<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                            ------------------------

                                   FORM 10-Q

            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

                         COMMISSION FILE NUMBER 1-14180

                       LORAL SPACE & COMMUNICATIONS LTD.

                         c/o LORAL SPACECOM CORPORATION
                                600 THIRD AVENUE
                            NEW YORK, NEW YORK 10016
                           TELEPHONE: (212) 697-1105

                     JURISDICTION OF INCORPORATION: BERMUDA

                     IRS IDENTIFICATION NUMBER: 13-3867424

     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 and
has been subject to such filing requirements for the past 90 days.

     As of April 30, 2001, there were 331,881,925 shares of Loral Space &
Communications Ltd. common stock outstanding.

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<PAGE>   2

                                    PART 1.

                             FINANCIAL INFORMATION

                       LORAL SPACE & COMMUNICATIONS LTD.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                                    MARCH 31,
                                                              ---------------------
                                                                2001        2000
                                                              --------    ---------
<S>                                                           <C>         <C>
Revenues from satellite sales...............................  $147,822    $ 222,584
Revenues from satellite services............................   113,313       95,502
                                                              --------    ---------
     Total revenues.........................................   261,135      318,086
Cost of satellite sales.....................................   127,055      190,974
Cost of satellite services..................................    75,505       78,829
Selling, general and administrative expenses................    54,651       54,262
                                                              --------    ---------
Operating income (loss).....................................     3,924       (5,979)
Interest and investment income..............................     7,669       29,239
Interest expense............................................   (49,693)     (43,316)
Gain on investment..........................................                 15,157
                                                              --------    ---------
Loss before income taxes, equity in net loss of affiliates,
  minority interest and cumulative effect of change in
  accounting principle......................................   (38,100)      (4,899)
Income tax benefit (expense)................................     1,925      (10,262)
                                                              --------    ---------
Loss before equity in net loss of affiliates, minority
  interest and cumulative effect of change in accounting
  principle.................................................   (36,175)     (15,161)
Equity in net loss of affiliates, net of tax benefits.......   (22,354)    (108,389)
Minority interest, net of taxes.............................     1,261          520
                                                              --------    ---------
Loss before cumulative effect of change in accounting
  principle.................................................   (57,268)    (123,030)
Cumulative effect of change in accounting principle, net of
  taxes (Note 10)...........................................    (1,741)
                                                              --------    ---------
Net loss....................................................   (59,009)    (123,030)
Preferred dividends.........................................   (16,123)     (19,357)
                                                              --------    ---------
Net loss applicable to common stockholders..................  $(75,132)   $(142,387)
                                                              ========    =========
Basic and diluted loss per share............................  $  (0.25)   $   (0.49)
                                                              ========    =========
Weighted average shares outstanding:
  Basic and diluted.........................................   298,656      293,282
                                                              ========    =========
</TABLE>

           See notes to condensed consolidated financial statements.
                                        1
<PAGE>   3

                       LORAL SPACE & COMMUNICATIONS LTD.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                               MARCH 31,     DECEMBER 31,
                                                                 2001            2000
                                                              -----------    ------------
                                                              (UNAUDITED)       (NOTE)
<S>                                                           <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $   216,846    $   394,045
  Accounts receivable, net..................................       54,119         56,347
  Contracts-in-process......................................      186,372        180,868
  Inventories...............................................      135,821        120,608
  Other current assets......................................      101,173         79,713
                                                              -----------    -----------
    Total current assets....................................      694,331        831,581
Property, plant and equipment, net..........................    1,966,434      1,944,815
Cost in excess of net assets acquired, net..................      912,049        918,826
Long-term receivables.......................................      152,696        145,504
Investments in and advances to affiliates...................      229,267        251,658
Deposits....................................................      147,490        161,790
Deferred tax assets.........................................      296,035        293,142
Other assets................................................      130,817        131,002
                                                              -----------    -----------
                                                              $ 4,529,119    $ 4,678,318
                                                              ===========    ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term debt.........................  $   107,935    $   110,715
  Accounts payable..........................................      116,584        139,104
  Accrued employment costs..................................       46,233         45,271
  Customer advances.........................................       58,238         70,866
  Accrued interest and preferred dividends..................       30,539         51,645
  Other current liabilities.................................       44,117         45,049
  Income taxes payable......................................       32,096         31,904
                                                              -----------    -----------
    Total current liabilities...............................      435,742        494,554
Pension and other postretirement liabilities................       53,500         51,619
Long-term liabilities.......................................      183,526        180,275
Long-term debt..............................................    2,330,263      2,346,129
Minority interest...........................................       18,027         19,353
Commitments and contingencies (Note 8)
Shareholders' equity:
  Series A convertible preferred stock, $.01 par value......
  Series B preferred stock, $.01 par value..................
  6% Series C convertible redeemable preferred stock
    ($674,893 redemption value), $.01 par value.............      665,761        665,809
  6% Series D convertible redeemable preferred stock
    ($400,000 redemption value), $.01 par value.............      388,172        388,204
  Common stock, $.01 par value..............................        2,997          2,983
  Paid-in capital...........................................    2,453,455      2,448,519
  Treasury stock............................................       (3,360)        (3,360)
  Unearned compensation.....................................         (101)          (148)
  Retained deficit..........................................   (2,021,639)    (1,946,507)
  Accumulated other comprehensive income....................       22,776         30,888
                                                              -----------    -----------
    Total shareholders' equity..............................    1,508,061      1,586,388
                                                              -----------    -----------
                                                              $ 4,529,119    $ 4,678,318
                                                              ===========    ===========
</TABLE>

---------------
NOTE: The December 31, 2000 balance sheet has been derived from the audited
      consolidated financial statements at that date.

           See notes to condensed consolidated financial statements.
                                        2
<PAGE>   4

                       LORAL SPACE & COMMUNICATIONS LTD.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                                                    MARCH 31,
                                                              ----------------------
                                                                2001         2000
                                                              ---------    ---------
<S>                                                           <C>          <C>
Operating activities:
  Net loss..................................................  $ (59,009)   $(123,030)
  Non-cash items:
    Equity in net loss of affiliates, net of taxes..........     22,354      108,389
    Minority interest, net of taxes.........................     (1,261)        (520)
    Cumulative effect of change in accounting principle, net
     of taxes...............................................      1,741
    Deferred taxes..........................................     (2,239)       5,367
    Non-cash interest expense...............................      9,903        9,827
    Depreciation and amortization...........................     54,287       53,107
    Non-cash interest and investment income.................                 (10,170)
    Gain on investment......................................                 (15,157)
  Change in operating assets and liabilities:
    Accounts receivable.....................................      2,228      (20,012)
    Contracts-in-process....................................    (16,218)      83,002
    Inventories.............................................    (15,213)      (6,248)
    Long-term receivables...................................     (7,192)      (5,436)
    Deposits................................................     14,300       16,980
    Other current assets and other assets...................     (7,496)       4,754
    Accounts payable........................................    (22,520)    (130,878)
    Accrued expenses and other current liabilities..........    (21,076)      (4,903)
    Customer advances.......................................    (12,628)     (35,706)
    Income taxes payable....................................        192        4,254
    Long-term liabilities...................................      5,133       10,360
    Other...................................................        677          614
                                                              ---------    ---------
Net cash used in operating activities.......................    (54,037)     (55,406)
                                                              ---------    ---------
Investing activities:
  Investments in and advances to affiliates.................    (16,216)     (20,655)
  Proceeds from sale of investment..........................                  16,341
  Capital expenditures......................................    (67,144)    (215,771)
  Use and transfer of restricted and segregated cash........                 162,109
                                                              ---------    ---------
Net cash used in investing activities.......................    (83,360)     (57,976)
                                                              ---------    ---------
Financing activities:
  Proceeds from issuance of 6% Series D preferred stock,
    net.....................................................                 388,000
  Borrowings under revolving credit facility................     50,000
  Repayments under term loans...............................    (28,000)     (18,750)
  Repayments under revolving credit facility................    (50,000)
  Repayments of other long-term obligations.................       (549)      (1,242)
  Proceeds from other stock issuances.......................      4,870        9,686
  Preferred dividends.......................................    (16,123)     (13,475)
                                                              ---------    ---------
Net cash (used in) provided by financing activities.........    (39,802)     364,219
                                                              ---------    ---------
Increase (decrease) in cash and cash equivalents............   (177,199)     250,837
Cash and cash equivalents -- beginning of period............    394,045      239,865
                                                              ---------    ---------
Cash and cash equivalents -- end of period..................  $ 216,846    $ 490,702
                                                              =========    =========
Non-cash activities:
  Unrealized gains (losses) on available-for-sale
    securities, net of taxes................................  $ (10,111)   $  36,333
                                                              =========    =========
  Unrealized net gains on derivatives, net of taxes.........  $   2,476
                                                              =========
  Conversion of Series A Preferred Stock to common stock....               $     459
                                                                           =========
  Conversion of Series C Preferred Stock to common stock and
    related issuance of additional common shares on
    conversion..............................................               $  75,449
                                                                           =========
</TABLE>

           See notes to condensed consolidated financial statements.
                                        3
<PAGE>   5

                       LORAL SPACE & COMMUNICATIONS LTD.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1) ORGANIZATION AND PRINCIPAL BUSINESS

     Loral Space & Communications Ltd. together with its subsidiaries ("Loral"
or the "Company") is one of the world's leading satellite communications
companies with substantial activities in satellite manufacturing and
satellite-based communications services. Loral has assembled the building blocks
necessary to provide a seamless, global networking capability for the
information age. Loral is organized into three distinct operating businesses
(see Note 9):

          Fixed Satellite Services ("FSS"):  Leasing transponder capacity to
     customers for various applications, including broadcasting, news gathering,
     Internet access and transmission, private voice and data networks, business
     television, distance learning and direct-to-home television ("DTH"),
     through the activities of Loral Skynet, Loral CyberStar, Inc. ("Loral
     CyberStar"), Loral Skynet do Brasil Ltda. ("Skynet do Brasil"), Satelites
     Mexicanos, S.A. de C.V. ("Satmex") and Europe*Star Limited ("Europe*Star");

          Satellite Manufacturing and Technology:  Designing and manufacturing
     satellites and space systems and developing satellite technology for a
     broad variety of customers and applications through Space Systems/Loral,
     Inc. ("SS/L"); and

          Data Services:  Providing managed communications networks and Internet
     and intranet services through Loral CyberStar and delivering high-speed
     broadband data communications and business television services through
     CyberStar, L.P. ("CyberStar LP").

2) BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules of the Securities and Exchange Commission
("SEC") and, in the opinion of the Company, include all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of results of
operations, financial position and cash flows as of and for the periods
presented. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the U.S. have been condensed or omitted pursuant to such SEC rules.
The Company believes that the disclosures made are adequate to keep the
information presented from being misleading. The results of operations for the
three months ended March 31, 2001, are not necessarily indicative of the results
to be expected for the full year. It is suggested that these financial
statements be read in conjunction with the audited consolidated financial
statements and notes thereto of Loral included in Loral's latest Annual Report
on Form 10-K.

  Reclassifications

     Certain reclassifications have been made to conform prior period amounts to
the current period presentation.

