarter of 1997.
     While the damage  suffered by the solar array has not  diminished  the
     satellite's operational  capability,  engineering studies completed in
     the first nine months of 1998 confirmed that the expected  operational
     life of the  satellite has been  shortened by 18.5%,  from 10 years to
     8.15 years.  Based on this study and under the terms of its  satellite
     insurance  policy,  a claim  was  filed  with the  insurers  seeking a
     recovery  equal to  18.5% of the  satellite's  cost.  The  corporation
     received  insurance  proceeds of $8.0 million in the third  quarter of
     this year and, accordingly, reduced the book value of the satellite.

6.   IMPAIRMENT OF LONG-LIVED ASSETS

     In the third  quarter  of 1998,  the  corporation  recorded a non-cash
     impairment  loss of $14.0  million  ($0.26  per fully  diluted  share)
     related to the write-down of the long-lived assets (goodwill and plant
     and equipment) of BelCom, COMSAT International's  company operating in
     Russia and in the Newly  Independent  States (NIS). The corporation is
     not able to recognize a tax benefit on the impairment  loss,  which is
     reported  as part of  COMSAT  International  in the  Network  Services
     segment.

     In accordance with the corporation's  accounting policy for evaluation
     of long-lived assets, the corporation  evaluates its long-lived assets
     whenever  events or  circumstances  indicate the carrying amount of an
     asset  may not be fully  recoverable.  Due to  BelCom's  deteriorating
     performance  and the  economic  conditions  in  Russia  and  the  NIS,
     management  determined  that the  corporation's  investment  in BelCom
     should be reduced.  The carrying amount of BelCom's  long-lived assets
     was determined based on a discounted analysis of expected cash flows.


                                     7

<PAGE>



7.   TAX BENEFIT

     The  corporation  favorably  resolved  a state tax audit for the years
     1992 - 1996 that allowed the corporation to reverse previously accrued
     interest costs of $1.7 million and state taxes of $2.2 million.  After
     federal taxes, the interest and state tax benefit increased net income
     for the third quarter and  year-to-date  period by $2.6 million ($0.05
     per fully diluted share).

     In addition,  the corporation  reversed  previously  accrued  interest
     costs of $2.5 million and taxes of $15.1  million for the years 1990 -
     1994 related to certain  federal tax matters.  Events during the third
     quarter  prompted the corporation to conclude that the amounts accrued
     were no longer  required.  The interest and tax benefit  increased net
     income for the third quarter and year-to-date  period by $16.6 million
     ($0.31 per fully diluted share).

8.   COMPREHENSIVE INCOME

     In January  1998,  the  corporation  adopted SFAS No. 130,  "Reporting
     Comprehensive   Income."  SFAS  No.  130  establishes   standards  for
     reporting and the display of  comprehensive  income and its components
     in the corporation's  financial  statements;  however, the adoption of
     this  statement  had  no  impact  on  the  corporation's   results  of
     operations  or  stockholders'  equity.  SFAS No. 130 requires  minimum
     pension  liability  adjustments,  unrealized  gains and  losses on the
     corporation's   available-for-sale  securities  and  foreign  currency
     translation  adjustments,   which  prior  to  adoption  were  reported
     separately  in   stockholders'   equity,   to  be  included  in  other
     comprehensive  income. Total comprehensive income (loss) for the three
     and nine months ended September 30, 1998 and 1997 were:

<TABLE>
<CAPTION>
<S>                                         <C>                 <C>              <C>               <C>

                                            Three Months Ended September 30     Nine Months Ended September 30
                                            --------------------------------    -------------------------------
In millions                                        1998             1997                1998             1997
---------------------------------------------------------------------------------------------------------------
Net income (loss)                            $      6.6         $  (20.8)         $     14.5         $   (36.4)
Other comprehensive loss                          (12.8)            (3.0)               (1.5)             (7.2)
                                             -----------       ----------         -----------        ----------
Total comprehensive income (loss)            $     (6.2)        $  (23.8)         $     13.0         $   (43.6)
                                             ===========       ==========         ===========        ==========
</TABLE>


     Other  comprehensive  income (loss) includes changes in the unrealized
     gain (loss) of  available-for-sale  securities,  net of tax, of ($9.1)
     million, $7.6 million, ($3.0) million and ($6.1) million for the three
     and  nine  month   periods   ended   September   30,  1998  and  1997,
     respectively.

9.   INTELSAT AND INMARSAT SHARE CHANGES

     The corporation's  18.0% ownership share of INTELSAT is unchanged from
     December 31, 1997.

     The corporation's  ownership share of Inmarsat decreased from 23.0% at
     December  31, 1997 to 22.2% as of September  30, 1998.  As a result of
     the  change in  ownership,  the  corporation  received a total of $5.9
     million during the nine months ended September 30, 1998.

                                     8

<PAGE>



10.  INVESTMENTS

     In March  1998,  the  corporation  wrote  off its $2.0  million  ($1.3
     million net of tax) investment in  Superconducting  Core Technologies,
     Inc. (SCT). The non-cash charge is reported in Other income (expense),
     net, on the condensed consolidated income statement.

11.  REGULATORY ENVIRONMENT AND LITIGATION

     REGULATORY ENVIRONMENT. Under the Communications Satellite Act of 1962
     (the Satellite Act), the International  Maritime Satellite Act of 1978
     (the Inmarsat Act) and the Communications Act of 1934, as amended (the
     Communications  Act),  COMSAT is subject to  regulation by the Federal
     Communications  Commission  (FCC)  with  respect  to its  capital  and
     organizational structure, and with respect to its COMSAT World Systems
     (CWS) and COMSAT Mobile Communications (CMC) businesses. FCC decisions
     and policies have had and will  continue to have a significant  impact
     on the corporation.

     In April  1998,  the FCC  granted  the  corporation's  petition  to be
     deregulated and  reclassified as a  "non-dominant"  telecommunications
     carrier in the major  markets of CWS.  The FCC's  decision  eliminates
     rate-of-return  restrictions,  structural  separation  regulation  and
     14-day advance tariff  notification in regard to approximately  90% of
     COMSAT's  INTELSAT  business.  It also allows CWS to  integrate  earth
     station and space segment  services,  requiring  only that COMSAT list
     those  offerings  separately  in tariff  filings  at the FCC.  The FCC
     denied  requests by major  INTELSAT  users to  condition  non-dominant
     carrier  status on the grant of direct  access  for users to  INTELSAT
     satellite capacity.  The FCC concluded that COMSAT's long-term carrier
     contracts do not impede competition; thus, such contracts would not be
     subject to regulatory  abrogation  based on the so-called "fresh look"
     doctrine.  The FCC  indicated,  however,  that it would begin a future
     proceeding to consider direct access implications. That proceeding was
     initiated by a Notice of Proposed  Rulemaking  issued in October 1998.
     For a discussion of these matters  refer to  "Management's  Discussion
     and Analysis -- Outlook"  section of the Form 10-Q and the description
     of the corporation's "Business" and Notes 8 and 9 to the corporation's
     1997 financial  statements  included as part of the corporation's 1997
     Form 10-K.

