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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                   FORM 20-F
 
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                        COMMISSION FILE NUMBER: 333-8880
 
                       SATELITES MEXICANOS, S.A. de C.V.
                         BLVD. M. AVILA CAMACHO NO. 40
                           COL. LOMAS DE CHAPULTEPEC
                               11000 MEXICO, D.F.
                                     MEXICO
                                 (525) 201-0800
 
                     JURISDICTION OF INCORPORATION: MEXICO
 
 SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d)
                                  OF THE ACT:
                     10 1/8% SERIES B SENIOR NOTES DUE 2004
 
 THE NUMBER OF OUTSTANDING SHARES OF CAPITAL STOCK AS OF DECEMBER 31, 1998 WAS:
 
<TABLE>
<C>        <S>
    2,550  CLASS I SERIES A SHARES
2,598,450  CLASS II SERIES A SHARES
    2,450  CLASS I SERIES B SHARES
2,496,550  CLASS II SERIES B SHARES
4,900,000  CLASS II SERIES N SHARES
</TABLE>
 
     The registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or
such shorter period, and has been subject to such filing requirements for the
past 90 days.
 
     The registrant has elected to follow financial statement Item 18.
 
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                               TABLE OF CONTENTS
 
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                                   PART I
Item 1.   BUSINESS....................................................    1
Item 2.   DESCRIPTION OF PROPERTY.....................................   16
Item 3.   LEGAL PROCEEDINGS...........................................   16
Item 4.   CONTROL OF REGISTRANT.......................................   16
Item 5.   NATURE OF TRADING MARKETS...................................   17
Item 6.   EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
          HOLDERS.....................................................   17
Item 7.   TAXATION....................................................   17
Item 8.   SELECTED FINANCIAL DATA.....................................   21
Item 9.   MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
          AND FINANCIAL CONDITION.....................................   22
Item 9A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
          RISK........................................................   28
Item 10.  DIRECTORS AND OFFICERS OF REGISTRANT........................   29
Item 11.  COMPENSATION OF DIRECTORS AND OFFICERS......................   29
Item 12.  OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR
          SUBSIDIARIES................................................   29
Item 13.  INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS..............   29
                                  PART III
Item 15.  DEFAULTS UPON SENIOR SECURITIES.............................   30
Item 16.  CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
          SECURITIES..................................................   30
                                  PART IV
Item 17.  FINANCIAL STATEMENTS........................................    *
Item 18.  FINANCIAL STATEMENTS........................................   30
Item 19.  FINANCIAL STATEMENTS AND EXHIBITS...........................   31
</TABLE>
 
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* The registrant has responded to Item 18 in lieu of this Item.
 
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                                     PART I
 
ITEMS 1.  BUSINESS
 
                                  THE COMPANY
 
GENERAL
 
     In 1997, Loral Space & Communications Ltd. (together with its subsidiaries
"Loral") and Principia, S.A. de C.V. ("Principia"), formerly Telefonica Autrey,
S.A. de C.V., acquired 75% of the outstanding capital stock of Satelites
Mexicanos, S.A. de C.V. (the "Company" or "Satmex") from the Government of
Mexico (the "Government"). The remaining 25% of Satmex's capital stock is owned
by the Government. Satmex is the leading provider of domestic fixed satellite
services ("FSS") in Mexico and intends to expand its services to become a
leading provider of satellite services throughout Latin America. The Company
provides transponder capacity to customers for distribution of network and cable
television programming, direct-to-home television ("DTH") service and on-site
transmission of live news reports, sporting events and other video feeds. Satmex
also provides satellite transmission capacity to telecommunications service
providers for public telephone networks in Mexico and elsewhere and to corporate
customers for their private business networks with data, voice and video
applications. The Company is also marketing the use of satellite transmission
capacity for new applications, such as Internet via satellite. Satmex has
landing rights to provide broadcasting and telecommunications transmission
capacity in the United States, Canada and 20 nations and territories in Latin
America. The Company's broadcasting customers include Televisa, MVS Multivision,
Television Azteca and its telecommunications services customers include Telmex,
Bancomer, Pemex, Cemex and the Mexican subsidiaries of Ford and DaimlerChrysler.
 
     The Company's three satellites (Solidaridad 1, Solidaridad 2 and Satmex 5)
are in geostationary orbit at 109.2 degrees W.L., 113 degrees W.L. and 116.8
degrees W.L., respectively, and have a total of 144 36-MHz transponder-
equivalents operating in the C- and Ku-band, with an aggregate footprint
covering substantially all of the continental United States, the Caribbean as
well as all of Latin America, other than certain regions in Brazil. The Company
believes that this capacity is one of the largest capacities dedicated primarily
to the Latin American region. The Company intends to expand its sales outside of
Mexico by expanding its network of offices, agents, distributors and value-added
resellers in principal cities in the Latin American region. Satmex also owns
another satellite, Morelos 2, which is in an inclined orbit.
 
     The Company is a member of the Loral Global Alliance, which is managed by
Loral Skynet. Through the alliance, the Company can offer its customers an
integrated portfolio of satellite capacity that provides "one stop shopping" for
local, regional and global geosynchronous satellite services. The other alliance
members are Loral Skynet and Loral Orion, two Loral subsidiaries, and
Europe*Star, a joint venture between Loral and Alcatel. The members of the
alliance currently have seven satellites in orbit with a total of 144 C-band and
192 Ku-band 36-MHz transponder-equivalents. In the next six months, the alliance
members are expected to have nine satellites in orbit with a total of 168 C-band
and 273 Ku-band 36-MHz transponder equivalents.
 
     The Loral Global Alliance provides for cross-selling arrangements among the
alliance members' respective sales force and for cooperative marketing and
promotional activities. The Company believes that such arrangements will enable
the members of the alliance to compete more effectively in sales of
communications satellite services worldwide. In addition, the alliance offers
in-orbit backup capabilities for its members in regions where members' fleets
have overlapping coverage.
 
     At December 31, 1998, Solidaridad 1, Solidaridad 2 and Satmex 5 have
remaining estimated useful lives of 8, 10 and 21 years, respectively. Satmex
holds 20-year concession titles to operate in its three orbital locations at
certain C- and Ku-band frequencies, each of which will expire on October 22,
2017. The concession titles are renewable thereafter, subject to certain
conditions, for an additional 20-year term without additional payment. In
addition, the Company operates two satellite control centers.
 
SERVICES
 
     The Company provides satellite transmission capacity to broadcasting
customers for network and cable television programming, DTH television service
and transmission of live news reports, sporting events and
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other video feeds from the scene of the event. The Company also provides
satellite transmission capacity to telecommunications service customers for
public telephone networks in Mexico and elsewhere and corporate customers for
their private business networks with data, voice and corporate video
applications. The Company offers its customers part-time service, varied power
and footprint service, grades of service protection and value-added services.
 
  BROADCASTING TRANSMISSION SERVICES
 
     Satellite capacity is utilized for broadcasting transmission services by
various national and international networks for the point to point and point to
multi-point distribution of television programs, video signals, and other
services, including distance learning, special events and live reports.
Customers include private and state-owned broadcasting networks, cable
television operators and DTH operators. Broadcasting transmission clients
usually lease one or more transponders.
 
     Broadcasting customers use satellite capacity to transmit coverage of live
scheduled special events, such as the Olympics, to programmers on an ad hoc
basis. The Company also provides broadcasting transmission services to relay
live news coverage, short duration video feeds and syndicated programming for
broadcasters on a scheduled or ad hoc basis.
 
     Broadcasting customers also use satellite capacity for "backhaul"
operations, such as transporting programming from a broadcaster's foreign news
bureau to a broadcast center for simultaneous or later transmission. The
Company's services in this area are focused on the transportation of program
material and syndicated programming for broadcasters on a scheduled basis.
 
  TELECOMMUNICATIONS TRANSMISSION SERVICES
 
     The Company provides domestic and international telecommunications
transmission services to public and private telecommunications networks
belonging to financial, industrial and commercial, government, transportation
and tourism, educational and press-related companies. Companies may lease
channels, circuits or fractions of a transponder, allowing these transponders to
be shared among several users.
 
     The Company provides satellite capacity to telephone companies which use
the capacity as part of their communications network on a national or
international basis. The Company's business communications services include the
provision of satellite capacity to communications carriers that provide private
business networks for data, voice and corporate video communications. Network
users utilize satellites rather than ground-based transmission media because
satellite systems provide customers cost savings for large, geographically
dispersed networks, greater independence from telephone companies,
predictability of costs over a long period, flexibility in changing or adding
remote locations to a network, integrated network management and control of all
remote locations and increased network availability and lower transmission error
rates.
 
     Many businesses and organizations currently use satellite communications
networks for certain of their communications needs. For example, retail chains
use satellite business communications networks for rapid credit card
authorization and inventory control. Banks use satellite networks to connect
automatic teller machines to processing computers. News agencies use satellite
networks to distribute information continuously to numerous locations, and
paging operators use satellite networks to distribute paging information from a
central switch to multiple remote transmitters for retransmission to pagers.
 
     The Company provides satellite capacity to domestic and regional
communications centers in Latin America. The provision of satellite capacity to
carriers involves relatively low marketing and operating costs, while promoting
the use of satellite networks for business communications in Latin America. The
Mexican government currently represents one of the single largest users of
communications facilities in Mexico.
 
     The Company offers transponder capacity for end-to-end satellite services
for two types of private business communications networks: IDS networks and VSAT
networks. IDS networks consist of rooftop antennas and are used by customers
that have relatively steady flows of information to and/or from all of the
points in the network. Because of their large transmission requirements, IDS
networks require dedicated, permanent communications links to each point. VSAT
networks differ from IDS networks in that VSAT
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networks consist of very small rooftop antennas and are utilized by customers
that need to send short bursts of data over the network for relatively short
periods of time. Through the use of VSAT technology and sophisticated software,
these networks can be served with a relatively small amount of satellite
capacity.
 
  NEW SERVICES
 
     Some of the new services that the Company plans to introduce and promote
are:
 
     Loral Skynet's Digital News Gathering.  An enhanced service that provides
live video feeds for broadcast of special events and breaking news.
 
     Loral Skynet's Digital Video Service.  A compressed digital video service
designed to provide additional video channels for customers. Because this
technology is designed to result in more efficient use of a transponder, it is
intended to provide the Company with higher overall transponder pricing.
 
     Loral Skynet's Global Booking System.  A transponder inventory management
system which should allow the Company to offer one-stop shopping to its
customers. It is designed to provide customers with information on transponder
availability, access and pricing and to allow the Company to offer its service
directly to customers.
 
CUSTOMERS
 
     The Company has a broad customer base which includes private and
state-owned broadcasting networks, cable television operators, DTH operators,
and public and private telecommunications networks belonging to financial,
industrial and commercial, government, transportation and tourism, educational
and press-related companies. The Company's largest customer is Televisa. Revenue
from Televisa and the Mexican government represented 29% and 5%, respectively of
total revenues for the year ended December 31, 1998 and 43% and 40%,
respectively of total revenues for the period November 17, 1997 to December 31,
1997.
 
     Approximately 89% and 95% of the Company's revenues for the year ended
December 31, 1998 and for the period November 17, 1997 to December 31, 1997,
respectively, were generated from customers in Mexico.
 
                 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
 
     This annual report on Form 20-F contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
from time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but are not limited to, various filings made by
the Company with the Securities and Exchange Commission, press releases or oral
statements made by or with the approval of an authorized executive officer of
the Company. Actual results could differ materially from those projected or
suggested in any forward-looking statements as a result of a wide variety of
factors and conditions, including, but not limited to, the factors summarized
below.
 
WE ARE HIGHLY LEVERAGED.
 
     As of March 31, 1999, we had outstanding debt of approximately $609
million. A significant portion of our cash flow is used to service this debt,
which in turn affects our ability to pay our other expenses and to fund our
expenditures. In addition, we will need to improve our cash flow significantly
in order to satisfy certain performance requirements contained in our debt
documents. If we are unable to meet those requirements, it could result in a
default. This in turn could permit acceleration of the related debt and result
in a default of other debt. In March 1999, Loral and Principia invested $31.9
million of capital into the Company, through the purchase of preferred stock, to
pay down debt in order to ensure compliance with covenants contained in our debt
documents. We cannot guarantee that the shareholders will make additional equity
contributions in the future.
 
     Covenants contained in the debt documents also limit our management's
option for dealing with business issues, including incurring additional debt,
making capital expenditures and paying dividends. We cannot be
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certain that the restrictions contained in those documents will not impair our
ability to finance our future operations or capital needs or to engage in other
business activities.
 
WE MAY NOT HAVE SUFFICIENT RESOURCES TO REPAY OUR DEBT OBLIGATIONS.
 
     Our ability to service our debt obligations will depend on our future
performance. At December 31, 1998, we had approximately $324 million of senior
secured notes outstanding, which bear interest at a floating rate. These notes
require repayment in $250,000 quarterly installments, with the balance due on
June 29, 2004. In addition, we have $320 million of 10 1/8% fixed rate notes
outstanding, which must be repaid in full on November 1, 2004. At December 31,
1998, we also had $50 million available under our revolving credit facility,
which is currently undrawn. Any borrowings under the revolving credit facility
must be repaid by December 29, 2002.
 
     If we are unable to repay any portion of the senior secured notes, the
fixed rate notes or the revolving credit facility when due, we will have to
refinance this indebtedness. We cannot guarantee that this refinancing will be
available, or if available, that it will be on terms acceptable to us.
 
OUR CONTRACTS WITH TELEVISA REPRESENT A SIGNIFICANT PORTION OF OUR REVENUES;
THEY ARE SCHEDULED TO EXPIRE IN OCTOBER 1999.
 
     Our largest customer is Televisa, which represented approximately 29% of
our revenues for the year ended December 31, 1998. Two of our contracts with
Televisa are scheduled to expire in October 1999. On March 30, 1999, the Company
executed a commitment letter with Televisa to renew Televisa's service for 12
Ku-band transponders on Solidaridad 2 through December 2001. The Company expects
to finalize a contract with Televisa in the second quarter of 1999. If these
contracts are not renewed and we are unable to sign up replacement customers,
our revenues and operating results would be hurt.
 
     As one of our anchor tenants, Televisa has the option to lease vacant
capacity on our existing satellites on terms that are substantially similar to
those contained in its existing contracts. The leases that we may enter into
with Televisa pursuant to its exercise of these options may therefore not be at
prevailing market rates. Moreover, the Televisa contracts provide that if we
enter into agreements with customers on terms that are more favorable than those
contained in the Televisa contracts, Televisa would, subject to certain limited
exceptions, be entitled to those more favorable terms.
 
WE HAVE SHORT-TERM CUSTOMER CONTRACTS.
 
     As of April 30, 1999, approximately 39% of our customer contracts have
terms that range from one to three years. Our revenues would be hurt if we were
unable to find new customers to replace customers whose contracts have expired.
 
WE COMPETE WITH OTHERS FOR CUSTOMERS; CHANGES IN MEXICAN REGULATIONS MAY RESULT
IN NEW COMPETITORS.
 
     We face competition from other companies, including PanAmSat Corporation
and Intelsat. PanAmSat has a fleet of 19 satellites, including six that serve
the Latin American market. Intelsat, an international consortium owned by 140
member countries, has 24 satellites, including four that cover Latin America. In
March 1998, Intelsat spun off six of its satellites to a newly formed company
known as New Skies Satellite N.V., which will also compete with us. We cannot
assure you that we will be able to compete successfully. Moreover, as our
competitors launch new satellites with coverage over the regions that we serve,
price reductions may result. This in turn could hurt our revenues and impact our
ability to service our debt obligations.
 
     The Mexican government has recently liberalized its regulatory environment
to allow non-Mexican satellite companies to provide satellite services in
Mexico. While we have historically been the leading provider of domestic fixed
satellite services in Mexico, our Mexican market share may be reduced in the
future by these new competitors. This would in turn have a corresponding effect
on our revenues.
 
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OUR GOVERNMENT CONCESSIONS MAY BE REVOKED UNDER CERTAIN CIRCUMSTANCES.
 
     The Mexican government has granted to us four concessions, three relating
to our use of the orbital slots currently occupied by our satellites and the
fourth relating to our use of the satellite control centers and the related land
and buildings on which they are located. The orbital concessions have an initial
20-year term, and are renewable after that time, subject to certain conditions,
for an additional 20-year term. The real property concession has a 40-year term.
However, these concessions are subject to termination prior to the expiration of
their terms upon the occurrence of certain events, including our bankruptcy or
liquidation.
 
     Also, the Mexican government has the right to revoke the orbital
concessions pursuant to an expropriation. The Mexican government may also
temporarily seize the orbital concessions in the event of natural disaster, war
or threat to national security, public order or the Mexican economy. In the
past, the Mexican government has used this power to ensure continued service
during labor disputes. If the concessions are terminated, revoked or temporarily
seized, our results of operations and financial condition will be materially and
adversely impacted.
 
WE OPERATE PRIMARILY IN MEXICO, WHICH MAY SUBJECT US TO ADDITIONAL RISKS.
 
     For the year ended December 31, 1998, approximately 89% of our revenues
were from sales within Mexico. As a result, our performance and prospects will
be affected by the political, social and economic developments in Mexico,
including currency fluctuations and inflation. Mexico has in the past
experienced economic crisis characterized by exchange rate instability, high
inflation, high domestic interest rates, negative economic growth and reduced
consumer buying power. Should Mexico experience any such economic crisis in the
future, we cannot assure you that our results of operations and financial
condition would not be affected.
 
     While the Mexican government does not generally restrict the ability of a
person, Mexican or otherwise, to convert pesos to foreign currencies, it has
done so in the past when it has experienced shortages in its foreign exchange
reserves. We cannot guarantee that this will not happen again in the future. If
we were to experience restrictions in our ability to convert pesos into dollars,
we would have difficulty servicing our debt obligations.
 
     Exchange rate fluctuations could also hurt us. In the past, we generally
hedged against the risk of exchange rate fluctuations. We cannot guarantee that
we will be able to hedge our exchange rate risk in the future or that our hedges
will be successful. Moreover, exchange rate fluctuations could impact our
customers' ability to pay for our services.
 
OUR IN-ORBIT SATELLITES REMAIN VULNERABLE TO FAILURE.
 
     Random failure of satellite components may result in damage to or loss of a
satellite before the end of its expected useful life. Satellites are carefully
built and tested and have certain redundant systems in case of failure. However,
in-orbit failure may result from various causes including:
 
     - component failure;
 
     - loss of power or fuel;
 
     - inability to control positioning of the satellite;
 
     - solar and other astronomical events; and
 
     - space debris.
 
     Repair of satellites in space is not feasible. Many factors affect the
useful lives of satellites. These factors include:
 
     - the quality of construction
 
     - gradual degradation of solar panels and
 
     - the durability of components.
 
     While we have obtained in-orbit insurance for Solidaridad 1, Solidaridad 2
and Satmex 5, a satellite failure may result in a drop in our profits, which
loss would not be insured. The in-orbit insurance for Solidaridad 1 and
Solidaridad 2 expires in November 2002 and the in-orbit insurance for Satmex 5
expires in
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December 2003. We cannot guarantee that we will be able to renew the insurance
at the end of these periods, or that if renewal is available, that it would be
on terms acceptable to us.
 
     At December 31, 1998, our satellites have remaining estimated useful lives
ranging from 8 to 21 years. However, our Solidaridad 1 satellite has experienced
problems and mechanical difficulties, including loss of its primary command
receiver and loss of pressure in a propulsion subsystem that could shorten its
operational life. On April 28, 1999, Solidaridad 1 experienced a loss of its
primary satellite control processor. Service was restored after 14 hours using
the backup satellite control processor. Satmex and the satellite manufacturer,
Hughes Space and Communications, Inc., are investigating the cause of the
service interruption. However, Solidaridad 1 does not have any redundant systems
should the back up satellite control processor fail. Failure of the back up
command receiver or the back up satellite control processor would result in a
loss of Solidaridad 1. Moreover, Solidaridad 1 and Solidaridad 2 were
manufactured by Hughes and are similar in design to other Hughes satellites
which have recently experienced in-orbit component failures.
 
OUR BUSINESS IS REGULATED, CAUSING UNCERTAINTY AND ADDITIONAL COSTS.
 
     Our business is regulated by the Mexican authorities. As we expand our
service outside of Mexico into other countries in Latin America and the United
States, we will become subject to regulations in those countries. For example,
we will need to obtain landing rights in the countries where we seek to operate.
Regulatory authorities in the various jurisdictions in which we operate can
modify, withdraw or impose charges or conditions upon the licenses which we
need, and so increase our cost of doing business. For example, the concessions
granted to us by the Mexican government require that we reserve approximately 7%
of our satellite capacity for use by the Mexican government free of charge.
Moreover, the concessions are subject to government regulations, which may make
modifications or impose limitations on our operations. If the Mexican government
determines that we are a dominant carrier in our segment, it could impose
informational and pricing requirements on us, which would hurt our results of
operations and financial condition.
 