                                        4
<PAGE>   6
                       LORAL SPACE & COMMUNICATIONS LTD.

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3) COMPREHENSIVE LOSS

     The components of comprehensive loss for the three months ended March 31,
2001 and 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                2001        2000
                                                              --------    ---------
<S>                                                           <C>         <C>
Net loss....................................................  $(59,009)   $(123,030)
Cumulative translation adjustment...........................      (476)        (319)
Unrealized net gains on derivatives, net of taxes (see Note
  10).......................................................     2,476
Unrealized gains (losses) on available-for-sale securities,
  net of taxes..............................................   (10,111)      36,333
Less: realized gain on available-for-sale securities
  included in net loss......................................                (15,157)
                                                              --------    ---------
Comprehensive loss..........................................  $(67,120)   $(102,173)
                                                              ========    =========
</TABLE>

4) CONTRACTS-IN-PROCESS

<TABLE>
<CAPTION>
                                                              MARCH 31,    DECEMBER 31,
                                                                2001           2000
                                                              ---------    ------------
                                                                   (IN THOUSANDS)
<S>                                                           <C>          <C>
U.S. government contracts:
  Amounts billed............................................  $ 11,498       $  8,285
  Unbilled receivables......................................     2,286          4,098
                                                              --------       --------
                                                                13,784         12,383
                                                              --------       --------
Commercial contracts:
  Amounts billed............................................    88,952         50,587
  Unbilled receivables......................................    83,636        117,898
                                                              --------       --------
                                                               172,588        168,485
                                                              --------       --------
                                                              $186,372       $180,868
                                                              ========       ========
</TABLE>

     Unbilled amounts include recoverable costs and accrued profit on progress
completed, which have not been billed. Such amounts are billed upon shipment of
the product, achievement of contractual milestones, or completion of the
contract and, at such time, are reclassified to billed receivables.

                                        5
<PAGE>   7
                       LORAL SPACE & COMMUNICATIONS LTD.

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5) INVESTMENTS IN AND ADVANCES TO AFFILIATES

     Investments in and Advances to Affiliates consist of (in thousands):

<TABLE>
<CAPTION>
                                                              MARCH 31,    DECEMBER 31,
                                                                2001           2000
                                                              ---------    ------------
<S>                                                           <C>          <C>
Globalstar:
  Acquired notes and loans ($588 million and $572 million
     principal and accrued interest as of March 31, 2001 and
     December 31, 2000, respectively).......................  $ 35,187       $ 50,267
  Vendor financing ($231 million and $229 million principal
     and accrued interest as of March 31, 2001 and December
     31, 2000, respectively)................................
Globalstar service provider partnerships equity investments
  and advances..............................................     8,302         11,400
Satmex equity investments...................................    81,089         84,290
Europe*Star equity investments and advances.................   103,581        104,593
Other affiliate equity investments..........................     1,108          1,108
                                                              --------       --------
                                                              $229,267       $251,658
                                                              ========       ========
</TABLE>

     In 2000, Loral's allocated share of Globalstar's losses and Globalstar's
impairment charges reduced Loral's investment in and advances to Globalstar to
zero. Accordingly, Loral has discontinued providing for its allocated share of
Globalstar's net losses beginning in 2001. The Company accounts for its
investment in Globalstar's $500 million credit facility at fair value, with
changes in the value (net of tax) recorded as a component of other comprehensive
income.

     Equity in net loss of affiliates consists of (in thousands):

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                                    MARCH 31,
                                                              ---------------------
                                                                2001        2000
                                                              --------    ---------
<S>                                                           <C>         <C>
Globalstar and Globalstar service provider partnerships, net
  of taxes..................................................  $(13,040)   $ (98,372)
Satmex......................................................    (3,216)      (8,221)
Europe*Star.................................................    (6,098)      (1,403)
Other affiliates, net of taxes..............................                   (393)
                                                              --------    ---------
                                                              $(22,354)   $(108,389)
                                                              ========    =========
</TABLE>

     The condensed consolidated statements of operations reflect the effects of
the following amounts related to transactions with or investments in affiliates
(in thousands):

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                                                  MARCH 31,
                                                              ------------------
                                                               2001       2000
                                                              -------    -------
<S>                                                           <C>        <C>
Revenues....................................................  $30,479    $41,430
Interest and investment income..............................      294     13,170
Interest expense capitalized on development stage
  enterprises...............................................               1,116
Elimination of Loral's proportionate share of intercompany
  profits...................................................      470      1,423
Amortization of excess carrying value, capitalized interest
  and intercompany profits related to investment in
  Globalstar................................................               7,733
</TABLE>

                                        6
<PAGE>   8
                       LORAL SPACE & COMMUNICATIONS LTD.

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5) INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)

     The following table represents the summary of results of operations of
certain of Loral's affiliates (in thousands):

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED MARCH 31,
                                               --------------------------------------------
                                                       2001                   2000
                                               --------------------   ---------------------
                                               GLOBALSTAR   SATMEX    GLOBALSTAR    SATMEX
                                               ----------   -------   ----------   --------
<S>                                            <C>          <C>       <C>          <C>
Sales........................................  $   1,509    $33,857   $     609    $ 32,315
Operating income (loss)......................    (44,661)    10,533    (135,230)      6,282
Net loss.....................................   (138,087)    (1,038)   (208,629)    (13,102)
Net loss applicable to common shareholders...                (1,415)                (13,479)
Net loss applicable to ordinary partnership
  interests..................................   (145,466)              (216,138)
</TABLE>

6) LONG TERM DEBT

<TABLE>
<CAPTION>
                                                             MARCH 31,     DECEMBER 31,
                                                                2001           2000
                                                             ----------    ------------
                                                                   (IN THOUSANDS)
<S>                                                          <C>           <C>
Term loan, 8.90% and 10.45% at March 31, 2001 and December
  31, 2000, respectively...................................  $  297,000     $  300,000
Revolver, 8.40% and 9.95% at March 31, 2001 and December
  31, 2000, respectively...................................     200,000        200,000
Term loan facility, 5.45% and 7.04% at March 31, 2001 and
  December 31, 2000 respectively...........................     150,000        175,000
Revolving credit facility, 5.45% and 7.04% at March 31,
  2001 and December 31, 2000, respectively.................     420,000        420,000
9.50% Senior notes due 2006................................     350,000        350,000
Export-Import credit facility..............................      10,726         10,726
Other......................................................         570            576
Non-recourse debt of Loral CyberStar:
  11.25% Senior notes due 2007 (principal amount $443
     million)..............................................     493,689        495,377
  12.50% Senior discount notes due 2007 (principal amount
     at maturity $484 million and accreted principal amount
     $440 million and $427 million at March 31, 2001 and
     December 31, 2000, respectively)......................     503,432        491,841
  Other....................................................      12,781         13,324
                                                             ----------     ----------
Total debt.................................................   2,438,198      2,456,844
Less, current maturities...................................     107,935        110,715
                                                             ----------     ----------
                                                             $2,330,263     $2,346,129
                                                             ==========     ==========
</TABLE>

7) LOSS PER SHARE

     Basic loss per share is computed based upon the weighted average number of
shares of common stock and the Series A Preferred Stock outstanding in 2000.
Diluted loss per share excludes the assumed conversion of the Company's Series C
Preferred Stock and the Series D Preferred Stock into shares of common stock, as
their effect would have been antidilutive for the three months ended March 31,
2001 and 2000. For the three months ended March 31, 2001 and 2000, weighted
options equating to approximately 1.6 million and 1.0 million shares of common
stock, respectively, as calculated using the treasury stock method, were
excluded from the calculation of diluted loss per share, as the effect would
have been antidilutive.

                                        7
<PAGE>   9
                       LORAL SPACE & COMMUNICATIONS LTD.

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7) LOSS PER SHARE -- (CONTINUED)
     The following table sets forth the computation of basic and diluted loss
per share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                                   MARCH 31,
                                                              --------------------
                                                                2001        2000
                                                              --------    --------
<S>                                                           <C>         <C>
Numerator:
  Loss before cumulative effect of change in accounting
     principle..............................................  $ 57,268    $123,030
  Cumulative effect of change in accounting principle, net
     of taxes...............................................     1,741
                                                              --------    --------
  Net loss..................................................    59,009     123,030
  Preferred dividends.......................................    16,123      19,357
                                                              --------    --------
  Numerator for basic and diluted loss per share -- net loss
     applicable to common stockholders......................  $ 75,132    $142,387
                                                              ========    ========
Denominator:
  Weighted average shares:
     Common stock...........................................   298,656     247,889
     Series A preferred stock...............................                45,393
                                                              --------    --------
  Denominator for basic and diluted loss per share..........   298,656     293,282
                                                              ========    ========
  Basic and diluted loss per share..........................  $   0.25    $   0.49
                                                              ========    ========
</TABLE>

     The cumulative effect of change in accounting principle did not affect the
Company's loss per share calculation (see Note 10).

     During the first quarter of 2000, all of the Company's Series A preferred
stock and 1.4 million shares of Series C preferred stock were converted into the
Company's common stock.

8) COMMITMENTS AND CONTINGENCIES

     In May 2000, Globalstar finalized $531.1 million of vendor financing
arrangements (including $31.1 million of capitalized interest as of May 2000)
with Qualcomm. The original terms of this vendor financing provided for interest
at 6%, a maturity date of August 15, 2003 and required repayment pro rata with
the term loans due to Loral under Globalstar's $500 million credit facility. As
of March 31, 2001, $564.7 million was outstanding under this facility (including
$64.7 million of capitalized interest).

     Loral has agreed that if the principal amount (excluding capitalized
interest of $64.7 million at March 31, 2001) outstanding under the Qualcomm
vendor financing facility exceeds the principal amount due Loral under
Globalstar's $500 million credit facility, as determined on certain measurement
dates, then Loral will guarantee 50% of such excess amount. As of March 31,
2001, Loral had no guarantee obligation.

     Loral Skynet has entered into prepaid leases and sales contracts relating
to transponders on its satellites. Under the terms of these agreements, Loral
Skynet continues to operate the satellites which carry the transponders and
provides a warranty for a period of 10 to 14 years, in the case of sales
contracts (twelve transponders), and the lease term, in the case of the prepaid
leases (six transponders). Depending on the contract, Loral Skynet may be
required to replace transponders which do not meet operating specifications. All
customers are entitled to a refund equal to the reimbursement value if there is
no replacement. In the case of the sales contracts, the reimbursement value is
based on the original purchase price plus an interest factor from the time the
payment was received to acceptance of the transponder by the customer, reduced
on a

                                        8
<PAGE>   10
                       LORAL SPACE & COMMUNICATIONS LTD.

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

straight-line basis over the warranty period. In the case of prepaid leases, the
reimbursement value is equal to the unamortized portion of the lease prepayment
made by the customer.

