##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended June 30,
2004

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.

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes þ          No o

As of July 31, 2004, there were 44,125,202
shares of Loral Space & Communications Ltd. common stock
outstanding.



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TABLE OF CONTENTS



|                                      |                                          |                                                      |  |  |  |  |  | 
|------------------------------------- | ---------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART 1. FINANCIAL INFORMATION        
|                                      | Item 1. Financial Statements            
|                                      |                                          | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|Three Months Ended June 30, 2004     
|Six Months Ended June 30, 2004       
|Three Months Ended June 30, 2003(7)  
|Six Months Ended June 30, 2003(7)    
|PART II.                             
|OTHER INFORMATION                    
|                                      | Item 1. Legal Proceedings               
|                                      | Item 3. Defaults Upon Senior Securities 
|                                      | Item 6. Exhibits and Reports on Form 8-K
|SIGNATURES                           
|EXHIBIT INDEX                        
|COMPUTATION OF DEFICIENCY OF EARNINGS
|CERTIFICATION                        
|CERTIFICATION                        
|CERTIFICATION                        
|CERTIFICATION                        



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##### Table of Contents






PART 1.

FINANCIAL INFORMATION







|        |                     
|------- | --------------------
|Item 1. | Financial Statements

LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION

CONDENSED CONSOLIDATED BALANCE
SHEETS

(In thousands, except par value)


(Unaudited)


|                                                               |                                              |                                                                   |                                             |              |         |           |           |            |         |           |  
|-------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------- | ------------ | ------- | --------- | --------- | ---------- | ------- | --------- | -
|                                                               |                                              | June 30,                                                          |                                             | December 31,
|                                                               |                                              | 2004                                                              |                                             | 2003        
|                                                               |                                              |                                                                   |                                             |             
|ASSETS                                                        
|Current assets:                                                |                                              |                                                                   |                                             |              |         |           |           |           
|                                                               | Cash and cash equivalents                    |                                                                   | $                                           | 186,659      |         |           | $         | 141,644    |        
|                                                               | Accounts receivable, net                     |                                                                   |                                             | 13,816       |         |           |           | 22,969     |        
|                                                               | Contracts-in-process                         |                                                                   |                                             | 46,658       |         |           |           | 62,063     |        
|                                                               | Inventories                                  |                                                                   |                                             | 38,929       |         |           |           | 42,456     |        
|                                                               | Insurance proceeds receivable                |                                                                   |                                             |             |         |           |           | 122,770    |        
|                                                               | Other current assets                         |                                                                   |                                             | 23,614       |         |           |           | 36,004     |        
|                                                               |                                              |                                                                   |                                             |              |         |           |           |           
|                                                               |                                              |                                                                   | Total current assets                        |              |         | 309,676   |           |            |         | 427,906   |  
|Property, plant and equipment, net                             |                                              |                                                                   | 929,350                                     |              |         |           | 1,828,282 |           
|Long-term receivables                                          |                                              |                                                                   | 82,105                                      |              |         |           | 70,749    |           
|Investments in and advances to affiliates                      |                                              |                                                                   | 48,193                                      |              |         |           | 46,674    |           
|Deposits                                                       |                                              |                                                                   | 9,000                                       |              |         |           | 9,000     |           
|Other assets                                                   |                                              |                                                                   | 53,799                                      |              |         |           | 73,130    |           
|                                                               |                                              |                                                                   |                                             |              |         |           |           |           
|                                                               |                                              |                                                                   | Total assets                                |              | $       | 1,432,123 |           |            | $       | 2,455,741 |  
|                                                               |                                              |                                                                   |                                             |              |         |           |           |           
|LIABILITIES AND SHAREHOLDERS
    DEFICIT                     
|Liabilities not subject to compromise:                         |                                              |                                                                   |                                             |              |         |           |           |           
|                                                               | Current liabilities:                         |                                                                   |                                             |              |         |           |           |            |        
|                                                               |                                              | Accounts payable                                                  |                                             | $            | 32,241  |           |           | $          | 50,656  |          
|                                                               |                                              | Accrued employment costs                                          |                                             |              | 28,861  |           |           |            | 23,532  |          
|                                                               |                                              | Customer advances and billings in excess of costs
    and profits |                                             |              | 335,899 |           |           |            | 239,225 |          
|                                                               |                                              | Deferred gain on sale of assets (Note 4)                          |                                             |              | 20,646  |           |           |            |        |          
|                                                               |                                              | Accrued interest and preferred dividends                          |                                             |              |        |           |           |            | 1,319   |          
|                                                               |                                              | Income taxes payable                                              |                                             |              | 5,236   |           |           |            | 269     |          
|                                                               |                                              | Other current liabilities                                         |                                             |              | 19,193  |           |           |            | 9,870   |          
|                                                               |                                              |                                                                   |                                             |              |         |           |           |           
|                                                               |                                              |                                                                   | Total current liabilities                   |              |         | 442,076   |           |            |         | 324,871   |  
|                                                               | Pension and other postretirement liabilities |                                                                   |                                             | 21,116       |         |           |           | 10,983     |        
|                                                               | Long-term liabilities                        |                                                                   |                                             | 44,904       |         |           |           | 66,947     |        
|                                                               |                                              |                                                                   |                                             |              |         |           |           |           
|                                                               |                                              |                                                                   | Total liabilities not subject to compromise |              |         | 508,096   |           |            |         | 402,801   |  
|Liabilities subject to compromise (Note 11)                    |                                              |                                                                   | 1,872,946                                   |              |         |           | 2,906,095 |           
|Minority interest                                              |                                              |                                                                   | 2,389                                       |              |         |           | 2,515     |           
|Commitments and contingencies (Notes 2, 9, 11,
    12, and 15) |                                              |                                                                   |                                             |              |         |           |           |           
|Shareholders deficit:                                         |                                              |                                                                   |                                             |              |         |           |           |           
|                                                               | Common stock, $.10 par value                 |                                                                   |                                             | 4,413        |         |           |           | 4,413      |        
|                                                               | Paid-in capital                              |                                                                   |                                             | 3,392,829    |         |           |           | 3,392,829  |        
|                                                               | Treasury stock, at cost                      |                                                                   |                                             | (3,360       | )       |           |           | (3,360     | )      
|                                                               | Unearned compensation                        |                                                                   |                                             | (127         | )       |           |           | (168       | )      
|                                                               | Retained deficit                             |                                                                   |                                             | (4,273,841   | )       |           |           | (4,171,536 | )      
|                                                               | Accumulated other comprehensive loss         |                                                                   |                                             | (71,222      | )       |           |           | (77,848    | )      
|                                                               |                                              |                                                                   |                                             |              |         |           |           |           
|                                                               |                                              |                                                                   | Total shareholders deficit                 |              |         | (951,308  | )         |            |         | (855,670  | )
|                                                               |                                              |                                                                   |                                             |              |         |           |           |           
|                                                               |                                              |                                                                   | Total liabilities and shareholders deficit |              | $       | 1,432,123 |           |            | $       | 2,455,741 |  
|                                                               |                                              |                                                                   |                                             |              |         |           |           |           

See notes to condensed consolidated financial
statements.

1



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


(Unaudited)


|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------ | ------- | ---------------- | - | ---- | -------- | ------- | - | - | -------- | ------- | - | - | -------- | ------- | -
|                                                                                                                                                    |                                                                        |                    |         |                 
|                                                                                                                                                    |                                                                        | Three Months Ended |         | Six Months Ended
|                                                                                                                                                    |                                                                        | June 30,           |         | June 30,        
|                                                                                                                                                    |                                                                        |                    |         |                 
|                                                                                                                                                    |                                                                        | 2004               |         | 2003             |   | 2004 |          | 2003   
|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |        
|Revenues from satellite services                                                                                                                    |                                                                        | $                  | 38,730  |                  |   | $    | 38,792   |         |   | $ | 67,981   |         |   | $ | 79,201   |        
|Revenues from satellite manufacturing                                                                                                               |                                                                        |                    | 74,973  |                  |   |      | 71,207   |         |   |   | 149,406  |         |   |   | 186,244  |        
|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        
|                                                                                                                                                    | Total revenues                                                         |                    |         | 113,703          |   |      |          | 109,999 |   |   |          | 217,387 |   |   |          | 265,445 |  
|Cost of satellite services                                                                                                                          |                                                                        |                    | 52,611  |                  |   |      | 46,985   |         |   |   | 116,192  |         |   |   | 93,878   |        
|Cost of satellite manufacturing                                                                                                                     |                                                                        |                    | 79,232  |                  |   |      | 153,281  |         |   |   | 147,531  |         |   |   | 283,417  |        
|Selling, general and administrative expenses                                                                                                        |                                                                        |                    | 30,794  |                  |   |      | 34,709   |         |   |   | 62,361   |         |   |   | 66,199   |        
|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        
|Loss from continuing operations before
    reorganization expenses due to bankruptcy                                                                |                                                                        |                    | (48,934 | )                |   |      | (124,976 | )       |   |   | (108,697 | )       |   |   | (178,049 | )      
|Reorganization expenses due to bankruptcy                                                                                                           |                                                                        |                    | (9,555  | )                |   |      |         |         |   |   | (17,870  | )       |   |   |         |        
|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        
|Operating loss from continuing operations                                                                                                           |                                                                        |                    | (58,489 | )                |   |      | (124,976 | )       |   |   | (126,567 | )       |   |   | (178,049 | )      
|Interest and investment income                                                                                                                      |                                                                        |                    | 2,473   |                  |   |      | 3,795    |         |   |   | 5,034    |         |   |   | 10,841   |        
|Interest expense (contractual interest was
    $12,722 and $25,585 for the three and six months ended
    June 30, 2004, respectively, see Note 12) |                                                                        |                    | (1,846  | )                |   |      | (7,942   | )       |   |   | (3,833   | )       |   |   | (16,448  | )      
|Gain on investment                                                                                                                                  |                                                                        |                    |        |                  |   |      | 16,793   |         |   |   |         |         |   |   | 17,900   |        
|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        
|Loss from continuing operations before income
    taxes, equity income (losses) in affiliates and minority
    interest                             |                                                                        |                    | (57,862 | )                |   |      | (112,330 | )       |   |   | (125,366 | )       |   |   | (165,756 | )      
|Income tax (provision) benefit                                                                                                                      |                                                                        |                    | (11,987 | )                |   |      | 2,966    |         |   |   | (12,183  | )       |   |   | 6,799    |        
|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        
|Loss from continuing operations before equity
    income (losses) in affiliates and minority interest                                               |                                                                        |                    | (69,849 | )                |   |      | (109,364 | )       |   |   | (137,549 | )       |   |   | (158,957 | )      
|Equity income (losses) in affiliates
    (Note 9)                                                                                                   |                                                                        |                    | 46,983  |                  |   |      | (8,335   | )       |   |   | 46,580   |         |   |   | (16,838  | )      
|Minority interest                                                                                                                                   |                                                                        |                    | 39      |                  |   |      | 15       |         |   |   | 126      |         |   |   | (24      | )      
|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        
|Loss from continuing operations                                                                                                                     |                                                                        |                    | (22,827 | )                |   |      | (117,684 | )       |   |   | (90,843  | )       |   |   | (175,819 | )      
|(Loss) income from discontinued operations (Note
    4)                                                                                             |                                                                        |                    | 158     |                  |   |      | 8,280    |         |   |   | (11,462  | )       |   |   | 18,241   |        
|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        
|Loss before extraordinary gain on acquisition of
    minority interest                                                                              |                                                                        |                    | (22,669 | )                |   |      | (109,404 | )       |   |   | (102,305 | )       |   |   | (157,578 | )      
|Extraordinary gain on acquisition of minority
    interest                                                                                          |                                                                        |                    |        |                  |   |      | 13,615   |         |   |   |         |         |   |   | 13,615   |        
|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        
|Net loss                                                                                                                                            |                                                                        |                    | (22,669 | )                |   |      | (95,789  | )       |   |   | (102,305 | )       |   |   | (143,963 | )      
|Preferred dividends                                                                                                                                 |                                                                        |                    |        |                  |   |      | (3,359   | )       |   |   |         |         |   |   | (6,719   | )      
|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        
|Net loss applicable to common shareholders                                                                                                          |                                                                        | $                  | (22,669 | )                |   | $    | (99,148  | )       |   | $ | (102,305 | )       |   | $ | (150,682 | )      
|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        
|Basic and diluted (loss) earnings per share
    (Note 16):                                                                                          |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        
|                                                                                                                                                    | Continuing operations                                                  |                    | $       | (0.51            | ) |      | $        | (2.76   | ) |   | $        | (2.06   | ) |   | $        | (4.19   | )
|                                                                                                                                                    | Discontinued operations                                                |                    |         |                 |   |      |          | 0.19    |   |   |          | (0.26   | ) |   |          | 0.42    |  
|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        
|                                                                                                                                                    | Loss before extraordinary gain on acquisition of
    minority interest |                    |         | (0.51            | ) |      |          | (2.57   | ) |   |          | (2.32   | ) |   |          | (3.77   | )
|                                                                                                                                                    | Extraordinary gain on acquisition of minority
    interest             |                    |         |                 |   |      |          | 0.31    |   |   |          |        |   |   |          | 0.31    |  
|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        
|                                                                                                                                                    | Loss per share                                                         |                    | $       | (0.51            | ) |      | $        | (2.26   | ) |   | $        | (2.32   | ) |   | $        | (3.46   | )
|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        
|Weighted average shares outstanding:                                                                                                                |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        
|                                                                                                                                                    | Basic and diluted                                                      |                    |         | 44,125           |   |      |          | 43,850  |   |   |          | 44,125  |   |   |          | 43,531  |  
|                                                                                                                                                    |                                                                        |                    |         |                  |   |      |          |         |   |   |          |         |   |   |          |        

See notes to condensed consolidated financial
statements.