     The regulatory process also requires that we negotiate with third parties
operating or intending to operate satellites at or near orbital locations where
we place our satellites so that the frequencies of the satellites do not
interfere. Because we cannot guarantee the results of negotiations with third
parties, "frequency coordination" is an additional source of uncertainty. For
example, we have to coordinate our Satmex 5 satellite with the government of
Canada.
 
THERE ARE POTENTIAL CONFLICTING INTERESTS BETWEEN US AND OUR SHAREHOLDERS.
 
     Loral and Principia own and have interests in other companies that are in
businesses similar to ours, which could give rise to a conflict of interest. In
particular, Loral Skynet and Loral Orion own or are building satellites, the
footprints of which overlap or are planned to overlap with those of our
satellites. We have, together with Loral Skynet, Loral Orion and Europe*Star, a
joint venture between Loral and Alcatel, adopted a marketing policy that
provides for collaboration and cross-selling among the Loral Global Alliance
members. If, however, the members of the Loral Global Alliance do not
collaborate but rather compete in areas of overlapping capacity, conflicting
commercial interests between us and the Loral entities may arise. If Loral
Skynet and Loral Orion do not collaborate with us or vice versa under the Loral
Global Alliance, Loral Skynet and Loral Orion might compete directly with us for
customers.
 
DISAGREEMENTS BETWEEN LORAL AND PRINCIPIA COULD RESULT IN DEADLOCK.
 
     We may undertake certain material actions only with the prior agreement of
both Loral and Principia. If Loral and Principia are unable to reach an
agreement, it could lead to a management deadlock, which would hurt us. To
resolve this deadlock, Loral or Principia may seek to sell its interests or
alternatively, buy the interests of the other. This could in turn result in a
change of control under our debt documents, which would entitle certain of our
debtholders to require us to buy back their debt, including in some cases at a
purchase price equal to 101% of the principal amount. A change of control may
under certain circumstances, also result in a termination of our concessions
from the Mexican government.
 
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IF SERVICIOS DEFAULTS IN THE PAYMENT OF CERTAIN DEBT OWED TO THE MEXICAN
GOVERNMENT, THE MEXICAN GOVERNMENT WOULD GAIN CONTROL OF US.
 
     Servicios Corporativos Satelitales, S.A. de C.V. has issued to the Mexican
government a note in the principal amount of $125.1 million, which bears
interest at 6.03%, matures in December 2004 and is secured by Loral's and
Principia's holdings in Firmamento Mexicano, S. de R.L. de C.V., our parent
company. This obligation is subject to earlier prepayment under certain
circumstances, including upon a failure by Loral and Principia to maintain
sufficient collateral to secure Servicio's obligation to the Mexican government.
Servicios will depend upon dividends from us to repay this obligation to the
Mexican government. We cannot assure you that Servicios will have the resources
to repay this obligation when due. If Servicios were to default in the payment
of this obligation, the Mexican government will have the right to foreclose upon
the Firmamento interests. This would result in the Mexican government gaining
control of us.
 
JUDGMENTS AGAINST US MAY BE PAID IN PESOS; UPON OUR BANKRUPTCY, OUR DOLLAR
DENOMINATED OBLIGATIONS ARE CONVERTED INTO PESOS.
 
     If a proceeding were to be brought in Mexico seeking to enforce our
obligations with respect to dollar denominated obligations (including certain of
our outstanding debt), we may elect under Mexican law to make that payment in
pesos, based on the then prevailing exchange rate. Any shortfall based upon
exchange rate fluctuation will be borne by the other party. Moreover, if we were
declared bankrupt, our dollar denominated obligations would be converted into
pesos based on the exchange rate in effect at the time the bankruptcy is
declared. There would be no adjustment to take into account any depreciation on
the value of the peso against the dollar from the time of the bankruptcy
declaration to the date the claim is actually paid.
 
THE YEAR 2000 PROBLEM.
 
     Many computer systems and software programs may not function properly in
the year 2000 and beyond because of a once common programming standard that used
two digits instead of four digits to signify a year. These computer systems and
software programs read the year 1999 as "99" and not "1999." Because of this,
the year 2000 may appear as the year 1900, which could result in system failures
or disruptions. This problem is often referred to as the "Year 2000" issue.
 
     If we are unable to fix a material Year 2000 problem, we could experience
an interruption or failure of our business operations. Likewise, if our
suppliers are unable to fix a material Year 2000 problem, a resulting
interruption or failure of their business could hurt us.
 
THERE ARE RISKS REGARDING FORWARD-LOOKING STATEMENTS.
 
     Some statements or information contained in this document are not
historical facts but are "forward-looking statements" (as such term is defined
in the U.S. Private Securities Litigation Reform Act of 1995). They can be
identified by the use of forward-looking words such as "believes", "expects",
"plans", "may", "will", "should", or "anticipate" or their negatives or other
variations of these words or other comparable words, or by discussion of
strategy that involve risks and uncertainties. Some of the factors which may
cause future results and performance to differ from what we may imply here are:
 
     - We owe significant amounts of money;
 
     - We rely on certain customer contracts and have many short-term contracts;
 
     - We face more competition under the current regulatory climate which could
       impact our market share;
 
     - We operate primarily in Mexico, which imposes certain risks;
 
     - Our concessions may be terminated or revoked by the Mexican government
       under certain circumstances; and
 
     - Our satellites remain vulnerable to failure after launch.
 
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     We warn you that forward-looking statements are only predictions. Actually
events or results may differ materially as a result of risks that we face,
including those presented above. These are representative of factors that could
affect the outcome of the forward-looking statements.
 
                                   REGULATION
 
REGULATORY FRAMEWORK
 
     The Federal Telecommunications Law of Mexico (the "Communications Law"),
which provides the overall legal framework for the regulation of satellite
services in Mexico, became generally effective on June 7, 1995. Under the
Communications Law, a provider of satellite services, such as the Company, must
operate under a concession granted by the Secretaria de Comunicaciones y
Transportes (the Ministry of Communications and Transportation or the "SCT"),
pursuant to an auction process. Such a concession may only be granted to a
Mexican corporation and may not be transferred or assigned without the approval
of the SCT. Foreign investors are permitted by law to hold up to 49% of the
voting stock of such a corporation.
 
     In addition, the Company's operations are mainly subject to the Ley General
de Bienes Nacionales (the General Law on National Assets), which regulates all
assets that fall within the public domain and the terms for the expropriation
(rescate) of the Company's concessions, the Ley General del Equilibrio Ecologico
y Proteccion al Ambiente (the General Law on Ecology and Protection of the
Environment or the "Environment Law") and other environmental laws, the Ley
Federal de Competencia Economica (the Federal Economic Competition Law), the Ley
de Vias Generales de Comunicacion (the Law of General Means of Communication)
and other international treaties, laws, rules and decrees.
 
     Under the Communications Law, the SCT is, among other things, responsible
for issuing concessions and permits related to telecommunications and for
formulating policies in the telecommunications area and otherwise taking all
other actions on behalf of the Mexican government in connection with
telecommunications. The Mexican Telecommunications Commission is the
telecommunications authority responsible for most day-to-day regulation of
satellite communications in Mexico. The Mexican Telecommunications Commission's
duties include, among other things: issuing administrative regulations relating
to telecommunications; recommending amendments to existing laws and rules;
making recommendations to SCT on applications for the grant, modification,
renewal, transfer and revocation of concessions and permits; administering the
radio frequency spectrum; promoting and overseeing interconnection of equipment
and public telecommunications networks; registering tariffs for
telecommunications services and establishing specific obligations relating to
tariffs, quality of service and provision of information by carriers with
substantial market power; and ensuring carriers comply with the obligations set
forth in concessions and permits.
 
     Satellite control centers must be established within Mexico for satellites
authorized to use Mexican orbital slots. The Communications Law allows
satellites licensed to Mexican orbital positions to serve other countries
subject to the terms and conditions of treaties with Mexico and subject to the
laws of the foreign country. The SCT may grant concessions at any time to
foreign satellite systems to serve Mexico subject to applicable treaties and
Mexican law.
 
     The rules promulgated pursuant to the Communications Law requires licensees
of satellites intending to provide telecommunications services through one or
more transmitting earth stations of their own to obtain a separate license to
construct and operate a public telecommunications network. Where the satellite
operator intends to provide services other than public telecommunications
services through its own earth stations, it must obtain a permit from the SCT.
Where a satellite operator intends to provide services other than the lease of
capacity by obtaining a separate license or permit, it may provide such services
only through an affiliate or subsidiary.
 
                                        8
<PAGE>   11
 
THE CONCESSIONS
 
     The Mexican government has awarded the Company the following concessions:
(i) the right to occupy each of three orbital positions and exploit their
respective C- and Ku-band frequencies (the "Orbital Concessions") and (ii) the
right to use the buildings and areas in which the control centers are located
(the "Property Concession"). The Orbital Concessions may be granted as
collateral to any party other than a foreign government or state.
 
     The Orbital Concessions include the right to exploit the 113.0 degreesWL,
116.8 degreesWL and 109.2 degreesWL orbital slots. As part of the Orbital
Concessions, the Company may establish rates and terms for transponder leasing,
which must be registered in order to become effective. However, if the SCT
determines that the Company has substantial power in the Mexican market, the
Mexican Telecommunications Commission may determine tariffs and specify
conditions relating to service quality and information requirements.
Additionally, the Company is prohibited from establishing cross subsidies and
using discriminatory practices.
 
     As part of the Orbital Concessions, the Company is required to allocate 181
MHz C-band and 181MHz Ku-band to the Mexican government, free of charge, for
national security and certain public purposes. In addition, the Company is
required to operate two L-band transponders (one on each of the Solidaridad
satellites), which will continue to be owned by the Mexican government.
 
     Under the Orbital Concessions, the Company is required to: (i) carry out
research and development in Mexico, (ii) preferentially staff the control
centers with Mexican nationals, and (iii) maintain satellite service
continuously and efficiently. As security for the performance by the Company of
its obligations under each Orbital Concession, the Company was required to post
and must maintain during the term thereof, a surety bond in the amount of 10
million pesos payable to the Federal Treasury of Mexico with respect to each
Orbital Concession. Under the terms of the surety bond, the Company has paid to
Fianzas Monterrey Aetna, a surety, a premium of 73,000 pesos per Orbital
Concession, and the surety has agreed to pay to the Federal Treasury of Mexico,
in the event the Company breaches the terms of the Orbital Concessions, a sum of
10 million pesos per Orbital Concession. The Orbital Concessions were finalized
and published in the Official Gazzette on December 30, 1997.
 
     The Orbital Concessions have twenty year terms and may, subject to certain
conditions, be extended for an additional twenty year term, without the payment
of any additional consideration to the Mexican government.
 
     Except in limited circumstances, the Company must notify the SCT prior to
issuing and selling any shares in the Company that represent 10% or more of the
outstanding capital stock of the Company, and must identify the potential
purchaser. Within 30 days of receipt of such notification the SCT may object to
the sale. The Company may only proceed with the proposed sale if no objection is
raised by the SCT. For a term of three years commencing on November 17, 1997,
shareholders of 51% of the paid-in capital stock of the Company, may not
transfer any shares without prior approval from the SCT (except for transfers
between the shareholders not exceeding 5% of the paid-in capital).
 
     The Property Concession includes two plots of land, and buildings and
fixtures built thereon. The Property Concession includes the right to use only
the property for the purposes of exploiting the orbital slots and frequency
assignments. Additionally, the Company may not rent or otherwise sublease the
property without the prior permission of the SCT. Under the Property Concession,
the Company is required to: (i) pay an annual fee in an amount equal to 7.5% of
the assessed property value and (ii) maintain the premises in good condition.
 
     The duration of the Property Concession is forty years or for the length of
the Orbital Concessions. The Property Concession duration may be extended at the
discretion of the SCT.
 
CONCESSION TERMINATION
 
     The Orbital Concessions will terminate if (i) the term of any such Orbital
Concession expires, (ii) the Company resigns its rights under any such Orbital
Concession, (iii) the Mexican government through the
 
                                        9
<PAGE>   12
 
SCT, expropriates any of the Orbital Concessions, (iv) the Company is liquidated
or becomes bankrupt or (v) the SCT revokes any of the Orbital Concessions. The
Company's assets and rights under the Orbital Concessions may also be
temporarily seized by the SCT, as described below.
 
     The Communications Law provides that the SCT may revoke any of the Orbital
Concessions upon the occurrence of certain events, including: (i) failure by the
Company to exercise its rights under any of the Orbital Concessions for a period
greater than 180 days from the date the Orbital Concessions were granted; (ii)
unjustified interruption of the services that may be provided under the Orbital
Concessions; (iii) the Company's undertaking any action or refraining from
taking any action that affects the rights of other licensees or concessionaires;
(iv) failure by the Company to satisfy the terms or conditions set forth in the
Orbital Concessions; (v) unjustified failure by the Company to interconnect
other concessionaires or licensees that have the right to provide
telecommunications services; (vi) change of nationality of the Company and (vii)
assignment or transfer of rights granted under the Orbital Concessions in
contravention of the terms of the Communications Law. In the cases of items (i),
(v), (vi) and (vii) above, the SCT may immediately revoke any of the Orbital
Concessions. In the cases of items (ii), (iii) and (iv) above, the SCT may only
revoke any of the Orbital Concessions if it has imposed sanctions on the Company
for the relevant breach on at least three separate occasions. In the event any
of the Orbital Concessions is revoked by the SCT, no compensation shall be paid
to the Company.
 
     The SCT also has the right to terminate any of the Orbital Concessions
pursuant to an expropriation (rescate). From and after any such expropriation,
assets used in connection with the exploitation of the Orbital Concessions would
be subject to the ownership and management of the Mexican government.
 
     The SCT may also temporarily seize the Orbital Concessions in the event of
natural disaster, war, substantial breach of the public peace and order, or
imminent danger to national security, internal peace or the Mexican economy. In
the past, the Mexican government has used this power to ensure continued service
during labor disputes. Mexican law requires that the Mexican government pay
compensation to the Company if it effects an expropriation or a temporary
seizure, except in the case of a temporary seizure due to war. In respect of an
expropriation (rescate), the basis for any compensation to a concessionaire is
specified by decree of the Mexican government and is subject to judicial review
in the event of dispute. With respect to a temporary seizure, the Communications
Law provides that the Mexican government will indemnify the affected
concessionaire in an amount equal to damages and losses reflecting their real
value; in the event of a dispute regarding such matters, losses shall be
determined by appraisers mutually appointed by the parties and damages shall be
determined on the basis of the average net income generated by the
concessionaire in the year prior to the temporary seizure.
 
     If the Orbital Concessions are expropriated and in connection with such
expropriation compensation is paid to the Company, the lenders under the
Company's secured credit facility and the holders of the secured floating rate
notes would have priority over the holders of the 10 1/8% fixed rate notes with
respect to such compensation until all amounts due under the secured credit
facility and all amounts due on the secured floating rate notes are paid in
full, and thereafter the holders of the fixed rate notes would have a claim with
respect to any such remaining compensation which would rank pari passu with the
claims of other unsecured creditors of the Company.
 
     The Property Concession will terminate if: (i) the Property Concession term
expires; (ii) the Company resigns its rights to the Property Concession; (iii)
the Orbital Concessions are terminated; (iv) the purpose for which the Property
Concession is granted no longer exists; (v) the Mexican government expropriates
the Property Concession for reasons of public interest or (vi) the Property
Concession is revoked. The Mexican government may revoke the Property Concession
for various reasons, including without limitation, the following: (i) failure to
use the Property Concession for the purpose for which it was granted; (ii)
failure to comply with the terms of the Property Concession; (iii) activities,
without prior permission of the SCT, which interfere with satellite operations;
and (iv) under terms and conditions generally applicable to property concessions
of this type under applicable Mexican law.
 
                                       10
<PAGE>   13
 
     At the end of the concession term, the orbital positions and control center
land and buildings will revert to the state. The Mexican government will then
have preference to acquire the satellites, control centers and other associated
and necessary equipment for the continuation of satellite service.
 
TREATIES AND INTERNATIONAL ACCORDS
 
  RECIPROCITY AGREEMENT BETWEEN THE UNITED STATES AND MEXICO
 
     In April 1996, Mexico and the United States (the "Parties") signed an
agreement (the "Reciprocity Agreement") concerning the transmission and
reception of signals from satellites for the provision of satellite services to
users in Mexico and the United States. The main aspects of this agreement are
(i) Mexican satellites are permitted to provide satellite service to, from and
within the United States (in conformance with applicable U.S. law), (ii) U.S.
satellites are permitted to provide satellite service to, from and within Mexico
(in conformance with applicable Mexican law), (iii) the conditions for the
transmission and reception of satellite signals will be as agreed to in
protocols to the agreement, (iv) the entities operating commercial satellites
and earth stations may be structured with either public or private participation
(in conformity with both Mexican and U.S. law), (v) neither Mexico nor the
United States shall require a satellite licensed by the other government to
obtain an additional license for the operation of the satellite in order to
provide the satellite services described in the protocols to the Reciprocity
Agreement, (vi) licenses for earth stations and satellite services must comply
with national laws and regulations, (vii) applicable foreign ownership
restrictions on satellite service providers and earth station licenses continue
to apply and (viii) both Mexico and the United States retain the right to take
actions that either government considers necessary for the protection of its
essential security interests.
 
     The Reciprocity Agreement may be amended by agreement of the Parties.
Additional protocols or protocol amendments may be concluded by written
agreement of the Parties. The Reciprocity Agreement may be terminated by mutual
agreement of the Parties, or by either Party by written notice of termination to
the other Party through diplomatic channels. Such notice of termination will
enter into effect six months after receipt of the notice.
 
  DTH PROTOCOL
 
     In November 1996, Mexico and the United States signed a protocol (the "DTH
Protocol") to the Reciprocity Agreement concerning the transmission and
reception of signals from satellites for the provision of direct-to-home
satellite services ("DTH"). DTH services are defined to include DTH fixed
satellite service ("DTH-FSS") and broadcasting satellite service ("BSS"), which
include one-way, encrypted video or video/audio radiocommunication signals
transmitted by satellite for direct reception by subscribers who pay a periodic
fee, distribution of video/audio to cable television head-ends and multipoint
distribution service ("MDS") or wireless cable facilities. The DTH Protocol
addressed only a limited number of radiocommunication frequencies. The United
States and Mexico have each agreed to permit satellites licensed by the other
government to provide DTH-FSS and BSS to, from, and within the other country's
territory. Entities seeking to transmit or receive DTH-FSS or BSS signals via a
satellite licensed by the other administration (e.g., through an earth station
in the non-licensing jurisdiction) must still comply with the non-licensing
jurisdiction's other applicable laws (e.g., the earth station licensing
process). Both Mexico and the United States reserve the right to refuse to
accept signals originating from third countries. In addition, both countries
agree to permit DTH-FSS and BSS signals to be delivered directly to subscribers
without requiring that they be retransmitted over an intermediary satellite
system. Mexico and the United States agree not to impose significant
restrictions on the amount or origin of advertising and program content. The DTH
Protocol does not apply to the transmission of any audio-only DTH-FSS or BSS
signals that do not contain solely music. Service to cable television head-ends
is permitted under the DTH Protocol as of November 8, 1997.
 
     The DTH Protocol may be amended by written agreement of the Parties. The
DTH Protocol may be terminated by agreement of the Parties, or by either Party
by written notice of termination to the other Party. Such notice of termination
shall enter into effect six months after receipt of the notice. The DTH Protocol
will remain in force until it is terminated in such manner or replaced by a new
protocol. Upon termination of the
 
                                       11
<PAGE>   14
 
DTH Protocol, a Party may, at its discretion, terminate any license that has
been issued pursuant to the DTH Protocol. In addition to the general provisions
for termination, the DTH Protocol may be terminated upon sixty days written
notice if a Party determines that the other Party has failed to conform to the
principles of the DTH Protocol.
 
  FSS PROTOCOL
 
     In October 1997, Mexico and the United States signed another protocol (the
"FSS Protocol") to the Reciprocity Agreement, with respect to the transmission
and reception of signals from satellites for the provision of international and
domestic FSS. The definition of FSS includes, but is not limited to, signals
carrying video or video/audio distributed to cable television head-end and
multipoint distribution service (restricted microwave television service)
facilities and excludes the DTH-FSS and BSS services governed by the DTH
Protocol. Like the DTH Protocol, the FSS Protocol addresses only a limited
number of radiocommunication frequencies. Subject to the terms of the FSS
Protocol, the United States and Mexico have agreed to permit satellites licensed
by the other to provide domestic and international FSS to, from, and within the
other country's territory. Satellites licensed by either Mexico or the United
States may be authorized to provide international service beginning October 16,
1997. Satellites licensed by the United States were authorized to provide
domestic FSS in Mexico beginning in January 1999. Satellites licensed by Mexico
were authorized to provide domestic FSS services in the United States beginning
on January 1, 1998. The FSS Protocol also states that a satellite licensed by
either Mexico or the United States to provide DTH-FSS or BSS shall be permitted
to provide video or video-audio distribution to cable television head-end and
multipoint distribution service (restricted microwave television services)
facilities beginning November 8, 1997. Entities seeking to transmit or receive
FSS signals via a satellite licensed by the other Party (e.g., through an earth
station in the non-licensing jurisdiction) must still comply with the
non-licensing jurisdiction's other applicable laws (e.g., the earth station
licensing process). Unlike the DTH Protocol, the FSS Protocol permits
communications to or from third countries. However, similar to the DTH Protocol,
under the FSS Protocol, both countries agree to permit FSS signals to be
delivered directly to fixed-earth stations without requiring that they be
retransmitted over an intermediary satellite system.
 