     LITIGATION.  COMSAT  and  its  subsidiaries  are a  party  to  various
     lawsuits and arbitration proceedings and are subject to various claims
     and inquiries,  which  generally are incidental to the ordinary course
     of its business.  The outcome of legal proceedings cannot be predicted
     with certainty.  Based on currently  available  information,  however,
     management  does not believe  that the outcome of any matter  which is
     pending or threatened,  either individually or in the aggregate,  will
     have  a  materially  adverse  affect  on  the  consolidated  financial
     condition of the corporation but could materially effect  consolidated
     results of  operations  in a given year or  quarter.  Certain of those
     matters  are  discussed  in  Notes 8 and 9 to the  corporation's  1997
     financial  statements  included as part of the corporation's 1997 Form
     10-K and "Item 1 - Legal Proceedings" of Part II of the March 31, 1998
     Form 10-Q.


                                     9

<PAGE>


12.  EARNINGS PER SHARE

     The  following  reconciliation  illustrates  the  calculation  of  the
     corporation's  basic and diluted  earnings  per share  amounts for the
     three and nine month periods ended September 30, 1998 and 1997:

<TABLE>
<CAPTION>
<S>                                               <C>            <C>                <C>           <C>

                                             Three Months Ended September 30,  Nine Months Ended September 30,
In millions, except per share amounts                   1998            1997              1998           1997
--------------------------------------------------------------------------------------------------------------
Income from continuing operations
  before extraordinary item                        $     6.6      $     9.4          $    14.5      $    26.6
                                                   ==========     ==========         ==========     ==========

Basic:
     Weighted average shares                            52.1           49.1               51.5           48.8
                                                   ===========    ==========         ==========     ==========
            Per share                              $    0.13      $    0.19          $    0.28      $    0.55
                                                   ===========    ==========         ==========     ==========

Assuming dilution:
            Weighted average shares                     52.1           49.1               51.5           48.8
            Stock options                                1.1            1.1                1.5            0.8
            Restricted stock awards and units            0.1            0.2                0.1            0.2
                                                   -----------    ----------         ----------     ----------
            Total                                       53.3           50.4               53.1           49.8
                                                   ===========    ==========         ==========     ==========
                 Per share                         $    0.12      $    0.19          $    0.27      $    0.53
                                                   ===========    ==========         ==========     ==========
</TABLE>


13.  NEW ACCOUNTING PRONOUNCEMENTS

     In June 1997, the Financial  Accounting  Standards Board (FASB) issued
     SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
     Information"  and in February 1998,  issued SFAS No. 132,  "Employers'
     Disclosures  about Pensions and Other  Postretirement  Benefits." SFAS
     No. 131 establishes  standards for the way public business enterprises
     report   information   about   operating   segments  and  the  related
     disclosures  about products and services,  geographic  areas and major
     customers. SFAS No. 132 requires revised disclosures about pension and
     post-retirement  benefit  plans.  Adoption  of  SFAS  No.  132  is not
     expected to have a material effect on the  corporation's  presentation
     of pension and post-retirement  benefit  disclosures.  In light of the
     April 1998  developments in the corporation's  regulatory  environment
     (see Note 7 and the "Management's  Discussion and Analysis -- Outlook"
     section of the Form 10-Q), the corporation is evaluating the effect of
     implementing  SFAS No. 131 on its  presentation of operating  segments
     and related disclosures.  The corporation will adopt SFAS Nos. 131 and
     132 in the fourth quarter of 1998.

     In June 1998, the Financial Accounting Standards Board issued SFAS No.
     133,  "Accounting for Derivative  Instruments and Hedging Activities."
     The  statement  requires  companies to recognize  all  derivatives  as
     either assets or liabilities,  with the  instruments  measured at fair
     value.  The  accounting  for changes in fair value and gains or losses
     depends  on the  intended  use of the  derivative  and  its  resulting
     designation.  The  statement is effective  for fiscal years  beginning
     after June 15, 1999.  The  corporation  will adopt SFAS No. 133 in the
     first quarter of 2000.  The  corporation is evaluating the impact that
     implementation of SFAS No. 133 will have on its consolidated financial
     statements.


                                     10

<PAGE>



14.  NOTE RECEIVABLE

     In  January  1997,  the  corporation   sold  its  19.66%  interest  in
     Philippine  Global  Communications,  Inc.  (PhilCom)  for  cash  and a
     collaterized note receivable  totaling $32.6 million.  At December 31,
     1997, the remaining note receivable balance of $12.7 million was to be
     paid in two payments  during 1998. In the third  quarter of 1998,  the
     note was  amended so that the  balance  would be paid in  installments
     with interest through June 2000. The corporation received a payment of
     $1.0 million in August 1998.  The  non-current  portion of the note is
     reported in other assets.


                                     11

<PAGE>



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1998

                           ANALYSIS OF OPERATIONS

CONSOLIDATED OPERATIONS
-----------------------

CONTINUING OPERATIONS

     Consolidated  revenues from continuing operations in the third quarter
and first nine  months of 1998 were  $158.4  million  and  $454.2  million,
respectively,  which were $13.1 million and $32.9  million  better than the
same periods in 1997.  The higher  revenues  were  primarily  the result of
improvements in Network Services segment revenues.

     Operating  income  for the third  quarter  and  year-to-date  was $2.4
million and $43.0 million, respectively,  which was $15.3 million and $21.2
million  below the  comparative  periods  of last year.  The third  quarter
results  included costs of $3.5 million related to the proposed merger with
Lockheed  Martin  Corporation  and a $14.0  million  write-down  of BelCom,
COMSAT  International's (CI) investment in Russia and the Newly Independent
States (NIS). See Notes 2 and 6 to the financial statements, respectively.

     Other income  (expense),  net, for the third quarter was a net expense
of $1.0  million,  compared  with a net income of $7.1 million in the third
quarter of 1997. For the first nine months of 1998,  other income (expense)
was a net expense of $4.9  million  versus  income of $7.9  million for the
same period last year.  During the third quarter of 1997,  the  corporation
recorded a $7.3 million gain from the sale of land in Clarksburg, Maryland.
In  addition,  the  year-to-date  1997  results  included a  currency  gain
recorded in the first quarter  related to the sale of an equity  investment
and a gain in the second quarter from the sale of an equity investment. The
year-to-date   1998  results  included  the  first  quarter  1998  non-cash
write-off of the corporation's  $2.0 million  investment in Superconducting
Core Technologies, Inc. See Note 10 to the financial statements.