2



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


(Unaudited)


|                                                        |                                                                            |                  |          |          |   |   |          |         |  
|------------------------------------------------------- | -------------------------------------------------------------------------- | ---------------- | -------- | -------- | - | - | -------- | ------- | -
|                                                        |                                                                            |                 
|                                                        |                                                                            | Six Months Ended
|                                                        |                                                                            | June 30,        
|                                                        |                                                                            |                 
|                                                        |                                                                            | 2004             |          | 2003    
|                                                        |                                                                            |                  |          |         
|Operating activities:                                   |                                                                            |                  |          |          |   |   |          |        
|Net loss                                                |                                                                            | $                | (102,305 | )        |   | $ | (143,963 | )      
|Non-cash items:                                         |                                                                            |                  |          |          |   |   |          |        
|                                                        | Loss (income) from discontinued operations                                 |                  |          | 11,462   |   |   |          | (18,241 | )
|                                                        | Equity (income) losses in affiliates                                       |                  |          | (46,580  | ) |   |          | 16,838  |  
|                                                        | Minority interest                                                          |                  |          | (126     | ) |   |          | 24      |  
|                                                        | Extraordinary gain on acquisition of minority
    interest                 |                  |          |         |   |   |          | (13,615 | )
|                                                        | Deferred taxes                                                             |                  |          | 11,434   |   |   |          | 3,395   |  
|                                                        | Depreciation and amortization                                              |                  |          | 84,121   |   |   |          | 59,648  |  
|                                                        | Valuation allowance on vendor financing
    receivables                    |                  |          |         |   |   |          | 10,008  |  
|                                                        | Provisions for bad debts                                                   |                  |          | 358      |   |   |          | 1,799   |  
|                                                        | Loss on cancellation of deposits                                           |                  |          |         |   |   |          | 23,500  |  
|                                                        | Loss on acceleration of receipt of long-term
    receivables               |                  |          |         |   |   |          | 10,893  |  
|                                                        | Accrual for Alcatel settlement                                             |                  |          |         |   |   |          | 8,000   |  
|                                                        | Impairment charge on satellite and related assets                          |                  |          | 11,989   |   |   |          |        |  
|                                                        | Loss on equipment disposals                                                |                  |          |         |   |   |          | 86      |  
|                                                        | Adjustment to revenue straightlining assessment                            |                  |          | 1,149    |   |   |          | 2,547   |  
|                                                        | Gain on investment                                                         |                  |          |         |   |   |          | (17,900 | )
|                                                        | Non-cash net (gain) loss on foreign currency
    transactions and interest |                  |          | (2,230   | ) |   |          | 6,801   |  
|                                                        | Provisions for inventory obsolescence                                      |                  |          | 287      |   |   |          | 23,957  |  
|Changes in operating assets and liabilities:            |                                                                            |                  |          |          |   |   |          |        
|                                                        | Accounts receivable, net                                                   |                  |          | 8,086    |   |   |          | (4,509  | )
|                                                        | Contracts-in-process                                                       |                  |          | 29,856   |   |   |          | 68,359  |  
|                                                        | Inventories                                                                |                  |          | 3,240    |   |   |          | (1,683  | )
|                                                        | Long-term receivables                                                      |                  |          | (6,264   | ) |   |          | 54,588  |  
|                                                        | Other current assets and other assets                                      |                  |          | (2,699   | ) |   |          | 7,224   |  
|                                                        | Accounts payable                                                           |                  |          | (8,452   | ) |   |          | (13,480 | )
|                                                        | Accrued expenses and other current liabilities                             |                  |          | (1,964   | ) |   |          | (9,058  | )
|                                                        | Customer advances                                                          |                  |          | 72,220   |   |   |          | (46,182 | )
|                                                        | Income taxes payable                                                       |                  |          | (814     | ) |   |          | (872    | )
|                                                        | Pension and other postretirement liabilities                               |                  |          | 9,039    |   |   |          | 5,479   |  
|                                                        | Long-term liabilities                                                      |                  |          | (3,362   | ) |   |          | (5,180  | )
|                                                        | Other                                                                      |                  |          | 6        |   |   |          | (82     | )
|                                                        |                                                                            |                  |          |          |   |   |          |        
|Net cash provided by operating activities               |                                                                            |                  | 68,451   |          |   |   | 28,381   |        
|                                                        |                                                                            |                  |          |          |   |   |          |        
|Net cash provided by discontinued operations            |                                                                            |                  | 29,445   |          |   |   | 48,764   |        
|                                                        |                                                                            |                  |          |          |   |   |          |        
|Investing activities:                                   |                                                                            |                  |          |          |   |   |          |        
|                                                        | Capital expenditures for continuing operations                             |                  |          | (23,630  | ) |   |          | (32,950 | )
|                                                        | Capital expenditures for discontinued operations                           |                  |          | (11,185  | ) |   |          | (17,036 | )
|                                                        | Proceeds from the sales of assets, net of
    expenses (Note 2)            |                  |          | 953,619  |   |   |          |        |  
|                                                        | Proceeds from sale of investment                                           |                  |          |         |   |   |          | 45,908  |  
|                                                        | Investments in and advances to affiliates                                  |                  |          | (4,798   | ) |   |          | (11,715 | )
|                                                        |                                                                            |                  |          |          |   |   |          |        
|Net cash provided by (used in) investing
    activities |                                                                            |                  | 914,006  |          |   |   | (15,793  | )      
|                                                        |                                                                            |                  |          |          |   |   |          |        
|Financing activities:                                   |                                                                            |                  |          |          |   |   |          |        
|                                                        | Repayments of term loans                                                   |                  |          | (576,500 | ) |   |          | (32,500 | )
|                                                        | Repayments of revolving credit facilities                                  |                  |          | (390,387 | ) |   |          |        |  
|                                                        | Borrowings under revolving credit facilities                               |                  |          |         |   |   |          | 66,000  |  
|                                                        | Interest payments on 10% senior notes                                      |                  |          |         |   |   |          | (30,635 | )
|                                                        | Repayments of other long-term obligations                                  |                  |          |         |   |   |          | (1,072  | )
|                                                        | Proceeds from other stock issuances                                        |                  |          |         |   |   |          | 3,817   |  
|                                                        | Payment of bank amendment costs                                            |                  |          |         |   |   |          | (5,131  | )
|                                                        |                                                                            |                  |          |          |   |   |          |        
|Net cash (used in) provided by financing
    activities |                                                                            |                  | (966,887 | )        |   |   | 479      |        
|                                                        |                                                                            |                  |          |          |   |   |          |        
|Increase in cash and cash equivalents                   |                                                                            |                  | 45,015   |          |   |   | 61.831   |        
|                                                        | Cash and cash equivalents  beginning
    of period                        |                  |          | 141,644  |   |   |          | 65,936  |  
|                                                        |                                                                            |                  |          |          |   |   |          |        
|                                                        | Cash and cash equivalents  end of
    period                              |                  | $        | 186,659  |   |   | $        | 127,767 |  
|                                                        |                                                                            |                  |          |          |   |   |          |        

See notes to condensed consolidated financial
statements.

3



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS




|   |                                    
|-- | -----------------------------------
|1. | Organization and Principal Business

Loral Space & Communications Ltd.
(Loral, the Company, we,
our and us, terms that include our
subsidiaries unless otherwise indicated or the context requires)
together with its subsidiaries is a leading satellite
communications company with substantial activities in
satellite-based communications services and satellite
manufacturing. Loral is organized into two operating segments
(see Note 17):



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Satellite Services,managed by our Loral Skynet division,
    generates its revenues and cash from leasing satellite capacity
    and platforms to customers for video and direct to home
    (DTH) broadcasting, high-speed data distribution,
    Internet access, communications and networking services.                                                                                                                                                             
|
| | Satellite Manufacturing,conducted by our subsidiary, Space
    Systems/ Loral (SS/ L), generates its revenues and
    cash from designing and manufacturing satellites, space systems
    and space system components for commercial and government
    applications including satellite services, DTH broadcasting,
    broadband data distribution, wireless telephony, digital radio,
    military communications, weather monitoring and air traffic
    management.



|   |                                                          
|-- | ---------------------------------------------------------
|2. | Bankruptcy Filings, Sale of Assets and
    Reorganization



| |                   
| | ------------------
| | Bankruptcy Filings

On July 15, 2003, Loral and certain of its
subsidiaries (the Debtor Subsidiaries and
collectively with Loral, the Debtors), including
Loral Space & Communications Corporation, Loral SpaceCom
Corporation (Loral SpaceCom), Loral Satellite, Inc.
(Loral Satellite), SS/ L and Loral Orion, Inc.
(Loral Orion), filed voluntary petitions for
reorganization under chapter 11 of title 11
(Chapter 11) of the United States Code (the
Bankruptcy Code) in the United States Bankruptcy
Court for the Southern District of New York (the
Bankruptcy Court) (Lead Case No. 03-41710
(RDD), Case Nos. 03-41709 (RDD) through 03-41728 (RDD))
(the Chapter 11 Cases). We and our Debtor
Subsidiaries continue to manage our properties and operate our
businesses as debtors in possession under the
jurisdiction of the Bankruptcy Court and in accordance with the
provisions of the Bankruptcy Code (see Note 3).

Also on July 15, 2003, Loral and one of its
Bermuda subsidiaries (the Bermuda Group) filed
parallel insolvency proceedings in the Supreme Court of Bermuda
(the Bermuda Court). On that date, the Bermuda Court
entered an order appointing Philip Wallace, Chris Laverty and
Michael Morrison, partners of KPMG, as Joint Provisional
Liquidators (JPLs) in respect of the Bermuda Group.
The Bermuda Court granted the JPLs the power to oversee the
continuation and reorganization of these companies
businesses under the control of their boards of directors and
under the supervision of the U.S. Bankruptcy Court and the
Bermuda Court. The JPLs have not audited the contents of this
report.

As a result of our voluntary petitions for
reorganization, all of our prepetition debt obligations were
accelerated (see below and Notes 11 and 12). On July 15,
2003, we also suspended interest payments on all of our
unsecured debt obligations. A creditors committee was
appointed in the Chapter 11 Cases to represent all
unsecured creditors, including all debt holders, and, in
accordance with the provisions of the Bankruptcy Code, has the
right to be heard on all matters that come before the Bankruptcy
Court (see Note 12).

For the duration of the Chapter 11 Cases,
our businesses are subject to the risks and uncertainties of
bankruptcy. For example, the Chapter 11 Cases could
adversely affect our relationships with customers, suppliers and
employees which in turn could adversely affect the going concern
value of our businesses and of our assets, particularly if the
Chapter 11 Cases are protracted. Also, transactions outside
the ordinary course of business are subject to the prior
approval of the Bankruptcy Court which may limit our ability to
respond to certain market events or take advantage of certain
market opportunities, and, as a result, our operations could be
materially adversely affected.