     The FSS Protocol may be amended by written agreement of the Parties. The
FSS Protocol may be terminated by agreement of the Parties, or by either Party
by written notice of termination to the other Party. Such notice of termination
shall enter into effect six months after receipt of the notice. Upon termination
of the FSS Protocol, a Party may, at its discretion, terminate any license that
has been issued pursuant to the FSS Protocol. The FSS Protocol will remain in
force until it is terminated in such manner or replaced by a new protocol.
 
  ANDESAT AGREEMENT
 
     On October 24, 1997, Mexico and Member Countries of the Andean Community of
Nations (the "Andean Community") entered into a five year agreement regarding
coordination between the Mexican satellite system and the Simon Bolivar Andean
satellite system, which was amended on March 1, 1999 (the "ANDESAT Agreement").
 
     Under the ANDESAT Agreement, Satmex has agreed to provide the Andean
Community satellite capacity until January 2003 on an exclusive basis in the
Andean Community at certain preferred rates. As of April 30, 1999, the Andean
Community has the right to use, at no charge, one transponder and beginning in
2000, will have the right to use, at no charge, an additional one quarter of one
transponder. Subject to certain conditions, ANDESAT has the first purchase
option of up to eight transponders for DTH service on Satmex 5 at a price to be
agreed upon by the parties and/or the parties reaching a shared utility
agreement. If requested, Satmex will provide up to 600 hours of technical
assistance at no charge for the design, construction and launch of the Simon
Bolivar satellite system. As of April 30, 1999, Satmex has not provided any
technical assistance for the Simon Bolivar satellite system. In addition, if
requested, Satmex will provide, subject to availability, backup satellite
capacity for the first Simon Bolivar satellite.
 
                                       12
<PAGE>   15
 
  ARGENTINE AGREEMENT
 
     The governments of Mexico and the Argentine Republic recently entered into
a bilateral agreement to afford reciprocal treatment for satellite service
providers licensed under the laws of each party. The agreement provides that
satellite service providers licensed in Mexico may transmit certain DTH-FSS, BSS
and other FSS signals to satellite customers in Argentina, and vice versa. The
agreement, using the radiocommunication rules of the International
Telecommunications Union (the "ITU") as a base, sets forth the terms and
conditions for the technical coordination of each party's satellite systems. The
parties further agreed to cooperate in assuring compliance with each party's
applicable laws and regulations. Mexican satellite providers operating in
Argentina would remain subject to applicable Argentine law, and vice versa. The
parties agreed to apply their respective laws in a transparent and
non-discriminatory fashion. The agreement may not be implemented until the
mutual exchange of diplomatic notes and the execution of a more detailed
protocol.
 
  THE GENERAL AGREEMENT ON TRADE IN SERVICES ("GATS")
 
     Under the auspices of the World Trade Organization (the "WTO"), the
Negotiating Group for Basic Telecommunications concluded negotiations that
resulted in receipt of commitments from 69 governments. The commitments cover
basic telecommunications services including telephony, packet and circuit data
transmission, fax, private leased, circuit, cellular telephony, individual
localization telex and telegraph services. These services can be offered through
a variety of available medium, such as cable, wireless, radio or satellite. The
GATS itself imposes an obligation to afford most-favored-nation treatment to all
other members unless an exemption is filed. Mexico did not file an exemption.
 
     Mexico has adopted the regulatory reference paper which established
parameters relating to competition, interconnection, universal service, public
availability, criteria for awarding licenses, autonomy of the regulatory entity
and assignment and exploitation of available resources. Mexico has established
the following service parameters: (i) telex and telegraph services are not
included; (ii) cross-border traffic must be routed through a company licensed by
the SCT; (iii) license fees are imposed; (iv) licenses will only be awarded to
Mexican companies, in which foreign participation is limited to 49%, except in
cellular, where foreign participation may be higher; (v) services other than
international long-distance that require the use of satellites must employ
Mexican satellites until 2002; and (vi) there is no limit to foreign investment
in companies that offer services to third parties.
 
GOVERNMENT AND SUPRA-GOVERNMENTAL REGULATION
 
  FCC REGULATION OF SATELLITE SERVICES AND FOREIGN OWNERSHIP OF FCC LICENSES
 
     The U.S. satellite and telecommunications industries are highly regulated.
In addition to the international accords and protocols discussed above, the
Federal Communications Commission (the "FCC") regulates satellite providers
operating in the U.S. as well as the provision of satellite services, generally.
The FCC currently regulates access to the U.S. market by non-U.S. licensed
satellite systems through regulation of U.S. earth stations used to communicate
with such satellite systems (including receive-only operations).
 
     In the Second Domestic International Satellite Consolidation rulemaking
("DISCO II"), the FCC adopted a framework under which it will consider requests
for the use of non-U.S. licensed satellites to provide services in the U.S. The
FCC will examine all requests to determine whether grant of authority is
consistent with the public interest, convenience and necessity. In doing so, the
FCC will consider factors such as the effect on competition in the U.S. market,
spectrum availability, eligibility requirements (such as foreign ownership,
legal, technical and financial qualifications), operating requirements and
national security, law enforcement, foreign policy and trade concerns, as
appropriate. Depending on the nature of the services offered in the United
States, these foreign-licensed satellites may be subject to a variety of
regulatory requirements. Petitions to reconsider certain aspects of the DISCO II
order have been filed with the FCC.
 
     In determining the effect on competition, the order in DISCO II establishes
a presumption that competition will be promoted, and, therefore, that no
effective competitive opportunities ("ECO") test is required, in evaluating
whether to permit satellites licensed by WTO member countries (including
affiliates of
 
                                       13
<PAGE>   16
 
INTELSAT and Inmarsat licensed by WTO members and providing covered services) to
provide services covered by the U.S. schedule of commitments under the World
Trade Organization Agreement on Basic Telecommunications (the "WTO Basic Telecom
Agreement"). Except that if Comsat Corporation seeks to provide domestic
services, it will be required to make an appropriate waiver of immunity from
suit and demonstrate that the service will enhance competition in the U.S.
market. For requests to serve the U.S. market by satellite operators, from
non-WTO member countries, the FCC will examine the effective competitive
opportunities in the foreign markets for U.S. satellite operators to determine
if the non-U.S. satellite satisfies the competition component of the public
interest analysis.
 
     The FCC will also apply the ECO tests to requests to serve the U.S. market
with services not covered by the WTO Agreement such as DTH-FSS, direct broadcast
satellite services, and digital audio radio services. The U.S. schedule of
commitments under the WTO Basic Telecom Agreement excludes DTH-FSS, direct
broadcast satellite service and digital audio radio service, and the U.S. has
taken a most-favored-nation and national treatment exception for these services.
Thus, for those services the FCC will continue to apply the ECO test to entities
including WTO member countries seeking to provide these services. The FCC,
however, has created an exception to this general rule where the U.S. has
entered into bilateral agreements with the other country regarding specific
services, as the U.S. has done with Mexico. The FCC will review earth station
applications to access a satellite licensed in a country with which the U.S. has
a bilateral agreement based on a presumption that entry will promote
competition. The application will be subject to other public interest
requirements and must comply with FCC technical and service rules.
 
     Once operational, a non-U.S. licensed satellite system serving the U.S.
will be subject to the same ongoing requirements that apply to U.S.-licensed
satellites. For instance, the FCC rules prohibit an international satellite
provider from entering into exclusionary arrangements with other countries for
satellite capacity for a particular service. The DISCO II process provides that
in order for non-U.S. satellite operators to bring before the FCC their requests
to serve the U.S. they may (i) participate in a U.S. space station processing
round, or (ii) file an application for an earth station. The FCC does not
require space stations licensed by another country or administration to obtain
separate and duplicative U.S. space station licenses.
 
     The FCC also places certain restrictions on the ownership by non-U.S.
citizens and corporations of FCC licenses. The Communications Act of 1934, as
amended (the "Communications Act"), provides that certain radio licenses,
including earth station licenses, cannot be granted to or held by any foreign
government or the representative thereof. In addition, under Section 310(b) of
the Communications Act, a non-U.S. citizen or a corporation organized under the
laws of any foreign government may not hold or vote more than 20% of the equity
of a common carrier, broadcast or aeronautical licensee directly. However, under
Section 310(b)(4), the FCC does permit non-U.S. citizens or foreign corporations
to own or vote 25% of the equity of a U.S. corporation which, in turn, owns all
or part of the equity of a common carrier, broadcast or aeronautical licensee
(i.e., a holding company) unless such ownership would be contrary to the public
interest. The FCC has the discretion to permit such persons and corporations to
exceed the 25% benchmark applicable to such indirect ownership interests.
 
     The FCC had applied an ECO test as part of its public interest analysis for
allowing non-U.S. citizens or foreign corporations to exceed the 25% benchmark
under Section 310(b)(4) for indirect interest in common carrier, broadcast and
aeronautical radio licensees. Recently the FCC eliminated the ECO test for
common carrier, broadcast and aeronautical licensees or applications with
indirect foreign ownership from WTO member countries. Instead, the FCC adopted a
rebuttable presumption that applications by investors from WTO member countries
to exceed the 25% foreign ownership benchmark under Section 310(b)(4) will
promote competition. The FCC will, however, consider other public interest
factors such as national security, law enforcement, foreign policy and trade
concerns, if raised by the Executive Branch of the U.S. government. Licensees
must seek FCC approval before they accept indirect foreign ownership that would
put them over the 25% benchmark. The FCC may deny applications that pose a very
high risk to competition that cannot be addressed by conditions that it may
impose on the license. Petitions to reconsider certain aspects of the FCC order
adopting the regime described above have been filed with the FCC.
 
                                       14
<PAGE>   17
 
  ROLE OF THE INTERNATIONAL TELECOMMUNICATION UNION
 
     Registration of orbital slots and international frequency coordination is
accomplished under the aegis of the ITU, an international body in which most of
the nations of the world are represented as member states. Representation at the
ITU for coordination purposes is limited to national representatives; private
companies are not entitled to participate in their own right in coordination
activities.
 
     All ITU filings are made through ITU member states. Therefore, companies
must work within the constraints set by the administration representing their
interests and factors such as national interests and foreign relations concerns
often affect positions that an administration is willing to take on behalf of
commercial entities.
 
     Nations are required by treaty to give notice of their proposed use of
satellite orbital slots and frequencies with Radiocommunication Bureau
("Bureau") of the ITU. After notification by the Bureau of the orbital slot
request, other nations are afforded the opportunity to apprise the Bureau of any
conflicts with their present or planned satellite systems. When a conflict or
potential conflict is noted, nations are obligated to negotiate in a effort to
coordinate the proposed uses and resolve any interference concerns. The ITU,
however, has no power to resolve disputes formally.
 
     The process is ultimately subject to enforcement by national regulatory
authorities acting pursuant to international treaty obligations. The ITU has no
power to enforce or police its rules; it relies on the goodwill and cooperation
of the individual members.
 
     ITU rules grant coordination priority with respect to most frequency
assignments at most orbital locations on a "first to file, first in right"
basis, even though a filing entails no enforceable commitment to construct or
launch a satellite within any particular period of time. When coordination
consultations have been successfully completed, the Bureau is notified of that
fact by the sponsoring administration. Subsequently, the satellite registrations
are listed in the Bureau's Master International Frequency Register ("MIFR"),
which contains, for instance, the assigned frequency, the date of its
registration, and technical details. Once this information is registered, the
assignment is entitled to international recognition and protection against
harmful interference for the life of the satellite while it is in operation.
 
     The SCT and other Mexican governmental agencies are responsible for filing
and coordinating requests by Mexican companies to coordinate orbital slots and
frequency assignments with the Bureau and for resolving interference concerns.
Use of the orbital slots remains subject to the continuing oversight of SCT and
to a variety of regulations generally applicable to all satellite and radio
licensees, including the international radio regulations.
 
  STATUS OF THE COMPANY SATELLITES
 
     The Mexican government notified the ITU on October 4, 1994 that
coordination for Solidaridad 1 had been completed and notified the ITU on April
25, 1995 that coordination for Solidaridad 2 had been completed.
 
     The Satmex 5 request for coordination was published by the ITU on June 24,
1997. The Company is currently conducting coordination discussions with the
government of Canada regarding Satmex 5 and expects to be able to provide
service in Canada in the third quarter of 1999.
 
  INTELSAT CONSULTATION
 
     INTELSAT is an international organization that owns and operates satellite
systems. Article XIV of the international agreement creating INTELSAT requires
signatories to the agreement, such as Mexico, to consult with INTELSAT prior to
establishing, acquiring or utilizing space segment facilities or satellites
other than INTELSAT to meet their domestic or international public
telecommunications services requirements. The Mexican government as a signatory
must complete the consultation process with INTELSAT for each new satellite or
modifications to existing satellites to ensure that any such satellite or
modification will not
 
                                       15
<PAGE>   18
 
cause INTELSAT technical harm arising from signal interference. The Mexican
government has completed the consultation process for Solidaridad 1, Solidaridad
2 and Satmex 5.
 
ITEM 2.  DESCRIPTION OF PROPERTY
 
     Except for the Company's in-orbit satellites, all of the Company's assets
are located in Mexico. The Company's primary satellite control center is located
at Iztapalapa, Mexico and the Company's secondary satellite control center is
located at Hermosillo, Mexico. These centers are designed to ensure that the
satellites are correctly positioned and that the satellites are operating within
established parameters. The equipment in the satellite control centers is owned
by the Company, while the buildings and land that house these centers are
property of the Government. The Company pays rent to the Government for the use
of the buildings.
 
     Satmex leases office space in Mexico City for its headquarters. The Company
believes its facilities are adequate for its present needs.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     Management is not aware of any pending material litigation against the
Company. Liability for all legal actions or other claims against Satmex prior to
October 15, 1997 has been retained by the Government.
 
ITEM 4.  CONTROL OF REGISTRANT
 
     Prior to October 15, 1997, the Company was not operated as a stand-alone
satellite service provider, but was operated by the Mexican government as part
of the operations of Telecomunicaciones de Mexico, an agency of the Mexican
government. In 1997, Loral and Principia formed a joint venture, Firmamento
Mexicano, S. de R.L. de C.V. ("Firmamento") to effect the acquisition of Satmex
from the Mexican government. On November 17, 1997, Corporativos Satellites
Mexicanos, S.A. de C.V. ("Acquisition Sub"), an indirect subsidiary of
Firmamento, entered into a Stock Purchase Agreement with the Mexican government
to acquire 75% of the outstanding capital stock of Satmex from the Mexican
government for a purchase price of $646.8 million. On November 17, 1997,
Acquisition Sub paid $194.0 million of the purchase price and on December 29,
1997 paid the balance, plus interest. On December 29, 1997, Acquisition Sub was
merged into Satmex.
 
     In consideration of the debt incurred by Satmex in connection with the
acquisition, Servicios Corporativos Satelitales, S.A. de C.V. ("Servicios"), a
wholly owned subsidiary of Firmamento, agreed to pay to the Mexican government
$125.1 million (the "Government Obligation"). The Government Obligation accrues
deferred interest at the rate of 6.03% per annum, compounds annually and matures
in December 2004. Payment of the Government Obligation is currently secured by
Loral's and Principia's interests in Firmamento. If Servicios were to default in
the payment of the Government Obligation, the Mexican government will have the
right to foreclose upon the Firmamento interests. This would result in the
Mexican government gaining control of the Company.
 
     Servicios holds 75% of the outstanding capital stock of the Company.
Firmamento is owned 65% by Loral and 35% by Principia. Principia, however, holds
51% of Firmamento's voting interests.
 
     The remaining 25% of Satmex was retained by the Mexican government, which
holds its interests through Class N shares of the Company. The Class N shares
have limited voting rights and may vote only with respect to the following
matters: extension of the Company's term, merger, conversion or anticipated
dissolution of the Company, amendment to the Company's corporate purpose, change
to the Company's nationality or cancellation of the Company's registration in
the Securities Section of the National Registry of Securities and Intermediaries
or in any Mexican or foreign stock exchange. Moreover, the Mexican government,
as long as it holds at least 25% of the Company's equity, has the right to
designate a member of the Company's board of directors.
 
     On March 30, 1999, the Company issued 606,730 shares of preferred stock to
Loral and Principia for a total purchase price of approximately $31.9 million.
The preferred stock has limited voting rights and pays a
                                       16
<PAGE>   19
 
dividend in common stock of the Company. The preferred stock can be exchanged at
the Company's option into common stock of the Company, at an exchange ratio of 1
share of preferred stock for 2.0008 shares of common stock, if the exchange
occurs before February 2, 2005, and at an exchange ratio of 1 share of preferred
stock for 4.0016 shares of common stock on and after February 2, 20005.
 
ITEM 5.  NATURE OF TRADING MARKETS
 
     The Company's capital stock is not publicly traded. The Company's 10 1/8%
Series B Senior Notes (the "Senior Notes") are not listed on any securities
exchange.
 
ITEM 6.  EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
 
     The Mexican economy has in the past experienced balance of payment deficits
and shortages in foreign exchange reserves. While the Mexican government does
not currently restrict the ability of Mexican or foreign persons or entities to
convert pesos to foreign currencies generally, and U.S. dollars in particular,
it has done so in the past and no assurance can be given that the Mexican
government will not institute a restrictive exchange control policy in the
future. In addition, while all of the Company's contracts are dollar
denominated, the Company is required to accept payment from its customers in
pesos at the current exchange rate on the date of payment. If the Company were
unable to exchange such pesos into dollars or were unable to obtain sufficient
dollars, it would have difficulty meeting its U.S. dollar payment obligations.
The effect of any such exchange control measures adopted by the Mexican
government on the Mexican economy cannot be accurately predicted.
 
ITEM 7.  TAXATION
 
     The summary contains a description of the principal Mexican and U.S.
federal income tax consequences of the purchase, ownership and disposition of
the Senior Notes. This summary is based on the tax laws in force as of January
1, 1999 and does not describe any tax consequences arising under the laws of any
state, locality or taxing jurisdiction other than Mexico and the United States.
 
     A Convention for the Avoidance of Double Taxation and a Protocol thereto
(the "Tax Treaty") between the United States and Mexico entered into force on
January 1, 1994. Provisions of the Tax Treaty that may affect the taxation of
certain U.S. holders of Senior Notes are summarized below. The United States and
Mexico have also entered into an agreement that covers the exchange of
information with respect to tax matters.
 
     Mexico has also entered into several treaties for the avoidance of double
taxation with various countries which are in effect. The tax effects of such
treaties, or of any other tax treaty to which Mexico may be a party in the
future, are not discussed below.
 
MEXICAN TAXATION
 
     This summary of certain Mexican tax considerations deals only with holders
of Senior Notes that are not residents of Mexico for Mexican tax purposes and
that do not conduct a trade or business through a permanent establishment or
fixed base in Mexico (a "Foreign Holder"). For purposes of Mexican taxation, an
individual is a resident of Mexico if he has established his domicile in Mexico,
unless he has resided in another country for more than 183 calendar days,
whether consecutive or not, in any one calendar year and can demonstrate that he
has become a resident of that country for tax purposes. A legal entity is a
resident of Mexico if it is incorporated under Mexican law or if it has
established its main administration or direction center in Mexico. A Mexican
citizen pursuant to Mexican law is presumed to be a resident of Mexico for tax
purposes unless such person can demonstrate otherwise. If a legal entity or an
individual has a permanent establishment or fixed base in Mexico for Mexican
federal tax purposes, such permanent establishment or fixed base shall be
required to pay taxes in Mexico on income attributable thereto in accordance
with applicable tax laws.
 
                                       17
<PAGE>   20
 
  TAXATION OF INTEREST AND PRINCIPAL
 
     Under the Mexican Income Tax Law, payments of interest made by the Company
in respect of the Senior Notes (including payments of principal in excess of the
issue price of such notes, which, under Mexican law, are deemed to be interest)
to a Foreign Holder will generally be subject to a Mexican withholding tax
assessed at a rate of 10% as long as the Senior Notes are registered in the
Special Section of the National Registry of Securities and Intermediaries
maintained by the Mexican National Banking and Securities Commission (the
"Registry").
 
     Pursuant to a temporary provision of the Mexican Income Tax Law, payments
of interest made by the Company in respect of the Senior Notes to a Foreign
Holder will be subject to a reduced 4.9% Mexican withholding tax rate (the
"Reduced Rate"), until December 31, 1999, if (i) the effective beneficiary of
the interest paid is a resident of a country which has entered into a treaty to
avoid double taxation with Mexico which is in effect, (ii) the requirements for
the application of a lower rate established in the applicable treaty are
satisfied by such Foreign Holder and (iii) the Senior Notes are registered with
the Registry.
 