     Interest expense, net of amounts capitalized for the third quarter and
first  nine  months  of  1998,   was  $6.1   million  and  $30.1   million,
respectively,  compared  to $11.2  million  and $31.0  million for the same
periods of 1997.  The  decrease  was due to the reversal of $4.2 million of
previously  accrued interest costs (discussed below in income tax benefit),
lower borrowings as a result of the use of the proceeds of the CRSI sale to
reduce  debt,  and  lower  amounts  of  capitalized  interest  due  to  the
completion of satellites under construction.

     Income tax benefit for the third  quarter and  year-to-date  was $11.3
million  and $6.5  million,  which  compares  to income tax expense of $4.2
million  and  $14.5  million  for the same  periods  of 1997.  In the third
quarter of 1998, the corporation  favorably resolved a state tax audit and,
accordingly, reversed previously accrued interest costs of $1.7 million and
state income taxes of $2.2  million.  In addition,  events during the third
quarter led the corporation to determine that previously  accrued  interest
costs of $2.5 million and federal income taxes of $15.1 million  related to
certain  federal tax  matters  were no longer  required.  See Note 7 to the
financial statements.

                                     12

<PAGE>



     Income from continuing  operations before  extraordinary  item for the
third  quarter  and  year-to-date  was  $6.6  million  and  $14.5  million,
respectively, $2.8 million and $12.1 million below the same periods of last
year.

     Basic  earnings  per share  for  continuing  operations  for the third
quarter were $0.13 and for the first nine months of 1998 were $0.28,  which
were  $0.06  and $0.27  below  the  comparative  periods  of 1997.  Diluted
earnings  per  share for  continuing  operations  were  $0.12 for the third
quarter and $0.27  year-to-date,  which were $0.07 and $0.26 below the same
periods of last year.

     During the first nine months of 1997, the corporation repurchased $100
million of its long-term debt. This early  extinguishment  of debt resulted
in an extraordinary loss in 1997 of $3.9 million, net of tax.

DISCONTINUED OPERATIONS

     During the second quarter of 1997, the  corporation  began  accounting
for the operations of both Ascent  Entertainment  Group,  Inc. (Ascent) and
substantially  all of COMSAT RSI, Inc. (CRSI) as  discontinued  operations.
See Note 3 to the financial statements.

CONSOLIDATED RESULTS

     On a  consolidated  basis,  the net income for the third  quarter  and
first nine months of 1998 was $6.6 million and $14.5 million, respectively,
compared  to net  losses of $20.8  million  and $36.4  million  in the same
periods of 1997.

     Basic  earnings per share for the third quarter were $0.13 and for the
first nine  months  were  $0.28,  compared to losses per share of $0.42 and
$0.75 for the same periods of 1997.  Diluted  earnings per share were $0.12
for the third quarter and $0.27 year-to-date,  compared to losses per share
of $0.41 and $0.74 for the same periods of last year.

SEGMENT OPERATING RESULTS

     The corporation  reports operating results in two segments - Satellite
Services and Network Services. The Satellite Services segment includes both
COMSAT World  Systems  (CWS) and COMSAT Mobile  Communications  (CMC).  The
Network  Services  segment  includes  COMSAT   International  (CI),  COMSAT
Laboratories and Government Programs.

                                     13

<PAGE>


<TABLE>
<CAPTION>
<S>                                          <C>                 <C>                           <C>                 <C>

RESULTS BY SEGMENT:


                                                    Quarter Ended September 30,                 Nine Months Ended September 30,
                                               ---------------------------------        ----------------------------------------
In millions                                            1998                 1997                       1998                1997
--------------------------------------------------------------------------------------------------------------------------------

REVENUES
Satellite Services:
     World Systems                               $     69.7          $      66.0                 $    204.7          $    199.3
     Mobile Communications                             42.8                 44.2                      123.7               126.1
                                                 -----------         ------------                -----------         -----------
     Total Satellite Services                         112.5                110.2                      328.4               325.4
                                                 -----------         ------------                -----------         -----------

Network Services:
     International                                     29.8                 25.1                       82.0                62.5
     Laboratories                                      11.4                  8.9                       31.9                26.7
     Government Programs                               14.0                 11.2                       42.0                33.5
                                                 -----------         ------------                -----------         -----------
     Total Network Services                            55.2                 45.2                      155.9               122.7
                                                 -----------         ------------                -----------         -----------

Eliminations and other                                 (9.3)               (10.1)                     (30.1)              (26.8)
                                                 -----------         ------------                -----------         -----------
     Total revenues                              $    158.4          $     145.3                 $    454.2          $    421.3
                                                 ===========         ============                ===========         ===========

OPERATING INCOME (LOSS)
Satellite Services:
     World Systems                               $     25.7          $      22.3                 $     75.5          $     77.6
     Mobile Communications                              7.4                  6.8                       22.4                17.7
                                                 -----------         ------------               ------------         -----------
     Total Satellite Services                          33.1                 29.1                       97.9                95.3
                                                 -----------         ------------               ------------         -----------

Network Services:
     International                                    (20.1)                (3.9)                     (30.7)              (10.5)
     Laboratories                                      (0.5)                (1.0)                      (1.1)               (1.3)
     Government Programs                                1.1                 (0.3)                       2.6                 0.5
                                                 -----------         ------------               ------------         -----------
     Total Network Services                           (19.5)                (5.2)                     (29.2)              (11.3)
                                                 -----------         ------------               ------------         -----------

     Total segment operating income                    13.6                 23.9                       68.7                84.0
General and administrative expense                     (6.3)                (5.4)                     (18.2)              (18.0)
Merger Costs                                           (3.5)                   -                       (3.5)                  -
Other                                                  (1.4)                (0.8)                      (4.0)               (1.8)
                                                 -----------         ------------               ------------         -----------
     Total operating income                      $      2.4          $      17.7                $      43.0          $     64.2
                                                 ===========         ============               ============         ===========
</TABLE>

SATELLITE SERVICES

     Revenues in the  Satellite  Services  segment in the third quarter and
year-to-date  were $112.5 million and $328.4 million,  respectively,  which
were $2.3 million and $3.0 million  above the  comparative  periods of last
year.  Operating  income in the third quarter and first nine months of 1998
was $33.1 million and $97.9 million,  respectively,  which was $4.0 million
and $2.6 million better than the same periods last year.