4



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Because we are in Chapter 11, the pursuit of
all claims and litigation pending against us that arose prior to
or relate to events that occurred prior to our bankruptcy
filings is generally subject to an automatic stay under
Section 362 of the Bankruptcy Code. Accordingly, absent
further order of the Bankruptcy Court, a party is generally
prohibited from taking any action to recover any prepetition
claims, enforce any lien against or obtain possession of any of
our property. In addition, pursuant to Section 365 of the
Bankruptcy Code, we may reject or assume prepetition executory
contracts and unexpired leases. Parties affected by our
rejections of contracts or leases may file claims with the
Bankruptcy Court.

On July 15, 2003, the New York Stock
Exchange suspended trading of our common stock and, on
September 2, 2003, removed our securities from listing and
registration. Our common stock is being quoted under the ticker
symbol LRLSQ on the Pink Sheets and on the Over-The-Counter
Bulletin Board Service (see Reorganizationbelow).



| |               
| | --------------
| | Sale of Assets

On March 17, 2004, Loral Space &
Communications Corporation, Loral SpaceCom Corporation and Loral
Satellite, Inc. (collectively, the Sellers)
consummated the sale (the Sale) of our North
American satellites and related assets to certain affiliates of
Intelsat, Ltd. and Intelsat (Bermuda), Ltd. (collectively,
Intelsat or the Purchasers). At closing,
we received approximately $1.011 billion, consisting of
approximately $961 million for the North American
satellites and related assets, after adjustments, and $50
million for an advance on a new satellite to be built for
Intelsat by SS/ L. Our obligations with respect to the
$50 million advance are secured by the Telstar 14/ Estrela
do Sul-1 satellite and related assets, including insurance
proceeds relating to the satellite. We used a significant
portion of the funds received to repay all $967 million of
our outstanding secured bank debt. In addition, after closing,
the Sellers received from Intelsat approximately
$16 million to reimburse a deposit made by us for the
launch of Telstar 8, and we received an additional
$4 million in May 2004 as a purchase price adjustment
resulting from resolution of a regulatory issue.

The North American satellites and related assets
have been accounted for as a discontinued operation, resulting
in the reclassification of our historical condensed consolidated
statements of operations and statements of cash flows to reflect
them as discontinued operations separately from continuing
operations (see Note 4).



| |               
| | --------------
| | Reorganization

We intend to reorganize around our satellite
manufacturing operations and our remaining fleet of
international satellites and do not believe we will require any
additional financing to fund operations.

On July 22, 2004, we announced that we had
reached an agreement with the creditors committee in our
Chapter 11 Cases on the principal terms of a plan of
reorganization. Under the proposed plan, reorganized Loral will
continue under current management substantially debt-free, with
its two businesses, satellite manufacturing, conducted by SS/ L
and satellite services, managed by Loral Skynet, intact. The
proposed plan will provide that all pre-petition institutional
debt will be exchanged for substantially all of the equity of
the reorganized company, and that certain other pre-petition
general unsecured creditors will be offered a payment plan that
may include an option to elect either a discounted cash payment
or a payout over time. The proposed plan will not provide for
any recovery or participation in reorganized Loral by the
holders of our existing common or preferred stock.

The Bankruptcy Court has extended the period
during which we have the exclusive right to file a plan of
reorganization through August 27, 2004, subject to any
further extension, as to which we can give no assurance. We are
currently working with the creditors committee to document
the proposed consensual plan of reorganization. If we fail to
file our plan of reorganization during this exclusive period, or
if a plan is filed

5



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and is not accepted by the required number of
creditors within the required period, any party in interest may
subsequently file its own plan of reorganization for us.

Implementation of the proposed plan and the
treatment of claims and equity interests as provided therein,
are subject to confirmation of the plan in accordance with the
provisions of the Bankruptcy Code. Although we expect to file
the plan of reorganization within a time frame to permit for
Lorals emergence from Chapter 11 some time in 2004,
the timing and terms of resolution of the Chapter 11 cases
cannot be predicted with certainty. There can be no assurance
that we will be able to obtain court approval of the plan we
propose or obtain acceptances from the number of creditors
necessary to confirm this plan.



|   |                      
|-- | ---------------------
|3. | Basis of Presentation

The accompanying unaudited condensed consolidated
financial statements (the financial statements) have
been prepared assuming Loral, in its current structure, will
continue as a going concern. However, the factors mentioned in
Note 2 above, among other things, raise substantial doubt about
our ability to continue as a going concern. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty. Our ability to continue as a
going concern is dependent on a number of factors including, but
not limited to, our submission of a plan of reorganization, the
Bankruptcy Courts confirmation of a plan, and maintaining
good relations with our customers, suppliers and employees. If a
plan of reorganization is not confirmed and implemented, we may
be forced to liquidate under applicable provisions of the
Bankruptcy Code. We cannot give any assurance of the level of
recovery our creditors would receive in a liquidation. The
financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and
classification of assets or the amounts and classification of
liabilities if we were forced to liquidate (see Reorganization
in Note 2).

The financial statements have been prepared
pursuant to the rules of the Securities and Exchange Commission
(SEC) and, in our opinion, 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 SEC rules. We believe that the disclosures
made are adequate to keep the information presented from being
misleading. The results of operations for the three and six
months ended June 30, 2004 are not necessarily indicative
of the results to be expected for the full year. The
December 31, 2003 balance sheet has been derived from the
audited consolidated financial statements at that date. It is
suggested that these financial statements be read in conjunction
with the audited consolidated financial statements included in
our latest Annual Report on Form 10-K.

The financial statements have been prepared in
accordance with Statement of Position No. 90-7, Financial
Reporting by Entities in Reorganization under the Bankruptcy
Code (SOP 90-7). SOP 90-7 requires us to distinguish
prepetition liabilities subject to compromise from postpetition
liabilities in our condensed consolidated balance sheet. The
caption liabilities subject to compromise reflects
the carrying value of prepetition claims that will be
restructured in our Chapter 11 Cases. In addition, our
condensed consolidated statements of operations portray the
results of operations of the reporting entity during
Chapter 11 proceedings. As a result, any revenue, expenses,
realized gains and losses, and provision for losses resulting
directly from the reorganization and restructuring of the
organization are reported separately as reorganization items,
except those required to be reported as discontinued operations
and extraordinary items in conformity with Statement of
Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS 144) and SFAS No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections
(SFAS 145). We did not prepare condensed
combined financial statements for Loral and its Debtor
Subsidiaries, since the subsidiaries that did not file voluntary
petitions for reorganization under Chapter 11 of

6



---



##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the Bankruptcy Code were immaterial to our
condensed consolidated financial position and results of
operations.



| |             
| | ------------
| | Income Taxes

During 2004 and 2003, we continued to maintain
the 100% valuation allowance established at December 31,
2002 and recorded no benefit for our domestic loss. As described
in Notes 6 and 9, with Globalstar, L.P.s
(Globalstar) liquidation on June 29, 2004, we
wrote-off the remaining book value of our investment in
Globalstars $500 million credit facility and reduced
to zero the unrealized gains and related deferred tax
liabilities previously reflected in accumulated other
comprehensive loss. The reversal of these deferred tax
liabilities, resulted in a net deferred tax asset of
$11.4 million against which we recorded a full valuation
allowance. Therefore, for 2004, our provision for continuing
operations includes the additional valuation allowance of
$11.4 million, a provision for foreign income taxes and no
benefit for the loss from continuing and discontinued
operations. For 2003, the benefit in continuing operations
primarily relates to a reclassification of a provision to income
from discontinued operations offset by a deferred tax liability
recorded for certain foreign entities.



| |                                         
| | ----------------------------------------
| | Pensions and Other Employee
    Benefits

The following table provides the components of
net periodic benefit cost for our qualified and supplemental
retirement plans (the Pension Benefits) and health
care and life insurance benefits for retired employees and
dependents (the Other Benefits) for the three and
six months ended June 30, 2004 and 2003 respectively (in
thousands):

|                                   |  |                    |        |                  |  |                    |        |                  |  |      |        |      |  |      |        |      |  |   |       |   |  |   |       |   |  |   |       |   |  |   |       |  
|---------------------------------- |  | ------------------ | ------ | ---------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ----- | - |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                   |  |                    |        |                 
|                                   |  | Pension Benefits   |        | Other Benefits  
|                                   |  |                    |        |                 
|                                   |  |                    |        |                  |  |                    |        |                 
|                                   |  | Three Months Ended |        | Six Months Ended |  | Three Months Ended |        | Six Months Ended
|                                   |  | June 30,           |        | June 30,         |  | June 30,           |        | June 30,        
|                                   |  |                    |        |                  |  |                    |        |                 
|                                   |  | 2004               |        | 2003             |  | 2004               |        | 2003             |  | 2004 |        | 2003 |  | 2004 |        | 2003
|                                   |  |                    |        |                  |  |                    |        |                  |  |      |        |      |  |      |        |     
|Service cost                       |  | $                  | 2,324  |                  |  | $                  | 3,049  |                  |  | $    | 4,648  |      |  | $    | 6,098  |      |  | $ | 274   |   |  | $ | 836   |   |  | $ | 548   |   |  | $ | 1,672 |  
|Interest cost                      |  |                    | 5,548  |                  |  |                    | 5,498  |                  |  |      | 11,096 |      |  |      | 10,996 |      |  |   | 1,069 |   |  |   | 1,300 |   |  |   | 2,138 |   |  |   | 2,600 |  
|Expected return on plan assets     |  |                    | (4,870 | )                |  |                    | (4,596 | )                |  |      | (9,740 | )    |  |      | (9,192 | )    |  |   | (20   | ) |  |   | (37   | ) |  |   | (40   | ) |  |   | (74   | )
|Amortization of prior service cost |  |                    | (9     | )                |  |                    | (9     | )                |  |      | (18    | )    |  |      | (18    | )    |  |   | (483  | ) |  |   | (318  | ) |  |   | (966  | ) |  |   | (636  | )
|Amortization of net loss           |  |                    | 1,164  |                  |  |                    | 1,314  |                  |  |      | 2,328  |      |  |      | 2,628  |      |  |   | 564   |   |  |   | 428   |   |  |   | 1,128 |   |  |   | 856   |  
|                                   |  |                    |        |                  |  |                    |        |                  |  |      |        |      |  |      |        |      |  |   |       |   |  |   |       |   |  |   |       |   |  |   |       |  
|                                   |  | $                  | 4,157  |                  |  | $                  | 5,256  |                  |  | $    | 8,314  |      |  | $    | 10,512 |      |  | $ | 1,404 |   |  | $ | 2,209 |   |  | $ | 2,808 |   |  | $ | 4,418 |  
|                                   |  |                    |        |                  |  |                    |        |                  |  |      |        |      |  |      |        |      |  |   |       |   |  |   |       |   |  |   |       |   |  |   |       |  

7



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                     
| | ------------------------------------
| | Additional Cash Flow
    Information

The following represents non-cash activities and
supplemental information to the condensed consolidated
statements of cash flows (in thousands):

|                          |                                                                              |                         |   |        |        |   |   |        |   | 
|------------------------- | ---------------------------------------------------------------------------- | ----------------------- | - | ------ | ------ | - | - | ------ | - | 
|                          |                                                                              |                        
|                          |                                                                              | Six Months Ended       
|                          |                                                                              | June 30,               
|                          |                                                                              |                        
|                          |                                                                              | 2004                    |   | 2003  
|                          |                                                                              |                         |   |       
|Non-cash activities:      |                                                                              |                         |   |        |        |   |   |       
|                          | Unrealized gains (losses) on
    available-for-sale securities, net of taxes |                         | $ | 8,142  |        |   | $ | (2,513 | )
|                          |                                                                              |                         |   |        |        |   |   |       
|                          | Unrealized net (losses) gains on
    derivatives, net of taxes               |                         | $ | (1,483 | )      |   | $ | 332    |  
|                          |                                                                              |                         |   |        |        |   |   |       
|                          | Accrual of preferred dividends                                               |                         |   |        |        |   | $ | 6,719  |  
|                          |                                                                              |                         |   |        |        |   |   |       
|Supplemental information: |                                                                              |                         |   |        |        |   |   |       
|                          | Cash (paid) received for reorganization
    items:                           |                         |   |        |        |   |   |        |  
|                          |                                                                              | Professional fees       |   | $      | (8,694 | ) |   |        |   | 
|                          |                                                                              |                         |   |        |        |   |   |       
|                          |                                                                              | Retention costs         |   | $      | (5,755 | ) |   |        |   | 
|                          |                                                                              |                         |   |        |        |   |   |       
|                          |                                                                              | Severance costs         |   | $      | (917   | ) |   |        |   | 
|                          |                                                                              |                         |   |        |        |   |   |       
|                          |                                                                              | Vendor settlement gains |   | $      | (36    | ) |   |        |   | 
|                          |                                                                              |                         |   |        |        |   |   |       
|                          |                                                                              | Interest income         |   | $      | 494    |   |   |        |   | 
|                          |                                                                              |                         |   |        |        |   |   |       



| |                  
| | -----------------
| | Reclassifications

Certain reclassifications have been made to
conform prior year amounts to the current years
presentation.



|   |                        
|-- | -----------------------
|4. | Discontinued Operations

As described in Note 2, on March 17, 2004,
we completed the sale of our North American satellites and
related assets to Intelsat. The operating revenues and expenses
of these assets have been classified as discontinued operations
under SFAS No. 144 for all periods presented. Due to
certain unsettled contingencies, we have deferred the expected
gain on the sale of approximately $21 million on our
condensed consolidated balance sheet as of June 30, 2004.
The determination of the actual gain will be finalized when all
contingencies are resolved, which is expected to occur by the
end of 2004. Accordingly, the actual gain ultimately recognized
may be different than the deferred gain reflected here.