     Pursuant to general rules (the "Reduced Rate Regulations") issued by the
Secretaria de Hacienda y Credito Publico (the "Ministry of Finance"), payments
of interest made by the Company to Foreign Holders with respect to the Senior
Notes will be subject to withholding taxes imposed at the Reduced Rate,
regardless of the place or residence or tax regime applicable to the Foreign
Holder recipient of such interest, so long as (i) the Senior Notes are
registered with the Special Section of the Registry, (ii) the Company timely
files with the Ministry of Finance certain information relating to the issuance
of and subsequent changes to the Senior Notes, (iii) the Company timely files
with the Ministry of Finance, after the date of each interest payment under the
Senior Notes, information representing that no party related to the Company (as
such term is defined under the Reduced Rate Regulations) directly or indirectly,
is the effective beneficiary of 5% or more of the aggregate amount of each such
interest payment, and (iv) the Company maintains records that evidence
compliance with item (iii) above. The Reduced Rate Regulations, together with
other tax regulations, are promulgated on an annual basis, and there can be no
assurance that the requirements set forth in the Reduced Rate Regulations
described above for the application of the Reduced Rate will be extended beyond
December 31, 1999.
 
     Apart from the Reduced Rate, other special rates of Mexican withholding tax
may apply. In particular, under the Tax Treaty, the Mexican withholding tax rate
was reduced from 10% to 4.9%, effective January 1, 1999 (the "Treaty Rate") for
certain holders that are residents of the United States (within the meaning of
the Tax Treaty) under certain circumstances contemplated therein.
 
     Payments of interest made by the Company with respect to the Senior Notes
to non-Mexican pension or retirement funds will be exempt from Mexican
withholding taxes, provided that (i) any such fund is duly incorporated pursuant
to the laws of its country of origin, is exempt from income tax in such country
and is registered with the Ministry of Finance for that purpose, (ii) the
relevant interest income is exempt from taxes in such country and (iii) there is
reciprocity between such country and Mexico.
 
     The Company has agreed, subject to specified exceptions and limitations, to
pay additional amounts to the holders of the Senior Notes in respect of the
Mexican withholding taxes mentioned above. If the Company pays additional
amounts in respect of such Mexican withholding taxes, any refunds of, or credits
against, Mexican taxes received with respect to such additional amounts will be
for the account of the Company.
 
     Holders or beneficial owners of Senior Notes may be requested to provide
certain information or documentation necessary to enable the Company to
establish the appropriate Mexican withholding tax rate applicable to such
holders or beneficial owners. In the event that the specified information or
documentation concerning the holder or beneficial owner, if requested, is not
provided on a timely basis, the obligation of the Company to pay additional
amounts will be limited.
 
     Under Mexican law and regulations, payments of principal on the Senior
Notes to a Foreign Holder will not be subject to any Mexican taxes.
 
                                       18
<PAGE>   21
 
  TAXATION OF DISPOSITIONS
 
     Capital gains resulting from the sale or other disposition of the Senior
Notes by a Foreign Holder will not be subject to Mexican income or other taxes.
 
  TRANSFER AND OTHER TAXES
 
     There are no Mexican stamp, registration, or similar taxes payable by a
Foreign Holder in connection with the purchase, ownership or disposition of the
Senior Notes. A Foreign Holder of Senior Notes will not be liable for Mexican
estate, gift, inheritance or similar tax with respect to the Senior Notes.
 
U.S. TAXATION
 
     This summary of certain U.S. federal income tax considerations deals
principally with U.S. Holders (as defined below) that will hold Senior Notes as
capital assets and whose functional currency is the U.S. dollar. This summary
generally does not address the tax treatment of U.S. Holders that may be subject
to special tax rules, such as banks, insurance companies, dealers in securities,
or persons that hold (or will hold) the Senior Notes as a position in a
"straddle" for tax purposes or as part of a "synthetic security" or a
"conversion transaction" or other integrated investment composed of the Senior
Notes and one or more other investments, nor does it address the tax treatment
of U.S. Holders that do not acquire Senior Notes at their issue price as part of
the initial distribution. As used under this section, the term "U.S. Holder"
means a beneficial owner of a Note that is a citizen or resident of the United
States for U.S. federal income tax purposes, a corporation or other entity
taxable as a corporation created or organized under the laws of the United
States, any state thereof or the District of Columbia, a trust whose
administration is subject to the primary supervision of a United States court
and having one or more U.S. persons with the authority to control all of such
trust's substantial decisions, an estate that is subject to U.S. federal income
tax on its income regardless of the source thereof, or a person whose worldwide
income or gain is otherwise subject to U.S. federal income tax on a net income
basis.
 
  TAXATION OF INTEREST
 
     A U.S. Holder will treat the gross amount of interest and additional
amounts (i.e., without reduction for Mexican withholding taxes, determined using
the appropriate Mexican withholding tax rate applicable to the U.S. Holder) as
ordinary interest income in respect of the Senior Notes. Mexican withholding
taxes paid at the appropriate rate applicable to the U.S. Holder will be treated
as foreign income taxes eligible for credit against such U.S. Holder's U.S.
federal income tax liability, subject to generally applicable limitations and
conditions, or, at the election of such U.S. Holder, for deduction in computing
such U.S. Holder's taxable income. Interest and additional amounts will
constitute income from sources without the United States for foreign tax credit
purposes. For purposes of applying the U.S. foreign tax credit limitation, such
income generally will constitute "passive income" or, in the case of certain
U.S. Holders, "financial services income" unless the Mexican withholding tax
rate applicable to the U.S. Holder is imposed at a rate of at least 5%, in which
case such income generally will constitute "high withholding tax interest."
 
     The calculation of foreign tax credits and, in the case of a U.S. Holder
that elects to deduct foreign taxes, the availability of deductions, involves
the application of rules that depend on a U.S. Holder's particular
circumstances. U.S. Holders should consult their own tax advisors regarding the
availability of foreign tax credits and the treatment of additional amounts.
 
     Subject to the discussion below regarding backup withholding, a holder or
beneficial owner of Senior Notes that is not a U.S. Holder (a "Non-U.S. Holder")
generally will not be subject to U.S. federal income or withholding tax on
interest income or additional amounts earned in respect of Senior Notes, unless
such income is effectively connected with the conduct by the Non-U.S. Holder of
a trade or business in the United States.
 
                                       19
<PAGE>   22
 
  TAXATION OF DISPOSITIONS
 
     Gain or loss realized by a U.S. Holder on the sale, redemption or other
disposition of Senior Notes (less amounts attributable to accrued interest)
generally will be long-term capital gain or loss if, at the time of the
disposition, the Senior Notes have been held for more than one year. Generally,
U.S. Holders that are individuals will be taxed at a preferential rate with
respect to long-term capital gains. There are limits on the deductibility of
capital losses. Gain realized by a U.S. Holder generally will be treated as U.S.
source income for U.S. foreign tax credit purposes. The United States Department
of the Treasury recently published temporary regulations which generally treat
the loss recognized by a U.S. Holder as U.S. source loss.
 
     Subject to the discussion below regarding backup withholding, a Non-U.S.
Holder of Senior Notes will not be subject to U.S. federal income or withholding
tax on gain realized on the sale or other disposition of Senior Notes unless (i)
such gain is effectively connected with the conduct by the Non-U.S. Holder of a
trade or business in the United States or (ii) in the case of gain realized by
an individual Non-U.S. Holder, the Non-U.S. Holder is present in the United
States for 183 days or more in the taxable year of the sale and certain other
conditions are met.
 
  BACKUP WITHHOLDING AND INFORMATION REPORTING
 
     In general, payments of interest and the proceeds of a sale, redemption or
other disposition of the Senior Notes payable to a U.S. Holders by a U.S. paying
agent or other U.S. intermediary will be reported to the Internal Revenue
Service and to the U.S. Holders as may be required under applicable regulations.
Backup withholding at a rate of 31% may apply to these payments if the U.S.
Holders fails to provide an accurate taxpayer identification number or
certification of foreign or other exempt status or fails to report all interest
and dividends required to be shown on its federal income tax returns. Certain
U.S. Holders (including, among others, corporations) are not subject to backup
withholding. U.S. Holders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
 
     The United States Department of the Treasury recently promulgated final
regulations regarding the information reporting and backup reporting rules
discussed above. In general, the final regulations do not significantly alter
the substantive information reporting and backup withholding requirements but
rather unify current certification procedures and forms and clarify reliance
standards. In addition, the final regulations permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. The final regulations are generally effective for
payments made on or after January 1, 2001, subject to certain transition rules.
Purchasers of the Senior Notes should consult their own tax advisors concerning
the effect of such regulations on their particular situations.
 
                                       20
<PAGE>   23
 
ITEM 8.  SELECTED FINANCIAL DATA
 
     The following table presents selected financial information for the fixed
satellite service business of the government of Mexico for the year ended
December 31, 1996, and for the period January 1, 1997 to November 16, 1997 (the
"Predecessor Company") and the Company for the period November 17, 1997 to
December 31, 1997 and for the year ended December 31, 1998. The information was
derived from the audited financial statements of the Predecessor Company and the
Company. The financial information set forth below should be read in conjunction
with the historical financial statements of the Predecessor Company and the
Company.
 
<TABLE>
<CAPTION>
                                                 PREDECESSOR COMPANY                          COMPANY
                                        --------------------------------------   ----------------------------------
                                                                                   FOR THE PERIOD
                                           YEAR ENDED         FOR THE PERIOD      NOVEMBER 17, 1997     YEAR ENDED
                                          DECEMBER 31,      JANUARY 1, 1997 TO     TO DECEMBER 31,     DECEMBER 31,
                                              1996          NOVEMBER 16, 1997           1997               1998
                                        -----------------   ------------------   -------------------   ------------
                                                           (AMOUNTS IN MILLIONS OF U.S. DOLLARS)
<S>                                     <C>                 <C>                  <C>                   <C>
STATEMENT OF OPERATIONS DATA:
  Revenues............................       $ 78.2               $ 93.4              $   12.9           $  104.8
  Operating income(1).................         17.6                 39.9                   4.0               32.8
  Income (loss) before income taxes,
     minority interest and
     extraordinary
     item.............................         17.8                 39.6                  (2.0)             (17.2)
  Deferred income tax provision(1)....                               1.6                   1.7                0.9
  Income (loss) before minority
     interest and extraordinary
     item.............................         17.8                 38.0                  (3.7)             (18.1)
  Net income (loss)...................         17.8                 38.0                  (4.4)             (23.7)
OTHER DATA:
  Depreciation and amortization.......       $ 35.0               $ 30.9              $    5.8           $   48.7
  Capital expenditures................         10.6                 65.9                   3.0              152.3
  Deficiency of earnings to fixed
     charges(2).......................          N/A                  N/A                   4.9               37.7
BALANCE SHEET DATA (AT END OF PERIOD):
  Total assets........................       $376.8                                   $1,035.1           $1,138.0
  Long-term debt......................           --                                      569.0              608.0
  Telecomm's investment...............        369.5                                         --                 --
  Stockholders' equity................           --                                      367.4              351.3
</TABLE>
 
------------------------------
(1) As a government agency, the Predecessor Company was subject to an assessment
    by the Mexican government equal to 5.8% of monthly revenues in lieu of
    income or asset taxes. The government assessment of $4.5 million and $4.8
    million for the year ended December 31, 1996 and for the period January 1,
    1997 to November 16, 1997, respectively, was recorded as an operating
    expense for such periods. The Company is not subject to such an assessment.
    However, the Company is subject to income and asset taxes at the statutory
    rates of 34% and 1.8%, respectively.
 
(2) The ratio of earning to fixed charges is not applicable for the year ended
    December 31, 1996 and the period January 1, 1997 to November 16, 1997
    because there were no fixed charges during those periods.
 
                                       21
<PAGE>   24
 
                                 EXCHANGE RATES
 
     The following table presents, for the periods indicated, the period-end,
average, low and high Noon Buying Rate for the purchase and sale of dollars,
each expressed in pesos per dollar. The exchange rate translations contained
herein should not be construed as representations that the peso amounts actually
represent such dollar amounts or could be converted into dollars at the rate
indicated.
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                                   EXCHANGE RATE(1)
                                                      -------------------------------------------
                                                      PERIOD END    AVERAGE(2)     LOW      HIGH
<S>                                                   <C>           <C>           <C>      <C>
1994................................................      5.00         3.48        3.11      5.75
1995................................................      7.74         6.43        5.00      8.05
1996................................................      7.88         7.64        7.33      8.05
1997................................................      8.08         7.97        7.72      8.41
1998................................................      9.90         9.24        8.04     10.63
1999 (through April 30, 1999).......................      9.24         9.70        9.24     10.60
</TABLE>
 
------------------------------
(1) Source: Federal Reserve Bank.
 
(2) Average of month-end rates.
 
ITEM 9.  MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
 
     Except for the historical information contained herein, the matters
discussed in this Management's Discussion and Analysis of Results of Operations
and Financial Condition of Satelites Mexicanos, S.A. de C.V. ("Satmex" or the
"Company") are forward-looking statements that involve risks and uncertainties,
many of which may be beyond the Company's control. The actual results that the
Company achieves may differ materially from any forward-looking projections due
to such risks and uncertainties. The following discussion should be read in
conjunction with the accompanying financial statements.
 
OVERVIEW
 
     The Company owns and operates three geosynchronous satellites, Solidaridad
1, Solidaridad 2 and Satmex 5. Satmex also owns Morelos 2 which is in an
inclined orbit. Satmex operates in one segment and is the leading provider of
fixed satellite services ("FSS") to broadcasting and telecommunications
customers in Mexico. The Company provides satellite transmission capacity to
broadcasting customers for network and cable television programming, DTH
television service and transmission of live news reports, sporting events and
other video feeds from the scene of the event. The Company also provides
satellite transmission capacity to telecommunications services customers for
public telephone networks in Mexico and elsewhere and corporate customers for
their private business networks with data voice and corporate video
applications. The Company is also marketing the use of satellite transmission
capacity for new applications, such as Internet via satellite. Satmex has
landing rights to provide broadcasting and telecommunications transmission
capacity in the United States, Canada and 20 nations and territories in Latin
America.
 
     In June 1995, the Constitution of Mexico was amended to establish the legal
framework for the privatization of certain FSS assets and operations of
Telecomunicaciones de Mexico ("Telecomm"), an agency of the government of Mexico
(the "Government"). On June 26, 1997, the Government formed Satmex for the
purpose of completing the privatization of Telecomm's FSS business. The FSS
business was operated by Telecomm through October 14, 1997 and thereafter by
Satmex.
 
     On November 17, 1997, Loral Space & Communications Ltd. (together with its
subsidiaries "Loral") and Principia, S.A. de C.V. ("Principia") formerly
Telefonica Autrey, S.A. de C.V., through an indirect subsidiary ("Acquisition
Sub") of their joint venture, acquired 75% of the outstanding capital stock of
Satmex from the Government (the "Acquisition") and paid the first installment of
the $646.8 million purchase price. The remaining 25% of the capital stock of
Satmex was retained by the Government. The final installment was paid on
December 29, 1997.
 
     On December 29, 1997, Acquisition Sub was merged into Satmex (the
"Merger"). The Merger was accounted for as a purchase from the Government of its
minority interest in Satmex in exchange for a 25%
 
                                       22
<PAGE>   25
 
interest in Acquisition Sub and additional consideration in the form of a debt
obligation. The debt obligation was issued by Servicios Corporativos
Satelitales, S.A. de C.V. ("Servicios"), the parent company of Acquisition Sub
in the form of a 6.03% Mexican Government Obligation due in seven years.
 
     The financial statements of Satmex for the period November 17, 1997 to
December 31, 1997 reflect the results of operations for that period and included
the effect of the Acquisition and the Merger.
 
RESULTS OF OPERATIONS FOR THE COMPANY
 
     This discussion covers the financial statements of Satmex for the year
ended December 31, 1998 and the period November 17, 1997 through December 31,
1997.
 
     During 1997 and 1998, the annual rates of inflation in Mexico, as measured
by changes in the National Consumer Price Index as provided by the Banco de
Mexico, were 15.7% and 18.6%, respectively. The Company's major expenditures,
including capital expenses and satellite insurance will not be affected by high
levels of inflation, because they are denominated in dollars. Customer contracts
are also denominated in dollars. However, high inflation rates would affect peso
denominated expenses such as payroll and rent and could result in an increase in
uncollectible accounts receivable and customer lease cancellations. To the
extent that the peso's devaluation against the U.S. dollar is less than the
inflation rate in Mexico, the Company will be adversely affected by the effect
of inflation in Mexico with respect to its peso denominated expenses.
 
  REVENUES
 
     Revenues were $104.8 million for the year ended December 31, 1998. Price
increases in 1998 and revenue from new customers were offset by cancellations
from customers who switched their telecommunications networks to fiber optic
service providers and lower than expected revenues on Morelos 2 which went into
inclined orbit in August 1998 to extend the satellite's useful life. Satmex
expects revenues for 1999 to increase when Satmex 5 is placed in service.
Revenues for the period November 17, 1997 to December 31, 1997 were $12.9
million.
 
     Revenues from Corporacion de Radio y T.V. del Norte de Mexico, S.A. de C.V.
("Televisa") and Telecomm represented 29% and 5%, respectively of total revenues
for the year ended December 31, 1998 and 43% and 40%, respectively of total
revenues for the period November 17, 1997 to December 31, 1997.
 
     The contracts with Televisa were entered into in October 1996 and expire by
October 1999. On March 30, 1999, the Company executed a binding commitment
letter with Televisa to renew service for 12 Ku-Band transponders on Solidaridad
2 through December 31, 2001. Satmex expects to finalize a contract with Televisa
in the second quarter of 1999.
 
     Revenues for 1998 and for the period November 17, 1997 to December 31, 1997
include the recognition of $2.2 million and $0.3 million, respectively of
deferred revenue related to the transponder capacity provided to the Government
at no charge in connection with the Acquisition (see Note 1).
 
  OPERATING EXPENSES
 
     Operating expenses were $71.9 million for the year ended December 31, 1998
and $8.9 million for the period November 17, 1997 to December 31, 1997.
 
     Satellite operations.  Satellite operations which consist principally of
satellite insurance and personnel costs related to the operation of the
satellites amounted to $14.9 million for the year ended December 31, 1998 and
$1.9 million for the period November 17, 1997 to December 31, 1997.
 
     Selling and administrative expenses.  Selling and administrative expenses
were $8.2 million for the year ended December 31, 1998 and $0.9 million for the
period November 17, 1997 to December 31, 1997.
 
     License and management fees.  Loral and Principia are responsible for
managing the Company, for which they receive a management fee. During 1998,
management fees were $0.3 million. In 1998, Loral and the Company agreed to
retroactively delay the commencement of license fees until January 1, 1999,
because
 
                                       23
<PAGE>   26
 
the intellectual property and related services to which the fees relate did not
begin to be implemented until the beginning of 1999, after Satmex 5 entered
commercial operations. All intellectual property fees accrued as of December 31,
1997 were reversed in 1998.
 
     Depreciation and amortization.  Depreciation expense includes depreciation
for Morelos 2, Solidaridad 1 and Solidaridad 2. Morelos 2 was fully depreciated
at June 30, 1998 and Solidaridad 1 and 2 are being depreciated through December
2007 and June 2009, respectively. Depreciation expense was $36.0 and $4.6
million for the year ended December 31, 1998 and for the period November 17,
1997 to December 31, 1997, respectively. Amortization expense relating to the
concessions amounted to $12.7 million and $1.2 million for the year ended
December 31, 1998 and for the period November 17, 1997 to December 31, 1997,
respectively.
 
  INTEREST EXPENSE
 
     Interest expense was $52.1 million and $14.8 million (net of $20.5 million
and $2.9 million of capitalized interest related to the construction and launch
of Satmex 5) for the year ended December 31, 1998 and for the period November
17, 1997 to December 31, 1997, respectively. Interest expense for 1998 includes
$5.4 million of amortization of deferred financing costs.
 
  NET FOREIGN EXCHANGE LOSS
 
     The Company recorded a net foreign exchange loss of approximately $0.5
million for the year ended December 31, 1998. The net loss reflects the effect
of the approximate 23% devaluation of the Mexican peso against the U.S. dollar.
 
     Foreign exchange gains for the period from November 17, 1997 to December
31, 1997 totaled $8.7 million. Foreign exchange forward contracts were entered
into to hedge the foreign exchange risk on the second installment payment to the
Mexican Government and the related interest due on December 29, 1997.
 
     There were no foreign exchange contracts outstanding at December 31, 1998.
 
  DEFERRED INCOME TAX PROVISION
 
     Satmex recorded a deferred income tax provision of $0.9 million for the
year ended December 31, 1998.
 
     The Company is subject to the greater of an income tax at 34% of taxable
income or an asset tax at 1.8% on the average of assets less certain
liabilities. Net operating losses may be carried forward for 10 years and any
asset tax paid is available as a credit against the income tax liability for a
ten-year period.
 
     The provision for income tax for the year ended December 31, 1998 excluded
a deferred tax benefit of $2.8 million related to the extraordinary charge on
the debt refinancing. The net deferred income tax asset at December 31, 1998 was
increased by $200,000 for the change to the Mexican statutory rate from 34% to
35% which was signed into law on December 31, 1998 to be effective January 1,
1999.
 