     Eleven of the satellites built by SS/L and launched since 1997, four of
which are owned and operated by Loral's subsidiaries or affiliates, have
experienced minor losses of power from their solar arrays. Although, to date,
neither the Company nor any of the customers using the affected satellites have
experienced any degradation in performance, there can be no assurance that one
or more of the affected satellites will not experience additional power loss
that could result in performance degradation, including loss of transponder
capacity. In the event of additional power loss, the extent of the performance
degradation, if any, will depend on numerous factors, including the amount of
the additional power loss, the level of redundancy built into the affected
satellite's design, when in the life of the affected satellite the loss occurred
and the number and type of use being made of transponders then in service. A
complete or partial loss of satellites could result in a loss of orbital
incentive payments and, in the case of satellites owned by Loral subsidiaries
and affiliates, a loss of revenues and profits. Losses of satellites owned by
Loral and its affiliates are fully insured. With respect to satellites under
construction and construction of new satellites, based on its investigation of
the matter, SS/L has identified and is implementing remedial measures that SS/L
believes will prevent newly launched satellites from experiencing similar
anomalies. SS/L does not expect that implementation of these measures will cause
delays in the launch of satellites under construction or construction of new
satellites. Based upon information currently available, including design
redundancies to accommodate small power losses and that no pattern has been
identified as to the timing or specific location within the solar arrays of the
failures, the Company believes that this matter will not have a material adverse
effect on the consolidated financial position or results of operations of Loral.

     In late 1998, following the launch of an SS/L-built satellite sold to
PanAmSat, a manufacturing error was discovered that affected the geographical
coverage of the Ku-band transponders on the satellite. On January 6, 2000,
PanAmSat filed an arbitration proceeding in connection with this error claiming
damages of $225 million for lost profits and increased sales and marketing
costs. SS/L believes it has meritorious defenses to the claim and that its
liability is limited to a loss of a portion of the applicable orbital
incentives, the estimated impact of which is included in Loral's consolidated
financial statements. PanAmSat has received a recovery from its insurance
carrier that should reduce any damage claim. Loral and PanAmSat have reached an
agreement in principle, subject to documentation, to settle this matter, and in
light of reserves provided, the Company believes that this matter will not have
a material adverse effect on the consolidated financial position or results of
operations of Loral.

     SS/L has an agreement with Alcatel Space Industries pursuant to which the
parties have agreed generally to operate as a team on satellite programs
worldwide. In addition, Alcatel Space has certain rights as a strategic partner
of SS/L for so long as it continues to hold at least 81.6% of the Loral
securities that it acquired in 1997 in exchange for SS/L stock that it
previously owned. Alcatel is permitted two representatives on SS/L's
seven-member board of directors, and certain actions require the approval of its
board representatives. Alcatel also has certain rights to purchase SS/L shares
at fair market value in the event of a change of control (as defined) of either
Loral or SS/L, including the right to use its Loral holdings as part of the SS/L
purchase price. These agreements are terminable upon one-year's notice by either
party, and SS/L gave the one-year notice to Alcatel on February 22, 2001.
Alcatel filed suit on March 16, 2001 in the United States District Court for the
Southern District of New York against Loral and SS/L alleging various breaches
of the agreements, seeking declaratory and injunctive relief to enforce its
rights thereunder and challenging the effectiveness of the termination. On April
26, 2001, the District Court issued its decision granting in part Alcatel's
motion for a preliminary injunction and granting the Company's motion to compel
arbitration. The District Court held that the issue of the termination of the
agreements is a matter that is to be decided in arbitration, as required by the
agreements. The arbitration has commenced. The District Court granted
                                        9
<PAGE>   11
                       LORAL SPACE & COMMUNICATIONS LTD.

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

Alcatel's request for a preliminary injunction requiring that the Company
continue to comply with the agreements pending resolution of the arbitration, or
the expiration of the agreements, whichever occurs earlier. The Company believes
that this matter will not have a material adverse effect on the consolidated
financial position or results of operations of Loral.

     SS/L was informed in 1998 that it was a target of a grand jury
investigation being conducted by the office of the U.S. Attorney for the
District of Columbia with respect to possible violations of export control laws
that may have occurred in connection with the participation of SS/L employees on
a committee formed in the wake of the 1996 crash of a Long March rocket in China
and whose purpose was to consider whether studies of the crash made by the
Chinese had correctly identified the cause of the failure. The Company is not in
a position to predict the direction or outcome of the investigation. If SS/L
were to be indicted and convicted of a criminal violation of the Arms Export
Control Act, it would be subject to a fine of $1 million per violation and could
be debarred from certain export privileges and, possibly, from participation in
government contracts. Since many of SS/L's satellites are built for foreign
customers and/or launched on foreign rockets, such a debarment would have a
material adverse effect on SS/L's business and, therefore, the Company.
Indictment for such violations would subject SS/L to discretionary debarment
from further export licenses. Under the applicable regulations, SS/L could be
debarred from export privileges without being convicted of any crime if it is
indicted for these alleged violations, and loss of export privileges would harm
SS/L's business. Whether or not SS/L is indicted or convicted, SS/L remains
subject to the State Department's general statutory authority to prohibit
exports of satellites and related services if it finds a violation of the Arms
Export Control Act that puts SS/L's reliability in question, and it can suspend
export privileges whenever it determines that grounds for debarment exist and
that such suspension "is reasonably necessary to protect world peace or the
security or foreign policy of the United States."

     As far as SS/L can determine, no sensitive information or technology was
conveyed to the Chinese, and no secret or classified information was discussed
with or reported to them. SS/L believes that its employees acted openly and in
good faith and that none engaged in intentional misconduct. Accordingly, the
Company does not believe that SS/L has committed a criminal violation of the
export control laws. The Company does not expect the grand jury investigation or
its outcome to result in a material adverse effect upon its business. However,
there can be no assurance as to these conclusions.

     On December 23, 1998, the Office of Defense Trade Controls, or ODTC, of the
U.S. Department of State temporarily suspended a previously approved technical
assistance agreement under which SS/L had been preparing for the launch of the
ChinaSat-8 satellite. According to ODTC, the purpose of the temporary suspension
was to permit that agency to review the agreement for conformity with then
newly-enacted legislation (Section 74 of the Arms Export Control Act) with
respect to the export of missile equipment and technology. In addition, SS/L was
required to re-apply for new export licenses from the State Department to permit
the launch of ChinaSat-8 on a Long March launch vehicle, when the old export
licenses issued by the Commerce Department, the agency that previously had
jurisdiction over satellite licensing, expired in March 2000. On January 4,
2001, the ODTC, while not rejecting these license applications, notified SS/L
that they were being returned without action. SS/L and the State Department are
now in discussions regarding SS/L's obtaining the approvals required for the
launch of ChinaSat-8.

     In December 1999, SS/L reached an agreement with ChinaSat to extend the
date for delivery of the ChinaSat-8 satellite to July 31, 2000. In return for
this extension and other modifications to the contract, SS/L provided to
ChinaSat two 36 MHz and one 54 MHz transponders on Telstar 10/Apstar IIR for
ChinaSat's use for the life of those transponders. As a result, SS/L recorded a
charge to earnings of $35 million in 1999. If ChinaSat were to terminate its
contract with SS/L as a result of these delays, SS/L may have to refund $134
million in advances received from ChinaSat and may incur penalties of up to $11
million

                                        10
<PAGE>   12
                       LORAL SPACE & COMMUNICATIONS LTD.

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

and believes it would incur costs of approximately $38 million to refurbish and
retrofit the satellite so that it could be sold to another customer, which
resale cannot be guaranteed. To the extent that SS/L is able to recover some or
all of its $52 million deposit payment on the Chinese launch vehicle, this
recovery would offset a portion of such payments. There can be no assurance,
however, that SS/L will be able either to obtain a refund from the launch
provider or to find a replacement customer for the Chinese launch vehicle.

     In March 1999, jurisdiction for satellite licensing was transferred from
the Commerce Department to the State Department and the State Department has
issued regulations relating to the export of and disclosure of technical
information related to, satellites and related equipment. It has been SS/L's
experience that obtaining licenses and technical assistance agreements under
these new regulations takes more time and is considerably more burdensome than
in the past. Delays in obtaining the necessary licenses and technical assistance
agreements may delay SS/L's performance on existing contracts, and, as a result,
SS/L may incur penalties or lose incentive payments under these contracts. In
addition, such delays may have an adverse effect on SS/L's ability to compete
against unregulated foreign satellite manufacturers for new satellite contracts.

     Under an agreement reached with Eutelsat, Loral CyberStar agreed to operate
Telstar 12, which was originally intended to operate at 12 degrees W.L., at 15
degrees W.L. while Eutelsat continued to develop its services at 12.5 degrees
W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot
and will assert its priority rights over such location on Loral CyberStar's
behalf. As part of this coordination effort, Loral CyberStar agreed to provide
to Eutelsat four transponders on Telstar 12 for the life of the satellite and
has retained risk of loss with respect to such transponders. Eutelsat also has
the right to acquire, at cost, four transponders on the next replacement
satellite for Telstar 12. As part of the international coordination process,
Loral continues to conduct discussions with various administrations regarding
Telstar 12's operations at 15 degrees W.L. If these discussions are not
successful, Telstar 12's useable capacity may be reduced.

     Loral holds debt obligations from Globalstar (see Note 5). In a bankruptcy
or restructuring proceeding involving Globalstar, challenges could be initiated
seeking subordination or recharacterization of the debt Loral holds from
Globalstar. While we know of no reason why such a claim would prevail with
respect to the debt Loral holds in Globalstar, there can be no assurance that
such claims will not be made in any restructuring or bankruptcy proceeding
involving Globalstar. Moreover, there can be no assurance that actions will not
be initiated in a Globalstar bankruptcy proceeding to characterize payments
previously made by Globalstar to Loral as preferential payments subject to
repayment. Loral also may be subject to other claims brought by Globalstar
creditors and securities holders, who may seek to impose liabilities on the
Company as a result of the Company's relationships with Globalstar. For example,
see Globalstar Related Matters below.

     The Company estimated the recovery of certain insurance proceeds in its
consolidated financial statements in connection with an insurance claim with its
insurance carrier and received the proceeds in May 2001.

     Globalstar Related Matters.  On February 28, 2001, plaintiff Eric Eismann
filed a purported class action complaint against Globalstar Telecommunications
Limited ("GTL") in the United States District Court for the Southern District of
New York. The other defendants named in the complaint are Loral Space &
Communications Ltd. and Bernard Schwartz. The complaint alleges that (a) GTL and
Mr. Schwartz violated Section 10(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Rule 10b-5 promulgated thereunder, by making material
misstatements or failing to state material facts about GTL's business and
prospects; and (b) that Loral and Mr. Schwartz are secondarily liable for these
alleged misstatements and omissions under Section 20(a) of the Exchange Act as
alleged "controlling persons" of GTL. The class of plaintiffs on whose behalf
this lawsuit has allegedly been asserted consists of all buyers of GTL common
stock from December 6, 1999 through October 27, 2000, excluding the defendants
and certain persons related or affiliated therewith (the "Excluded Persons").
                                        11
<PAGE>   13
                       LORAL SPACE & COMMUNICATIONS LTD.