The following table summarizes certain statement
of operations data for the discontinued operations. In 2004, the
operating results of the discontinued operations are for the
period from January 1, 2004 to March 17, 2004, the
date of the sale. The 2004 results include the write-off of
approximately $11 million of debt issue costs to interest
expense relating to secured debt that we repaid. For the
purposes of this presentation, in accordance with SFAS 144, we
have included in continuing operations all indirect costs
normally associated

8



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

with these operations, including telemetry,
tracking and control, access control, maintenance and
engineering, selling and marketing, and general and
administrative.

|                                           |  |                    |     |                  |  |      |         |      |  |   |         |   |  |   |         |  
|------------------------------------------ |  | ------------------ | --- | ---------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                           |  |                    |     |                 
|                                           |  | Three Months Ended |     | Six Months Ended
|                                           |  | June 30,           |     | June 30,        
|                                           |  |                    |     |                 
|                                           |  | 2004               |     | 2003             |  | 2004 |         | 2003
|                                           |  |                    |     |                  |  |      |         |     
|                                           |  |                   
|                                           |  | (In thousands)    
|Revenues of discontinued operations        |  | $                  |    |                  |  | $    | 33,206  |      |  | $ | 29,106  |   |  | $ | 76,534  |  
|                                           |  |                    |     |                  |  |      |         |      |  |   |         |   |  |   |         |  
|Operating income (loss)                    |  | $                  | (25 | )                |  | $    | 24,100  |      |  | $ | 13,293  |   |  | $ | 48,174  |  
|Interest expense                           |  |                    | 183 |                  |  |      | (10,987 | )    |  |   | (24,755 | ) |  |   | (19,285 | )
|                                           |  |                    |     |                  |  |      |         |      |  |   |         |   |  |   |         |  
|Income (loss) before income taxes          |  |                    | 158 |                  |  |      | 13,113  |      |  |   | (11,462 | ) |  |   | 28,889  |  
|Income tax provision                       |  |                    |    |                  |  |      | (4,833  | )    |  |   |        |   |  |   | (10,648 | )
|                                           |  |                    |     |                  |  |      |         |      |  |   |         |   |  |   |         |  
|Income (loss) from discontinued operations |  | $                  | 158 |                  |  | $    | 8,280   |      |  | $ | (11,462 | ) |  | $ | 18,241  |  
|                                           |  |                    |     |                  |  |      |         |      |  |   |         |   |  |   |         |  

The satellites sold had a net book value of
$935 million, including insurance proceeds receivable on
our consolidated balance sheet at December 31, 2003. The
related assets and liabilities sold had a net book value of
$30 million and $31 million, respectively, as of
December 31, 2003.



|   |                                            
|-- | -------------------------------------------
|5. | Accounting for Stock Based
    Compensation

In accordance with SFAS No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure
(SFAS 148), an amendment of SFAS 123, presented
below are pro forma results reflecting the application of the
fair value-based method of accounting for stock-based employee
compensation. Under SFAS 123, the fair value of stock-based
awards to employees is calculated using option pricing models,
even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without
vesting restrictions, which differ significantly from our stock
option awards. These models also require subjective assumptions,
including future stock price volatility and expected exercise
time, which can significantly affect the calculated values. We
used the Black-Scholes option pricing model with the following
weighted average assumptions in our calculations: expected life,
six to twelve months following vesting; stock volatility, 90%;
risk free interest rate, 2.4% to 6.6% based on date of grant;
and dividends, none during the expected term. Our calculations
are based on a multiple option valuation approach and
forfeitures are recognized as they occur. The following table
summarizes what our pro forma net loss and pro forma loss per

9



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

share would have been if we used the fair value
method under SFAS 123 (in millions, except per share amounts):

|                                                                                                                          |  |                    |       |                  |  |      |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                          |  |                    |       |                 
|                                                                                                                          |  | Three Months Ended |       | Six Months Ended
|                                                                                                                          |  | June 30,           |       | June 30,        
|                                                                                                                          |  |                    |       |                 
|                                                                                                                          |  | 2004               |       | 2003             |  | 2004 |        | 2003
|                                                                                                                          |  |                    |       |                  |  |      |        |     
|Reported loss from continuing operations                                                                                  |  | $                  | (22.8 | )                |  | $    | (117.7 | )    |  | $ | (90.8  | ) |  | $ | (175.8 | )
|Add: Total stock based compensation charged to
    operations under the intrinsic value method, net of taxes              |  |                    |      |                  |  |      |       |      |  |   |       |   |  |   |       |  
|Less: Total stock based employee compensation
    determined under the fair value method for all awards, net of
    taxes |  |                    | (0.3  | )                |  |      | (1.7   | )    |  |   | (0.6   | ) |  |   | (2.3   | )
|                                                                                                                          |  |                    |       |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Pro forma loss from continuing operations                                                                                 |  |                    | (23.1 | )                |  |      | (119.4 | )    |  |   | (91.4  | ) |  |   | (178.1 | )
|Net (loss) income from discontinued
    operations, net of taxes                                                          |  |                    | 0.1   |                  |  |      | 8.3    |      |  |   | (11.5  | ) |  |   | 18.2   |  
|                                                                                                                          |  |                    |       |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Pro forma net loss before extraordinary gain on
    acquisition of minority interest                                      |  |                    | (23.0 | )                |  |      | (111.1 | )    |  |   | (102.9 | ) |  |   | (159.9 | )
|Extraordinary gain on acquisition of minority
    interest                                                                |  |                    |      |                  |  |      | 13.6   |      |  |   |       |   |  |   | 13.6   |  
|                                                                                                                          |  |                    |       |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Pro forma net loss                                                                                                        |  |                    | (23.0 | )                |  |      | (97.5  | )    |  |   | (102.9 | ) |  |   | (146.3 | )
|Preferred dividends                                                                                                       |  |                    |      |                  |  |      | (3.4   | )    |  |   |       |   |  |   | (6.7   | )
|                                                                                                                          |  |                    |       |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Pro forma net loss applicable to common
    shareholders                                                                  |  | $                  | (23.0 | )                |  | $    | (100.9 | )    |  | $ | (102.9 | ) |  | $ | (153.0 | )
|                                                                                                                          |  |                    |       |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Reported basic and diluted loss per share from
    continuing operations                                                  |  | $                  | (0.51 | )                |  | $    | (2.76  | )    |  | $ | (2.06  | ) |  | $ | (4.19  | )
|Pro forma basic and diluted loss per share from
    continuing operations                                                 |  |                    | (0.52 | )                |  |      | (2.80  | )    |  |   | (2.07  | ) |  |   | (4.25  | )
|Basic and diluted income (loss) per share
    from discontinued operations                                                |  |                    |      |                  |  |      | 0.19   |      |  |   | (0.26  | ) |  |   | 0.42   |  
|Extraordinary gain on acquisition of minority
    interest                                                                |  |                    |      |                  |  |      | 0.31   |      |  |   |       |   |  |   | 0.31   |  
|Reported loss per share applicable to common
    shareholders                                                             |  |                    | (0.51 | )                |  |      | (2.26  | )    |  |   | (2.32  | ) |  |   | (3.46  | )
|Pro forma loss per share applicable to common
    shareholders                                                            |  |                    | (0.52 | )                |  |      | (2.30  | )    |  |   | (2.33  | ) |  |   | (3.51  | )

The fair values of stock based employee
compensation above were calculated based on the relative values
of the options at the date of grant. In order for the stock
options to have any value to the holders, the market share of
our common stock would have to rise from $0.14 at June 30,
2004 to greater than $3.80 (the lowest price of our stock
options outstanding).

Our proposed consensual plan of reorganization
would not provide for participation or recovery by our equity
holders.

10



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                   
|-- | ------------------
|6. | Comprehensive Loss

The components of comprehensive loss are as
follows (in thousands):

|                                                                               |                                                                                                                                          |                    |         |                  |   |      |          |      |   |   |          |        |   |   |          |      |  
|------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------- | ---------------- | - | ---- | -------- | ---- | - | - | -------- | ------ | - | - | -------- | ---- | -
|                                                                               |                                                                                                                                          |                    |         |                 
|                                                                               |                                                                                                                                          | Three Months Ended |         | Six Months Ended
|                                                                               |                                                                                                                                          | June 30,           |         | June 30,        
|                                                                               |                                                                                                                                          |                    |         |                 
|                                                                               |                                                                                                                                          | 2004               |         | 2003             |   | 2004 |          | 2003
|                                                                               |                                                                                                                                          |                    |         |                  |   |      |          |     
|Net loss                                                                       |                                                                                                                                          | $                  | (22,669 | )                |   | $    | (95,789  | )    |   | $ | (102,305 | )      |   | $ | (143,963 | )   
|Cumulative translation adjustment                                              |                                                                                                                                          |                    | 29      |                  |   |      | 5        |      |   |   | (33      | )      |   |   | 426      |     
|Unrealized gains (losses) on
    available-for-sale securities, net of taxes   |                                                                                                                                          |                    | 8,594   |                  |   |      | (2,513   | )    |   |   | 8,142    |        |   |   | (2,513   | )   
|Foreign currency hedging:                                                      |                                                                                                                                          |                    |         |                  |   |      |          |      |   |   |          |        |   |   |          |     
|                                                                               | Net (decrease) increase in foreign currency
    exchange contracts                                                                       |                    |         |                 |   |      |          | 223  |   |   |          |       |   |   |          | 453  |  
|                                                                               | Reclassifications into revenue and cost of sales
    from other comprehensive income                                                     |                    |         | (234             | ) |      |          | (260 | ) |   |          | (1,483 | ) |   |          | 382  |  
|                                                                               | Reclassifications into interest expense from
    other comprehensive income for anticipated transactions that are
    no longer probable |                    |         |                 |   |      |          | (59  | ) |   |          |       |   |   |          | (504 | )
|Less: realized gains on available-for-sale
    securities included in net loss |                                                                                                                                          |                    |        |                  |   |      | (10,421  | )    |   |   |         |        |   |   |         |     
|                                                                               |                                                                                                                                          |                    |         |                  |   |      |          |      |   |   |          |        |   |   |          |     
|Comprehensive loss                                                             |                                                                                                                                          | $                  | (14,280 | )                |   | $    | (108,814 | )    |   | $ | (95,679  | )      |   | $ | (145,719 | )   
|                                                                               |                                                                                                                                          |                    |         |                  |   |      |          |      |   |   |          |        |   |   |          |     

As described in Note 9, with Globalstars
liquidation on June 29, 2004, we wrote-off the remaining
book value of our investment in Globalstars
$500 million credit facility and reduced to zero the
unrealized gains and related deferred tax liabilities previously
reflected in accumulated other comprehensive loss. The
unrealized gains reflected above for the three and six months
ended June 30, 2004, include the reversal of
$11.4 million of deferred tax liabilities relating to our
investment in Globalstars $500 million credit
facility.



|   |                     
|-- | --------------------
|7. | Contracts-in-Process

|                     |  |                |        |              |  |   |        | 
|-------------------- |  | -------------- | ------ | ------------ |  | - | ------ | 
|                     |  | June 30,       |        | December 31,
|                     |  | 2004           |        | 2003        
|                     |  |                |        |             
|                     |  |               
|                     |  | (In thousands)
|Amounts billed       |  | $              | 31,396 |              |  | $ | 14,104 | 
|Unbilled receivables |  |                | 15,262 |              |  |   | 47,959 | 
|                     |  |                |        |              |  |   |        | 
|                     |  | $              | 46,658 |              |  | $ | 62,063 | 
|                     |  |                |        |              |  |   |        | 

Unbilled amounts include recoverable costs and
accrued profit on progress completed. Such amounts are billed in
accordance with the contract terms, typically upon shipment of
the product, achievement of contractual milestones, or
completion of the contract and, at such time, are reclassified
to billed receivables.