     CWS's revenues in the third quarter of 1998 were $69.7 million,  which
were $3.7 million above the same period of 1997.  For the first nine months
of 1998,  revenues of $204.7 million were $5.4 million better than the same
period of last year.  The increase in revenues was  primarily the result of
improvements in International  Business Service (IBS) traffic and wide-band
mobile  services,  offset in part by lower full-time  voice  revenues.  The
improvement  in IBS was due primarily to increases in  high-speed  data and
Internet services. CWS's operating income for the third quarter of 1998 and
first nine months of 1998 was $25.7 million and $75.5 million,

                                     14

<PAGE>



respectively, which was $3.4 million higher and $2.1 million lower than the
comparative  periods last year. The improvement in operating  income in the
third  quarter  was, in part,  the result of  increased  revenues and lower
operating expenses, partially offset by increased depreciation from placing
in service four INTELSAT satellites during the past year.

     Revenues in CMC during the third quarter and first nine months of 1998
were $42.8 million and $123.7  million,  respectively,  or $1.4 million and
$2.4 million below the same periods of 1997.  The decreases in revenue were
primarily  the  result of a decline in sales of Planet 1  terminals,  which
were  introduced to the market in January 1997. The results in both periods
also  reflect  improved  revenues  from  services  provided  to the Federal
Aviation Administration's (FAA) Wide Area Augmentation System (WAAS). CMC's
operating  income for the  quarter  was $7.4  million,  which was  $600,000
better than the third  quarter of 1997.  For the first nine months of 1998,
operating income was $22.4 million,  which was $4.7 million higher than the
same period last year. The  improvement  in operating  income was primarily
the  result  of  lower  operating  costs,  partially  offset  by  increased
depreciation  from two  Inmarsat  satellites  placed in service  since July
1997. The operating costs in 1997 included  marketing costs associated with
the launch of Planet 1 service.

NETWORK SERVICES

     Network  Services  revenues  for the third  quarter and the first nine
months of 1998 were $55.2 million and $155.9 million,  respectively,  which
were $10.0 million and $33.2 million higher than the comparative periods of
last year. The operating loss in the third quarter and first nine months of
1998 was $19.5 million and $29.2 million,  compared to operating  losses of
$5.2 million and $11.3 million for the comparative periods of 1997.

     Revenues in CI during the third quarter were $29.8 million, which were
$4.7  million or 19% higher than the same  period last year.  For the first
nine months  revenues were $82.0  million,  which were $19.5 million or 31%
above the same period of 1997. The year-to-date improvement in revenues was
driven primarily by increases in Argentina,  Brazil,  Colombia,  Mexico and
Venezuela.  CI's  operating  loss in the  third  quarter  of 1998 was $20.1
million,  compared to an operating loss of $3.9 million in the same quarter
of 1997.  The  year-to-date  operating  loss was  $30.7  million,  or $20.2
million higher than the same period last year.  CI's operating loss for the
third quarter included a non-cash  impairment loss of $14.0 million related
to the write-down of long-lived  BelCom assets,  namely  goodwill and plant
and equipment.  See Note 6 to the financial statements.  The corporation is
not able to recognize a tax benefit on the impairment  loss.  Excluding the
BelCom  charge  of $14.0  million,  operating  losses  increased  from $3.9
million for the third  quarter in 1997 to $6.1  million for the same period
in 1998.  The  increased  operating  loss  was  primarily  due to  BelCom's
deteriorating  operating  performance  and a charge in Brazil  which was in
part  related  to  lost  contracts.  Revenue  commitments  under  long-term
contracts at September 30, 1998 was $341 million,  compared to $323 million
at December 31, 1997.



                                     15

<PAGE>



     COMSAT Laboratories revenues in the third quarter and for year-to-date
were $11.4  million and $31.9  million,  respectively,  or $2.5 million and
$5.2 million higher than the comparative periods last year primarily due to
increases in technical  consulting  revenues.  The Laboratories'  operating
loss for the third quarter was $500,000  compared to a loss of $1.0 million
in the same  quarter  last  year.  For the first nine  months of 1998,  the
Laboratories  operating loss was $1.1 million,  or $200,000 better than the
comparative period of 1997. The Laboratories' backlog at September 30, 1998
was $24 million, as compared to $28 million at December 31, 1997.

     Government  Programs revenues for the third quarter of 1998 were $14.0
million, which was $2.8 million higher than the same quarter last year. For
the year-to-date,  revenues were $42.0 million, or $8.5 million better than
the  comparative  period  of  1997.  The  improvement  over  last  year was
primarily the result of increased  revenues from the  Commercial  Satellite
Communications  Initiative (CSCI) contract.  Operating income in Government
Programs for the third quarter and  year-to-date  was $1.1 million and $2.6
million,  respectively,  or $1.4 million and $2.1  million  better than the
same periods of last year.

                                  OUTLOOK

     MANY OF THE STATEMENTS THAT FOLLOW ARE  FORWARD-LOOKING  AND RELATE TO
ANTICIPATED  FUTURE  EVENTS AND  OPERATING  RESULTS.  STATEMENTS  THAT LOOK
FORWARD  IN  TIME  ARE  BASED  ON  MANAGEMENT'S  CURRENT  EXPECTATIONS  AND
ASSUMPTIONS,  WHICH MAY BE AFFECTED BY SUBSEQUENT DEVELOPMENTS AND BUSINESS
CONDITIONS,   AND  NECESSARILY  INVOLVE  RISKS  AND  UNCERTAINTIES.   THESE
STATEMENTS AND THE  CORPORATION'S  FUTURE OPERATING RESULTS MAY BE AFFECTED
BY THE TIMING AND OUTCOME OF REGULATORY AND OTHER GOVERNMENTAL PROCEEDINGS,
LEGISLATIVE ACTIONS, DEVELOPMENTS CONCERNING THE PRIVATIZATIONS OF INTELSAT
AND  INMARSAT,  THE  PROPOSED  ACQUISITION  OF  COMSAT BY  LOCKHEED  MARTIN
CORPORATION,  INTERNATIONAL  AND DOMESTIC  BUSINESS  CONDITIONS,  INCREASED
COMPETITION  FROM OTHER SATELLITE  SERVICES  PROVIDERS,  THE DISPOSITION OF
DISCONTINUED  OPERATIONS,  THE EFFECT OF THE YEAR 2000 ISSUE ON COMSAT, AND
OTHER  FACTORS.  THEREFORE,  THERE CAN BE NO ASSURANCE  THAT ACTUAL  FUTURE
RESULTS WILL NOT DIFFER MATERIALLY FROM ANTICIPATED  RESULTS.  ALTHOUGH THE
CORPORATION  HAS ATTEMPTED TO IDENTIFY  SOME OF THE IMPORTANT  FACTORS THAT
MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED, THOSE
FACTORS  SHOULD NOT BE VIEWED AS THE ONLY FACTORS  WHICH MAY AFFECT  FUTURE
OPERATING RESULTS.