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

     Eighteen additional purported class action complaints have been filed in
the United States District Court for the Southern District of New York by
plaintiffs Chaim Kraus, L.A. Murphy, Eddie Maiorino, Damon Davis, Iskander
Batyrev, Shelly Garfinkel, Sequoia Land Development and Phil Sigel, Michael
Ceasar as Trustee for Howard Gunty Profit Sharing Plan, Colin Barry, James D.
Atlas, Lawrence Phillips, Kent A. Hillemeir, Sarah Harman, Pablo Lozza, Joseph
and Eudice Meyers, The 60223 Trust, Antonio and Lucia Maddalena and Chaim Troman
on each of March 2, March 2, March 6, March 7, March 7, March 9, March 16, March
21, March 21, March 22, March 23, March 28, March 28, April 2, April 3, April
11, April 27, and May 1, 2001, respectively. These complaints allege claims
against GTL, Loral, and Mr. Schwartz (and, in the case of the Sequoia, Atlas and
Meyers complaints, two additional individual defendants, Messrs. Navarra and
DeBlasio) that are substantially identical to those set forth in the Eismann
action. The class of plaintiffs on whose behalf these lawsuits have been
allegedly asserted are: with respect to the Kraus, Davis, Maiorino, Batyrev,
Ceasar, Phillips, Hillemeir, Harman and The 60223 Trust actions, buyers of GTL
common stock in the period from December 6, 1999, through October 27, 2000; with
respect to the Murphy, Barry and Troman actions, buyers of GTL securities in the
period from December 6, 1999, through October 27, 2000; with respect to the
Sequoia/Sigel, Atlas and Meyers actions, buyers of GTL common stock in the
period from December 6, 1999, through July 19, 2000; with respect to the
Garfinkel and Lozza actions, buyers of GTL debt securities in the period from
December 6, 1999, through October 27, 2000; and with respect to the Maddalena
action, buyers of GTL securities in the period from October 11, 1999 through
October 27, 2000. In each case, the Excluded Persons are excepted from the
class.

     Loral believes that it has meritorious defenses to the above Globalstar
Related Matters and intends to pursue them vigorously.

     The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, that arise in the ordinary course of business.
Although the outcome of these claims cannot be predicted with certainty, the
Company does not believe that any of these other existing legal matters will
have a material adverse effect on its consolidated financial position or results
of operations.

9) SEGMENTS

     Loral is organized into three distinct operating businesses: Fixed
Satellite Services, Satellite Manufacturing and Technology and Data Services
(see Note 1).

     In evaluating financial performance, management uses revenues and EBITDA as
the measure of a segment's profit or loss. Segment results include the results
of its subsidiaries and its affiliates, Satmex and Europe*Star which are
accounted for using the equity method in these condensed consolidated financial
statements. Intersegment revenues primarily consists of satellites under
construction by Satellite Manufacturing and Technology for Fixed Satellite
Services and sales by Fixed Satellite Services to Data Services and Satellite
Manufacturing and Technology for the lease of transponder capacity. In 2001, the
Company no longer considered Global Mobile Telephone Service to be a reportable
segment and has excluded it from its segment presentation and restated the
information for 2000 accordingly.

                                        12
<PAGE>   14
                       LORAL SPACE & COMMUNICATIONS LTD.

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9) SEGMENTS -- (CONTINUED)

     Summarized financial information concerning the reportable segments is as
follows (in millions):

                       THREE MONTHS ENDED MARCH 31, 2001

<TABLE>
<CAPTION>
                                                         SATELLITE
                                            FIXED      MANUFACTURING
                                          SATELLITE         AND           DATA
                                         SERVICES(1)   TECHNOLOGY(2)   SERVICES(3)   CORPORATE(4)     TOTAL
                                         -----------   -------------   -----------   ------------   ---------
<S>                                      <C>           <C>             <C>           <C>            <C>
REVENUES AND EBITDA:
Revenues from external customers.......   $  116.0       $  125.8        $ 28.7                     $   270.5
Intersegment revenue...................       13.2           75.3                                        88.5
                                          --------       --------        ------                     ---------
Operating segment revenues.............   $  129.2       $  201.1        $ 28.7                         359.0
                                          ========       ========        ======
Revenue of unconsolidated
  affiliates(5)........................                                                                 (35.4)
Intercompany revenues(6)...............                                                                 (62.5)
                                                                                                    ---------
Operating revenues as reported.........                                                             $   261.1
                                                                                                    =========
Segment EBITDA before eliminations.....   $   83.9       $   19.2        $(10.0)        $ (9.4)     $    83.7
EBITDA of unconsolidated
  affiliates(5)........................                                                                 (19.0)
Intercompany EBITDA(6).................                                                                  (6.5)
                                                                                                    ---------
EBITDA(7)..............................                                                                  58.2
Depreciation and amortization(8).......                                                                 (54.3)
                                                                                                    ---------
Operating income.......................                                                             $     3.9
                                                                                                    =========
OTHER DATA:
Depreciation and amortization before
  affiliate eliminations(8)............   $   56.6       $    7.5        $  5.5         $  0.5      $    70.1
                                          ========       ========        ======         ======
Depreciation and amortization of
  unconsolidated affiliates(5)(8)......                                                                 (15.8)
                                                                                                    ---------
Depreciation and amortization(8).......                                                             $    54.3
                                                                                                    =========
Total assets before affiliate
  eliminations.........................   $4,190.1       $1,233.9        $209.5         $403.0      $ 6,036.5
                                          ========       ========        ======         ======
Total assets of unconsolidated
  affiliates(5)........................                                                              (1,507.4)
                                                                                                    ---------
Total assets...........................                                                             $ 4,529.1
                                                                                                    =========
</TABLE>

---------------

(1) Includes 100% of Europe*Star's and Satmex's revenues and EBITDA (Europe*Star
    commenced revenue service in 2001). Also includes Loral's subsidiary, Loral
    Skynet do Brasil, since November 2000.

(2) Satellite manufacturing and technology consists of 100% of SS/L's results.

(3) Data services consists of 100% of CyberStar LP and Loral CyberStar's data
    services business.

(4) Represents unallocated corporate expenses incurred in support of the
    Company's operations.

(5) Represents amounts related to unconsolidated affiliates (Satmex and
    Europe*Star), which are eliminated in order to arrive at Loral's
    consolidated results. Loral's proportionate share of these affiliates is
    included in net loss of affiliates in Loral's consolidated statements of
    operations.

                                        13
<PAGE>   15
                       LORAL SPACE & COMMUNICATIONS LTD.

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9) SEGMENTS -- (CONTINUED)

(6) Represents the elimination of intercompany sales and EBITDA, primarily for
    satellites under construction by SS/L for wholly-owned subsidiaries; as well
    as eliminating sales for the lease of transponder capacity by Satellite
    Manufacturing and Technology from Fixed Satellite Services.

(7) EBITDA (which is equivalent to operating income/loss before depreciation and
    amortization, including amortization of unearned stock compensation) is
    provided because it is a measure commonly used in the communications
    industry to analyze companies on the basis of operating performance,
    leverage and liquidity and is presented to enhance the understanding of
    Loral's operating results. EBITDA is not an alternative to net income as an
    indicator of a company's operating performance, or cash flow from operations
    as a measure of a company's liquidity. EBITDA may be calculated differently
    and, therefore, may not be comparable to similarly titled measures reported
    by other companies.

(8) Includes amortization of unearned stock compensation charges.

                       THREE MONTHS ENDED MARCH 31, 2000

<TABLE>
<CAPTION>
                                                         SATELLITE
                                            FIXED      MANUFACTURING
                                          SATELLITE         AND           DATA
                                         SERVICES(1)   TECHNOLOGY(2)   SERVICES(3)   CORPORATE(4)     TOTAL
                                         -----------   -------------   -----------   ------------   ---------
<S>                                      <C>           <C>             <C>           <C>            <C>
REVENUES AND EBITDA:
Revenues from external customers.......   $   94.7       $  215.7        $ 32.5                     $   342.9
Intersegment revenues..................        7.3           32.5                                        39.8
                                          --------       --------        ------                     ---------
Operating segment revenues.............   $  102.0       $  248.2        $ 32.5                         382.7
                                          ========       ========        ======
Revenues of unconsolidated
  affiliates(5)........................                                                                 (32.3)
Intercompany revenues(6)...............                                                                 (32.3)
                                                                                                    ---------
Operating revenue as reported..........                                                             $   318.1
                                                                                                    =========
Segment EBITDA before eliminations.....   $   62.0       $   26.4        $(10.4)       $   (9.5)    $    68.5
EBITDA of unconsolidated
  affiliates(5)........................                                                                 (19.1)
Intercompany EBITDA(6).................                                                                  (2.3)
                                                                                                    ---------
EBITDA(7)..............................                                                                  47.1
Depreciation and amortization(8).......                                                                  53.1
                                                                                                    ---------
Operating loss.........................                                                             $    (6.0)
                                                                                                    =========
OTHER DATA:
Depreciation and amortization before
  affiliate eliminations(8)............   $   54.3       $    9.0        $  4.9        $    0.3     $    68.5
                                          ========       ========        ======        ========
Depreciation and amortization of
  unconsolidated affiliates(5)(8)......                                                                 (15.4)
                                                                                                    ---------
Depreciation and amortization(8).......                                                             $    53.1
                                                                                                    =========
Total assets before affiliate
  eliminations.........................   $3,722.9       $1,566.3        $223.1        $1,308.1     $ 6,820.4
                                          ========       ========        ======        ========
Total assets of unconsolidated
  affiliates(5)........................                                                              (1,275.6)
                                                                                                    ---------
Total assets...........................                                                             $ 5,544.8
                                                                                                    =========
</TABLE>

                                        14
<PAGE>   16
                       LORAL SPACE & COMMUNICATIONS LTD.

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10) ADOPTION OF NEW ACCOUNTING STANDARD

     On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"). SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
that do not qualify, or are not effective as hedges, must be recognized
currently in earnings. Upon adoption, the Company recorded a $1.7 million
reduction in net income, net of tax, and a $1.2 million increase in other
comprehensive income (OCI), net of tax, relating to the cumulative effect of the
change in adopting this new accounting principle. The Company recorded these
adjustments to recognize the fair value of foreign currency forward contracts
and swaps that qualify as derivatives under SFAS 133.

     Foreign Exchange Exposure Management

     The Company enters into long-term construction contracts with customers and
vendors, some of which are denominated in foreign currencies, and hedges the
foreign currency risks with foreign currency exchange contracts (forwards and
swaps) with maturities matching the expected cash flows. Derivatives are used to
eliminate, reduce, or transfer foreign currency risks that can be identified and
quantified. Hedges of expected foreign currency denominated contract revenues
and related purchases are designated and documented at inception as cash flow
hedges, evaluated for effectiveness at least quarterly, and have maturities
through 2006. As the critical terms of the currency exchange contracts and
expected cash flows from long-term construction contracts are matched at hedge
inception, currency exchange contract effectiveness is calculated by comparing
the fair value of the derivative to the change in value of the expected cash
flow, with the effective portion of highly effective hedges reflected on the
balance sheet and accumulated in OCI. Forward points are excluded from
effectiveness testing on derivatives that are adjusted due to accelerated or
delayed cash flows within the contract. OCI associated with hedges of foreign
currency contract revenues and costs are reclassified to revenue and cost of
sales, respectively, based on a percentage of contract completion, while gains
and losses associated with hedges of receivables and payables are reclassified
to interest income or expense.