When we filed for Chapter 11, SS/ Ls
hedges with counterparties (primarily yen-denominated forward
contracts) were cancelled leaving SS/ L vulnerable to foreign
currency fluctuations in the future. The inability to enter into
forward contracts exposes SS/ Ls future revenues, costs
and cash associated with anticipated yen-denominated receipts
and payments to currency fluctuations. As of June 30, 2004,
SS/ L had the following

11



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

amounts denominated in Japanese yen (which was
translated into U.S. dollars based on the June 30, 2004
exchange rate) that were unhedged (in millions):

|                     |  |              |       |        |  |   |      | 
|-------------------- |  | ------------ | ----- | ------ |  | - | ---- | 
|                     |  | Japanese Yen |       | U.S. $
|                     |  |              |       |       
|Future revenues      |  | ¥            | 1,090 |        |  | $ | 10.1 | 
|Future expenditures  |  |              | 1,134 |        |  |   | 10.5 | 
|Contracts-in-process |  |              | 1,523 |        |  |   | 14.1 | 

At June 30, 2004, SS/ L also had future
expenditures in euros of 1.8 million ($2.2 million
U.S.) that were unhedged.



|   |                              
|-- | -----------------------------
|8. | Property, Plant and Equipment

|                                                                                  |  |                |           |              |  |   |           |  
|--------------------------------------------------------------------------------- |  | -------------- | --------- | ------------ |  | - | --------- | -
|                                                                                  |  | June 30,       |           | December 31,
|                                                                                  |  | 2004           |           | 2003        
|                                                                                  |  |                |           |             
|                                                                                  |  |               
|                                                                                  |  | (In thousands)
|Land and land improvements                                                        |  | $              | 24,827    |              |  | $ | 24,827    |  
|Buildings                                                                         |  |                | 88,251    |              |  |   | 86,065    |  
|Leasehold improvements                                                            |  |                | 17,000    |              |  |   | 16,995    |  
|Satellites in-orbit, including satellite
    transponder rights of $279.6 million |  |                | 1,008,820 |              |  |   | 1,454,511 |  
|Satellites under construction                                                     |  |                | 158,546   |              |  |   | 707,453   |  
|Earth stations                                                                    |  |                | 39,676    |              |  |   | 59,303    |  
|Equipment, furniture and fixtures                                                 |  |                | 298,663   |              |  |   | 290,257   |  
|Other construction in progress                                                    |  |                | 11,016    |              |  |   | 24,728    |  
|                                                                                  |  |                |           |              |  |   |           |  
|                                                                                  |  |                | 1,646,799 |              |  |   | 2,664,139 |  
|Accumulated depreciation and amortization                                         |  |                | (717,449  | )            |  |   | (835,857  | )
|                                                                                  |  |                |           |              |  |   |           |  
|                                                                                  |  | $              | 929,350   |              |  | $ | 1,828,282 |  
|                                                                                  |  |                |           |              |  |   |           |  

On March 17, 2004 we sold our North American
satellites and related assets (see Note 2).

In January 2004, our Telstar 14/ Estrela do Sul-1
satellites North solar array only partially deployed after
launch diminishing the power and life expectancy of the
satellite. At the end of March 2004, the satellite began
commercial service able to operate from 15 to 17 of its 41
transponders. The satellites life expectancy is now
approximately seven years, as compared to a design life of
15 years. During March 2004, we recorded an impairment
charge of $12 million to reduce the carrying value of the
satellite and related assets to the expected proceeds from
insurance of $250 million. Until the claim process with the
insurers has been completed, however, there can be no assurance
as to the amount of the insurance proceeds that we will receive
regarding this claim. We believe resolution of the insurance
claim will not have a material adverse effect on our condensed
consolidated financial position or our results of operations,
although no assurance can be provided.

12



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                              
|-- | ---------------------------------------------
|9. | Investments in and Advances to
    Affiliates

Investments in and advances to affiliates consist
of (in thousands):

|                         |  |          |        |              |  |   |        | 
|------------------------ |  | -------- | ------ | ------------ |  | - | ------ | 
|                         |  | June 30, |        | December 31,
|                         |  | 2004     |        | 2003        
|                         |  |          |        |             
|XTAR equity investments  |  | $        | 48,193 |              |  | $ | 43,382 | 
|Globalstar:              |  |          |        |              |  |   |        | 
|Acquired notes and loans |  |          |       |              |  |   | 3,292  | 
|                         |  |          |        |              |  |   |        | 
|                         |  | $        | 48,193 |              |  | $ | 46,674 | 
|                         |  |          |        |              |  |   |        | 

Equity income (losses) in affiliates,
consists of (in thousands):

|                                                            |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |         |  
|----------------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------- | -
|                                                            |  |                    |        |                 
|                                                            |  | Three Months Ended |        | Six Months Ended
|                                                            |  | June 30,           |        | June 30,        
|                                                            |  |                    |        |                 
|                                                            |  | 2004               |        | 2003             |  | 2004 |        | 2003
|                                                            |  |                    |        |                  |  |      |        |     
|XTAR                                                        |  | $                  | 416    |                  |  | $    | (957   | )    |  | $ | 13     |  |  | $ | (4,152  | )
|Satmex                                                      |  |                    |       |                  |  |      | (7,822 | )    |  |   |       |  |  |   | (13,334 | )
|Globalstar and Globalstar service provider
    partnerships |  |                    | 46,567 |                  |  |      | 444    |      |  |   | 46,567 |  |  |   | 648     |  
|                                                            |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |         |  
|                                                            |  | $                  | 46,983 |                  |  | $    | (8,335 | )    |  | $ | 46,580 |  |  | $ | (16,838 | )
|                                                            |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |         |  

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

|                                                                                                  |  |                    |       |                  |  |      |        |      |  |   |       |   |  |   |        |  
|------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                                                                                  |  |                    |       |                 
|                                                                                                  |  | Three Months Ended |       | Six Months Ended
|                                                                                                  |  | June 30,           |       | June 30,        
|                                                                                                  |  |                    |       |                 
|                                                                                                  |  | 2004               |       | 2003             |  | 2004 |        | 2003
|                                                                                                  |  |                    |       |                  |  |      |        |     
|Revenues                                                                                          |  | $                  | 2,122 |                  |  | $    | 8,055  |      |  | $ | 5,210 |   |  | $ | 23,214 |  
|Investment income                                                                                 |  |                    |      |                  |  |      | 295    |      |  |   |      |   |  |   | 589    |  
|Interest expense capitalized on development stage
    enterprise                                  |  |                    |      |                  |  |      |       |      |  |   | 478   |   |  |   | 428    |  
|(Losses) profits relating to affiliate
    transactions not eliminated                            |  |                    | (726  | )                |  |      | 1,604  |      |  |   | (731  | ) |  |   | 2,288  |  
|Elimination of our proportionate share of losses
    (profits) relating to affiliate transactions |  |                    | 924   |                  |  |      | (1,695 | )    |  |   | 931   |   |  |   | (2,814 | )
|Amortization of deferred credit and profits
    relating to investments in affiliates             |  |                    |      |                  |  |      | 262    |      |  |   |      |   |  |   | 523    |  



| |     
| | ----
| | XTAR

XTAR, a joint venture between us and Hisdesat
Servicios Estrategicos, S.A. (Hisdesat), a
consortium comprised of leading Spanish telecommunications
companies, including Hispasat, S.A., and agencies of the Spanish
government, is constructing and plans to launch an X-band
satellite to provide X-band services to government users in the
United States and Spain, as well as other friendly and allied
nations. We own 56% of XTAR (accounted for under the equity
method since we do not control certain significant operating
decisions) and Hisdesat owns 44%. In addition, XTAR has agreed
to lease certain transponders on the Spainsat satellite, which
is being constructed by SS/ L for Hisdesat. As of June 30, 2004,
the partners in proportion to their respective ownership
interests have contributed $95 million to XTAR.

13



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In October 2003, we and Hisdesat entered into an
agreement (the Contribution Agreement) to contribute
over time an additional $25.4 million and
$20.0 million, respectively, into XTAR, with our
contribution effected through the cancellation of amounts owed
under XTARs satellite construction contract with SS/ L.
The proceeds from Hisdesats capital contributions have
been and will be used largely to fund the remaining amounts due
under the satellite construction contract. XTAR has entered into
a Launch Services Agreement with Arianespace, S.A. providing for
launch of its satellite on Arianespaces Ariane 5 ECA
launch vehicle. This flight represents the resumption of the
Ariane 5 ECAs missions since an unsuccessful launch in
late 2002. Arianespace has agreed to provide a one-year loan for
a portion of the launch price, secured by certain of XTARs
assets, including the satellite, ground equipment and rights to
the orbital slot. The remainder of the launch price consists of
a revenue-based fee to be paid over time following commencement
of operations by XTAR. No launch price would be payable to
Arianespace in the event of a launch failure that resulted in a
total constructive loss of the satellite and the related loan
payable would be cancelled. In the event of a launch failure
that resulted in a partial loss, the launch price and the loan
payable would be correspondingly reduced. XTAR still requires
additional funds to insure its satellite, complete the ground
station system and fund its operations.

In March 2004, after receiving Bankruptcy Court
approval, we provided an additional $2.8 million to XTAR,
which was matched by $2.2 million from Hisdesat. In June
2004, we received Bankruptcy Court approval to make an
additional equity contribution of $2.24 million into XTAR,
which amount would be funded upon XTARs receipt of
Hisdesats contribution of $1.76 million. XTAR is in
the process of finalizing an arrangement under which Hisdesat
would provide XTAR with a convertible loan in the amount of
$10.8 million. Under this arrangement, Hisdesat would
receive enhanced governance rights in XTAR. Moreover, if
Hisdesat were to convert the loan into XTAR equity, our equity
interest in XTAR would be reduced to 51%. XTAR may elect not to
insure for the launch of its satellite, currently scheduled to
occur in October 2004. In the event of the loss of XTARs
satellite during launch without insurance, our investment in
XTAR, which totaled $48 million as of June 30, 2004,
would be lost. Moreover, if XTAR is unable to repay the
Arianespace loan when due, Arianespace will have the right to
foreclose on the XTAR assets pledged as collateral, which also
may adversely affect our investment in XTAR.



| |           
| | ----------
| | Globalstar

On June 29, 2004, Globalstar, L.P.
(Globalstar) was dissolved. As a result of
Globalstars liquidation, we recorded equity income of
$47 million on the reversal of vendor financing liabilities
that were non-recourse to SS/ L in the event of non-payment by
Globalstar (see Note 11).

On April 14, 2004, Globalstar announced the
completion of its financial restructuring following the formal
acquisition of its main business operations and assets by Thermo
Capital Partners LLC (Thermo), effectively resulting
in Globalstar exiting from bankruptcy. Thermo invested
$43 million in the newly formed Globalstar company
(New Globalstar) in exchange for an 81.25% equity
interest, with the remaining 18.75% of the equity to be
distributed to the creditors of Globalstar. Our share of the
equity interest is approximately 2.7% of New Globalstar, for
which we assigned no value. Upon receipt of our equity interest
in New Globalstar in June 2004, we reversed the
$2.8 million unrealized gain included in accumulated other
comprehensive income against the remaining $2.8 million
investment in Globalstars $500 million credit
facility, which had no impact on our condensed consolidated
results of operations.