BUSINESS COMBINATION WITH LOCKHEED MARTIN

     On September  18, 1998,  COMSAT  entered into an Agreement and Plan of
Merger (the Merger  Agreement) with Lockheed Martin  Corporation  (Lockheed
Martin) and Deneb Corporation  (Acquisition Sub), a wholly-owned subsidiary
of  Lockheed  Martin.  Under the terms of the  Merger  Agreement,  Lockheed
Martin will acquire all of the  outstanding  common stock, no par value, of
COMSAT (the COMSAT Common Stock) in a two-step transaction.

     On September 25, 1998, a wholly-owned  subsidiary of Lockheed  Martin,
Regulus,  LLC  (Purchaser),  initiated a tender offer to purchase up to 49%
(subject to certain  adjustments)  of the COMSAT Common Stock at a price of
$45.50 per share in cash.  The tender  offer is being made  pursuant to the
Merger  Agreement upon the terms and subject to the conditions set forth in
the Purchaser's  Offer to Purchase,  dated September 25, 1998 (the Offer to
Purchase),  and the related Letter of Transmittal (which, together with the
Offer to Purchase, constitute the Offer).


                                     16

<PAGE>



     Certain  significant  conditions  to the  consummation  of  the  Offer
include:  (i) there being validly  tendered and not withdrawn  prior to the
expiration date of the Offer at least  one-third of the outstanding  shares
of COMSAT Common  Stock;  (ii) the approval by COMSAT  shareholders  of the
Merger (described below) and the Merger Agreement; and (iii) the receipt of
all  required   regulatory  consents  and  approvals.   In  addition,   the
obligations  of the Purchaser to consummate  the Offer are subject to there
not being any failure of any  representation or warranty,  or breach of any
covenant or agreement,  of COMSAT,  or any fact or circumstance  that would
reasonably be expected to have a Material Adverse Effect (as defined in the
Merger  Agreement)  on  COMSAT.  In  addition,  the  Purchaser  will not be
obligated  to  consummate  the Offer if (a) there has been a decline in the
Standard  & Poor's  500 Index of at least  27% from the date of the  Merger
Agreement  through  any  given  day  (a  Measurement  Date)  prior  to  the
termination  or expiration of the Offer,  and (b) the Standard & Poor's 500
Index is at least 27% lower than on the date of the Merger Agreement on the
earlier  of (i) the close of trading  on the next  trading  day at least 30
calendar days from such Measurement  Date, and (ii) the close of trading on
the next trading date immediately prior to the date on which the expiration
of the Offer  would  otherwise  occur but for the  failure to satisfy  this
condition.

     The Merger  Agreement also provides that as soon as practicable  after
consummation of the Offer and the  satisfaction or waiver of the conditions
set forth therein, COMSAT will be merged with Acquisition Sub (the Merger).
In the  Merger,  each  share of COMSAT  Common  Stock  that is  issued  and
outstanding  immediately  prior to the effective  time of the Merger (other
than shares of COMSAT  Common  Stock held by COMSAT,  Purchaser or Lockheed
Martin and dissenting  shares,  if any) will be converted into the right to
receive 0.5 shares of common stock,  par value $1.00 per share, of Lockheed
Martin  (the  Lockheed  Martin  Common  Stock),  subject to  adjustment  as
provided in the Merger Agreement.  Lockheed Martin recently announced their
intention to change their capitalization through a two-for-one stock split.
As a result of this stock split,  the exchange  ratio in the Merger will be
adjusted so that each share of COMSAT Common Stock  outstanding at the time
of the Merger  (other  than shares of COMSAT  Common  Stock held by COMSAT,
Purchaser  or  Lockheed  Martin  and  dissenting  shares,  if any)  will be
exchanged  for one  share of  Lockheed  Martin  Common  Stock,  subject  to
adjustment as provided in the Merger Agreement.

     Certain  significant  conditions  to the  consummation  of the  Merger
include: (i) the consummation of the Offer; (ii) the amendment or repeal of
the Communications Satellite Act of 1962 (the Satellite Act), and (iii) the
receipt  of the  approvals  of the FCC and other  governmental  authorities
required for the consummation of the Merger.  In addition,  the obligations
of Lockheed Martin and Acquisition Sub to consummate the Merger are subject
to there  not being  any fact or  circumstance  that  would  reasonably  be
expected  to have a  Significant  Adverse  Effect (as defined in the Merger
Agreement).

     In connection with the execution of the Merger Agreement,  the parties
entered  into  certain  ancillary  agreements.  The Company  entered into a
Shareholders  Agreement,  dated as of  September  18, 1998,  with  Lockheed
Martin  (the   Shareholders   Agreement),   pursuant  to  which,  upon  the
consummation of the Offer,  COMSAT will take all actions necessary to cause
the three  individuals  selected by Lockheed  Martin (the  Lockheed  Martin
Designees)  to be elected to the Board of Directors of COMSAT and appointed
to certain committees of the Board of Directors of COMSAT.  Pursuant to the


                                     17

<PAGE>

Shareholders  Agreement,  the  Company  agreed  not to amend or repeal  the
provisions of its bylaws that permits any three directors to call a special
meeting  of the Board of  Directors  or  otherwise  amend its  Articles  of
Incorporation  or bylaws in a manner that would adversely affect the rights
of Lockheed  Martin under the  Shareholders  Agreement or the  Registration
Rights  Agreement  (described  below).  The  Shareholders   Agreement  also
provides that, in the event that the Merger is not consummated, COMSAT will
cause its Board of Directors to amend COMSAT's Articles of Incorporation to
eliminate the transfer  restrictions  contained in Section  5.03(c) thereof
and to recommend  such  amendment to the  shareholders  of COMSAT for their
approval.   The  Shareholders  Agreement  contains  other  restrictions  on
Lockheed Martin with respect to its ownership of COMSAT Common Stock.

     In addition,  Lockheed Martin and COMSAT entered into the Registration
Rights Agreement,  dated as of September 18, 1998 (the Registration  Rights
Agreement),  pursuant to which, assuming that the Purchaser acquired shares
of COMSAT Common Stock in the Offer and that the Merger is not consummated,
Lockheed  Martin has certain demand and piggy-back  registration  rights to
cause  COMSAT  to  prepare  and  file  registration  statements  under  the
Securities  Act of 1933,  as amended,  to register  shares of COMSAT Common
Stock held by Lockheed Martin.