     The Company also enters into firm commitments with unrelated parties to
purchase required component and subassembly inventory from vendors, some of
which are denominated in foreign currencies, and hedges the foreign currency
risk with foreign currency forward contracts or, for short periods, with foreign
currency balances. Hedges of firm commitments are designated and documented at
inception as fair value hedges and evaluated for effectiveness at least
quarterly. As the critical terms of the forward contracts and firm commitments
are matched at hedge inception, forward contract effectiveness is calculated by
comparing the fair value of the derivative to the change in value of the
expected inventory purchase. Forward points are excluded from effectiveness
testing on hedges that are adjusted due to accelerated or delayed payments and
cash balances. Changes in the value of both highly effective hedges and the
designated firm commitment are reflected on the balance sheet and recognized
currently in interest income or expense.

     Ineffectiveness from all hedging activity was immaterial in the first
quarter of 2001. During the first quarter of 2001, SS/L incurred a $0.5 million
charge for excluded forward points on accelerated or delayed cash flows, which
was recorded as interest expense.

                                        15
<PAGE>   17
                       LORAL SPACE & COMMUNICATIONS LTD.

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10) ADOPTION OF NEW ACCOUNTING STANDARD -- (CONTINUED)

     Unrealized Net Gains on Derivatives

     The following table summarizes the activity in OCI (net of tax) related to
derivatives classified as cash flow hedges held by the Company during the period
of January 1, 2001 through March 31, 2001 (in thousands):

<TABLE>
<S>                                                           <C>
Cumulative transition adjustment............................     $ 1,220
Net increase in foreign currency exchange contracts.........       3,943
Reclassifications into revenue and cost of sales from OCI...      (2,687)
                                                                 -------
Unrealized net gains on derivatives.........................     $ 2,476
                                                                 =======
</TABLE>

     At March 31, 2001, the Company anticipates reclassifying $1.8 million of
the balance in OCI to earnings in the next twelve months.

11) SUBSEQUENT EVENT

     In March 2001, Loral announced exchange offers for shares of the Company's
Series C Preferred Stock and Series D Preferred Stock. Under the terms of the
voluntary exchange program, each share of Series C Preferred Stock could be
exchanged for 5.5 shares of common stock and each share of Series D Preferred
Stock could be exchanged for 5.7 shares of common stock. As of March 31, 2001,
there were 13,497,863 shares of the Series C Preferred Stock outstanding and
8,000,000 shares of the Series D Preferred Stock outstanding. Each offer was
extended to all outstanding shares of the Series C and D preferred stock until 5
p.m., New York City time, April 16, 2001.

     On April 16, 2001, the Company concluded the exchange offers for its Series
C and Series D Preferred Stock. As a result, 3.7 million shares of Series C
Preferred Stock and 1.9 million shares of Series D Preferred Stock were tendered
and accepted for exchange, representing approximately 27% and 24%, respectively,
of the outstanding shares of the two issues. As a result, Loral will issue 30.9
million shares of common stock in the exchange and incur a non-cash dividend
charge in the second quarter of approximately $29 million, which will have no
impact on Loral's total shareholders' equity. In addition, Loral will save
approximately $17 million annually in preferred dividend payments and will avoid
approximately $277 million in mandatory redemptions in 2006 and 2007.

                                        16
<PAGE>   18

                       LORAL SPACE & COMMUNICATIONS LTD.

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

     Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Results of
Operations and Financial Condition of Loral Space & Communications, Ltd. and its
subsidiaries ("Loral" or the "Company") are not historical facts, but are
"forward-looking statements," as that term is defined in the Private Securities
Litigation Reform Act of 1995. In addition, the Company or its representatives
have made and may continue to make forward-looking statements, orally or in
writing, in other contexts, such as in reports filed with the SEC, press
releases or statements made with the approval of an authorized executive officer
of the Company. These forward-looking statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "plans," "may,"
"will," "would," "could," "should," "anticipates," "estimates," "project,"
"intend," or "outlook" or the negative of these words or other variations of
these words or other comparable words, or by discussion of strategy that
involves risks and uncertainties. These forward-looking statements are only
predictions, and actual events or results may differ materially as a result of a
wide variety of factors and conditions, many of which are beyond the Company's
control. Some of these factors and conditions include: (i) the Company and its
subsidiaries and affiliates have significant debt and guarantee obligations;
(ii) the Company may be required to take further charges relating to its
investment in connection with Globalstar related activities and may be subject
to claims brought by third parties seeking to impose liabilities on the Company
as a result of its relationships with Globalstar, L.P. ("Globalstar"); (iii) if
the Company's business plan does not succeed, our operations might not generate
enough cash to pay our obligations; (iv) launch failures may delay operations;
(v) some of the satellites the Company currently has in orbit have experienced
operational problems; (vi) Space Systems/Loral, Inc. ("SS/L") is currently in
arbitration proceedings with PanAmSat; (vii) SS/L is subject to export control
restrictions and is the target of a grand jury investigation that may adversely
affect its ability to export; (viii) severe competition in the Company's
industries; and (ix) governmental or regulatory changes. For a detailed
discussion of these factors and conditions, please refer to the periodic reports
filed with the SEC by Loral, Loral CyberStar, Inc. ("Loral CyberStar") and
Satelites de Mexico, S.A. de C.V. ("Satmex"). In addition, we caution you that
the Company operates in an industry sector where securities values may be
volatile and may be influenced by economic and other factors beyond the
Company's control. The Company undertakes no obligation to update any
forward-looking statements.

     Loral is one of the world's leading satellite communications companies,
with substantial activities in satellite manufacturing and satellite-based
communications services. Loral has assembled the building blocks necessary to
provide a seamless, global networking capability for the information age. Loral
is organized into three distinct operating businesses:

          Fixed Satellite Services ("FSS").  Through the Loral Global Alliance,
     which currently consists of Loral Skynet, Loral CyberStar, Loral Skynet do
     Brasil Ltda. ("Skynet do Brasil"), its 49% owned affiliate Satmex, and its
     42% owned affiliate Europe*Star Limited ("Europe*Star"), Loral has become
     one of the world's leading providers of satellite services using
     geostationary communications satellites. The Company leases transponder
     capacity on its satellites to its customers for various applications,
     including broadcasting, news gathering, Internet access and transmission,
     private voice and data networks, business television, distance learning and
     direct-to-home television ("DTH"). The Loral Global Alliance currently has
     ten high-powered geosynchronous satellites in orbit: the seven satellite
     Telstar fleet, two Satmex satellites and one Europe*Star satellite, with
     footprints covering almost all of the world's population;

          Satellite Manufacturing and Technology.  Designing and manufacturing
     satellites and space systems and developing satellite technology for a
     broad variety of customers and applications through SS/L; and

          Data Services:  Providing managed communications networks and Internet
     and intranet services through Loral CyberStar and delivering high-speed
     broadband data communications and business television and infomedia
     services through CyberStar, L.P. ("CyberStar LP").
                                        17
<PAGE>   19

CONSOLIDATED OPERATING RESULTS

     In evaluating financial performance, management uses revenues and earnings
before interest, taxes, depreciation and amortization ("EBITDA") as a measure of
a segment's profit or loss. The following discussion of revenues and EBITDA
reflects the results of Loral's operating businesses for the three months ended
March 31, 2001 and 2000 respectively. See Note 9 to Loral's condensed
consolidated financial statements for additional information on segment results.
The remainder of the discussion relates to the consolidated results of Loral,
unless otherwise noted.

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                                                  MARCH 31,
                                                              ------------------
                                                               2001       2000
                                                              -------    -------
                                                                (IN MILLIONS)
<S>                                                           <C>        <C>
REVENUES:
Fixed satellite services(1).................................  $129.2     $102.0
Satellite manufacturing and technology(2)...................   201.1      248.2
Data services(3)............................................    28.7       32.5
                                                              ------     ------
Segment revenues............................................   359.0      382.7
Affiliate eliminations(5)...................................   (35.4)     (32.3)
Intercompany eliminations(6)................................   (62.5)     (32.3)
                                                              ------     ------
Revenues as reported........................................  $261.1     $318.1
                                                              ======     ======
EBITDA(7):
Fixed satellite services(1).................................  $ 83.9     $ 62.0
Satellite manufacturing and technology(2)...................    19.2       26.4
Data services(3)............................................   (10.0)     (10.4)
Corporate expenses(4).......................................    (9.4)      (9.5)
                                                              ------     ------
Segment EBITDA before eliminations..........................    83.7       68.5
Affiliate eliminations(5)...................................   (19.0)     (19.1)
Intercompany eliminations(6)................................    (6.5)      (2.3)
                                                              ------     ------
EBITDA as reported..........................................  $ 58.2     $ 47.1
                                                              ======     ======
</TABLE>

---------------
(1) Includes 100% of Europe*Star's and Satmex's revenues and EBITDA (Europe*Star
    commenced revenue service in 2001). Also includes Loral's subsidiary, Loral
    Skynet do Brasil, since November 2000.

(2) Satellite manufacturing and technology consists of 100% of SS/L's results.

(3) Data services consists of 100% of CyberStar LP and Loral CyberStar's data
    services business.

(4) Represents corporate expenses incurred in support of the Company's
    operations.

(5) Represents amounts related to unconsolidated affiliates (Satmex and
    Europe*Star), which are eliminated in order to arrive at Loral's
    consolidated results. Loral's proportionate share of these affiliates is
    included in net loss of affiliates in Loral's consolidated statements of
    operations.

(6) Represents the elimination of intercompany sales and EBITDA, primarily for
    satellites under construction by SS/L for wholly-owned subsidiaries; as well
    as eliminating sales for the lease of transponder capacity by Satellite
    Manufacturing and Technology from Fixed Satellite Services.

(7) EBITDA (which is equivalent to operating income/loss before depreciation is
    provided because it is a measure commonly used in the communications
    industry to analyze companies on the basis of operating performance,
    leverage and liquidity and is presented to enhance the understanding of
    Loral's operating results. EBITDA is not an alternative to net income as an
    indicator of a company's operating performance, or cash flow from operations
    as a measure of a company's liquidity. EBITDA may be calculated differently
    and, therefore, may not be comparable to similarly titled measures reported
    by other companies.

                                        18
<PAGE>   20

THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH MARCH 31, 2000

     Segment revenues for Loral's operating businesses were $359 million in 2001
versus $383 million in 2000, before intercompany and affiliate eliminations of
$98 million in 2001 and $65 million in 2000. The decrease in revenues was due
primarily to lower revenues in satellite manufacturing and technology due in
part to lower launch sales in the current period, offset by strong growth in FSS
sales. The increase in intercompany eliminations in 2001 primarily reflects
increased sales by satellite manufacturing to FSS.

     EBITDA as reported increased in 2001 to $58 million from $47 million in
2000. This increase arose primarily from strong revenue growth in fixed
satellite services due to utilization growth on the satellite fleet, offset by
lower satellite manufacturing and technology EBITDA, which was due to lower
revenues.

     Depreciation and amortization was $54 million and $53 million for the
quarter ended March 31, 2001 and 2000, respectively.