     At December 31, 1998 the Company had tax loss carryforwards of
approximately $271.6 million which expire from 2007 to 2008 and tax credits
available against the asset tax of approximately $27 million which expire in
2008.
 
  EXTRAORDINARY ITEM
 
     Fees of $8.3 million, less applicable income tax benefit of $2.8 million,
related to the debt that was refinanced in March 1998 are presented as an
extraordinary item in the results of operations for the year ended December 31,
1998.
 
                                       24
<PAGE>   27
 
RESULTS OF OPERATIONS FOR THE PREDECESSOR COMPANY
 
     This discussion covers the historical financial statements of the FSS
business of Telecomm ("the Predecessor Company") for the year ended December 31,
1996 and the period January 1, 1997 to November 16, 1997.
 
  REVENUES
 
     Revenues of the Predecessor Company were $78.2 million and $93.4 million
for the year ended December 31, 1996 and the period January 1, 1997 to November
16, 1997, respectively. Revenues include approximately $8.0 million and $28.0
million for the year ended December 31, 1996 and the period January 1, 1997 to
November 16, 1997, respectively, related to contracts with Televisa.
 
  OPERATING EXPENSES
 
     The Predecessor Company's operating expenses were $60.6 million and $53.5
million for the year ended December 31, 1996 and the period January 1, 1997 to
November 16, 1997, respectively. The most significant operating expenses during
the periods were depreciation, personnel costs, separation bonuses and
employment costs related to the privatization of Satmex, insurance, provision
for uncollectible accounts and assessment paid to the Mexican Government.
 
     Depreciation.  Depreciation expense for the Predecessor Company was $35.0
million and $30.9 million for the year ended December 31, 1996 and the period
January 1, 1997 to November 16, 1997, respectively, which represents
approximately the same monthly depreciation expense during each period.
 
     Personnel costs.  Personnel costs consist of recurring payroll and payroll
related expenses for the approximately 220 employees who were employees of the
Predecessor Company at November 17, 1997. Such costs for the Predecessor Company
were $2.9 million and $4.1 million for the year ended December 31, 1996 and the
period from January 1, 1997 to November 16, 1997, respectively. Increases in
expenses for the latter period reflect significant compensation increases
effective July 1997.
 
     Separation bonuses and employment costs.  Separation bonuses and employment
costs related to the privatization of Satmex include, for the period January 1,
1997 to November 16, 1997, non-recurring payments of $4.0 million made to
employees who transferred from Telecomm to Satmex in July 1997, and, for the
year ended December 31, 1996 and the period January 1, 1997 to November 16,
1997, payroll and related costs of $1.0 million and $0.8 million, respectively,
incurred prior to July 1997 for employees who did not transfer to SatMex.
 
     Insurance.  Satellite insurance expense for the Predecessor Company was
$10.7 million and $8.7 million for the year ended December 31, 1996 and the
period January 1, 1997 to November 16, 1997, respectively. Expenses for the
latter period reflect rate decreases in October 1997 when the policy for
Solidaridad 1 and 2 was renewed.
 
     Provision for uncollectible accounts.  The provision for uncollectible
accounts was determined based upon management's assessment of the amount of
accounts receivable for which collection is not probable. The provision for the
year ended December 31, 1996 was $1.8 million. The credit to the provision for
uncollectible accounts of $3.0 million for the period January 1, 1997 to
November 16, 1997 was the result of improved collections and a reduction in
gross accounts receivable.
 
     Government assessment.  As a government agency the Predecessor Company
through October 14, 1997, was subject to an assessment by the Mexican Government
equal to 5.8% of revenues.
 
  DEFERRED INCOME TAX PROVISION
 
     From October 15, 1997 through November 16, 1997 the Predecessor Company was
subject to income and asset taxes at the statutory rates of 34% and 1.8%,
respectively. Net operating losses may be carried forward for 10 years and any
asset tax paid is available as a credit against the income tax liability for a
10 year period. The Predecessor Company prior to October 15, 1997, was not
subject to income and asset taxes.
                                       25
<PAGE>   28
 
CAPITAL EXPENDITURES
 
     Substantially all capital expenditures are denominated in U.S. Dollars.
Capital expenditures, including capitalized interest, were $152.3 million for
the year ended December 31, 1998 and $3.0 million for the period November 17,
1997 to December 31, 1997. Capital expenditures are primarily for the
construction and launch of Satmex 5.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     At December 31, 1998, Satmex had total debt of $644.0 million, consisting
of $320 million of fixed rate notes and $324 million of senior secured floating
rate notes. At December 31, 1998, the Company was in compliance with all
covenants governing its debt agreements.
 
     In March 1999, Loral and Principia purchased 606,703 shares of Satmex
preferred stock for $31.9 million. The proceeds from the sale together with a
portion of the Company's available cash was used to prepay $35 million principal
amount of the Company's outstanding senior secured notes. The requirement for
prepayment was due to lower than expected revenues in 1998 on Morelos 2 and to
the launch delay associated with Satmex 5. The Company anticipates that, as a
result of the commencement of Satmex 5 commercial operations in the first
quarter of 1999, the Company's cash flow from operations will be sufficient for
the Company to fund its working capital requirements and maintain availability
under its debt facilities.
 
     The Company's primary source of liquidity for working capital purposes is
cash flow from operations. At December 31, 1998, the Company had cash and cash
equivalents of $11.9 million and $9.8 million in its interest reserve account to
meet its interest obligations under the fixed rate notes.
 
     Consistent with other satellite operators, Satmex earns high margins, which
are expected to increase when Satmex 5 goes into service. The Company believes
that these margins will be adequate to service the interest and retire the debt
principal or permit refinancing, thereafter.
 
     Cash used and provided.  Net cash provided by operating activities for the
year ended December 31, 1998 was $50.8 million consisting primarily of funds
generated by earnings before depreciation and amortization, taxes, and
extraordinary loss of $31.5 million and increases in accounts payable, interest
payable and accrued expenses of $46.2 million offset by increases in prepaid
insurance of $18.1 million and deferred financing costs and other assets of
$11.4 million.
 
     Cash used in investing activities for 1998 was $152.3 million and related
primarily to the completion of the construction and launch of Satmex 5.
 
     Cash provided by financing activities for the year ended December 31, 1998
was $89.2 million and reflects the refinancing of the Company's debt in the
first quarter of 1998.
 
EFFECT OF YEAR 2000
 
     Satmex participates in Loral's Year 2000 Program that is proceeding on
schedule. The Year 2000 issue is the result of computer programs which were
written using two digits rather than four to signify a year (i.e. the year 1999
is denoted as "99" and not "1999"). Computer programs written using only two
digits may recognize the year 2000 as the year 1900. This could result in a
system failure or miscalculations causing disruption of operations.
 
     The Company has implemented a Year 2000 program (the "Year 2000 Program")
for its internal products, systems and equipment, as well as for key vendor and
customer supplied products, systems and equipment. As part of the Year 2000
Program, the Company is assessing the Year 2000 capabilities of, among other
things, its satellites and ground equipment. The Year 2000 Program consists of
the following phases: inventory of Year 2000 items, assessment (including
prioritization), remediation (including modification, upgrading and
replacement), testing and auditing. This five-step program is divided into six
major sections covering both information and non-information technology systems:
1) business systems, 2) technical systems, 3) products and services, 4) imbedded
hardware/firmware, 5) vendor supplied products and 6) customer provided
products. The Company estimates that, as of March 31, 1999 it had completed
approximately 99% of
                                       26
<PAGE>   29
 
the inventory phase and approximately 97% of the assessment phase. The Company
expects to complete the first four phases, through the testing period, of the
Year 2000 Program during the third quarter of 1999, which is prior to any
anticipated material impact on the operations of the Company. The fifth phase,
the audit phase, commenced in January 1999 and is expected to continue through
the third quarter of 1999 to accommodate re-audits if deemed necessary.
 
     Both internal and external resources are being utilized to execute the
Company's plan. The program to address Year 2000 has been underway since
December 1997. The incremental cost incurred through December 31, 1998 for its
effort were approximately $39,000. Based on the efforts to date, the Company
anticipates additional incremental expenses of approximately $168,000 will be
incurred to complete the effort.
 
     Based on the accomplishments to date, no contingency plans are expected to
be needed. As risks are identified, contingency plans will be developed and
implemented as necessary. However, because of the progress achieved to date and
the Company's expectation that its Year 2000 Program will be substantially
complete in the third quarter of 1999, the Company believes that adequate time
will be available to insure alternatives can be developed, assessed and
implemented prior to a Year 2000 issue having a material negative impact on the
operations of the Company. However, there can be no assurance that such
modifications and conversions, if required, will be completed on a timely basis.
 
     The cost of the program and the dates on which the Company believes it will
substantially complete Year 2000 modifications are based on management's best
estimates. Such estimates were derived using software surveys and programs to
evaluate calendar date exposures and numerous assumptions of future events,
including the continued availability of certain resources, third-party Year 2000
readiness and other factors. Because none of these estimates can be guaranteed,
actual results could differ materially and adversely from those anticipated.
Specific factors that might cause an adjustment of costs are: number of
personnel trained in this area, the ability to locate and correct all relevant
computer codes the ability to validate supplier certification and similar
uncertainties.
 
     The Company's failure to remediate a material Year 2000 problem could
result in an interruption of failure of certain basic business operations. These
failures could materially and adversely affect the Company's results of
operations, liquidity and financial conditions. The Company is also assessing
the Year 2000 readiness of its key third-party suppliers. Information requests
have been distributed to such suppliers and replies are being evaluated. If the
risk is deemed material, on-site visits to suppliers will be conducted to verify
the adequacy of the information received. However, due to the general
uncertainty of the Year 2000 problem, including uncertainty with regard to
third-party suppliers and customers, the Company is unable to determine at this
time whether the consequences of Year 2000 failures will have an adverse
material impact on the Company's results of operations, liquidity or financial
condition. There can be no assurance given that the Company's Year 2000 Program
will be successful in avoiding any interruption or failure of certain basic
business operations, which may have a material adverse effect on the Company's
results of operations or financial position.
 
ACCOUNTING PRONOUNCEMENTS
 
     In June 1998, the Financial Accounting Standards Board issued Statement No.
133 Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company has not yet determined the impact that the
adoption of SFAS 133 will have on its earnings or financial position. The
Company is required to adopt SFAS 133 on January 1, 2000.
 
SUBSEQUENT EVENTS
 
     Televisa Contract.  On March 30, 1999, the Company signed a binding
commitment letter with Televisa to renew service for 12 Ku-band transponders on
Satmex's Solidaridad 2 satellite until December 31, 2001.
 
                                       27
<PAGE>   30
 
The new commitment replaces the existing contracts with Televisa and contains
provisions allowing for further renewals of service. The Company expects to
finalize a contract with Televisa in the second quarter of 1999.
 
     Preferred Stock.  On March 31, 1999 the Company issued 606,730 shares of
preferred stock to Loral and Principia for a total purchase price of
approximately $31.9 million. The preferred stock has limited voting rights and
pays a dividend in common stock of the Company. The preferred stock can be
exchanged at the Company's option into common stock of the Company, at an
exchange ratio of 1 share of preferred stock for 2.0008 shares of common stock
if the exchange occurs before February 2, 2005, and at an exchange ratio of 1
share of preferred stock for 4.0016 shares of common stock on and after February
2, 2005.
 
     Solidaridad 1 Service Interruption.  On April 28, 1999, Solidaridad 1
experienced a loss of its primary satellite control processor. Service was
restored after 14 hours, using the back up satellite control processor. Satmex
and the satellite manufacturer, Hughes Space and Communications, Inc., are
investigating the cause of the service interruption. Failure of the back up
satellite control processor would result in the loss of Solidaridad 1.
 
ITEM 9A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     The Company is exposed to market risk from changes in currency exchange
rates and change in interest rates. The Company from time to time assesses its
exposure and monitors opportunities to manage these risks.
 
  EXCHANGE RATE RISK
 
     During 1997 and 1998, the annual rates of inflation in Mexico, as measured
by changes in the National Consumer Price Index as provided by the Banco de
Mexico, were 15.7% and 18.6%, respectively. The Company's major expenditures,
including capital expenses and satellite insurance will not be affected by high
levels of inflation, because they are denominated in dollars. Customer contracts
are also denominated in dollars. However, high inflation rates would affect peso
denominated expenses such as payroll and rent and could result in an increase in
uncollectible accounts receivable and customer lease cancellations. To the
extent that the peso's devaluation against the U.S. dollar is less than the
inflation rate in Mexico, the Company will be adversely affected by the effect
of inflation in Mexico with respect to its peso denominated expenses.
 
  INTEREST RATE RISK
 
     At December 31, 1998, the fair value, based on quoted market prices, of the
Company's debt was $577.6 million. The carrying value of the Company's debt
exceeded fair value by $66.4 million. Market risk on debt is estimated as the
potential increase in annual interest expense resulting from a hypothetical one
percent increase in interest rates and amounts to $6.4 million.
 
                                       28
<PAGE>   31
 
ITEM 10.  DIRECTORS AND OFFICERS OF REGISTRANT
 
     The following table presents the directors and executive officers of the
Company.
 
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
 
<TABLE>
<CAPTION>
                NAME                                 POSITION                     PERIOD OF SERVICE
                ----                                 --------                     -----------------
<S>                                   <C>                                      <C>
Sergio Autrey Maza(1)...............  Chairman of the Board and Director       Since November 1997
Bernard L. Schwartz(1)..............  Director                                 Since November 1997
Lauro Gonzalez-Moreno...............  Chief Executive Officer and Director     Since November 1997
Xavier Autrey Maza..................  Director                                 Since November 1997
Eric J. Zahler......................  Director                                 Since November 1997
Joseph Del Riego....................  Chief Operating Officer                  Since April 1998
Cynthia Pelini......................  Chief Financial Officer                  Since April 1998
Jorge Lopez Aguado..................  Chief Accounting Officer                 Since June 1998
Juan Manuel Pinedo..................  Sales Executive Director                 Since January 1999
</TABLE>
 
------------------------------
(1) Member of the Executive Committee.
 
     The Board of Directors of the Company is chaired by Mr. Sergio Autrey Maza
and pursuant to an agreement between Loral and Principia currently consists of
three Principia directors and two Loral directors. In addition, the Mexican
government has the right to appoint a director to the Board.
 
     The Executive Committee is authorized to take action on all matters that
may be authorized by the Board of Directors.
 
     Mr. Gonzalez is the Chief Executive Officer and was named jointly by
Principia and Loral. The Chief Executive Officer reports to the Executive
Committee and the Board of Directors. His duties include day to day management
of the Company, strategic planning and relationship development. The Chief
Executive Officer can be removed at the request of either Principia or Loral.
 
     The Chief Operating Officer of the Company is responsible for the day to
day management and operations of the Company and is appointed by Loral, subject
to approval from Principia, which approval cannot be unreasonably withheld.
 
     All other executive officers have been and will be appointed by the mutual
consent of Loral and Principia.
 
ITEM 11.  COMPENSATION OF DIRECTORS AND OFFICERS
 
     For the year ended December 31, 1998, the aggregate compensation of the
executive officers of the Company paid or accrued in that year for services in
all capacities was approximately $420,000. During 1998, the Company did not make
payments to members of the Board for attendance at Board or committee meetings.
In addition, during 1998 the Company did not provide any pension, retirement or
similar benefits for directors or executive officers.
 
     Members of management are eligible for bonuses. For the year ended December
31, 1998, no performance bonuses were paid by the Company.
 
ITEM 12.  OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
 
     Not applicable.
 
ITEM 13.  INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
 
     Pursuant to a management services agreement among the Company, Loral and
Principia, the Company has agreed to pay a quarterly management fee based on
quarterly gross revenues of the Company and its subsidiaries as follows: with
respect to revenues of less than $25 million, no management fee will be payable,
 
                                       29
<PAGE>   32
 
(ii) with respect to revenues in excess of $25 million but less than $32
million, 10% of all revenues in excess of $25 million; and with respect to
revenues equal to or in excess of $32 million, 15% of all revenues in excess of
$32 million; provided that the management fee will in no event exceed 3.75% of
the cumulative gross revenues of the Company and its subsidiaries. The
management fee represents compensation paid to Loral and Principia for
management services rendered to the Company. For the year ended December 31,
1998, the management fee was $276,000.
 
     Loral has licensed certain intellectual property to the Company for an
annual fee of 1.50% of the Company's gross revenues. In 1998 Loral and the
Company agreed to delay the commencement of such fees until January 1, 1999,
because the intellectual property and related services to which the fees related
were not expected to be implemented until the beginning of 1999, when Satmex 5
was placed in service.
 
     The Company is a member of the Loral Global Alliance, which other members
are Loral Skynet and Loral Orion, subsidiaries of Loral, and Europe*Star, a
joint venture between Loral and Alcatel. The Loral Global Alliance provides for
cross-selling arrangements among the alliance members' respective sales force
and for cooperative marketing and promotional activities. The Company believes
that such arrangements will enable the members of the alliance to compete more
effectively in sales of communications satellite services worldwide. In
addition, the alliance offers in-orbit backup capabilities for its members in
regions where members' fleets have overlapping coverage.
 
     The Company and Loral Skynet agreed to move the Company's Morelos 2
satellite, which was replaced by Satmex 5, to 120 degrees W.L., the orbital slot
previously occupied by Loral Skynet's Telstar 303 satellite. The Company and
Loral Skynet have agreed to equally share any revenues generated from the
Morelos 2 satellite.
 
     In connection with the privatization, the Company is required to provide
181 MHz C-band and 181 MHz Ku-band capacity for the Mexican government for
national security and certain public purposes at no charge. The Company also
operates two L-band transponders (one on each of the Solidaridad satellites)
which continued to be owned by the Mexican government. Under the real property
concession granted by the Mexican government to the Company, the Company pays to
the government an annual fee of 7.5% of the value of the property on which the
Company's satellite control centers are located.
 
     On March 30, 1999, the Company issued 606,730 shares of preferred stock to
Loral and Principia for a total purchase price of approximately $31.9 million.
The preferred stock has limited voting rights and pays a dividend in common
stock of the Company. The preferred stock can be exchanged at the Company's
option into common stock of the Company, at an exchange ratio of 1 share of
preferred stock for 2.0008 shares of common stock, if the exchange occurs before
February 2, 2005, and at an exchange ratio of 1 share of preferred stock for
4.0016 shares of common stock on and after February 2, 20005.
 
                                    PART III
 
ITEM 15.  DEFAULTS UPON SENIOR SECURITIES
 
     Not applicable.
 
ITEM 16.  CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
 
     Not applicable.
 
                                    PART IV
 
ITEM 18.  FINANCIAL STATEMENTS
 
     See Item 19(a) for a list of all financial statements filed as part of this
Form 20-F.
 