During the Globalstar bankruptcy, Loral entered
into a settlement and release agreement with Globalstar and
Globalstars official creditors committee to resolve
certain issues related to Globalstar and its restructuring (the
Settlement). This Settlement was approved on
April 14, 2003 by the bankruptcy court overseeing
Globalstars case and closed on July 10, 2003. Among
other things, the Settlement provided that Globalstar grants us,
subject to certain conditions, a general release of all claims
it may have against us in exchange for certain considerations
including, effective upon Globalstars emergence from
Chapter 11 reorganization, an

14



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

approximate 50% reduction in the amount of our
unsecured claims against Globalstar of approximately
$875 million.

On April 24, 2003, one of Globalstars
creditors filed a motion seeking reconsideration by
Globalstars bankruptcy court of its approval of the
Settlement. Globalstars bankruptcy court denied this
motion for reconsideration on May 30, 2003, and, on
June 9, 2003, the creditor filed a notice of appeal of the
bankruptcy courts order approving the Settlement. Although
we believe that the appeal, which is currently pending, is
without merit, no assurance can be given in this regard or as to
what relief, if any, might be granted in the event the appeal
were to be successful.



|    |                                 
|--- | --------------------------------
|10. | Other Acquired Intangible Assets

Other acquired intangible assets are included in
other assets in our consolidated balance sheets as follows (in
millions):

|                              |  |               |      |                   |  |        |       |              |  |   |      |  |  |   |       |  
|----------------------------- |  | ------------- | ---- | ----------------- |  | ------ | ----- | ------------ |  | - | ---- |  |  | - | ----- | -
|                              |  |               |      |                  
|                              |  | June 30, 2004 |      | December 31, 2003
|                              |  |               |      |                  
|                              |  | Gross         |      | Accumulated       |  | Gross  |       | Accumulated 
|                              |  | Amount        |      | Amortization      |  | Amount |       | Amortization
|                              |  |               |      |                   |  |        |       |             
|Satellite related intangibles |  | $             |     |                   |  | $      |      |              |  | $ | 40.7 |  |  | $ | (23.4 | )
|Regulatory fees               |  |               | 22.5 |                   |  |        | (6.8  | )            |  |   | 22.7 |  |  |   | (6.2  | )
|Other intangibles             |  |               | 13.0 |                   |  |        | (11.1 | )            |  |   | 13.0 |  |  |   | (10.2 | )
|                              |  |               |      |                   |  |        |       |              |  |   |      |  |  |   |       |  
|                              |  | $             | 35.5 |                   |  | $      | (17.9 | )            |  | $ | 76.4 |  |  | $ | (39.8 | )
|                              |  |               |      |                   |  |        |       |              |  |   |      |  |  |   |       |  

As of June 30, 2004, the weighted average
remaining amortization period for regulatory fees was
approximately 11 years and approximately one year for other
intangibles.

Total amortization expense for other acquired
intangible assets was $0.8 million and $0.9 million for the
three months ended June 30, 2004 and 2003, respectively,
and $1.7 million for both the six months ended
June 30, 2004 and 2003. Annual pre-tax amortization expense
for other acquired intangible assets for the five years ended
December 31, 2008 is estimated to be as follows (in
millions):

|     |  |   |     | 
|---- |  | - | --- | 
|2004 |  | $ | 3.3 | 
|2005 |  |   | 2.5 | 
|2006 |  |   | 1.4 | 
|2007 |  |   | 1.4 | 
|2008 |  |   | 1.4 | 



|    |                                  
|--- | ---------------------------------
|11. | Liabilities Subject to Compromise

As discussed in Note 2, we and our Debtor
Subsidiaries have been operating as a debtor in possession under
the jurisdiction of the Bankruptcy Court and in accordance with
the provisions of the Bankruptcy Code.

On the condensed consolidated balance sheets, the
caption liabilities subject to compromise reflects
our carrying value of prepetition claims that will be
restructured in our Chapter 11 Cases. Pursuant to court
order, we have been authorized to pay certain prepetition
operating liabilities incurred in the ordinary course of
business (e.g. salaries and insurance). Since July 15,
2003, as permitted under the Bankruptcy Code, we have rejected
certain of our prepetition contracts and are calculating our
estimated liability to the unsecured creditors affected by these
rejections. The Bankruptcy Court established January 26,
2004 as the bar date in the Debtors Chapter 11 Cases,
which is the date by which prepetition claims against us and our
Debtor Subsidiaries were to have been filed for claimants to
receive any distribution in the Chapter 11 Cases.
Differences between liability amounts estimated by us and claims
filed by our creditors are being investigated and the Bankruptcy
Court will make a final determination of the allowable claims.
The determination of how

15



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

liabilities ultimately will be treated cannot be
made until the Bankruptcy Court approves a Chapter 11 plan
of reorganization. We will continue to evaluate the amount and
classification of our prepetition liabilities through the
remainder of our Chapter 11 Cases. Should we identify
additional liabilities subject to compromise, we will recognize
them accordingly. As a result, liabilities subject to
compromise may change. Claims classified as
liabilities subject to compromise represent secured
as well as unsecured claims. Liabilities subject to compromise
at June 30, 2004 and December 31, 2003 consisted of
the following (in thousands):

|                                                       |  |          |           |              |  |   |           |    
|------------------------------------------------------ |  | -------- | --------- | ------------ |  | - | --------- | ---
|                                                       |  | June 30, |           | December 31,
|                                                       |  | 2004     |           | 2003        
|                                                       |  |          |           |             
|Debt obligations (Note 12)                             |  | $        | 1,269,977 |              |  | $ | 2,236,864 |    
|Accounts payable                                       |  |          | 50,031    |              |  |   | 50,605    |    
|Accrued employment costs                               |  |          | 400       |              |  |   | 6,295     |    
|Customer advances                                      |  |          | 23,985    |              |  |   | 36,430    |    
|Accrued interest and preferred dividends               |  |          | 40,428    |              |  |   | 44,610    |    
|Income taxes payable                                   |  |          | 39,733    |              |  |   | 39,514    |    
|Pension and other postretirement liabilities           |  |          | 137,959   |              |  |   | 130,981   |    
|Other liabilities                                      |  |          | 86,452    |              |  |   | 136,815   | (1)
|6% Series C convertible redeemable preferred
    stock |  |          | 187,274   |              |  |   | 187,274   |    
|6% Series D convertible redeemable preferred
    stock |  |          | 36,707    |              |  |   | 36,707    |    
|                                                       |  |          |           |              |  |   |           |    
|                                                       |  | $        | 1,872,946 |              |  | $ | 2,906,095 |    
|                                                       |  |          |           |              |  |   |           |    



---



|    |                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes approximately $47 million of vendor
    financing that was non-recourse to SS/ L in the event of
    non-payment by Globalstar due to bankruptcy. In June 2004, we
    recorded $47 million of equity income relating to
    Globalstar on the reversal of such non-recourse vendor financing
    obligations, upon the liquidation of Globalstar.



| |                                   
| | ----------------------------------
| | Series C and D Preferred
    Stock

In August 2002, Lorals Board of Directors
approved a plan to suspend indefinitely the future payment of
dividends on its two series of preferred stock. Accordingly, we
have deferred the payments of quarterly dividends due on our
Series C preferred stock commencing on November 1,
2002 and the payments of quarterly dividends due on our
Series D preferred stock commencing on November 15, 2002.
On July 15, 2003, as a result of our Chapter 11
filing, we stopped accruing dividends on our two series of our
preferred stock in our financial statements. Because we failed
to pay dividends on our preferred stock for six consecutive
quarters, holders of the majority of each class of the preferred
stock are now entitled, subject to the applicable effects of the
Chapter 11 Cases and our Bermuda insolvency proceedings, to
elect two additional directors, for a total of four directors,
to our Board of Directors. Our proposed consensual plan of
reorganization would not provide for participation or recovery
by holders of our preferred stock.

16



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12. Debt

|                                                                                     |                                                                           |                |           |              |  |   |           |         | 
|------------------------------------------------------------------------------------ | ------------------------------------------------------------------------- | -------------- | --------- | ------------ |  | - | --------- | ------- | 
|                                                                                     |                                                                           | June 30,       |           | December 31,
|                                                                                     |                                                                           | 2004           |           | 2003        
|                                                                                     |                                                                           |                |           |             
|                                                                                     |                                                                           |               
|                                                                                     |                                                                           | (In thousands)
|Loral Orion 10.00% senior notes due 2006:                                            |                                                                           |                |           |              |  |   |           |        
|                                                                                     | Principal amount                                                          |                | $         | 612,704      |  |   | $         | 612,704 | 
|                                                                                     | Accrued interest (deferred gain on debt exchanges)                        |                |           | 214,446      |  |   |           | 214,446 | 
|Bank debt:                                                                           |                                                                           |                |           |              |  |   |           |        
|                                                                                     | Loral Satellite term loan, 5.75% at
    December 31, 2003                 |                |           |             |  |   |           | 226,500 | 
|                                                                                     | Loral Satellite revolving credit facility, 5.75%
    at December 31, 2003 |                |           |             |  |   |           | 200,000 | 
|                                                                                     | LSC term loan facility, 5.25% at
    December 31, 2003                    |                |           |             |  |   |           | 350,000 | 
|                                                                                     | LSC revolving credit facility, 5.25% at
    December 31, 2003             |                |           |             |  |   |           | 190,387 | 
|9.50% Senior notes due 2006                                                          |                                                                           |                | 350,000   |              |  |   | 350,000   |        
|Non-recourse debt of Loral Orion:                                                    |                                                                           |                |           |              |  |   |           |        
|                                                                                     | 11.25% Senior notes due 2007 (principal amount
    $37 million)           |                |           | 39,402       |  |   |           | 39,402  | 
|                                                                                     | 12.50% Senior discount notes due 2007 (principal
    amount $49 million)  |                |           | 53,425       |  |   |           | 53,425  | 
|                                                                                     |                                                                           |                |           |              |  |   |           |        
|Total debt                                                                           |                                                                           |                | 1,269,977 |              |  |   | 2,236,864 |        
|Less, current maturities included in liabilities
    subject to compromise (Note 11) |                                                                           |                | 1,269,977 |              |  |   | 2,236,864 |        
|                                                                                     |                                                                           |                |           |              |  |   |           |        
|                                                                                     |                                                                           | $              |          |              |  | $ |          |        
|                                                                                     |                                                                           |                |           |              |  |   |           |        

As a result of our voluntary petitions for
reorganization, all of our prepetition debt obligations were
accelerated. On July 15, 2003, we also suspended interest
payments on all of our unsecured debt obligations. Accordingly,
we only paid interest on our secured bank debt from
July 15, 2003 through March 18, 2004, which
significantly reduced our cash interest payments. Subsequent to
March 18, 2003, we no longer incur or pay any interest on
our debt obligations. A creditors committee was appointed
in the Chapter 11 Cases to represent all unsecured
creditors, including all of our debt holders and, in accordance
with the provisions of the Bankruptcy Code, the committee has
the right to be heard on all matters that come before the
Bankruptcy Court (see Note 2).

On March 17, 2004, we repaid all
$967 million of our outstanding secured bank debt (see Note
2). In June 2004, our secured bank lenders released all
remaining liens they held on our assets. As of June 30,
2004, the principal amounts of our prepetition debt obligations
were $1.049 billion.

When we filed for Chapter 11, the Bankruptcy
Court entered an order authorizing us to use existing cash and
the cash proceeds of the bank lenders collateral to fund
all operating expenses associated with our businesses in
accordance with an agreed upon budget and with certain other
terms set forth in the order. This order has been terminated,
and, accordingly, we are free to use our cash without further
restriction or requirement.

For the three and six months ended June 30,
2004, we did not recognize $10.9 million and
$21.8 million, respectively, of interest expense on our
senior notes (excluding our 10% senior notes) and
$15.3 million and $30.6 million, respectively, of a
reduction to accrued interest on our 10% senior notes as a
result of the suspension of interest payments on our debt
obligations.