     Interest and investment income decreased to $8 million in 2001 from $29
million in 2000, principally due to non-cash interest income in 2000 related to
warrants received in connection with the guarantees provided by Loral
subsidiaries of Globalstar's $500 million credit facility and dividend income in
2000 related to the Company's investment in Globalstar Telecommunications
Limited preferred stock, as well as lower average cash balances for investment
in 2001.

     Interest expense was $50 million in 2001, net of capitalized interest of $5
million, compared with $43 million in 2000, net of capitalized interest of $2
million. The increase is due primarily to interest expense incurred in
connection with the Company's $500 million credit facility.

     In 2000 the Company realized a $15 million gain from the sale of a portion
of its investment in The Fantastic Corporation common stock.

     Loral, as a Bermuda company, is subject to U.S. federal, state and local
income taxation at regular corporate rates plus an addition 30% "branch profits"
tax on any income that is effectively connected with the conduct of a U.S. trade
or business. Loral's U.S. subsidiaries are subject to regular corporate tax on
their worldwide income. For 2001, the Company recorded an income tax benefit of
$2 million on a pre-tax tax loss of $38 million, as compared to an income tax
expense of $10 million on a pre-tax loss of $5 million for 2000. The decrease in
tax expense is primarily attributable to a lower amount of income subject to
U.S. tax during the current period.

     The equity in net loss of affiliates was $22 million in 2001 compared to
$108 million in 2000. Loral's share of equity in net losses of affiliates
related to Globalstar's activities, net of the related tax benefit, was $13
million in 2001 compared to $98 million in 2000. This decrease is primarily due
to the Company recording its share of Globalstar's equity losses and impairment
charges in the fourth quarter of 2000, which reduced its investment in and
advances in connection with Globalstar to zero. Also included in equity in net
loss of affiliates is Loral's share of losses from other affiliates.

     The minority interest benefit in 2001 primarily reflects the reduction of
CyberStar LP's loss attributed to CyberStar LP's other investor, who owned 17.6%
as of March 31, 2001.

     On January 1, 2001, the Company adopted Financial Accounting Standard No.
133, Accounting for Derivative Instruments and Hedging Activities, which
resulted in the Company recording a charge from the cumulative effect of a
change in accounting principle of $1.7 million.

     Preferred distributions were $16 million in 2001 as compared to $19 million
for 2000. Preferred distributions were higher in 2000 primarily due to the
dividend charge incurred in connection with the conversion of 1.4 million shares
of Loral's 6% Series C convertible redeemable preferred stock (the "Series C
Preferred Stock") into 3.5 million shares of common stock in the first quarter
of 2000. The exchange offers completed by the Company in April 2001 will result
in the annual elimination of approximately $17 million of future dividend
payments (see Liquidity and Capital Resources).

     As a result of the above, the net loss applicable to common stockholders
for 2001 was $75 million or $0.25 per basic and diluted share, compared to the
net loss of $142 million or $0.49 per basic and diluted share, for
                                        19
<PAGE>   21

2000. Basic and diluted weighted average shares were 298.7 million for 2001 and
293.3 million for 2000. The increase in shares was primarily due to the shares
of common stock issued upon conversion of the Series C Preferred Stock into
common stock in 2000. The exchange offers completed by the Company in April 2001
resulted in 30.9 million shares of common stock being issued (see Liquidity and
Capital Resources).

RESULTS BY OPERATING SEGMENT

  Fixed Satellite Services

     FSS revenue (including 100% of Satmex and Europe*Star) in 2001 was $129
million versus $102 million in 2000, due to utilization growth on the satellite
fleet. EBITDA (including 100% of Satmex and Europe*Star) was $84 million in
2001, up from EBITDA of $62 million in 2000, primarily due to increased revenues
without a proportionate growth in costs. As of March 31, 2001, FSS had 10
operational satellites (three of which are owned by affiliates). Funded backlog
for the segment totaled $2.4 billion at March 31, 2001, an increase of 26% over
the $1.9 billion as of March 31, 2000, including intercompany backlog of $107
million and $4 million as of March 31, 2001 and 2000, respectively and affiliate
backlog for Satmex and Europe*Star of $561 million as of March 31, 2001 and $481
million for Satmex as of March 31, 2000.

  Satellite Manufacturing and Technology

     Revenues at SS/L, the Company's satellite manufacturing and technology
subsidiary, before intercompany eliminations were $201 million in 2001, compared
with $248 million in 2000, due in part to lower launch sales in 2001. EBITDA in
2001 was $19 million, compared with $26 million in 2000, primarily due to lower
revenues. Funded backlog for SS/L as of both March 31, 2001 and 2000, was $1.6
billion, including intercompany backlog of $405 million as of March 31, 2001 and
$325 million as of March 31, 2000.

  Data Services

     Revenues for the data services segment in 2001 were $29 million compared to
$33 million in 2000. Revenue is derived primarily from Loral CyberStar's
corporate data networking and Internet and intranet services businesses. EBITDA
in 2001 and 2000 was a loss of $10 million. As of March 31, 2001, funded backlog
was $167 million, compared to $232 million as of March 31, 2000 (all from
external sources).

LIQUIDITY AND CAPITAL RESOURCES

     Loral intends to capitalize on its innovative capabilities, market position
and advanced technologies to offer value-added satellite-based services as part
of the evolving worldwide communications networks and, where appropriate, to
form strategic alliances with major telecommunications service providers and
equipment manufacturers to enhance and expand its satellite-based communications
service opportunities. In order to pursue such opportunities, Loral may seek
funds from strategic partners and other investors, and through incurrence of
debt or the issuance of additional equity.

  Debt

     $500 Million Credit Agreement

     In November 2000, a subsidiary of Loral entered into a $500 million secured
credit agreement with Bank of America, National Association and the other
lenders party thereto (the "$500 Million Credit Agreement"). The $500 Million
Credit Agreement provides for a $200 million three-year revolving credit
facility (the "Revolver") and a $300 million term loan (the "Term Loan"). The
Term Loan is subject to an amortization payment schedule as follows: 1% of the
principal amount on each of January 15, 2001 (paid) and June 30, 2001; 15% of
the principal amount on June 30, 2002; 25% of the principal amount on March 31,
2003; and 58% of the principal amount on August 15, 2003. All amounts
outstanding under the Revolver are due and payable on August 15, 2003.
Borrowings under the $500 Million Credit Agreement bear interest, at Loral's
option, at various rates based on margins over the lead bank's base rate or the
London Interbank Offer Rate for periods of one to six months. Loral pays a
commitment fee on the unused portion of the Revolver.

                                        20
<PAGE>   22

     The $500 Million Credit Agreement is secured by certain assets of a
subsidiary of Loral, including the Telstar 6 and Telstar 7 satellites and the
loans due to Loral under Globalstar's $500 million credit facility. Based on
third party valuations, management believes that the fair value of Telstar 6 and
Telstar 7 is in excess of $500 million. As of March 31, 2001, the net book value
of Telstar 6 and Telstar 7 was approximately $350 million. Loral has also agreed
to guarantee its subsidiary's obligations under the $500 Million Credit
Agreement.

     Loral SpaceCom Credit Agreement

     The Amended and Restated Credit Agreement, dated as of November 14, 1997,
as amended, among Loral SpaceCom Corporation ("Loral SpaceCom"), SS/L and the
banks party thereto (the "Credit Agreement"). The facility matures in November
2002. The Credit Agreement is secured by the stock of Loral SpaceCom Corporation
and SS/L. As of March 31, 2001, the net book value of the assets that secure the
Credit Agreement was approximately $1.2 billion. As of March 31, 2001, there was
$52 million of borrowing availability under this credit facility.

     Other Debt Agreements

     Loral CyberStar's outstanding debt as of March 31, 2001, of $1.0 billion,
is non-recourse to Loral, and includes certain restrictions on Loral CyberStar's
ability to pay dividends or make loans to Loral. The accreted principal value of
Loral CyberStar's senior notes and senior discount notes was $883 million at
March 31, 2001.

     As of March 31, 2001, Loral believes it was in compliance with all
covenants pertaining to its debt facilities.

  Equity

     In March 2001, Loral announced exchange offers for shares of the Company's
Series C Preferred Stock and Series D Preferred Stock. Under the terms of the
voluntary exchange program, each share of Series C Preferred Stock could be
exchanged for 5.5 shares of common stock and each share of Series D Preferred
Stock could be exchanged for 5.7 shares of common stock. As of March 31, 2001,
there were 13,497,863 shares of the Series C Preferred Stock outstanding and
8,000,000 shares of the Series D Preferred Stock outstanding. Each offer was
extended to all outstanding shares of the Series C and D preferred stock until 5
p.m., New York City time, April 16, 2001.

     On April 16, 2001, the Company concluded the exchange offers for its Series
C and Series D Preferred Stock. As a result, 3.7 million shares of Series C
Preferred Stock and 1.9 million shares of Series D Preferred Stock were tendered
and accepted for exchange, representing approximately 27% and 24%, respectively,
of the outstanding shares of the two issues. As a result, Loral will issue 30.9
million shares of common stock in the exchange and incur a non-cash dividend
charge in the second quarter of approximately $29 million, which will have no
impact on Loral's total shareholders' equity. In addition, Loral will save
approximately $17 million annually in preferred dividend payments and will avoid
approximately $277 million in mandatory redemptions in 2006 and 2007.

  Cash and Available Credit

     As of March 31, 2001, Loral had $269 million of cash and available credit
(including $52 million of available credit). Loral intends to utilize its
existing capital base to further develop satellite technologies and hardware and
by building out its fixed satellite services business.

                                        21
<PAGE>   23

  Net Cash Used in Operating Activities

     Net cash used in operating activities for 2001 was $54 million, primarily
due to increases in inventories of $15 million and contracts-in-process of $16
million and decreases in accounts payable of $23 million and accrued expenses
and other current liabilities of $21 million, offset by the net loss as adjusted
for non-cash operating items of $26 million.

     Net cash used in operating activities for 2000 was $55 million, primarily
due to decreases in accounts payable of $131 million and customer advances of
$36 million, offset by the net loss as adjusted for non-cash operating items of
$28 million and a decrease in contracts-in-process of $83 million.

  Net Cash Used in Investing Activities

     Net cash used in investing activities for 2001 was $83 million, as a result
of capital expenditures of $67 million primarily for the construction of
satellites and $16 million of investments in affiliates (including $11 million
to Globalstar service provider partnerships).

     Net cash used in investing activities for 2000 was $58 million, primarily
as a result of capital expenditures of $216 million (including approximately
$181 million for the final payment for Telstar 10/Apstar IIR), mainly for the
construction or acquisition of satellites and $21 million of investments in and
advances to affiliates, offset by a reduction in restricted and segregated cash
of $162 million and proceeds from the sale of The Fantastic Corporation's common
stock of $16 million.

  Net Cash (Used in) Provided by Financing Activities

     Net cash used in financing activities for 2001 was $40 million, due
primarily to net repayments of debt obligations of $29 million and preferred
dividend payments of $16 million.