     In order to  facilitate  consummation  of the  Offer  and the  Merger,
COMSAT  also  entered  into a Carrier  Acquisition  Agreement,  dated as of
September  18,  1998,  with  Lockheed  Martin,  the  Purchaser  and  COMSAT
Government  Systems,  Inc.  (CGSI),  a  wholly-owned  subsidiary of COMSAT,
pursuant to which CGSI will be merged with and into  Purchaser (the Carrier
Acquisition) as soon as practicable following the satisfaction or waiver of
the conditions set forth in the Carrier Acquisition  Agreement,  or on such
other  date as the  parties  may  agree,  but in all  events  prior  to the
consummation of the Offer. In the Carrier  Acquisition,  the Purchaser will
acquire the common carrier telecommunications business of CGSI.

RESTRUCTURING OF INTELSAT AND INMARSAT

     During  1998,  significant  progress has been made with respect to the
corporation's ongoing efforts to restructure INTELSAT and Inmarsat.

     The INTELSAT Assembly of Parties, at its March 1998 meeting,  approved
a restructuring plan to transfer six INTELSAT satellites (five currently in
orbit and one to be  launched  in 1999)  into a  separate,  new  commercial
company.  The  new  company,  incorporated  in the  Netherlands,  has  been
temporarily  named New Skies  Satellites  N.V. (New Skies).  It is expected
that the  transfer of assets from  INTELSAT to New Skies will occur  before
the end of this year. Additionally,  an initial public offering is expected
to  occur   sometime   during  1999  to  fund  New  Skies'  future  capital
requirements.  New Skies will  operate  as an  entirely  separate  company,
independent of INTELSAT.  INTELSAT's  direct ownership in New Skies, set at
10%, will be held in a non-voting trust.  Individual  ownership levels will
be  limited  to  17%,  and it is  expected  that  COMSAT's  initial  direct
investment in New Skies will be approximately 16.6%.

     In June 1998,  the FCC issued a public  notice  requiring  U.S.  earth
stations  licensees  which  currently  use  INTELSAT  satellites  that will
transfer to New Skies to file license modification applications by July 17,
1998 in order to access the New Skies system. Several companies,  including
COMSAT, filed applications in response to this notice. In September 1998, a


                                     18

<PAGE>

competitor  of New  Skies  filed a  petition  asking  the FCC to grant  the
applicants  special  temporary  authority to access New Skies for a limited
period and to defer the  question of  permanent  authority to a later date.
COMSAT, New Skies, and several of the applicants opposed this petition. The
corporation   anticipates   that  the  FCC  will  ultimately   grant  these
applications,  and that,  if  necessary,  it will grant  special  temporary
authority  for the period  between the asset  transfer from INTELSAT to New
Skies and the issuance of the FCC's decisions.

     COMSAT  currently  consolidates  its share of the accounts of INTELSAT
and  recognizes  its  portion  of  INTELSAT's  results of  operations  each
reporting  period.  COMSAT  anticipates  it will  use the  cost  method  of
accounting for its investment in New Skies.  Under the cost method,  COMSAT
would  only  recognize  income  at the time  dividends  from New  Skies are
received.  COMSAT does not anticipate that New Skies will declare dividends
during its first year of operations.  As a result, beginning at the time of
the transfer of assets to New Skies,  the  corporation's  pre-tax  earnings
from  its  investments  in both  INTELSAT  and New  Skies  will be lower by
approximately  $2 million each quarter as compared to periods  prior to the
transfer in the absence of other factors that may affect operating  results
in CWS.

     At its meeting in  September  1998,  the  INTELSAT  Board of Governors
continued its discussions on transforming the remaining portion of INTELSAT
to a fully private  company.  The INTELSAT Board of Governors will continue
this work at its next  meeting in December  1998.  It is the  corporation's
objective  to  privatize  the  remaining  portion of INTELSAT by the end of
2001. The corporation,  as a minority shareholder and the U.S. signatory to
INTELSAT,  lacks the ability to  independently  effect a  restructuring  of
INTELSAT.  The  success of the  corporation's  efforts  will  depend on the
corporation's  ability to achieve a consensus  among other  signatories and
participating member governments. A two-thirds vote of the governments that
are  members of  INTELSAT  would be  necessary  for  approval  of any final
privatization proposal.

     In September 1998, the Inmarsat Assembly of Parties approved a plan to
transfer the  operating  assets of the current  Inmarsat  intergovernmental
organization  to  a  new  company.   Inmarsat  is  expected  to  become  an
independent commercial company on or shortly after April 1, 1999. While the
new company initially would not be publicly traded, it is expected that the
company would proceed with an initial public offering within  approximately
24 months after its creation. Individual ownership in the new company would
be capped at 15%,  although  COMSAT's  ownership in Inmarsat at the time of
privatization  would be  grandfathered.  COMSAT's  voting rights,  however,
would be capped at 15% with respect to votes  against  certain  shareholder
resolutions.  COMSAT's  ownership of Inmarsat as of September  30, 1998 was
22.2%.  Prior to the public  offering,  owners are  expected  to be able to
trade  shares,  and  strategic  investors  may invest up to $500 million in
equity in the new company.

     The U.S. government delegation to the Inmarsat Assembly did not oppose
the  Assembly's  final  decision on  privatization  which  called for rapid
implementation.  However,  COMSAT understands that the Executive Branch has
concluded that it may not "implement" the Inmarsat restructuring within the
United States without  legislative  authorization.  COMSAT understands that
the Executive Branch is currently assessing a number of options,  including
potential  U.S.  withdrawal  from  Inmarsat,  either  prior to or after the
restructuring,  and  instructing  COMSAT  not to accept  its  shares in the
restructured  Inmarsat until the requisite  legislation is enacted.  If the
U.S.  were to withdraw  from Inmarsat  prior to the  restructuring,  COMSAT


                                     19

<PAGE>

would be required to liquidate its investment in Inmarsat at book value. If
the U.S.  were to withdraw from Inmarsat  after the  restructuring,  COMSAT
might be required to place its shares in the restructured Inmarsat in trust
and might not be able to vote those  shares  but would have the  ability to
direct the  disposition  of those  shares.  The  corporation  plans to work
closely with the U.S.  Government  to achieve a resolution  of these issues
that protects the value of the corporation's  investment in Inmarsat. There
can be no assurance,  however,  that the corporation  will be successful in
that effort.

     As with INTELSAT,  COMSAT  consolidates  its shares of the accounts of
Inmarsat.  Assuming COMSAT continues to own at least 20% of the new company
at the time it is privatized and other details and  assumptions  related to
the restructuring do not change, the corporation  anticipates that it would
use the equity method of accounting  for its  investment in the  privatized
Inmarsat.  Under the equity  method,  the  corporation  would  continue  to
include its proportionate share of the new company's operating results, net
of taxes,  as part of the  corporation's  pre-tax  operating  results.  The
accounting method used for this investment, however, will be dependent upon
the  terms  and  conditions  of the final  Inmarsat  restructuring  and the
corporation's  then current  ownership  interest.  As a privatized  entity,
Inmarsat will recognize income tax expense in its operating results.  It is
anticipated  that  Inmarsat  will  have a higher  effective  rate  than the
corporation in 1999,  which will decrease the  corporation's  net income by
approximately $2 million.