17



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LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                              
|--- | ---------------------------------------------
|13. | Reorganization Expenses due to
    Bankruptcy

Reorganization expenses due to bankruptcy include
professional fees associated with bankruptcy services, employee
retention costs, severance costs, vendor settlement gains and
interest income earned, excluding interest earned in relation to
satellite activities, and were as follows (in thousands):

|                         |                                                 |                    |       |                  |  |   |        |        | 
|------------------------ | ----------------------------------------------- | ------------------ | ----- | ---------------- |  | - | ------ | ------ | 
|                         |                                                 | Three Months Ended |       | Six Months Ended
|                         |                                                 | June 30, 2004      |       | June 30, 2004   
|                         |                                                 |                    |       |                 
|Professional fees        |                                                 | $                  | 5,348 |                  |  | $ | 10,356 |       
|Employee retention costs |                                                 |                    | 3,516 |                  |  |   | 7,036  |       
|Severance costs          |                                                 |                    | 1,008 |                  |  |   | 1,008  |       
|Vendor settlement gains  |                                                 |                    | (36   | )                |  |   | (36    | )     
|Interest income          |                                                 |                    | (281  | )                |  |   | (494   | )     
|                         |                                                 |                    |       |                  |  |   |        |       
|                         | Total reorganization expenses due to bankruptcy |                    | $     | 9,555            |  |   | $      | 17,870 | 
|                         |                                                 |                    |       |                  |  |   |        |       



|    |                      
|--- | ---------------------
|14. | Shareholders Deficit



| |             
| | ------------
| | Common Stock

On June 4, 2003, our Board of Directors
approved a reverse stock split of our common stock at a ratio of
one-for-ten, resulting in a new par value of $0.10 per common
share (previously $0.01 par value per common share). The reverse
stock split became effective after the close of business on
June 13, 2003 and reduced the number of shares of common
stock then outstanding from 440 million to 44 million.
All share and per share amounts for all periods presented have
been retroactively restated to reflect the reverse stock split.
Our proposed consensual plan of reorganization would not provide
for participation or recovery by our common stockholders.



|    |                              
|--- | -----------------------------
|15. | Commitments and Contingencies

SS/ L has deferred revenue for performance
warranty obligations relating to satellites sold to customers
which could be affected by future performance. SS/ L accounts
for satellite performance warranties in accordance with the
product warranty provisions of FIN 45 which requires disclosure,
but not initial recognition and measurement, of performance
guarantees. SS/ L estimates the deferred revenue for its
warranty obligations based on historical satellite performance.
SS/ L periodically reviews and adjusts the deferred revenue for
warranty reserves based on the actual performance of each
satellite and remaining warranty period. A reconciliation of
such deferred amounts for the period ended June 30, 2004,
is as follows (in millions):

|                                                                                 |  |   |      | 
|-------------------------------------------------------------------------------- |  | - | ---- | 
|Balance of deferred amounts at January 1,
    2004                               |  | $ | 16.3 | 
|Accruals for deferred amounts issued during the
    period                       |  |   |     | 
|Accruals relating to pre-existing contracts
    (including changes in estimates) |  |   | 1.5  | 
|                                                                                 |  |   |      | 
|Balance of deferred amounts at June 30, 2004                                     |  | $ | 17.8 | 
|                                                                                 |  |   |      | 

Loral Skynet has in the past entered into prepaid
leases, sales contracts and other arrangements relating to
transponders on its satellites. Under the terms of these
agreements, as of June 30, 2004, Loral Skynet continues to
provide for a warranty for periods of two and one-quarter years
to eight and one-quarter years for sales contracts and other
arrangements (seven transponders), and prepaid leases (two
transponders). Depending on the contract, Loral Skynet may be
required to replace transponders which do not meet operating
specifications. Substantially all customers are entitled to a
refund equal to the reimbursement value if there is no
replacement, which is normally covered by insurance. In the case
of the sales contracts, the

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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. For other arrangements, in the event of transponder
failure where replacement capacity is not available on the
satellite, one customer is not entitled to reimbursement, and
the other customers reimbursement value is based on
contractually prescribed amounts that decline over time.

Fourteen of the satellites built by SS/ L and
launched since 1997, three of which are owned and operated by
our subsidiaries or affiliates, have experienced minor losses of
power from their solar arrays. Although to date, neither we 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
or reduction in power transmitted. 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 how many transponders
are then in service and how they are being used. It is also
possible that one or more transponders on a satellite may need
to be removed from service to accommodate the power loss and to
preserve full performance capabilities on the remaining
transponders. A complete or partial loss of a satellites
capacity could result in a loss of orbital incentive payments to
us and, in the case of satellites owned by our subsidiaries and
affiliates, a loss of revenues and profits. With respect to
satellites under construction and construction of new
satellites, based on its investigation of the matter, SS/ L has
identified and has implemented remediation 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 any significant
delay 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, we believe that this matter will not have a material
adverse effect on our condensed consolidated financial position
or our results of operations, although no assurance can be
provided.

In September 2001, the PAS 7 satellite built by
SS/ L for PanAmSat experienced an electrical power failure on
its solar arrays that resulted in the loss of use of certain
transponders on the satellite. The PAS 8 satellite also has
experienced minor power losses on its solar arrays, the cause of
which is unrelated to the PAS 7 event. SS/ L believes that these
failures are isolated events and do not reflect a systemic
problem in either the satellite design or manufacturing process.
Accordingly, SS/ L does not believe that these anomalies will
affect other on-orbit satellites built by SS/ L. On
June 30, 2003, PanAmSat initiated an arbitration claiming
that under its contract with SS/ L it is entitled to
$23.7 million as a result of these losses. In June 2004,
the Bankruptcy Court approved an agreement between Loral and
PanAmSat settling this matter and, in the fourth quarter of 2003
(based on estimates at that time), we recorded a charge to
operations of $8 million in connection with the settlement.

SS/ L has contracted to build a spot beam,
Ka-band satellite for a customer planning to offer broadband
data services directly to the consumer. SS/ L had suspended work
on this program in December 2001 while the customer and SS/ L
discussed how to resolve a contract dispute. In March 2003, SS/
L and the customer reached an agreement in principle to restart
the satellite construction program, and, in June 2003, SS/ L and
the customer executed a definitive agreement. As of
June 30, 2004, SS/ L had billed and unbilled accounts
receivable and vendor financing arrangements of $61 million
(including accrued interest of $11 million) with this
customer. Under the agreement, the customer will pay the
remainder of the contracted purchase price of $65 million
plus accrued interest (including $61 million owed to SS/ L
at June 30, 2004), most of which will be due subsequent to
completion of the satellite (scheduled to be completed in
September 2004).

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LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

SS/ L was a party to an Operational Agreement
with Alcatel Space Industries, pursuant to which the parties had
agreed to cooperate on certain satellite programs, and an
Alliance Agreement with Alcatel Space (together with Alcatel
Space Industries, Alcatel), pursuant to which
Alcatel had certain rights with respect to SS/ L. On
June 30, 2003, Loral, SS/ L and Alcatel entered into a
master settlement agreement in settlement of all claims among
the parties, including arbitration claims brought by Alcatel
against Loral alleging breaches of the Operational Agreement and
Alliance Agreement. Pursuant to the master settlement agreement,
Loral paid Alcatel $5 million and agreed to pay an
additional $8 million within one year, resulting in a
charge to operations of $13 million. In addition, Alcatel
transferred to Loral its minority interest in CyberStar, and
Loral transferred to Alcatel its minority interests in
Europe*Star and SkyBridge Limited Partnership that Loral had
previously written off. As a result of receiving Alcatels
minority interest in CyberStar, Loral recognized an
extraordinary gain of $14 million in the second quarter of
2003, which represents the extinguishment of the minority
interest liability less the fair value of the acquired net
assets. Under the terms of the master settlement agreement, the
arbitration and a related court proceeding to confirm the
arbitral tribunals partial award were suspended, with
termination of the arbitration to occur on the date of
confirmation of a plan of reorganization or a liquidation,
provided that if any action is commenced in the Chapter 11
Cases seeking the repayment, disgorgement or turnover of the
transfers made in connection with the master settlement
agreement, because of the commencement of the Chapter 11
Cases, the arbitration and related court confirmation proceeding
would not be terminated until such repayment, disgorgement or
turnover action had been dismissed. The master settlement
agreement also provides that Alcatel is entitled to reinstate
the arbitration if it is required by judicial order to repay,
disgorge or turn over the consideration paid to it under the
agreement in the context of the Chapter 11 Cases.

SS/ L is required to obtain licenses and enter
into technical assistance agreements, presently under the
jurisdiction of the State Department, in connection with the
export of satellites and related equipment, as well as with the
disclosure of technical data to foreign persons. Due to the
relationship between launch technology and missile technology,
the U.S. government has limited, and is likely in the future to
limit, launches from China and other foreign countries. Delays
in obtaining the necessary licenses and technical assistance
agreements have in the past resulted in, and may in the future
result in, the delay of SS/ Ls performance on its
contracts, which could result in the cancellation of contracts
by its customers, the incurrence of penalties or the loss of
incentive payments under these contracts.

The launch of ChinaSat 8 has been delayed pending
SS/ Ls obtaining the approvals required for the launch.
SS/ L is continuing to seek the State Department approvals
required for the launch of ChinaSat 8. In June 2004, the
Bankruptcy Court approved a settlement agreement among ChinaSat,
SS/ L and China Great Wall Industry Corporation which resolved a
portion of the disputes outstanding among the parties. This
settlement agreement provides, among other things, for a release
by ChinaSat of any claim it may have against SS/ L to recover
some or all of the $52 million that ChinaSat paid to SS/ L,
and SS/ L paid to China Great Wall, for a Chinese launch
vehicle. Nothing in the settlement agreement would, however,
preclude ChinaSat from seeking to terminate its contract with
SS/ L for ChinaSat 8 as a result of the delay caused by the
inability to obtain necessary U.S. government approvals to
launch and transfer the satellite to ChinaSat. In such event,
ChinaSat may seek, after giving effect to the settlement
agreement, a refund of $81.6 million for payments made to
SS/ L as well as penalties of up to $6.5 million. We do not
believe that ChinaSat is entitled to such a refund or penalties
and would vigorously contest any such claims by ChinaSat. If the
ChinaSat 8 contract were terminated, SS/ L estimates that it
would cost approximately $38 million to refurbish and
retrofit the satellite so that it could be sold to another
customer, which resale cannot be guaranteed.

On September 20, 2002, and as further
amended in March 2003, we agreed with APT Satellite Company
Limited (APT) to jointly acquire the Apstar V
satellite, a satellite then under construction by SS/ L for APT
pursuant to which we and APT agreed to share, on a 50/50 basis,
the project cost of constructing, launching and insuring the
satellite. Under this agreement, we were initially to acquire
23% of the satellite in return for paying 25% of the project
cost, and were to pay APT over time an additional 25% of the
project cost

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LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

to acquire an additional 23% interest in the
satellite. At June 30, 2004, the project cost of the
satellite was estimated at $230 million.

In August 2003, in order to expedite the receipt
of necessary export licenses from the U.S. government, we
amended our various agreements with APT converting our
arrangement from joint ownership to a lease, but leaving
unchanged the cost allocation between the parties relating to
the project cost of the satellite. Under this arrangement, we
retain title to the entire satellite, now known as Telstar 18,
and will initially lease to APT transponders representing 77% of
the transponder capacity. The number of transponders leased to
APT would be reduced over time upon repayment by us of the
second 25% of the satellites project cost, ultimately to
54% of the satellites transponder capacity. As a result of
this conversion from joint ownership to a lease arrangement, in
the third quarter of 2003 we (a) reversed the cumulative
sales of $83 million and cost of satellite manufacturing of
$73 million and (b) recorded an increase to
self-constructed assets of $73 million and recorded
deferred revenue of $80 million from APT.

In November 2003, we agreed with APT to further
revise our existing arrangement. Under this revised arrangement,
we agreed, among other things, to accelerate the termination of
APTs leasehold interest in 4.5 transponders by assuming
$20.4 million of project cost which otherwise would have
been initially paid by APT, decreasing APTs initial leased
transponder capacity from 77% to 69%. In addition, we agreed to
provide to APT, free of charge, certain unused capacity on
Telstar 10/ Apstar IIR, during an interim period, and to provide
APT with certain rights to exchange Ku-band transponder capacity
on Telstar 18 for equivalent Ku-band transponder capacity on
Telstar 10/ Apstar IIR. As of June 30, 2004, we had
recorded $124 million of customer advances from APT.