     Net cash provided by financing activities for 2000 was $364 million, due
primarily to net proceeds of $388 million from the Company's issuance of Series
D Preferred Stock and proceeds from other equity transactions of $10 million,
offset by repayments of debt obligations of $20 million and preferred dividend
payments of $13 million.

  Fixed Satellite Services

     Loral Skynet

     On April 22, 2001, the Company's Telstar 6 satellite experienced a
component failure on its primary central processing unit ("CPU"). As designed,
the satellite switched to its backup CPU, which is fully operational, and
returned to normal operation. The Company is investigating whether the primary
CPU can be restarted, in which case it would serve as the backup CPU. If the
primary CPU cannot be restarted, a subsequent failure of the currently operating
CPU would result in the loss of Telstar 6 (which is fully insured), and, until a
replacement satellite is placed in-orbit, lost revenues and profits to the
Company.

     Satmex

     On August 30, 2000, Satmex announced that its Solidaridad 1 satellite
ceased operation and was irretrievably lost. The loss was caused by the failure
of the back-up control processor on board the satellite. Solidaridad 1, which
was built by Hughes Space and Communications ("Hughes") and launched in 1994,
experienced a failure of its primary control processor in April 1999, and had
been operating on its back-up processor since that time. The majority of
Solidaridad 1's customers have been provided replacement capacity on other
Satmex satellites or on satellites operated by Loral Skynet. Satmex received net
insurance proceeds of $235 million relating to the loss of Solidaridad 1. In
connection with this loss, Satmex recognized an after-tax gain of $67 million,
which resulted from the insurance proceeds in excess of the carrying amount of
the satellite and the incremental costs associated with providing replacement
capacity, as required by its contracts with its customers. Satmex has contracted
with SS/L to build a replacement satellite. This satellite, known as

                                        22
<PAGE>   24

Satmex 6, is scheduled to be launched in 2003, and is designed to provide
broader coverage and higher power levels than any other satellite currently in
the Satmex fleet.

     At March 31, 2001, Solidaridad 2 had a remaining estimated useful life of
eight years. Solidaridad 2 was manufactured by Hughes and is similar in design
to Solidaridad 1 and to other Hughes satellites which have experienced in-orbit
component failures. While Satmex has obtained in-orbit insurance for Solidaridad
2, a satellite failure may result in a drop in Satmex's profits, which loss of
profits would not be insured. The in-orbit insurance for Solidaridad 2 expires
in November 2002. Satmex cannot guarantee that it will be able to renew the
insurance at the end of this period, or that if renewal is available, that it
would be on acceptable terms. For example, a renewal policy for Solidaridad 2
may not insure against an in-orbit failure due to the loss of the satellite's
control processor, the same component that caused the loss of Solidaridad 1 and
other Hughes satellites. An uninsured loss would have a material adverse effect
on Satmex's results of operations and financial condition.

     In connection with the privatization by the Mexican Government of its fixed
satellite services business, Loral and Principia formed a joint venture,
Firmamento Mexicano, S.A. de R.L. de C.V. ("Holdings"). In 1997, Holdings
acquired 75% of the outstanding capital stock of Satmex. As part of the
acquisition, Servicios Corporativos Satelitales, S.A. de C.V. ("Servicios"), a
wholly owned subsidiary of Holdings, issued a seven-year Government Obligation
("Government Obligation") to the Mexican Government in consideration for the
assumption by Satmex of the debt incurred by Servicios in connection with the
acquisition. The Government Obligation had an initial face amount of $125
million, which accretes at 6.03% and expires in December 2004. The debt of
Satmex and Holdings is non-recourse to Loral and Principia. However, Loral and
Principia have agreed to maintain assets in a collateral trust in an amount
equal to the value of the Government Obligation through December 30, 2000 and,
thereafter, in an amount equal to 1.2 times the value of the Government
Obligation until maturity. As of March 31, 2001, Loral and Principia have
pledged their respective shares in Holdings in such trust.

     Europe*Star

     Through March 31, 2001, Loral has invested $76 million in Europe*Star.
Pursuant to the terms of the shareholders agreement, Loral has permitted Alcatel
to fund additional expenditures to develop Europe*Star's business and
infrastructure through approximately $175 million in loans to the venture. Loral
has the right to elect either to match the amount of such loans or permit
Alcatel to elect to convert some or all its loans into equity, which could
dilute Loral's equity in venture to as little as approximately 22%.

  Data Services

     Based upon its current expectations for growth, Loral CyberStar anticipates
it will have additional funding requirements over the next three years to fund
the streaming media investment, the purchase of VSATs, senior note interest
payments, replacement of Telstar 11 which is expected to reach the end of its
useful life in 2005, other capital expenditures and other operating needs. Loral
CyberStar will need to secure funding from Loral, or raise additional financing
to fund these requirements. Sources of additional capital may include public or
private debt, equity financings or strategic investments. To the extent that
Loral CyberStar seeks to raise additional debt financing, its indentures limit
the amount of such additional debt and prohibit Loral CyberStar from using
Telstar 11, Telstar 10/Apstar IIR and Telstar 12 as collateral for indebtedness
for money borrowed. If Loral CyberStar requires additional financing and is
unable to obtain such financing from Loral or from outside sources in the
amounts and at the times needed, there would be a material adverse effect on
Loral CyberStar.

COMMITMENTS AND CONTINGENCIES

     In May 2000, Globalstar finalized $531.1 million of vendor financing
arrangements (including $31.1 million of capitalized interest as of May 2000)
with Qualcomm. The original terms of this vendor financing provided for interest
at 6%, a maturity date of August 15, 2003 and required repayment pro rata with
the term

                                        23
<PAGE>   25

loans due to Loral under Globalstar's $500 million credit facility. As of March
31, 2001, $564.7 million was outstanding under this facility (including $64.7
million of capitalized interest).

     Loral has agreed that if the principal amount (excluding capitalized
interest of $64.7 million at March 31, 2001) outstanding under the Qualcomm
vendor financing facility exceeds the principal amount due Loral under
Globalstar's $500 million credit facility, as determined on certain measurement
dates, then Loral will guarantee 50% of such excess amount. As of March 31,
2001, Loral had no guarantee obligation.

     Loral Skynet has entered into prepaid leases and sales contracts relating
to transponders on its satellites. Under the terms of these agreements, Loral
Skynet continues to operate the satellites which carry the transponders and
provides a warranty for a period of 10 to 14 years, in the case of sales
contracts (twelve transponders), and the lease term, in the case of the prepaid
leases (six transponders). Depending on the contract, Loral Skynet may be
required to replace transponders which do not meet operating specifications. All
customers are entitled to a refund equal to the reimbursement value if there is
no replacement. In the case of the sales contracts, the reimbursement value is
based on the original purchase price plus an interest factor from the time the
payment was received to acceptance of the transponder by the customer, reduced
on a straight-line basis over the warranty period. In the case of prepaid
leases, the reimbursement value is equal to the unamortized portion of the lease
prepayment made by the customer.

     Eleven of the satellites built by SS/L and launched since 1997, four of
which are owned and operated by Loral's subsidiaries or affiliates, have
experienced minor losses of power from their solar arrays. Although, to date,
neither the Company nor any of the customers using the affected satellites have
experienced any degradation in performance, there can be no assurance that one
or more of the affected satellites will not experience additional power loss
that could result in performance degradation, including loss of transponder
capacity. In the event of additional power loss, the extent of the performance
degradation, if any, will depend on numerous factors, including the amount of
the additional power loss, the level of redundancy built into the affected
satellite's design, when in the life of the affected satellite the loss occurred
and the number and type of use being made of transponders then in service. A
complete or partial loss of satellites could result in a loss of orbital
incentive payments and, in the case of satellites owned by Loral subsidiaries
and affiliates, a loss of revenues and profits. Losses of satellites owned by
Loral and its affiliates are fully insured. With respect to satellites under
construction and construction of new satellites, based on its investigation of
the matter, SS/L has identified and is implementing remedial measures that SS/L
believes will prevent newly launched satellites from experiencing similar
anomalies. SS/L does not expect that implementation of these measures will cause
delays in the launch of satellites under construction or construction of new
satellites. Based upon information currently available, including design
redundancies to accommodate small power losses and that no pattern has been
identified as to the timing or specific location within the solar arrays of the
failures, the Company believes that this matter will not have a material adverse
effect on the consolidated financial position or results of operations of Loral.

     In late 1998, following the launch of an SS/L-built satellite sold to
PanAmSat, a manufacturing error was discovered that affected the geographical
coverage of the Ku-band transponders on the satellite. On January 6, 2000,
PanAmSat filed an arbitration proceeding in connection with this error claiming
damages of $225 million for lost profits and increased sales and marketing
costs. SS/L believes it has meritorious defenses to the claim and that its
liability is limited to a loss of a portion of the applicable orbital
incentives, the estimated impact of which is included in Loral's consolidated
financial statements. PanAmSat has received a recovery from its insurance
carrier that should reduce any damage claim. Loral and PanAmSat have reached an
agreement in principle, subject to documentation, to settle this matter, and in
light of reserves provided, the Company believes that this matter will not have
a material adverse effect on the consolidated financial position or results of
operations of Loral.

     SS/L has an agreement with Alcatel Space Industries pursuant to which the
parties have agreed generally to operate as a team on satellite programs
worldwide. In addition, Alcatel Space has certain rights as a strategic partner
of SS/L for so long as it continues to hold at least 81.6% of the Loral
securities that it acquired in 1997 in exchange for SS/L stock that it
previously owned. Alcatel is permitted two representatives on SS/L's
seven-member board of directors, and certain actions require the approval of its
board representa-

                                        24
<PAGE>   26

tives. Alcatel also has certain rights to purchase SS/L shares at fair market
value in the event of a change of control (as defined) of either Loral or SS/L,
including the right to use its Loral holdings as part of the SS/L purchase
price. These agreements are terminable upon one-year's notice by either party,
and SS/L gave the one-year notice to Alcatel on February 22, 2001. Alcatel filed
suit on March 16, 2001 in the United States District Court for the Southern
District of New York against Loral and SS/L alleging various breaches of the
agreements, seeking declaratory and injunctive relief to enforce its rights
thereunder and challenging the effectiveness of the termination. On April 26,
2001, the District Court issued its decision granting in part Alcatel's motion
for a preliminary injunction and granting the Company's motion to compel
arbitration. The District Court held that the issue of the termination of the
agreements is a matter that is to be decided in arbitration, as required by the
agreements. The arbitration has commenced. The District Court granted Alcatel's
request for a preliminary injunction requiring that the Company continue to
comply with the agreements pending resolution of the arbitration, or the
expiration of the agreements, whichever occurs earlier. The Company believes
that this matter will not have a material adverse effect on the consolidated
financial position or results of operations of Loral.