REGULATORY AND LEGISLATIVE DEVELOPMENTS

     On April 24,  1998,  the FCC granted the  corporation's  petition  for
reclassification as a non-dominant common carrier in markets that represent
approximately  90% of CWS's  revenues.  For those  markets,  rate-of-return
regulation  has  been  lifted  effective  immediately.   In  the  remaining
"thin-route" markets, which are expected to account for only 10% or less of
the CWS  business  in 1998,  the FCC  denied the  corporation's  request to
forbear from dominant carrier regulation.  The FCC, however, stated that it
would consider on an expedited basis a form of  incentive-based  regulation
to replace  dominant carrier  rate-of-return  regulation for the thin-route
business,  and  issued a  Notice  of  Proposed  Rulemaking  seeking  public
comment.  In response,  COMSAT submitted an incentive  regulation  proposal
committing  to  various  rate  reductions  and  price  caps for thin  route
services. A decision by the FCC in the incentive  regulation  proceeding is
expected  before  the end of the year.  The FCC's  non-dominant  order also
granted the corporation's  request to file tariffs on one day's notice with
a presumption  of  lawfulness  and request for the  elimination  of the CWS
structural  separation  requirements.  In addition,  the non-dominant order
gave CWS authority to enter the earth station market on an unseparated  and
non-dominant basis. The non-dominant order also reviewed COMSAT's long-term
carrier contracts and found that they do not impede competition; thus, such
contracts  should  not be  subject to  regulatory  abrogation  based on the
so-called  "fresh look"  doctrine.  On October 28,  1998,  the FCC issued a
separate  notice of  proposed  rulemaking  to explore the  implications  of
enabling  users to have direct  access to the INTELSAT  system,  as the FCC
indicated that it would do in its non-dominant  order. In the direct access
notice, the FCC tentatively  concluded,  among other things,  that it lacks
the  statutory  authority to impose  Level 4 direct  access (by which users
could

                                     20

<PAGE>


invest in INTELSAT),  but does have the authority to require Level 3 direct
access (by which users could contract with INTELSAT for capacity).  The FCC
is seeking comments on whether it is in the public interest to exercise its
authority and mandate Level 3 direct access.  The corporation plans to file
comments in this  proceeding  contesting  the basis for the FCC's  proposed
action.

     In October  1998,  Congress  passed,  and the  President  subsequently
signed,  the  International  Anti-Bribery  Act of 1998.  The act contains a
provision which states that, except as required by international agreements
to which  the  United  States  is a party,  an  international  organization
providing commercial satellite services shall not be accorded immunity from
suit or legal process in connection with its provision of such service. The
effective  date of this  provision is May 1, 1999. The Act also states that
the President shall designate which agreements are international agreements
to which the United States is a party for purposes of this  provision,  and
directs  the  President  to take  all  appropriate  actions  to  reduce  or
eliminate all privileges and immunities that are not eliminated pursuant to
this provision. The corporation opposed prior versions of this legislation,
but supported it in the form ultimately passed by Congress. The corporation
does not believe that  enactment of this  legislation  will have a material
effect on its  business,  because (i) Inmarsat is expected to be privatized
before May 1, 1999,  and (ii) the  President is expected to  designate  the
INTELSAT Headquarters Agreement,  which affords INTELSAT immunity from suit
and legal process, as an international agreement to which the United States
is a party.

     In May 1998, the U.S. House of Representatives  passed a bill entitled
the  "Communications  Satellite  Competition and Privatization Act of 1998"
(H.R. 1872). While the corporation supports H.R. 1872's stated objective of
privatizing  INTELSAT  and  Inmarsat in a  pro-competitive  manner,  COMSAT
opposed H.R. 1872 in the form in which it was passed.  In testimony  before
the Senate  Subcommittee  on  Communications  on September  10,  1998,  the
Clinton Administration also opposed H.R. 1872 on the grounds, among others,
that it would reduce, not promote,  competition for satellite services, and
would negatively impact the President's foreign policy prerogatives as well
as  national  security  and  trade  policy.  H.R.  1872  expired  upon  the
adjournment of the 105th Congress on October 21, 1998.

     An  international  satellite bill, S. 2365, also was introduced in the
Senate on July 28,  1998.  COMSAT  believes  that S.  2365,  on the  whole,
represented a more constructive approach to privatization and international
satellite policy.  The proposed Senate bill excluded many of the provisions
of H.R. 1872 that could impair COMSAT's  investments  and  operations.  The
Senate bill, however,  contained certain provisions  (including a provision
authorizing  direct  access to INTELSAT  and  Inmarsat on  so-called  "thin
routes" and another  provision  which  could lead to U.S.  withdrawal  from
INTELSAT  and  Inmarsat  if full  privatization  has not been  realized  by
January 1, 2003) which the corporation believes are not needed and could be
counterproductive.  As with H.R. 1872, S. 2365 expired with the adjournment
of the 105th Congress.



                                     21

<PAGE>


YEAR 2000 ISSUE - (YEAR 2000 READINESS DISCLOSURE)

     The year 2000 issue is the result of computer  programs  being written
using two digits  rather  than four  digits to define the  applicable  year
(I.E., "97" for 1997). Certain of the corporation's  computer programs that
have  date-sensitive  software may not operate  properly  when the last two
digits  become "00",  as will occur on January 1, 2000.  To the extent that
this  situation  exists,  there is the  potential  for  system  failure  or
miscalculations,  which could cause a disruption of operations. The problem
is not limited to computer programs, as some of the corporation's  computer
and other operational equipment that has date-sensitive  processors may not
be able to process dates after December 31, 1999.

     In the second  half of 1996,  the  corporation  initiated a program to
identify and properly address issues  associated with the year 2000 problem
in order to avoid interruption to the corporation's  operations at the turn
of the century. Each of the operating segments of the corporation,  as well
as the administrative  functions,  has essentially  completed the inventory
and assessment phase of the year 2000  implementation plan and is currently
implementing plans to remediate the non-compliant systems identified during
these  first two  phases.  The  corporation  presently  believes  that such
changes to the corporation's key computer and other operational systems and
equipment  will be completed  and tested by the end of the third quarter of
1999.