                                       30
<PAGE>   33
 
ITEM 19.  FINANCIAL STATEMENTS AND EXHIBITS
 
     (a) List of Financial Statements
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Index To Financial Statements...............................  F-1
SATELITES MEXICANOS, S.A. DE C.V.:
Report of Independent Accountants...........................  F-2
Balance Sheets as of December 31, 1998 and 1997.............  F-3
Statements of Operations for the year ended December 31,
  1998 and the period November 17, 1997 to
  December 31, 1997.........................................  F-4
Statements of Changes in Stockholders' Equity for the year
  ended December 31, 1998 and the period November 17, 1997
  to December 31, 1997......................................  F-5
Statements of Cash Flows for the year ended December 31,
  1998 and the period November 17, 1997 to
  December 31, 1997.........................................  F-6
Notes to the Financial Statements...........................  F-7
TELECOMMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
  (PREDECESSOR COMPANY):
Report of Independent Accountants...........................  F-19
Balance Sheet as of December 31, 1996.......................  F-20
Results of Operations for the year ended December 31, 1996
  and the period January 1, 1997 to November 16, 1997.......  F-21
Statements of Changes in Investment/Equity for the year
  ended December 31, 1996 and the period January 1, 1997
  to November 16, 1997......................................  F-22
Statements of Cash Flows for the year ended December 31,
  1996 and the period January 1, 1997 to November 16, 1997..  F-23
Notes to Financial Statements...............................  F-24
</TABLE>
 
     (b) List of Exhibits
 
<TABLE>
<CAPTION>
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
<C>           <S>
    2.1       Contract for the Purchase and Sale of Personal Property
              (Contrato de Compraventa de Bienes Muebles), dated as of
              October 15, 1997, by and between the Federal Government of
              the United Mexican States and Satelites Mexicanos, S.A. de
              C.V.+
    2.2       Contract for the Purchase and Sale of Personal Property
              (Contrato de Compraventa de Bienes Muebles), dated as of
              October 15, 1997, by and between the Federal Government of
              the United Mexican States and Satelites Mexicanos, S.A. de
              C.V. (English translation).+
    2.3       Stock Purchase and Sale Agreement (Contrato de Compraventa
              de Acciones), dated as of November 17, 1997, by and between
              the Federal Government of the United Mexican States and
              Corporativo Satelites Mexicanos, S.A. de C.V.+
    2.4       Stock Purchase and Sale Agreement (Contrato de Compraventa
              de Acciones), dated as of November 17, 1997, by and between
              the Federal Government of the United Mexican States and
              Corporativo Satelites Mexicanos, S.A. de C.V. (English
              translation).+
    3.1       Estatutos Sociales (bylaws) of Satelites Mexicanos, S.A. de
              C.V.+
    3.2       Estatutos Sociales (bylaws) of Satelites Mexicanos, S.A. de
              C.V. (English translation)+
    4.1       Indenture, dated as of February 2, 1998, between Satelites
              Mexicanos, S.A. de C.V. and The Bank of New York, as
              trustee.+
    4.2       Amended and Restated Credit Agreement among Firmamento
              Mexicano S. de R.L. de C.V., Servicios Corporativos
              Satelitales, S.A. de C.V., Satelites Mexicanos, S.A. de
              C.V., the several Lenders from time to time parties thereto,
              Donaldson, Lufkin & Jenrette Securities Corporation and
              Lehman Brothers Inc., as arrangers, DLJ Capital Funding,
              Inc. and Lehman Commercial Paper Inc., as Syndication
              Agents, and Citibank, N.A., as Administrative Agent, dated
              as of February 23, 1998.+
</TABLE>
 
                                       31
<PAGE>   34
 
<TABLE>
<CAPTION>
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
<C>           <S>
    4.3       Intercreditor and Collateral Trust Agreement among
              Firmamento Mexicano S. de R.L. de C.V., Servicios
              Corporativos Satelitales, S.A. de C.V., Satelites Mexicanos,
              S.A. de C.V., Citibank, N.A., as Administrative Agent,
              Citibank, N.A., as Indenture Trustee, and Citibank, N.A., as
              Collateral Trustee, dated as of February 23, 1998.+
    4.4       Indenture, dated as of March 4, 1998, among, Satelites
              Mexicanos, S.A. de C.V., as the Issuer, Firmamento Mexicano
              S. de R.L. de C.V. and Servicios Corporativos Satelitales,
              S.A. de C.V., as Guarantors, and Citibank, N.A., as
              trustee.+
    4.5       First Amendment, dated as of June 23, 1998, to the Amended
              and Restated Credit Agreement among Firmamento Mexicano S.
              de R.L. de C.V., Servicios Corporativos Satelitales, S.A. de
              C.V., Satelites Mexicanos, S.A. de C.V., the several Lenders
              from time to time parties thereto, Donaldson, Lufkin &
              Jenrette Securities Corporation and Lehman Brothers Inc., as
              arrangers, DLJ Capital Funding, Inc. and Lehman Commercial
              Paper Inc., as Syndication Agents, and Citibank, N.A., as
              Administrative Agent, dated as of February 23, 1998.+
    4.6       First Supplemental Indenture, dated as of June 30, 1998,
              Supplemental to Indenture, dated as of March 4, 1998, among,
              Satelites Mexicanos, S.A. de C.V., as the Issuer, Firmamento
              Mexicano S. de R.L. de C.V. and Servicios Corporativos
              Satelitales, S.A. de C.V., as Guarantors, and Citibank,
              N.A., as trustee.+
   10.1       Intentionally omitted.
   10.2       Intentionally omitted.
   10.3       Intentionally omitted.
   10.4       Intentionally omitted.
   10.5       Registration Rights Agreement, dated as of February 2, 1998,
              by and between Satelites Mexicanos, S.A. de C.V. and
              Donaldson, Lufkin & Jenrette Securities Corporation and
              Lehman Brothers Inc., as Initial Purchasers.+
   10.6       Contract Number TVDP-1191/97 for the Provision of Ongoing
              Service for the Transmission of Restricted Television
              Signals by Satellite, dated September 9, 1997, by and
              between the Decentralized Telecommunications Agency of
              Mexico and Corporacion de Radio y Television del Norte de
              Mexico, S.A. de C.V.+#
   10.7       Contract Number TVDP-1191/97 for the Provision of Ongoing
              Service for the Transmission of Restricted Television
              Signals by Satellite, dated September 9, 1997, by and
              between the Decentralized Telecommunications Agency of
              Mexico and Corporacion de Radio y Television del Norte de
              Mexico, S.A. de C.V. (English translation).+#
   10.8       Modifying Agreement to Contract Number TVDP-007/96 for the
              Provision of Ongoing Service for the Transmission of
              Restricted Television Signals by Satellite, dated September
              9, 1997, by and between the Decentralized Telecommunications
              Agency of Mexico and Corporation de Radio y Television del
              Norte de Mexico, S.A. de C.V.+#
   10.9       Modifying Agreement to Contract Number TVDP-007/96 for the
              Provision of Ongoing Service for the Transmission of
              Restricted Television Signals by Satellite, dated September
              9, 1997, by and between the Decentralized Telecommunications
              Agency of Mexico and Corporation de Radio y Television del
              Norte de Mexico, S.A. de C.V. (English translation).+#
  10.10       Satellite Concession 116.8 degreesW+
  10.11       Satellite Concession 116.8 degreesW (English Translation)+
  10.12       Satellite Concession 113.0 degreesW+
  10.13       Satellite Concession 113.0 degreesW (English Translation)+
  10.14       Satellite Concession 109.2 degreesW+
  10.15       Satellite Concession 109.2 degreesW (English Translation)+
  10.16       Property Concession+
</TABLE>
 
                                       32
<PAGE>   35
 
<TABLE>
<CAPTION>
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
<C>           <S>
  10.17       Property Concession (English Translation)+
  10.18       Amended and Restated Membership Agreement, dated as of
              August 21, 1998 among Loral SatMex Ltd., Ediciones Enigma,
              S.A. de C.V. and Firmamento Mexicano, S. de R.L. de C.V.+
     12       Computation of Deficiency of Earnings to Cover Fixed
              Charges*.
</TABLE>
 
------------------------------
 # Portions of Exhibit omitted pursuant to an application for confidential
   treatment.
 + Incorporated by reference from registrant's Registration Statement on Form
   S-4 filed on November 9, 1998 (File No. 333-8880).
 * Filed herewith.
 
                                   SIGNATURES
 
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
 
                                          SATELITES MEXICANOS, S.A. de C.V.
 
                                          By: /s/ CYNTHIA PELINI
                                            ------------------------------------
                                            Cynthia Pelini
                                            Chief Financial Officer
 
Date: May 19, 1999
 
                                       33
<PAGE>   36
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
SATELITES MEXICANOS, S.A. DE C.V.:
Report of Independent Accountants...........................  F-2
Balance Sheets as of December 31, 1998 and 1997.............  F-3
Statements of Operations for the year ended December 31,
  1998 and the period November 17, 1997 to December 31, 1997. F-4
Statements of Changes in Stockholders' Equity for the year
  ended December 31, 1998 and the period November 17, 1997 
  to December 31, 1997......................................  F-5
Statements of Cash Flows for the year ended December 31,
  1998 and the period November 17, 1997 to December 31, 1997. F-6
Notes to the Financial Statements...........................  F-7
TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
  (PREDECESSOR COMPANY):
Report of Independent Accountants...........................  F-19
Balance Sheet as of December 31, 1996.......................  F-20
Results of Operations for the year ended December 31, 1996
  and the period January 1, 1997 to November 16, 1997.......  F-21
Statements of Changes in Investment/Equity for the year
  ended December 31, 1996 and the period January 1, 1997 
  to November 16, 1997......................................  F-22
Statements of Cash Flows for the year ended December 31,
  1996 and the period January 1, 1997 to November 16, 1997..  F-23
Notes to Financial Statements...............................  F-24
</TABLE>
 
                                       F-1
<PAGE>   37
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Stockholders and Board of Directors
of Satelites Mexicanos, S.A. de C.V.
 
     In our opinion, the accompanying balance sheets, statements of operations,
changes in stockholders' equity and cash flows presents fairly, in all material
respects, the financial position of Satelites Mexicanos, S.A. de C.V. (a
subsidiary of Servicios Corporativos Satelitales, S.A. de C.V.) as of December
31, 1998 and 1997 and for the year ended December 31, 1998 and the period
November 17, 1997 to December 31, 1997, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
 
PricewaterhouseCoopers
 
Mexico City
March 29, 1999
 
                                       F-2
<PAGE>   38
 
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                                 BALANCE SHEETS
                        AS OF DECEMBER 31, 1998 AND 1997
                      (Amounts in thousands of US dollars)
 
<TABLE>
<CAPTION>
                                                                 1998          1997
                                                              ----------    ----------
<S>                                                           <C>           <C>
                                 ASSETS
Current assets:
  Cash and cash equivalents.................................  $   11,883    $   24,144
  Interest reserve account..................................       9,765        25,000
  Accounts receivable.......................................       7,062         4,451
  Due from related parties..................................       1,954         3,339
  Prepaid insurance.........................................      26,673         8,550
                                                              ----------    ----------
          Total current assets..............................      57,337        65,484
Satellites and equipment, net...............................     557,456       394,820
Concessions, net............................................     502,237       549,581
Deferred financing costs, net...............................      12,911        15,404
Other assets................................................         303           306
Deferred income tax assets..................................       7,720         9,500
                                                              ----------    ----------
          Total assets......................................  $1,137,964    $1,035,095
                                                              ==========    ==========
                  LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current maturities of long-term debt......................  $   36,000    $    1,000
  Accounts payable and accrued expenses.....................      38,714         5,945
  Interest payable..........................................      13,770           329
  Deferred income tax liabilities...........................       3,810         3,431
  Due to related parties....................................         822           247
                                                              ----------    ----------
          Total current liabilities.........................      93,116        10,952
Deferred revenue............................................      85,535        87,735
Long-term debt..............................................     608,000       569,000
                                                              ----------    ----------
          Total liabilities.................................     786,651       667,687
                                                              ----------    ----------
Commitments and contingencies (Note 9)
 
Stockholders' equity:
  Capital stock.............................................     379,403       371,848
  Accumulated deficit.......................................     (28,090)       (4,440)
                                                              ----------    ----------
          Total stockholders' equity........................     351,313       367,408
                                                              ----------    ----------
          Total liabilities and stockholders' equity........  $1,137,964    $1,035,095
                                                              ==========    ==========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
                                       F-3
<PAGE>   39
 
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                            STATEMENTS OF OPERATIONS
              FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD
                     NOVEMBER 17, 1997 TO DECEMBER 31, 1997
                      (Amounts in thousands of US dollars)
 
<TABLE>
<CAPTION>
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Revenue.....................................................  $104,779    $ 12,893
                                                              --------    --------
Operating expenses:
  Satellite operations......................................    14,946       1,928
  Selling and administrative expenses.......................     8,178         860
  License and management fees...............................        86         247
  Depreciation and amortization of concessions..............    48,728       5,843
                                                              --------    --------
                                                                71,938       8,878
                                                              --------    --------
Operating income............................................    32,841       4,015
Interest income.............................................     2,604
Interest expense and amortization of deferred financing
  costs.....................................................   (52,119)    (14,792)
Net foreign exchange gain (loss)............................      (532)      8,774
                                                              --------    --------
Loss before income taxes, minority interest and
  extraordinary item........................................   (17,206)     (2,003)
Deferred income tax provision...............................      (931)     (1,711)
                                                              --------    --------
Loss before minority interest and extraordinary item........   (18,137)     (3,714)
Minority interest...........................................                  (726)
Extraordinary loss from extinguishment of debt, net of
  income tax benefit of $2,840..............................    (5,513)
                                                              --------    --------
Net loss....................................................  $(23,650)   $ (4,440)
                                                              ========    ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
                                       F-4
<PAGE>   40
 
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD
                     NOVEMBER 17, 1997 TO DECEMBER 31, 1997
                      (Amounts in thousands of US dollars)
 
<TABLE>
<CAPTION>
                                               NUMBER OF
                                             COMMON SHARES    CAPITAL     ACCUMULATED
                                              OUTSTANDING      STOCK        DEFICIT       TOTAL
                                             -------------    --------    -----------    --------
<S>                                          <C>              <C>         <C>            <C>
Issuance of capital stock..................    7,500,000      $141,134                   $141,134
Capital stock contribution of Government in
  exchange for 25% of the Company's common
  stock upon the merger....................    2,500,000       145,425                    145,425
Effect of push down of additional
  contribution paid to Government by
  shareholders.............................                     85,289                     85,289
Net loss...................................                                $ (4,440)       (4,440)
                                              ----------      --------     --------      --------
Balance at December 31, 1997...............   10,000,000       371,848       (4,440)      367,408
Finalization of fair value of assets
  contributed by the Government upon the
  merger...................................                      7,555                      7,555
Net loss...................................                                 (23,650)      (23,650)
                                              ----------      --------     --------      --------
Balance at December 31, 1998...............   10,000,000      $379,403     $(28,090)     $351,313
                                              ==========      ========     ========      ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-5
<PAGE>   41
 
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                            STATEMENTS OF CASH FLOWS
              FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD
                     NOVEMBER 17, 1997 TO DECEMBER 31, 1997
                      (Amounts in thousands of US dollars)
 
<TABLE>
<CAPTION>
                                                                1998         1997
                                                              ---------    ---------
<S>                                                           <C>          <C>
OPERATING ACTIVITIES
Net loss....................................................  $ (23,650)   $  (4,440)
Items not requiring cash:
  Depreciation and amortization of concessions..............     48,728        5,843
  Amortization of deferred financing costs..................      5,423
  Extraordinary item........................................      5,513
  Deferred income tax provision.............................        931        1,711
  Minority interest.........................................                     726
Changes in assets and liabilities:
  Accounts receivable.......................................     (2,611)       3,496
  Prepaid insurance.........................................    (18,123)      (8,313)
  Accounts payable and accrued expenses.....................     32,769        4,558
  Interest payable..........................................     13,441
  Due from/to related parties...............................      1,960
  Deferred revenue..........................................     (2,200)        (265)
  Deferred financing costs and other assets.................    (11,402)     (15,710)
                                                              ---------    ---------
Cash flow provided by (used in) operating activities........     50,779      (12,394)
                                                              ---------    ---------
INVESTING ACTIVITIES
Acquisition of equipment and advances
  for construction of satellite.............................   (152,275)      (3,031)
Investment in subsidiary, net of cash acquired of $194......                (646,565)
                                                              ---------    ---------
Cash flow used in investing activities......................   (152,275)    (649,596)
                                                              ---------    ---------
FINANCING ACTIVITIES
Proceeds from issuance of senior secured notes..............    325,000
Proceeds from issuance of fixed rate notes..................    320,000
Repayment of senior secured notes...........................     (1,000)
Interest reserve account....................................     15,235      (25,000)
Proceeds from bank loans....................................                 627,500
Repayment of bank loans.....................................   (570,000)     (57,500)
Capital contributions.......................................                 141,134
                                                              ---------    ---------
Cash flow provided by financing activities..................     89,235      686,134
                                                              ---------    ---------
Increase (decrease) in cash and cash equivalents............    (12,261)      24,144
Cash and cash equivalents at beginning of period............     24,144
                                                              ---------    ---------
Cash and cash equivalents at end of period..................  $  11,883    $  24,144
                                                              =========    =========
Supplemental disclosure:
  Interest paid ............................................  $  49,851    $  10,924
                                                              =========    =========
  Income taxes paid.........................................  $      --    $      --
                                                              =========    =========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
                                       F-6
<PAGE>   42
 
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                       NOTES TO THE FINANCIAL STATEMENTS
                  (Monetary amounts expressed in U.S. dollars)
 
 1.  ACTIVITY AND FORMATION OF THE COMPANY
 
     Satelites Mexicanos, S.A. de C.V. ("Satmex") owns and operates three
geosynchronous communications satellites, Solidaridad 1, Solidaridad 2 and
Satmex 5. Satmex also owns another satellite, Morelos 2, which is in an inclined
orbit. Satmex operates in one segment and is the leading provider of fixed
satellite services ("FSS") to broadcasting and telecommunications customers in
Mexico. Satmex has landing rights to provide broadcasting and telecommunications
transmission capacity in the United States, Canada and 20 nations and
territories in the Latin American region.
 
     In June 1995, the Constitution of Mexico was amended to establish the legal
framework for the privatization of certain FSS assets and operations of
Telecomunicaciones de Mexico, ("Telecomm"), an agency of the government of
Mexico (the "Government"). On June 26, 1997, the Government formed Satmex for
the purpose of completing the privatization of Telecomm's FSS business. The FSS
business was operated by Telecomm through October 14, 1997 and thereafter by
Satmex. On October 15, 1997, the Government sold Satmex certain assets of
Telecomm, based on historical cost, for $405.0 million plus $63.0 million of
value added tax. The assets consisted principally of three in-orbit satellites,
one satellite under construction and equipment located at two satellite control
facilities.
 
     Effective October 15, 1997, the Government sold Satmex the rights to three
20-year concession titles (the "Concessions"), to operate in the three orbital
slots currently occupied by Satmex's satellites (Solidarid 1 -- 109.2 degrees
W.L., Solidarid 2 -- 113.0 degrees W.L. and Satmex 5 -- 116.8 degrees W.L.) for
$504.4 million plus $75.7 million of value added tax. The Concessions are
renewable on certain conditions for an additional 20 years at no additional
cost. Since the Concessions were transferred between commonly controlled
entities, the assets were recorded at historical cost which was zero. The
Concessions require Satmex to reserve certain capacity on each satellite for use
by the Government. The Concessions also include the right to use the land and
buildings on which the satellite control centers are located, for an annual rent
equal to 7.5% of appraised value. A deferred tax asset of $171.5 million was
recorded by Satmex relating to the estimated deferred tax benefits from the
transfer of the Concessions from the Government.
 
     On October 30, 1997, Loral Space & Communications Ltd. (together with its
subsidiaries "Loral") and Principia, S.A. de C.V., ("Principia") formerly
Telefonica Autrey S.A. de C.V. (collectively "the Sponsors"), were awarded the
right to acquire 75% of the issued and outstanding capital stock of Satmex for
$646.8 million.
 
     On November 12, 1997, the Sponsors formed Corporativo Satelites Mexicanos,
S.A. de C.V. ("Acquisition Sub"), a wholly owned subsidiary of Firmamento
Mexicano, S. de R. L. de C.V. ("Holdings"), to effect the acquisition of Satmex.
Holdings contributed $141.1 million in cash to Acquisition Sub for the initial
installment payment of the purchase price.
 
     On November 17, 1997, Acquisition Sub completed the acquisition of the 75%
interest in Satmex ("the Acquisition"). On December 29, 1997, Acquisition Sub
merged with and into Satmex ("the Merger"). There were no operations of
Acquisition Sub prior to the Acquisition.
 
     The financial statements of Satmex for the period November 17, 1997 to
December 31, 1997 reflect the results of operations for that period and include
the effect of the Acquisition and the Merger.
 
  THE ACQUISITION
 
     The Acquisition was made pursuant to the terms of a stock purchase
agreement entered into on November 17, 1997 between the Government and
Acquisition Sub for a purchase price of $646.8 million payable in two
installments. On November 17, 1997, $194.0 million was paid in cash using equity
 
                                       F-7
<PAGE>   43
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                 NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
 
contributions of $141.1 million and $52.5 million obtained through an interim
unsecured credit facility. The final installment, including interest, of $466.1
million was paid on December 29, 1997 using cash received from additional
borrowings (see Note 6).
 
     The Acquisition has been accounted for as a purchase. The excess of the
purchase price over net assets acquired has been calculated as follows (in
thousands):
 
<TABLE>
<S>                                                     <C>          <C>
Purchase price........................................               $646,759
                                                                     ========
Estimated fair value of Satmex at November 16, 1997...  $ 625,289
                                                        =========
Estimated fair value of net assets acquired (75%).....  $ 468,967
Fair market value allocated to the Concessions........    375,345
Deferred revenue associated with reserve capacity.....    (88,000)
Deferred tax adjustment...............................   (109,553)
                                                        ---------
Total fair value......................................               $646,759
                                                                     ========
</TABLE>
 
     In connection with the Acquisition, the Company is required to provide the
Government, at no charge, approximately 7% of its available transponder capacity
for the duration of the Concessions. In 1998, the Company completed its
valuation of this obligation and the financial statements reflect $88 million
recorded as deferred revenue and an increase in the value of the Concessions by
the same amount. This obligation is being recognized over 40 years as an
increase in revenues and a corresponding increase in amortization expense.
Amortization of deferred revenue for the year ended December 31, 1998 and the
period November 17, 1997 to December 31, 1997 was $2.2 million and $265,000
respectively.
 
     The following unaudited pro forma financial information for the year ended
December 31, 1997 assumes the Acquisition occurred on January 1, 1997 and gives
effect to certain adjustments, including depreciation and amortization of the
assets acquired based on their fair value, increased interest expense, minority
interest for the effect of the merger and the related income tax effects (in
thousands):
 
<TABLE>
<S>                                                           <C>
Net revenue.................................................  $107,255
Net loss....................................................    16,799
</TABLE>
 
  THE MERGER
 
     On December 15, 1997, the stockholders of Satmex agreed to merge
Acquisition Sub with and into Satmex effective December 29, 1997. The merger
between Satmex and Acquisition Sub has been accounted for as a purchase from the
Government of its minority interest in Satmex in exchange for a 25% interest in
Acquisition Sub and additional consideration in the form of a debt obligation.
The minority interest attributable to the Government's 25% interest in Satmex at
December 29, 1997 ($146.1 million based on the net book value of Satmex at
December 29, 1997), was contributed by the Government in exchange for 25% of the
common stock of the Company. In 1998, as a result of the final allocation of the
purchase price, the Company determined that the fair value of the net assets
contributed by the Government at the Merger exceeded book value by $7.6 million,
net of $4.1 million of deferred income taxes.
 