     SS/L was informed in 1998 that it was a target of a grand jury
investigation being conducted by the office of the U.S. Attorney for the
District of Columbia with respect to possible violations of export control laws
that may have occurred in connection with the participation of SS/L employees on
a committee formed in the wake of the 1996 crash of a Long March rocket in China
and whose purpose was to consider whether studies of the crash made by the
Chinese had correctly identified the cause of the failure. The Company is not in
a position to predict the direction or outcome of the investigation. If SS/L
were to be indicted and convicted of a criminal violation of the Arms Export
Control Act, it would be subject to a fine of $1 million per violation and could
be debarred from certain export privileges and, possibly, from participation in
government contracts. Since many of SS/L's satellites are built for foreign
customers and/or launched on foreign rockets, such a debarment would have a
material adverse effect on SS/L's business and, therefore, the Company.
Indictment for such violations would subject SS/L to discretionary debarment
from further export licenses. Under the applicable regulations, SS/L could be
debarred from export privileges without being convicted of any crime if it is
indicted for these alleged violations, and loss of export privileges would harm
SS/L's business. Whether or not SS/L is indicted or convicted, SS/L remains
subject to the State Department's general statutory authority to prohibit
exports of satellites and related services if it finds a violation of the Arms
Export Control Act that puts SS/L's reliability in question, and it can suspend
export privileges whenever it determines that grounds for debarment exist and
that such suspension "is reasonably necessary to protect world peace or the
security or foreign policy of the United States."

     As far as SS/L can determine, no sensitive information or technology was
conveyed to the Chinese, and no secret or classified information was discussed
with or reported to them. SS/L believes that its employees acted openly and in
good faith and that none engaged in intentional misconduct. Accordingly, the
Company does not believe that SS/L has committed a criminal violation of the
export control laws. The Company does not expect the grand jury investigation or
its outcome to result in a material adverse effect upon its business. However,
there can be no assurance as to these conclusions.

     On December 23, 1998, the Office of Defense Trade Controls, or ODTC, of the
U.S. Department of State temporarily suspended a previously approved technical
assistance agreement under which SS/L had been preparing for the launch of the
ChinaSat-8 satellite. According to ODTC, the purpose of the temporary suspension
was to permit that agency to review the agreement for conformity with then
newly-enacted legislation (Section 74 of the Arms Export Control Act) with
respect to the export of missile equipment and technology. In addition, SS/L was
required to re-apply for new export licenses from the State Department to permit
the launch of ChinaSat-8 on a Long March launch vehicle, when the old export
licenses issued by the Commerce Department, the agency that previously had
jurisdiction over satellite licensing, expired in March 2000. On January 4,
2001, the ODTC, while not rejecting these license applications, notified SS/L
that they were being returned without action. SS/L and the State Department are
now in discussions regarding SS/L's obtaining the approvals required for the
launch of ChinaSat-8.

     In December 1999, SS/L reached an agreement with ChinaSat to extend the
date for delivery of the ChinaSat-8 satellite to July 31, 2000. In return for
this extension and other modifications to the contract,
                                        25
<PAGE>   27

SS/L provided to ChinaSat two 36 MHz and one 54 MHz transponders on Telstar
10/Apstar IIR for ChinaSat's use for the life of those transponders. As a
result, SS/L recorded a charge to earnings of $35 million in 1999. If ChinaSat
were to terminate its contract with SS/L as a result of these delays, SS/L may
have to refund $134 million in advances received from ChinaSat and may incur
penalties of up to $11 million and believes it would incur costs of
approximately $38 million to refurbish and retrofit the satellite so that it
could be sold to another customer, which resale cannot be guaranteed. To the
extent that SS/L is able to recover some or all of its $52 million deposit
payment on the Chinese launch vehicle, this recovery would offset a portion of
such payments. There can be no assurance, however, that SS/L will be able either
to obtain a refund from the launch provider or to find a replacement customer
for the Chinese launch vehicle.

     In March 1999, jurisdiction for satellite licensing was transferred from
the Commerce Department to the State Department and the State Department has
issued regulations relating to the export of and disclosure of technical
information related to, satellites and related equipment. It has been SS/L's
experience that obtaining licenses and technical assistance agreements under
these new regulations takes more time and is considerably more burdensome than
in the past. Delays in obtaining the necessary licenses and technical assistance
agreements may delay SS/L's performance on existing contracts, and, as a result,
SS/L may incur penalties or lose incentive payments under these contracts. In
addition, such delays may have an adverse effect on SS/L's ability to compete
against unregulated foreign satellite manufacturers for new satellite contracts.

     Under an agreement reached with Eutelsat, Loral CyberStar agreed to operate
Telstar 12, which was originally intended to operate at 12 degrees W.L., at 15
degrees W.L. while Eutelsat continued to develop its services at 12.5 degrees
W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot
and will assert its priority rights over such location on Loral CyberStar's
behalf. As part of this coordination effort, Loral CyberStar agreed to provide
to Eutelsat four transponders on Telstar 12 for the life of the satellite and
has retained risk of loss with respect to such transponders. Eutelsat also has
the right to acquire, at cost, four transponders on the next replacement
satellite for Telstar 12. As part of the international coordination process,
Loral continues to conduct discussions with various administrations regarding
Telstar 12's operations at 15 degrees W.L. If these discussions are not
successful, Telstar 12's useable capacity may be reduced.

     Loral holds debt obligations from Globalstar (see Note 5). In a bankruptcy
or restructuring proceeding involving Globalstar, challenges could be initiated
seeking subordination or recharacterization of the debt Loral holds from
Globalstar. While we know of no reason why such a claim would prevail with
respect to the debt Loral holds in Globalstar, there can be no assurance that
such claims will not be made in any restructuring or bankruptcy proceeding
involving Globalstar. Moreover, there can be no assurance that actions will not
be initiated in a Globalstar bankruptcy proceeding to characterize payments
previously made by Globalstar to Loral as preferential payments subject to
repayment. Loral also may be subject to other claims brought by Globalstar
creditors and securities holders, who may seek to impose liabilities on the
Company as a result of the Company's relationships with Globalstar. For example,
see Globalstar Related Matters below.

     The Company estimated the recovery of certain insurance proceeds in its
consolidated financial statements in connection with an insurance claim with its
insurance carrier and received the proceeds in May 2001.

     Globalstar Related Matters.  On February 28, 2001, plaintiff Eric Eismann
filed a purported class action complaint against Globalstar Telecommunications
Limited ("GTL") in the United States District Court for the Southern District of
New York. The other defendants named in the complaint are Loral Space &
Communications Ltd. and Bernard Schwartz. The complaint alleges that (a) GTL and
Mr. Schwartz violated Section 10(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Rule 10b-5 promulgated thereunder, by making material
misstatements or failing to state material facts about GTL's business and
prospects; and (b) that Loral and Mr. Schwartz are secondarily liable for these
alleged misstatements and omissions under Section 20(a) of the Exchange Act as
alleged "controlling persons" of GTL. The class of plaintiffs on whose behalf
this lawsuit has allegedly been asserted consists of all buyers of GTL common
stock from December 6, 1999 through October 27, 2000, excluding the defendants
and certain persons related or affiliated therewith (the "Excluded Persons").

                                        26
<PAGE>   28

     Eighteen additional purported class action complaints have been filed in
the United States District Court for the Southern District of New York by
plaintiffs Chaim Kraus, L.A. Murphy, Eddie Maiorino, Damon Davis, Iskander
Batyrev, Shelly Garfinkel, Sequoia Land Development and Phil Sigel, Michael
Ceasar as Trustee for Howard Gunty Profit Sharing Plan, Colin Barry, James D.
Atlas, Lawrence Phillips, Kent A. Hillemeir, Sarah Harman, Pablo Lozza, Joseph
and Eudice Meyers, The 60223 Trust, Antonio and Lucia Maddalena and Chaim Troman
on each of March 2, March 2, March 6, March 7, March 7, March 9, March 16, March
21, March 21, March 22, March 23, March 28, March 28, April 2, April 3, April
11, April 27, and May 1, 2001, respectively. These complaints allege claims
against GTL, Loral, and Mr. Schwartz (and, in the case of the Sequoia, Atlas and
Meyers complaints, two additional individual defendants, Messrs. Navarra and
DeBlasio) that are substantially identical to those set forth in the Eismann
action. The class of plaintiffs on whose behalf these lawsuits have been
allegedly asserted are: with respect to the Kraus, Davis, Maiorino, Batyrev,
Ceasar, Phillips, Hillemeir, Harman and The 60223 Trust actions, buyers of GTL
common stock in the period from December 6, 1999, through October 27, 2000; with
respect to the Murphy, Barry and Troman actions, buyers of GTL securities in the
period from December 6, 1999, through October 27, 2000; with respect to the
Sequoia/Sigel, Atlas and Meyers actions, buyers of GTL common stock in the
period from December 6, 1999, through July 19, 2000; with respect to the
Garfinkel and Lozza actions, buyers of GTL debt securities in the period from
December 6, 1999, through October 27, 2000; and with respect to the Maddalena
action, buyers of GTL securities in the period from October 11, 1999 through
October 27, 2000. In each case, the Excluded Persons are excepted from the
class.

     Loral believes that it has meritorious defenses to the above Globalstar
Related Matters and intends to pursue them vigorously.

     The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, that arise in the ordinary course of business.
Although the outcome of these claims cannot be predicted with certainty, the
Company does not believe that any of these other existing legal matters will
have a material adverse effect on its consolidated financial position or results
of operations.

OTHER MATTERS

  Accounting Pronouncements

     On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"). SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
that do not qualify, or are not effective as hedges, must be recognized
currently in earnings. Upon adoption, the Company recorded a $1.7 million
reduction in net income, net of tax, and a $1.2 million increase in other
comprehensive income (OCI), net of tax, relating to the cumulative effect of the
change in adopting this new accounting principle. The Company recorded these
adjustments to recognize the fair value of foreign currency forward contracts
and swaps that qualify as derivatives under SFAS 133.

     In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. It revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. The Company has adopted the
applicable disclosure requirements of SFAS No. 140 in its consolidated financial
statements as of December 31, 2000. The Company is currently evaluating the
impact of adopting the remaining provisions of SFAS No. 140, which will be
effective for transactions entered into after March 31, 2001.

                                        27
<PAGE>   29

                           PART II. OTHER INFORMATION

ITEM 2.  LEGAL PROCEEDINGS

     See legal proceedings disclosure in Commitments and Contingencies.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

     The following exhibits are filed as part of this report:

        Exhibit 12 -- Computation of Deficiency of Earnings to Cover Fixed
Charges

     (b) Reports on Form 8-K

<TABLE>
<CAPTION>
DATE OF REPORT                                                            DESCRIPTION
--------------                                                            -----------
<S>                             <C>                             <C>
January 22, 2001                Item 5 -- Other Events          Globalstar, L.P. information
                                                                  and ChinaSat-8.
February 22, 2001               Item 5 -- Other Events          Exchange offers for preferred
                                                                  stock.
</TABLE>

                                   SIGNATURES

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

                                            LORAL SPACE & COMMUNICATIONS LTD.
                                                        Registrant

                                          /s/ RICHARD J. TOWNSEND
                                          --------------------------------------
                                          Richard J. Townsend
                                          Senior Vice President and
                                          Chief Financial Officer
                                          (Principal Financial Officer) and
                                          Registrant's Authorized Officer

Date: May 14, 2001

                                        28
<PAGE>   30

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
<S>           <C>
Exhibit 12 -- Computation of Deficiency of Earnings to Cover Fixed Charges

</TABLE>

                                        29