     The corporation's  current estimate is that it will cost approximately
$8  million  prior to January  1, 2000 to modify  its  in-house  management
information  systems,  customer  products and other  systems and  equipment
affected by the year 2000 issue. Of this amount,  the corporation has spent
$800,000 or 10% of the projected  amount through  September 30, 1998.  Year
2000  modifications  and  replacements  are based on  management's  current
expectations  and  assumptions,  which were derived  using  assumptions  of
future events,  including the continued  availability  of resources and the
reliability  of third party  modification  plans.  Future events that might
cause  material   differences  in  management's  current  expectations  and
assumptions  include,  but are not limited to, the availability and cost of
personnel with  appropriate  skills,  the ability to locate and correct all
relevant   computer   code,   reliance   on  third   parties   and  similar
uncertainties.

     SATELLITE  SERVICES.  While the  corporation  is devoting  substantial
resources to its own year 2000 compliance effort,  COMSAT, as well as other
international  telecommunications  carriers, will be dependent, in part, on
foreign and other third party  telecommunication  carriers  being year 2000
compliant.    The   financial    impact   of   foreign   or   third   party
telecommunications  carriers  failing to meet the year 2000 challenge would
be realized in either of two ways:  loss of revenue due to the inability to
complete  the  up-link or  down-link  transmissions  to or from a satellite
and/or loss of the corporation's  share of INTELSAT and Inmarsat  revenues.
In recognition of the financial  exposure resulting from this dependency on
foreign and third party  telecommunications  carriers,  the corporation has
undertaken,  as part of its year 2000 efforts, an analysis of the year 2000
compliance efforts of these telecommunications carriers as to the status of
their year 2000  compliance  efforts.  In  addition to this  analysis,  the
corporation  is also  utilizing  the results of efforts  undertaken  by the
International  Telecommunication  Union (ITU). The corporation will develop
contingency  plans to deal with this issue  depending on the results of its
analysis   and   the   year   2000    readiness    status   of   individual
telecommunications carriers.



                                     22

<PAGE>

     COMSAT  World  Systems  derives in excess of 90% of it revenues  under
long-term  contracts.  Almost  all of these  revenues  are  dependent  upon
termination  with a foreign  telecommunication  carrier.  Even though these
long-term  contracts are not subject to termination as a result of the year
2000 issue, a significant  portion of the expected  future CWS revenues and
COMSAT's share of INTELSAT  revenues is generated from services between the
United  States  and areas of the  world  which may be  subject  to  service
interruptions resulting from year 2000 readiness issues. It is not possible
for the  corporation  to  accurately  quantify the amount,  if any, of this
exposure at this time.

     COMSAT  Mobile  Communications  derives a  significant  portion of its
revenues from services  either  originating or  terminating  outside of the
United  States.  If the  originating  or  terminating  carrier is unable to
initiate or terminate a call,  COMSAT Mobile  Communications,  directly and
through  its share of Inmarsat  revenues,  would be  adversely  affected by
reduced revenues. It is not possible at this time to accurately measure the
corporation's financial exposure as a result of this situation.

     NETWORK SERVICES. COMSAT International and COMSAT Laboratories rely on
third-party  vendor  provided  and  vendor  supported  systems  to  provide
products and services to their customers.  COMSAT  International and COMSAT
Laboratories have sought,  but have not yet received,  final  certification
from all of their third-party vendors. If it became necessary,  a compliant
product  provided  by a different  supplier  would be utilized to replace a
non-compliant product. At this time neither COMSAT International nor COMSAT
Laboratories has any reason to believe this will become necessary.

                      LIQUIDITY AND CAPITAL RESOURCES

     The primary sources of cash in the first nine months of 1998 were cash
from  operations,  and  proceeds  from the sale of CRSI and the exercise of
stock  options.  Cash was used  primarily  for the purchase of property and
equipment and to reduce short-term debt. The corporation's  working capital
at September 30, 1998 was $41.3  million,  which was $19.7  million  higher
than at December 31, 1997.

     The  corporation  has access to short-term and long-term  financing at
favorable rates. The  corporation's  current  long-term debt ratings are A-
from Standard and Poor's and A3 from  Moody's.  The  corporation's  current
commercial  paper  ratings  are A2 from  Standard  and  Poor's  and P2 from
Moody's.  Following the  announcement of the Merger Agreement with Lockheed
Martin,  both  Standard and Poor's and Moody's  placed their ratings on the
corporation's  long-term  debt under  review for possible  downgrades.  The
downgrades  would take effect as a result of merging the corporation with a
lower-rated parent company.  The ratings for commercial paper are not under
review at this time.

     The  corporation's  $200  million  commercial  paper  program  had $11
million in  borrowings  outstanding  at September  30, 1998. A $200 million
credit agreement,  expiring in 1999, backs up the corporation's  commercial
paper program.


                                     23

<PAGE>


     The corporation had $36 million  remaining at September 30, 1998 under
a $100 million  medium-term note program,  which is unchanged from year-end
1997.  The  medium-term  program is part of a $200 million debt  securities
shelf registration program initiated in 1994.

     The corporation's capital structure and debt-financing  activities are
regulated   by  the  FCC.   The   corporation   is  required  to  submit  a
capitalization plan to the FCC for review annually. In August 1997, the FCC
approved  the  corporation's  1997  capitalization  plan.  The  corporation
submitted  its  1998  capitalization  plan  to the FCC in May  1998,  and a
response from the FCC is expected in the fourth quarter of 1998.  Under the
existing  FCC  guidelines,  the  corporation  is subject to a limit of $200
million in short-term debt, a maximum long-term debt-to-total-capital ratio
of  45%  and an  interest  coverage  ratio  of 2.3  to 1.  The  latter  two
guidelines are measured at year end. The corporation was in compliance with
the $200 million short-term debt limit as of September 30, 1998 and expects
to be in compliance with the other guidelines at December 31, 1998.


                                    24

<PAGE>


PART II.   OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS


           See  Note  11 of  this  Form  10-Q,  Item  1 of  Part  II of the
           corporation's  March  31,  1998  Form  10-Q  and  Item  3 of the
           corporation's  1997 Form 10-K, which are incorporated  herein by
           reference.

ITEM 2.    CHANGE IN SECURITIES
           None

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.    (a)  EXHIBITS
                27 - Financial Data Schedule

           (b)  REPORTS ON FORM 8-K
                Report  dated   September  20,  1998  announcing  that  the
                corporation  had  entered  into an  Agreement  and  Plan of
                Merger,   dated  September  18,  1998,  by  and  among  the
                corporation,   Lockheed   Martin   Corporation   and  Deneb
                Corporation,  a wholly-owned  subsidiary of Lockheed Martin
                Corporation.

                                     25

<PAGE>


                                 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 hereunto duly authorized.


                             COMSAT CORPORATION


                             By /S/ ALAN G. KOROBOV
                                -------------------
                                    Alan G. Korobov
                                    Controller


Date:  November 16, 1998

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