     The debt obligation was issued by Servicios Corporativos Satelitales, S.A.
de C.V. ("Servicios"), the parent company of Acquisition Sub, in the form of a
6.03% obligation to the Mexican Government (the "Government Obligation") due in
seven years. The principal amount of the Government Obligation of $125.1 million
has been discounted to its estimated fair value of $85.3 million using a 12%
interest rate, which the Company believes represents the fair market rate for
similar instruments. Affiliates of the Sponsors have pledged their interest in
Holdings as collateral for this obligation. Since Servicios owns 100% of the
voting
 
                                       F-8
<PAGE>   44
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                 NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
 
shares of the Company, the balance sheet reflects the push down of this
additional consideration paid by Servicios as a deemed equity contribution and
additional value of the Concessions of $129.2 million and the related deferred
tax impact of $43.9 million. Servicios will be dependent upon dividends from
Satmex to make all or part of the interest and principal payment on the
Government Obligation.
 
     The Company believes that the value associated with the effect of the
Merger and the additional consideration paid to the Government approximates the
fair value of the 25% interest acquired from the minority interest.
 
 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Basis of presentation
 
     The Company's financial statements are presented in US dollars and have
been prepared using accounting principles generally accepted in the United
States of America.
 
  Functional currency and translation
 
     The Company maintains its books and records in Mexican pesos. The
functional currency of the Company is the US dollar. Monetary assets and
liabilities denominated in pesos are translated into US dollars using current
exchange rates. Non-monetary assets and liabilities originally denominated in
pesos are translated into US dollars using the historical exchange rate at the
date of the transaction. Capital stock is translated at historical exchange
rates.
 
  Use of estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from these estimates. Significant estimates include the
estimated useful lives of the Company's satellites and deferred income taxes.
 
  Cash and cash equivalents
 
     Cash and cash equivalents represent investments in short-term deposits and
commercial paper with banks which have original maturities of ninety days or
less.
 
  Fixed assets
 
     Fixed assets are stated at historical cost except for the Solidaridad 1 and
Solidaridad 2 satellites which are recorded at fair market value as of December
29, 1997. Depreciation expense is calculated on the straight-line method over
the estimated useful lives of the related assets. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life of the
improvements.
 
     The estimated useful lives of the Company's fixed assets are:
 
<TABLE>
<S>                                                <C>
Solidaridad 1....................................    14 years
Solidaridad 2....................................  14.5 years
Satmex 5.........................................    21 years
Equipment........................................     9 years
Furniture and fixtures...........................    10 years
</TABLE>
 
     Solidaridad 1 and Solidaridad 2 are being depreciated over their estimated
useful lives commencing on their in-orbit service dates of December 12, 1993 and
November 11, 1994, respectively. Satmex 5 will be
 
                                       F-9
<PAGE>   45
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                 NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
 
depreciated over 21 years commencing on its in-service date of January 22, 1999.
The estimated useful lives of the satellites were determined by engineering
analyses performed at the in-orbit service dates. Morelos 2 was fully
depreciated at June 30, 1998.
 
     Costs incurred in connection with the construction and successful
deployment of the Company's satellites and related equipment are capitalized.
Such costs include direct contract costs, allocated indirect costs, launch
costs, launch insurance, and construction period interest. Capitalized interest
related to the construction of Satmex 5 was $20.5 million and $2.9 million for
the year ended December 31, 1998 and for the period November 17, 1997 to
December 31, 1997, respectively. All capitalized satellite costs are being
amortized over the estimated useful life of the satellite. Losses from in-orbit
satellite failures, net of insurance proceeds, will be recorded in the period
when the loss occurs.
 
     Except for the Company's in-orbit satellites, all the Company's long-lived
assets are located in Mexico.
 
  Concessions
 
     Concessions consist of the following:
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         --------------------
                                                           1998        1997
                                                         --------    --------
                                                            (IN THOUSANDS)
<S>                                                      <C>         <C>
Balance at beginning of period.........................  $550,831
Allocation of purchase price...........................   (34,624)   $322,215
Additional value assigned as a result of the Government
  Obligation...........................................               129,226
Deferred taxes not realizable due to the Merger........                 9,246
Value of deferred revenue relating to transponder
  capacity.............................................                88,000
Other purchase accounting adjustments..................                 2,144
                                                         --------    --------
                                                          516,207     550,831
Accumulated amortization...............................   (13,970)     (1,250)
                                                         --------    --------
                                                         $502,237    $549,581
                                                         ========    ========
</TABLE>
 
     The Concessions are being amortized over 40 years. Amortization expense was
$12.7 million and $1.3 million for the year ended December 31, 1998 and the
period November 17, 1997 to December 31, 1997, respectively.
 
  Deferred financing costs
 
     Deferred financing costs are being amortized over the period of the related
debt (see Note 6). Amortization expense for the year ended December 31, 1998 was
$5.4 million.
 
  Valuation of long-lived assets
 
     The carrying value of the Company's long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that an asset
may not be recoverable. Current and future profitability, as well as current and
future undiscounted cash flows, excluding financing costs, are primary
indicators of recoverability.
 
  Labor benefits, indemnification payments and other benefits plans
 
     As a legal commercial entity in Mexico the Company accrues, in the year in
which service is rendered, seniority premiums to which its employees are
entitled upon termination of employment after fifteen years of
                                      F-10
<PAGE>   46
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                 NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
 
service. Employees who transferred from Telecomm did not receive any credit for
prior service. The obligation for seniority premiums at December 31, 1998 and
1997 was not significant.
 
     The Company has no obligation for post-retirement health care insurance or
other benefits.
 
  Income tax
 
     The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 Accounting for Income Taxes ("SFAS 109"),
which requires an asset and liability approach for accounting and reporting for
income taxes.
 
  Revenue recognition
 
     Satmex provides satellite capacity under service agreements for periods
ranging from one year to ten years. Revenue is recognized when service is
provided.
 
  Comprehensive income
 
     Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130").
During the periods presented, the Company had no changes in equity from
transactions or other events and circumstances from non-owner sources.
Accordingly, a statement of comprehensive loss has not been provided as
comprehensive loss equals net loss for all periods presented.
 
  Financial instruments
 
     The estimated fair value of the Company's financial instruments has been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop estimates of fair value.
 
     The carrying value of cash and cash equivalents, accounts receivable, and
accounts payable is a reasonable estimate of their fair value.
 
     The fair value at December 31, 1998, of the Company's senior secured notes
and fixed rate notes based on quoted market prices was $265.6 million and $312.0
million, respectively.
 
  Foreign exchange forward contracts
 
     The Company uses foreign exchange forward contracts to hedge the Company's
net monetary liabilities in foreign currencies. Gains and losses from the
contracts are included in the component "Net foreign exchange gain (loss)" in
the Statements of Operations. No such contracts were outstanding at December 31,
1998 and 1997.
 
  Concentration of credit risk and principal customers
 
     Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company's cash and cash equivalents are maintained
with high-credit-quality financial institutions. The Company's customers are the
Mexican government and large and mid-sized corporations. The creditworthiness of
such institutions is generally substantial. As the Company expands its
operations, it has added customers in emerging markets or customers that are in
the development stage. Management believes that its credit evaluation, approval
and monitoring processes mitigate potential credit risks.
 
                                      F-11
<PAGE>   47
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                 NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
 
     Revenue from Corporacion de Radio y T.V. del Norte de Mexico, S.A. de C.V.
("Televisa") and Telecomm represented 29% and 5%, respectively of total revenues
for the year ended December 31, 1998 and 43% and 40%, respectively of total
revenues for the period November 17, 1997 to December 31, 1997.
 
     Approximately 89% and 95% of the Company's revenues for the year ended
December 31, 1998 and for the period November 17, 1997 to December 31, 1997,
respectively, were generated from customers in Mexico.
 
  Value added tax
 
     The Company collects value added tax based on revenues from its customers.
Value added taxes previously paid for the acquisition of assets or operating
expenses may be offset against value added tax collected from customers.
 
     In connection with the privatization of Telecomm's FSS business the Company
recorded a receivable of $138.7 million for recoverable value added tax on the
purchase of the assets and Concessions from Telecomm. The Company also assumed
the Mexican Government's value added tax liability of $138.7 million which
resulted from the sale of the assets and Concessions of Telecomm. In November
1997, the Company offset the recoverable value added tax against the value added
tax liability.
 
  New accounting pronouncements
 
     In June 1998, the Financial Accounting Standards Board issued Statement No.
133 Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company has not yet determined the impact that the
adoption of SFAS 133 will have on its earnings or financial position. The
Company is required to adopt SFAS 133 on January 1, 2000.
 
  Reclassifications
 
     Certain reclassifications have been made to conform prior year amounts to
the current year's presentation.
 
3.  ACCOUNTS RECEIVABLE
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         --------------------
                                                           1998        1997
                                                         --------    --------
                                                            (IN THOUSANDS)
<S>                                                      <C>         <C>
Customers..............................................    $5,799      $4,079
Value added tax recoverable............................     1,291           2
Other..................................................       594         370
Allowance for uncollectible accounts...................      (622)
                                                         --------    --------
                                                           $7,062      $4,451
                                                         ========    ========
</TABLE>
 
                                      F-12
<PAGE>   48
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                 NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
 
4.  SATELLITES AND EQUIPMENT
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         --------------------
                                                           1998        1997
                                                         --------    --------
                                                            (IN THOUSANDS)
<S>                                                      <C>         <C>
Satellites.............................................  $340,112    $293,743
Equipment..............................................    23,077      21,011
Furniture and fixtures.................................     2,643       2,028
Leasehold improvements.................................     1,784
Construction in progress...............................                 1,923
Advances for construction and launch of Satmex 5.......   234,142      84,409
                                                         --------    --------
                                                          601,758     403,114
Accumulated depreciation...............................   (44,302)     (8,294)
                                                         --------    --------
                                                         $557,456    $394,820
                                                         ========    ========
</TABLE>
 
     Depreciation expense for the year ended December 31, 1998 and the period
November 17, 1997 to December 31, 1997 was $36.0 million and $4.6 million,
respectively.
 
     On December 5, 1998, Satmex 5 was successfully launched into orbit and was
placed into service on January 22, 1999.
 
5.  BALANCES AND TRANSACTIONS WITH RELATED PARTIES
 
     The Company had the following amounts due from and payable to related
parties:
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           ------------------
                                                            1998        1997
                                                           ------      ------
                                                             (IN THOUSANDS)
<S>                                                        <C>         <C>
ACCOUNTS RECEIVABLE:
Holdings.................................................  $   61
Servicios................................................     101
Principia................................................     422
Mexican government agencies..............................   1,370      $3,339
                                                           ------      ------
                                                           $1,954      $3,339
                                                           ======      ======
ACCOUNTS PAYABLE:
Loral....................................................  $  726      $  190
Principia................................................      96          57
                                                           ------      ------
                                                           $  822      $  247
                                                           ======      ======
</TABLE>
 
                                      F-13
<PAGE>   49
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                 NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
 
     Transactions with related parties are as follows:
 
  Revenue
 
     Revenue from related parties, primarily the Mexican Government, amounted to
$8.9 million and $7.1 million for the year ended December 31, 1998 and the
period November 17, 1997 to December 31, 1997, respectively.
 
  Management fee
 
     Loral and Principia are responsible for managing the Company. Loral and
Principia receive a management fee, based on a sliding scale, up to a maximum of
3.75% of the Company's quarterly gross revenues. For the year ended December 31,
1998 and the period November 17, 1997 to December 31, 1997, the management fee
was $276,000 and $57,000, respectively.
 
  License fee
 
     Loral has licensed certain intellectual property to the Company for an
annual fee of 1.5% of the Company's gross revenues. For the period November 17,
1997 to December 31, 1997, the fees amounted to $190,000. In 1998 Loral and the
Company agreed to delay the commencement of such fees until January 1, 1999,
because the intellectual property and related services to which the fees relate
were not expected to be implemented until the beginning of 1999, when Satmex 5
was placed in service. Fees accrued in the prior period were reversed in 1998.
 
  Rent
 
     The equipment in the satellite control centers is owned by the Company,
while the buildings and land that house these centers are property of the
Government. The Company pays rent to the Government for the use of the
buildings. For the year ended December 31, 1998 the rent expense under this
agreement was $262,000.
 
     For the year ended December 31, 1998, the Company paid $252,000 to an
affiliate of Principia for the rental of office space.
 
  Guarantee arrangements
 
     In connection with the loan agreements (see Note 6), Holdings and Servicios
have provided and continue to provide guarantees on behalf of the Company.
 
                                      F-14
<PAGE>   50
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                 NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
 
 6.  DEBT
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         --------------------
                                                           1998        1997
                                                         --------    --------
                                                            (IN THOUSANDS)
<S>                                                      <C>         <C>
Senior secured notes (9.03% at December 31, 1998)......  $324,000
Fixed rate notes.......................................   320,000
Bridge notes...........................................              $295,000
Term loans under credit facility.......................               275,000
                                                         --------    --------
Total debt.............................................   644,000     570,000
Less, current maturities...............................    36,000       1,000
                                                         --------    --------
                                                         $608,000    $569,000
                                                         ========    ========
</TABLE>
 
     On December 29, 1997, in connection with the purchase of Satmex, the
Company entered into a $475 million senior secured credit facility (the "Credit
Facility") and the Company issued $295 million of senior unsecured increasing
rate notes (the "Bridge Notes") to finance the remainder of the purchase price.
 
     On February 2, 1998, the Bridge Notes were repaid with a portion of the
proceeds from the issuance of the Company's $320 million 10.125% fixed rate
notes due 2004 (the "Fixed Rate Notes").
 
     On February 23, 1998, the Credit Facility was amended to provide a $310
million term loan and a $50 million five year revolving credit facility. The
revolving credit facility bears interest, at the Company's option, at rates
based on margins over LIBOR or the base rate specified in the credit agreement.
The Company pays a commitment fee on the unused portion of these facilities. On
March 2, 1998, the $310 million term loan was refinanced with $325 million of
senior secured floating rate notes due 2004 (the "Senior Secured Notes"). The
Senior Secured Notes rank senior in right of payment to all subordinated debt of
Company and pari passu in right of payment to all senior indebtedness of the
Company including the Credit Facility and the Fixed Rate Notes. The Senior
Secured Notes bear interest, at the Company's option, at rates based on LIBOR or
the base rate specified in the credit agreement, are redeemable at the option of
the Company and are secured equally and ratably with the Credit Facility by
substantially all of the assets of the Company. In addition, the Senior Secured
Notes and the Credit Facility are guaranteed by Holdings and Servicios.
 
     The Fixed Rate Notes are unsecured and rank senior in right of payment to
all subordinated debt of the Company and pari passu in right of payment to all
senior debt of the Company, including the Credit Facility and the Senior Secured
Notes.
 
     Both the Credit Facility and the Senior Secured Notes contain covenants
which require maintenance of certain quarterly financial and operating ratio
levels. In addition, the Credit Facility and Senior Secured Notes contain
limitations on indebtedness, capital expenditures, business combinations and
other customary restrictions.
 
                                      F-15
<PAGE>   51
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                 NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
 
     As a result of the refinancing of the debt, the Company recorded an
extraordinary charge of $8.3 million less an applicable income tax benefit of
$2.8 million. The extraordinary charge consisted of the write-off of unamortized
financing costs.
 
     On March 1, 1999, the Company notified the holders of the Senior Secured
Notes that the Company will prepay $35 million principal amount of the Senior
Secured Notes on March 31, 1999.
 
     The aggregate maturities for total debt are as follows:
 
<TABLE>
<S>                                                           <C>
1999........................................................  $ 36,000
2000........................................................     1,000
2001........................................................     1,000
2002........................................................     1,000
2003........................................................     1,000
Thereafter..................................................   604,000
                                                              --------
                                                              $644,000
                                                              ========
</TABLE>
 
     On November 17, 1997 the Company entered into a $57.5 million demand loan
agreement. Such funds were used to pay the first installment of the purchase
price. The loan was repaid on December 29, 1997.
 
     The Company was required to maintain an interest reserve account, in the
initial amount of $25 million. The interest reserve account was restricted to
pay interest on the Senior Secured Notes. The Senior Secured Notes require
semi-annual interest payments beginning August 1, 1998. The interest reserve
account paid the first semi-annual interest payment of $15.2 million and paid
approximately one half of the second semi-annual interest payment on February 1,
1999.
 
 7.  STOCKHOLDERS' EQUITY
 
     At December 31, 1998 and 1997 the Company's issued and outstanding capital
stock was variable, with a fixed portion represented by 50 shares and an
unlimited maximum.
 
     On November 17, 1997, the Company increased the authorized number of shares
to 1,170,050.
 
     On December 15, 1997, the stockholders agreed to:
          a. merge the Company with Acquisition Sub effective with the payment
     of the final installment to the Government;
          b. not modify Satmex's capital stock structure; and to
          c. exchange 1,170,050 Acquisition Sub shares for 10,000,000 shares
     comprised of shares with voting rights (Series "A" and "B") and restricted
     voting rights (Series "N").
 
     At December 31, 1998 and 1997 the authorized and outstanding common shares
of the Company consisted of the following:
 
<TABLE>
<CAPTION>
SERIES                                               SHARES
------                                             ----------
<S>                                                <C>
 A...............................................   2,601,000
 B...............................................   2,499,000
 N...............................................   4,900,000
                                                   ----------
                                                   10,000,000
                                                   ==========
</TABLE>
 
                                      F-16
<PAGE>   52
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                 NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
 
     At December 31, 1998 and 1997 the capital stock and the notional value is
as follows:
 
<TABLE>
<CAPTION>
                                             NUMBER
               DESCRIPTION                   SHARES        1998        1997
               -----------                 ----------    --------    --------
                                                            (IN THOUSANDS)
<S>                                        <C>           <C>         <C>
Fixed portion............................          50    $      6    $      6
Variable portion.........................   9,999,950     379,397     371,842
                                           ----------    --------    --------
                                           10,000,000    $379,403    $371,848
                                           ==========    ========    ========
</TABLE>
 
     In accordance with Mexican tax law any capital reduction is subject to
income tax payable by the Company equal to 53.85% of the portion of capital
stock exceeding contributions.
 
     Series A shares have full voting rights and can only be acquired by Mexican
individuals, Mexican corporations or irrevocable trusts. These shares are
divided into Class I (minimum fixed capital) and Class II (variable capital)
shares. Series B shares have full voting rights and may be acquired by Mexican
or foreign investors. The series B shares can be converted into series A shares
based on conditions approved by a vote of the stockholders. These shares are
divided into Class I (minimum fixed capital) and Class II (variable capital)
shares. Series N shares contain restricted voting and limited corporate rights
and may not represent more than 49% of the total common shares issued. These
shares may be acquired by Mexican and foreign investors and represent variable
capital.
 
 8.  INCOME TAXES
 
     The income tax provision for the year ended December 31, 1998 and the
period November 17, 1997 to December 31, 1997 is as follows:
 
<TABLE>
<CAPTION>
                                                           1998        1997
                                                         --------    --------
                                                            (IN THOUSANDS)
<S>                                                      <C>         <C>
Deferred...............................................  $    931    $  1,711
                                                         --------    --------
Net income tax provision...............................  $    931    $  1,711
                                                         ========    ========
</TABLE>
 
     The provision for income taxes for the year ended December 31, 1998
excludes a deferred tax benefit of $2.8 million related to the extraordinary
charge on the debt refinancing (see Note 6). The net deferred tax asset at
December 31, 1998 increased by $200,000 for the change to the Mexican statutory
rate from 34% to 35% which was signed into law on December 31, 1998 to be
effective January 1, 1999.
 
     The components of the net deferred income tax assets are as follows:
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         --------------------
                                                           1998        1997
                                                         --------    --------
                                                            (IN THOUSANDS)
<S>                                                      <C>         <C>
Satellites and equipment...............................  $(78,050)   $ (1,198)
Concessions............................................   (29,221)     10,910
Deferred financing costs...............................    (3,796)     (5,114)
Prepaid insurance......................................   (10,563)     (3,431)
Deferred revenue.......................................    29,937
Tax loss carryforwards.................................    95,061       4,902
Other, net.............................................       542
                                                         --------    --------
Net deferred tax assets................................  $  3,910    $  6,069
                                                         ========    ========
</TABLE>
 
                                      F-17
<PAGE>   53
                       SATELITES MEXICANOS, S.A. DE C.V.
        (SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
 
                 NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
 
     The net deferred income tax assets is classified as follows:
 
<TABLE>
<CAPTION>
                                                           1998        1997
                                                         --------    --------
                                                            (IN THOUSANDS)
<S>                                                      <C>         <C>
Current deferred income tax liabilities................  $ (3,810)   $ (3,431)
                                                         ========    ========
Long-term deferred income tax assets...................  $  7,720    $  9,500
                                                         ========    ========
</TABLE>
 
     At December 31, 1998 the Company had tax loss carryforwards of
approximately $271.6 million which expire from 2007 to 2008.
 
     The provision for income taxes, for the year ended December 31, 1998 and
the period November 17, 1997 to December 31, 1997 differs from the amount
computed by applying the Mexican income tax rate because of the effect of the
following items:
 
<TABLE>
<CAPTION>
                                                           1998        1997
                                                         --------    --------
                                                            (IN THOUSANDS)
<S>                                                      <C>         <C>
Tax benefit at Mexican statutory income
  tax rate (34%).......................................  $ (5,850)   $   (681)
Inflation component and effect of remeasurement........     6,298
Non deductible expenses................................        53         134
Valuation allowance....................................                 1,853
Other..................................................       430         405
                                                         --------    --------
Net income tax provision...............................  $    931    $  1,711
                                                         ========    ========
</TABLE>
 
     The Mexican asset tax law provides for a minimum tax of 1.8% on average
assets, less certain liabilities, which is payable when the asset tax is greater
than amounts due for income taxes. For the year ended December 31, 1998,
available credits offset any asset tax liability.
 
     As a result of the Merger, certain deferred tax assets, principally tax
loss carryforwards net of a valuation allowance, amounting to $6.1 million,
which existed prior to the Merger are no longer available. The Company has
reflected the loss of these deferred tax assets as additional purchase price.
 
9.  COMMITMENTS AND CONTINGENCIES
 
     The Company leases office space under a noncancelable operating lease
expiring in May 2005. The monthly rent, including maintenance, is approximately
$91,000. Rent expense under this lease was $599,000 for the year ended December
31, 1998.
 
     Management is not aware of any pending litigation against the Company.
Liability for all legal actions or other claims against Satmex prior to October
15, 1997 has been retained by the Government.
 
10.  SUBSEQUENT EVENTS
 
  Televisa Contract
 
     On March 30, 1999, the Company executed a commitment letter with Televisa
to renew Televisa's service for 12 Ku-band transponders on Solidaridad 2 through
December 2001. The Company expects to finalize a contract with Televisa in the
second quarter of 1999.
 
  Preferred Stock
 
     On March 30, 1999, the Company issued 606,730 shares of preferred stock to
Loral and Principia for a total purchase price of approximately $31.9 million.
The preferred stock has limited voting rights and pays a dividend in common
stock of the Company. The preferred stock can be exchanged at the Company's
option into common stock of the Company, at an exchange ratio of 1 share of
preferred stock for 2.0008 shares of common stock if the exchange occurs before
February 2, 2005, and at an exchange ratio of 1 share of preferred stock for
4.0016 shares of common stock on and after February 2, 2005.
 
                                      F-18
<PAGE>   54
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors of
Satelites Mexicanos, S.A. de C.V.
 
     In our opinion, the accompanying balance sheet, statements of operations,
of changes in Telecomm's investment and of cash flows present fairly, in all
material respects, the financial position, the results of operations, changes in
Telecomm's investment and cash flows of the fixed satellite service business of
Telecomunicaciones de Mexico ("Telecomm") (the Predecessor Company of Satelites
Mexicanos, S.A. de C.V.) as of December 31, 1996 and for the year ended December
31, 1996 and for the period from January 1, 1997 through November 16, 1997, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of Telecomm's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
 
PRICE WATERHOUSE
 
Mexico City
December 15, 1997
 
                                      F-19
<PAGE>   55
 
             TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
 
                                 BALANCE SHEET
                            AS OF DECEMBER 31, 1996
                                    (Note 1)
                      (Amounts in thousands of US dollars)
 
<TABLE>
<S>                                                           <C>
ASSETS
Current assets:
  Accounts receivable (Note 3)..............................  $  8,054
  Prepaid insurance.........................................     7,254
                                                              --------
Total current assets........................................    15,308
Satellites and equipment (Note 4)...........................   361,493
                                                              --------
          Total assets......................................  $376,801
                                                              ========
LIABILITIES AND TELECOMM INVESTMENT
Current liabilities:
  Accounts payable..........................................  $  7,299
                                                              --------
Total current liabilities...................................     7,299
                                                              --------
Commitments and contingencies (Note 6)
Telecomm investment.........................................   369,502
                                                              --------
          Total liabilities and Telecomm investment.........  $376,801
                                                              ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-20
<PAGE>   56
 
             TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
 
                             RESULTS OF OPERATIONS
                                    (Note 1)
                      (Amounts in thousands of US dollars)
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED        FOR THE PERIOD
                                                              DECEMBER 31,      JANUARY 1, 1997
                                                                  1996        TO NOVEMBER 16, 1997
                                                              ------------    --------------------
<S>                                                           <C>             <C>
Revenues....................................................    $78,207             $93,351
                                                                -------             -------
Operating expenses:
  Separation bonuses and employment costs related to
     privatization of SatMex (Note 2).......................    $ 1,004             $ 4,762
  Personnel costs...........................................      2,932               4,120
  Materials and supplies....................................        483                 248
  General and administrative expenses.......................      2,862               2,739
  Depreciation and amortization.............................     34,953              30,854
  Insurance.................................................     10,720               8,690
  Miscellaneous expenses....................................      1,323                 282
  Provision for uncollectible accounts......................      1,761              (3,046)
  Assessment paid to the Mexican Government (Note 5)........      4,535               4,809
                                                                -------             -------
                                                                 60,573              53,458
                                                                -------             -------
Operating income............................................     17,634              39,893
Interest expense............................................                            (24)
Foreign exchange gain (loss)................................        140                (278)
                                                                -------             -------
Income before income tax....................................     17,774              39,591
Income tax..................................................                          1,543
                                                                -------             -------
Net income..................................................    $17,774             $38,048
                                                                =======             =======
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-21
<PAGE>   57
 
             TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
 
                 STATEMENTS OF CHANGES IN TELECOMM'S INVESTMENT
                                    (Note 7)
                      (Amounts in thousands of US dollars)
 
<TABLE>
<CAPTION>
                                                                                 PERIOD FROM
                                                               YEAR ENDED     JANUARY 1, 1997 TO
                                                              DECEMBER 31,       NOVEMBER 16,
                                                                  1996               1997
                                                              ------------    ------------------
<S>                                                           <C>             <C>
Net investment by Telecomm at beginning of period...........    $397,530           $369,502
Net advances to Telecomm....................................     (45,802)              (258)
Net income during the period................................      17,774             35,712(1)
                                                                --------           --------
Net investment by Telecomm at end of period.................    $369,502
                                                                ========
Net assets contributed to SatMex............................                        404,956
Deferred tax asset resulting from contribution of
  concessions...............................................                        171,498
Net income during period....................................                          2,336(2)
Issuance of common stock....................................                              6
                                                                                   --------
Shareholder's equity of SatMex at end of period.............                       $578,796
                                                                                   ========
</TABLE>
 
------------------------------
(1) For the period January 1, 1997 to October 14, 1997.
 
(2) For the period October 15, 1997 to November 16, 1997.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-22
<PAGE>   58
 
             TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
 
                            STATEMENTS OF CASH FLOWS
                      (Amounts in thousands of US dollars)
 
<TABLE>
<CAPTION>
                                                                              FOR THE PERIOD FROM
                                                               YEAR ENDED     JANUARY 1, 1997 TO
                                                              DECEMBER 31,       NOVEMBER 16,
                                                                  1996               1997
                                                              ------------    -------------------
<S>                                                           <C>             <C>
OPERATING ACTIVITIES
Net income..................................................    $ 17,774           $ 38,048
Items not requiring cash:
  Depreciation and amortization.............................      34,953             30,854
  Provision for uncollectible accounts......................       1,761             (3,046)
(Increase) decrease in working capital components:
  Accounts receivable.......................................      (2,033)              (188)
  Prepaid insurance.........................................         682              4,982
  Accounts payable and accrued expenses.....................       3,279             (4,294)
                                                                --------           --------
Cash provided by operating activities.......................      56,416             66,356
                                                                --------           --------
INVESTMENT ACTIVITIES
Acquisition of equipment and advances for construction and
  launch of satellite.......................................     (10,614)           (65,909)
                                                                --------           --------
Cash used in investing activities...........................     (10,614)           (65,909)
                                                                --------           --------
FINANCING ACTIVITIES
Net advances to Telecomm....................................     (45,802)              (258)
Issuance of capital stock...................................                              6
                                                                --------           --------
Cash used in financing activities...........................     (45,802)              (252)
                                                                --------           --------
Net change in cash and cash equivalents.....................          --                195
Cash and cash equivalents at beginning of period............          --                 --
                                                                --------           --------
Cash and cash equivalents at end of period..................    $     --           $    195
                                                                ========           ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-23
<PAGE>   59
 
             TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
 
                         NOTES TO FINANCIAL STATEMENTS
 
                  (Monetary amounts expressed in thousands of
                       US dollars, except share amounts)
 
NOTE 1--HISTORY AND ACTIVITY OF TELECOMM FSS
 
     In June 1995, the Constitution of Mexico was amended to establish the legal
framework for the privatization of certain fixed satellite services ("FSS")
assets and operations of Telecomunicaciones de Mexico, ("Telecomm"), a
wholly-owned subsidiary of the Mexican Government ("Telecomm FSS"). On June 26,
1997 the Mexican Government formed Satelites Mexicanos, S.A. de C.V. ("SatMex")
for the purpose of completing the privatization process.
 
     SatMex was formed by the Government for the purpose of completing the
privatization of the FSS business operated by Telecomm through October 14, 1997
and thereafter by SatMex.
 
     On October 15, 1997, the Government sold SatMex certain net assets of
Telecomm based on historical cost for $404,956 plus $63,003 of value added tax.
The net assets consisted principally of three satellites, one satellite under
construction and equipment located at two ground control facilities.
 
     Effective October 15, 1997, the Government sold SatMex the rights to a
20-year concession title (the "Concession"), for $504,400 plus $75,661 of value
added tax, renewable on certain conditions for an additional 20 years thereafter
at no additional cost, to operate in the three orbital slots occupied by
Telecomm FSS satellites at their associated C- and Ku-Band frequencies. Since
the Concession was transferred between commonly controlled entities the assets
were recorded at its historical cost. SatMex has allowed the Government to
retain the L-Band transponders and has reserved certain capacity on each
satellite for use by the Government. The Concession also includes the right to
use the buildings and areas in which the control centers are located, for the
purpose of exploiting the orbital slots and frequency assignments for an annual
rental equivalent to 7.5% of their appraised value.
 
     The accompanying results of operations and statement of cash flows reflect
the operations of Telecomm's FSS business for the year ended December 31, 1996
and the combined results of operations and statement of cash flows of Telecomm's
FSS and SatMex's activities for the period January 1, 1997 to November 16, 1997.
The combined results of operations and statement of cash flows consists of the
results of operations and cash flows of Telecomm's FSS business for the period
from January 1, 1997 through October 14, 1997 and the results of operations and
cash flows for the period from October 15, 1997 through November 16, 1997 when
such activities were assumed by SatMex (hereafter referred to as the FSS
financial statements).
 
     The revenues and direct and indirect expenses related to the FSS business
for the year ended December 31, 1996 and for the period January 1, 1997 to
October 14, 1997 were carved out of the accounting records of Telecomm. Indirect
costs incurred by Telecomm on behalf of the FSS business were allocated based on
internally prepared utilization studies. Telecomm's management believes that the
basis of allocation of such services is reasonable. All expenses applicable to
Telecomm FSS on a stand-alone basis have been included in the accompanying
financial statements.
 
     On October 30, 1997, a joint venture formed by Loral Space & Communications
Ltd. ("Loral") and Telefonica Autrey, S.A. de C.V. ("Telefonica Autrey") agreed
to acquire 75% of the issued and outstanding capital stock of SatMex from the
Mexican Government (the "Government"). On November 17, 1997 the Government sold
75% of its economic interest, representing 100% of the voting interest in SatMex
to a subsidiary ("Acquisition Sub") of the joint venture. On December 29, 1997,
Acquisition Sub merged with and into SatMex.
 
NOTE 2--BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
     The accompanying FSS financial statements are presented in U.S. dollars
following generally accepted accounting principles in the United States of
America.
 
                                      F-24
<PAGE>   60
             TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
     The significant accounting policies are summarized below:
 
     a. Functional currency and translation--
 
     Telecomm FSS is required to maintain its books and records in Mexican pesos
("pesos"). The functional currency of Telecomm FSS is the U.S. dollar, the
currency in which the Telecomm FSS sales contracts are denominated and in which
Telecomm FSS incurs a significant portion of its expenses and acquires its fixed
assets.
 
     Monetary assets and liabilities denominated in pesos are translated into
U.S. dollars using current exchange rates. The difference between the exchange
rate on the date of the transaction and the exchange rate on settlement date, or
balance sheet date if not settled, is included in the income statement as a
foreign exchange gain/loss.
 
     Non-monetary assets or liabilities originally denominated in pesos are
translated into U.S. dollars using the historical exchange rate at the date of
the transaction.
 
     b. Use of estimates--
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from these estimates.
 
     c. Cash equivalents--
 
     Cash equivalents represent investments in short-term deposits and
commercial paper with banks which have original maturities of ninety days or
less.
 
     d. Fixed assets--
 
     Fixed assets, principally satellites and advances for construction and
launching of a new satellite, are stated at historical cost, net of
depreciation. Equipment, furniture and fixtures were stated at appraised values
determined by a Mexican Government appraiser as of September 30, 1997.
Management believes that such values represent the net historical cost of these
assets. Depreciation expense for the periods presented was determined based on
management's estimates. The estimated useful lives of furniture and fixtures,
communications equipment and computing equipment are approximately 10, 9 and 4
years, respectively.
 
     Costs incurred in connection with the construction and successful
deployment of the Telecomm FSS satellites and related equipment are capitalized.
Such costs include direct contract costs, allocated indirect costs, launch
costs, launch insurance, and construction period interest. All capitalized
satellite costs will be amortized over the estimated useful life of the
satellite. The estimated useful lives of the satellites, as determined by an
independent engineering analysis are; Morelos II -- August 1998, Solidaridad
I -- December 2007 and Solidarid II -- June 2009. Losses from unsuccessful
launches and in-orbit failures of satellites, net of insurance proceeds, will be
recorded in the period when the loss occurs.
 
     e. Depreciation--
 
     Depreciation of satellites, machinery and equipment is computed by the
straight-line method, based on the estimated useful lives of the related assets.
 
     f. Separation bonuses--
 
     In preparation for the privatization, Telecomm FSS transferred 220
employees to SatMex. In connection with the transfer Telecomm FSS negotiated and
paid separation bonuses with the employees who transferred amounting to $4,012.
Employees who did not transfer to SatMex were assigned other responsibilities
within Telecomm. Personnel costs related to employees retained by Telecomm were
$1,004 and $750 for the year ended December 31, 1996 and the period January 1,
1997 to November 16, 1997, respectively.
 
                                      F-25
<PAGE>   61
             TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
     g. Revenue recognition--
 
     Revenue is recorded when the satellite service is provided. Telecomm FSS
has provided FSS to the teleports business unit of Telecomm amounting to $3,696
in the year ended December 31, 1996 and $2,772 in the nine months ended
September 30, 1997. Effective November 1, 1997 these services will be invoiced
by SatMex to Telecomm on a monthly basis, for a minimum of $180 per month
through December 31, 1997. It is expected this contract will be renewed by the
Government on an annual basis beginning January 1, 1998. In addition, SatMex
will invoice Telecomm $40 per month for control services related to L-Band
transponders retained by Telecomm.
 
     Historically, Telecomm FSS has provided satellite services to the
Government with substantial discounts. Revenues for these services have been
included in the results of operations for the year ended December 31, 1996 and
the period January 1, 1997 to November 16, 1997, net of such discounts.
 
     In connection with the privatization SatMex has agreed to provide certain
agencies of the Mexican Government with access to a portion of its available
transponder capacity (the "reserve capacity"), representing approximately 181.44
MHz in C-band and 151.20 megahertz in Ku-band of its currently available
capacity, at no cost. The capacity will be utilized by various Government
agencies such as the Defense and Education Ministries which currently receive
100% discounts on services provided.
 
     h. Principal customer--
 
     Revenue from one customer represented 28% of total revenues for the nine
months ended September 30, 1997. No individual customer represented more than
10% of total revenues for the year ended December 31, 1996.
 
NOTE 3--ACCOUNTS RECEIVABLE
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                                  1996
                                                              ------------
<S>                                                           <C>
Trade accounts receivable...................................   $  21,683
Allowance for uncollectible accounts........................     (13,629)
                                                               ---------
                                                               $   8,054
                                                               =========
</TABLE>
 
NOTE 4--SATELLITES AND EQUIPMENT
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                                  1996
                                                              ------------
<S>                                                           <C>
Satellites..................................................   $ 448,193
Equipment...................................................      23,038
Furniture and fixtures......................................         603
Accumulated depreciation....................................    (130,331)
                                                               ---------
                                                                 341,503
Construction in process.....................................       4,995
Advances for the construction and launch of the SatMex 5
  satellite.................................................      14,995
                                                               ---------
                                                               $ 361,493
                                                               =========
</TABLE>
 
     Payments amounting to $81,500 have been made to Hughes Communications
International, Inc. and Arianespace for the construction and launch of a new
satellite (SatMex 5) to replace the Morelos II satellite, which completes its
useful life in 1998. The estimated cost of the project, including launch and
insurance, is approximately $224,400. The launch is scheduled for late 1998.
 
                                      F-26
<PAGE>   62
             TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 5--TAX MATTERS
 
     Historically, income of Telecomm FSS from telecommunication services via
satellite was subject to the payment to the Government of an assessment
equivalent to 5.8% of total monthly revenues.
 
     SatMex as an independent legal commercial entity will not be subject to the
5.8% assessment but will be subject to the payment of income tax or asset tax at
the statutory rates of 34% and 1.8%, respectively.
 
     Income tax is determined following interperiod allocation procedures under
the liability method. Under this method, deferred income taxes are recognized
for the estimated future tax effects attributable to temporary differences and
tax loss and tax credit carryforwards. Pro forma income tax expense, assuming
Telecomm FSS had operated as a commercial entity for the year ended December 31,
1996 and the period January 1, 1997 to November 16, 1997 would have been $7,585
and $15,096, respectively.
 
     At October 15, 1997 a deferred tax asset was recognized related to the
estimated future tax benefits from the Concession transferred to SatMex of
$171,498. The amounts paid by SatMex for the Concessions are deductible for
income tax purposes over a six and a half year period. As a new corporate entity
SatMex will be exempt from asset tax through December 31, 2000.
 
NOTE 6--STOCKHOLDERS' EQUITY
 
     During special shareholder meetings on October 17 and 27, 1997, SatMex
increased the authorized number of shares to 10,000,000 and approved the
capitalization of $576,454 of the notes payable to the Government in exchange
for the issuance of 9,995,000 common shares.
 
     At November 16, 1997, as a result of the above mentioned modifications to
SatMex's capital structure, the authorized and outstanding common shares
consisted of the following:
 
<TABLE>
<CAPTION>
SERIES                                                       SHARES
------                                                     ----------
<S>                                                        <C>
A........................................................   2,601,000
B........................................................   2,499,000
N........................................................   4,900,000
                                                           ----------
                                                           10,000,000
                                                           ==========
</TABLE>
 
     The principal difference in the series of shares relates to shares with
voting rights (Series "A" and "B") and restricted voting rights (Series "N").
 
NOTE 7--COMMITMENTS AND CONTINGENCIES
 
     Management is not aware of any pending litigation against Telecomm FSS.
Liability for all legal actions or other claims against Telecomm FSS or SatMex
prior to October 15, 1997 has been retained by the Government.
 
                                      F-27
<PAGE>   63
 
                       SATELITES MEXICANOS, S.A. DE C.V.
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
 
             ANALYSIS OF CHANGES IN ALLOWANCE FOR DOUBTFUL ACCOUNTS
                      (AMOUNTS IN THOUSANDS OF US DOLLARS)
 
<TABLE>
<CAPTION>
                                          BALANCE                                                  BALANCE
                                        BEGINNING OF                                              AT END OF
                ENTITY                     PERIOD       PROVISIONS    WRITE OFFS    RECOVERIES     PERIOD
                ------                  ------------    ----------    ----------    ----------    ---------
<S>                                     <C>             <C>           <C>           <C>           <C>
Telecomm FSS
  1996................................    $11,868          1,761                                   $13,629
  1997................................     13,629         (3,046)       (1,037)                      9,546(1)
Satmex
  1997................................         --(1)                                                    --(2)
Acquisition Sub(2)
  1997................................         --(3)                                                    --(4)
Satmex
  1998................................         --(4)         622                                       622(5)
</TABLE>
 
------------------------------
 
(1) Balance at October 14, 1997
 
(2) Acquisition Sub merged into Satmex effective December 29, 1997, see Note 1
    to the financial statements of Satelites Mexicanos, S.A. de C.V. (Satmex)
 
(3) Balance at November 17, 1997 (commencement of operations)
 
(4) Balance at December 31, 1997
 
(5) Balance at December 31, 1998
 
                                       S-1