SS/ L has entered into several long-term launch
services agreements with various launch providers to secure
future launches for its customers, including Loral and its
affiliates. SS/ L had launch services agreements with
International Launch Services (ILS) which covered a
number of launches, three of which remained open. In November
2002, SS/ L terminated one of those future launches, which had a
termination liability equal to SS/ Ls deposit of
$5 million. Subsequently, SS/ L received a letter from ILS
alleging SS/ Ls breach of the agreements and purporting to
terminate the launch service agreements and all three remaining
launches. Despite ILSs wrongful termination of the
agreements and all three launches, to protect its interest SS/ L
also terminated a second launch, which had a termination
liability equal to its deposit of $5 million, but reserved
all of its rights against ILS. As a result, SS/ L recognized a
non-cash charge to earnings of $10 million in the fourth
quarter of 2002 with respect to the two terminated launches. In
June 2003, to protect its interest SS/ L also terminated a third
launch, which had a termination liability equal to
$23.5 million, and SS/ L recognized a non-cash charge to
earnings of $23.5 million in the second quarter of 2003
with respect to this launch. SS/ L also reserved all of its
rights at that time. In April 2004, SS/ L commenced an adversary
proceeding against ILS in the Bankruptcy Court to seek recovery
of $37.5 million of its deposits. In June 2004, ILS filed
counterclaims in the Bankruptcy Court seeking to recover
termination charges of up to $54.75 million with respect to
the three terminated launches, $50 million in damages for
alleged losses incurred in connection with halting production of
launch vehicles and $38 million in lost revenue due to our
alleged failure to comply with a contractual obligation to
assign the launch of another satellite to ILS. We believe that
ILSs counterclaims are without merit and intend to defend
against them vigorously and will continue to seek recovery of
SS/ Ls deposits. We do not believe that this matter will
have a material adverse effect on our condensed consolidated
financial position or results of operations, although no
assurance can be provided.

We have estimated that we will incur
approximately $52 million to repair a satellite that was
damaged in transit, a significant portion of which we expect to
recover through insurance coverage. We believe resolution of the
insurance claim will not have a material adverse effect on our
condensed consolidated financial position or our results of
operations, although no assurance can be provided.

While we have in the past, consistent with
industry practice and the requirements in our debt agreements,
typically obtained in-orbit insurance for our satellites, we
cannot assure that, upon a policys expiration, we will

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LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

be able to renew the insurance on acceptable
terms, especially on satellites that have, or that are part of a
family of satellites that have, experienced problems in the
past. Two satellites owned by Loral Orion have the same solar
array configuration as one other 1300-class satellite
manufactured by SS/ L that has experienced an event with a large
loss of solar power. SS/ L believes that this failure is an
isolated event and does not reflect a systemic problem in either
the satellite design or manufacturing process. Accordingly, we
do not believe that this anomaly will affect the two Loral Orion
satellites with the same solar array configuration. The
insurance coverage for one of these satellites, however,
provides for coverage of losses due to solar array failures only
in the event of a capacity loss of 80% or more. We believe that
the insurers will require either exclusions of, or limitations
on, coverage due to solar array failures in connection with
future insurance renewals for these two satellites. An uninsured
loss of a satellite would have a material adverse effect on our
condensed consolidated financial position and our results of
operations.

On October 21, 2002, National Telecom of
India Ltd. (Natelco) filed suit against Loral and a
subsidiary in the United States District Court for the Southern
District of New York. The suit relates to a joint venture
agreement entered into in 1998 between Natelco and ONS
Mauritius, Ltd., a Loral Orion subsidiary, the effectiveness of
which was subject to express conditions precedent. In 1999, ONS
Mauritius had notified Natelco that Natelco had failed to
satisfy those conditions precedent. In Natelcos amended
complaint filed in March 2003, Natelco has alleged wrongful
termination of the joint venture agreement, has asserted claims
for breach of contract and fraud in the inducement and is
seeking damages and expenses in the amount of $97 million.
We believe that the claims are without merit and intend to
vigorously defend against them. As a result of the commencement
of the Chapter 11 Cases, this lawsuit is subject to the
automatic stay and further proceedings in the matter have been
suspended.



| |                                                
| | -----------------------------------------------
| | Lawsuits against our Directors and
    Officers

In August 2003, plaintiffs Robert Beleson and
Harvey Matcovsky filed a purported class action complaint
against Bernard Schwartz in the United States District Court for
the Southern District of New York. The complaint alleges
(a) that Mr. Schwartz violated Section 10(b) of
the Exchange Act and Rule 10b-5 promulgated thereunder, by
making material misstatements or failing to state material facts
about our financial condition relating to the sale of assets to
Intelsat and Lorals Chapter 11 filing and
(b) that Mr. Schwartz is secondarily liable for these
alleged misstatements and omissions under Section 20(a) of
the Exchange Act as an alleged controlling person of
Loral. The class of plaintiffs on whose behalf the lawsuit has
been asserted consists of all buyers of Loral common stock
during the period from June 30, 2003 through July 15,
2003, excluding the defendant and certain persons related to or
affiliated with him. In November 2003, three other complaints
against Mr. Schwartz with substantially similar allegations
were consolidated into the Belesoncase. In February
2004, a motion to dismiss the complaint in its entirety was
denied by the court. Defendant filed an answer in March 2004 and
discovery has commenced.

In November 2003, plaintiffs Tony Christ,
individually and as custodian for Brian and Katelyn Christ,
Casey Crawford, Thomas Orndorff and Marvin Rich, filed a
purported class action complaint against Bernard Schwartz and
Richard J. Townsend in the United States District Court for the
Southern District of New York. The complaint alleges
(a) that defendants violated Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder, by
making material misstatements or failing to state material facts
about Lorals financial condition relating to the
restatement in 2003 of the financial statements for the second
and third quarters of 2002 to correct accounting for certain
general and administrative expenses and the alleged improper
accounting for a satellite transaction with APT Satellite
Company Ltd. and (b) that each of the defendants is
secondarily liable for these alleged misstatements and omissions
under Section 20(a) of the Exchange Act as an alleged
controlling person of Loral. The class of plaintiffs
on whose behalf the lawsuit has been asserted consists of all
buyers of Loral common stock during the period from
July 31, 2002 through June 29, 2003, excluding the
defendants and certain persons related to or affiliated with
them. Defendants filed a motion to dismiss the complaint in June
2004.

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LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In December 2003, plaintiff Wendy Koch, a former
employee, filed a purported class action complaint against the
Loral Space & Communications Ltd. Savings Plan
Administrative Committee, all Loral directors, Richard J.
Townsend and certain other Loral officers and employees in the
United States District Court for the Southern District of New
York. The complaint alleges (a) that defendants violated
Section 404 of the Employee Retirement Income Security Act
(ERISA), by breaching their fiduciary duties to
prudently and loyally manage the assets of the Loral Savings
Plan (the Plan) by including Loral common stock as
an investment alternative and by providing matching
contributions under the Plan in Loral stock, (b) that the
director defendants violated Section 404 of ERISA by
breaching their fiduciary duties to monitor the committee
defendants and (c) that defendants violated Sections 404
and 405 of ERISA by failing to provide complete and accurate
information to Plan participants and beneficiaries. The class of
plaintiffs on whose behalf the lawsuit has been asserted
consists of all participants in or beneficiaries of the Plan at
any time between November 4, 1999 and the present and whose
accounts included investments in Loral stock. One other similar
complaint against the defendants with substantially similar
allegations has been filed, and the two cases have been
consolidated. In July 2004, Plaintiffs filed an amended
complaint.

We are obligated to indemnify our directors and
officers for any losses or costs they may incur as a result of
these lawsuits. We are unable to estimate the maximum potential
impact of these obligations on our future results of operations.

Other

We are 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, we do not believe
that any of these other existing legal matters will have a
material adverse effect on our condensed consolidated financial
position or our results of operations. These claims against us
are generally subject to the automatic stay as a result of the
commencement of the Chapter 11 Cases.

Globalstar
Related Matters

On September 26, 2001, the nineteen separate
purported class action lawsuits filed in the United States
District Court for the Southern District of New York by various
holders of securities of Globalstar Telecommunications Limited
(GTL) and Globalstar against GTL, Loral, Bernard L.
Schwartz and other defendants were consolidated into one action
titled In re: Globalstar Securities Litigation.In
November 2001, plaintiffs in the consolidated action filed a
consolidated amended class action complaint against Globalstar,
GTL, Globalstar Capital Corporation, Loral and Bernard L.
Schwartz alleging (a) that all defendants (except Loral)
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 Globalstars business
and prospects, (b) that defendants 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
Globalstar, (c) that defendants GTL and Mr. Schwartz
are liable under Section 11 of the Securities Act of 1933 (the
Securities Act) for untrue statements of material
facts in or omissions of material facts from a registration
statement relating to the sale of shares of GTL common stock in
January 2000, (d) that defendant GTL is liable under
Section 12(2)(a) of the Securities Act for untrue
statements of material facts in or omissions of material facts
from a prospectus and prospectus supplement relating to the sale
of shares of GTL common stock in January 2000, and (e) that
defendants Loral and Mr. Schwartz are secondarily liable
under Section 15 of the Securities Act for GTLs
primary violations of Sections 11 and 12(2)(a) of the
Securities Act as alleged controlling persons of
GTL. The class of plaintiffs on whose behalf the lawsuit has
been asserted consists of all buyers of securities of
Globalstar, Globalstar Capital and GTL during the period from
December 6, 1999 through October 27, 2000, excluding
the defendants and certain persons related to or affiliated with
them. Loral and Mr. Schwartz have filed a motion to dismiss
the amended complaint in its entirety as to Loral and
Mr. Schwartz, which motion is pending before the court. We
believe that we have

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LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

meritorious defenses to this class action lawsuit
and intend to pursue them vigorously. As a result of the
commencement of the Chapter 11 Cases, however, this lawsuit
is subject to the automatic stay and further proceedings in the
matter have been suspended insofar as Loral is concerned but are
proceeding as to GTL and Mr. Schwartz. Loral is obligated
to indemnify Mr. Schwartz for any losses or costs he may
incur as a result of this lawsuit. We are unable to estimate the
maximum potential impact of these obligations on our future
results of operations. In December 2003, a motion to dismiss the
amended complaint in its entirety was denied by the court
insofar as GTL and Mr. Schwartz are concerned, and
discovery has commenced.

On March 2, 2002, the seven separate
purported class action lawsuits filed in the United States
District Court for the Southern District of New York by various
holders of Loral common stock against Loral, Bernard L. Schwartz
and Richard Townsend were consolidated into one action titled
In re: Loral Space & Communications Ltd. Securities
Litigation.On May 6, 2002, plaintiffs in the
consolidated action filed a consolidated amended class action
complaint alleging (a) that all defendants violated
Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder, by making material misstatements or
failing to state material facts about Lorals financial
condition and its investment in Globalstar and (b) that
Mr. Schwartz is secondarily liable for these alleged
misstatements and omissions under Section 20(a) of the
Exchange Act as an alleged controlling person of
Loral. The class of plaintiffs on whose behalf the lawsuit has
been asserted consists of all buyers of Loral common stock
during the period from November 4, 1999 through
February 1, 2001, excluding the defendants and certain
persons related to or affiliated with them. Loral and
Messrs. Schwartz and Townsend have filed a motion to
dismiss the complaint in its entirety. After oral argument on a
motion to dismiss filed by Loral and Messrs. Schwartz and
Townsend, in June 2003, the plaintiffs filed an amended
complaint alleging essentially the same claims as in the
original amended complaint. Loral believes that it has
meritorious defenses to this class action lawsuit and intends to
pursue them vigorously. As a result of the commencement of the
Chapter 11 Cases, however, this lawsuit is subject to the
automatic stay, and further proceedings in the matter have been
suspended, insofar as Loral is concerned but are proceeding as
to the other defendants. Loral is obligated to indemnify
Messrs. Schwartz and Townsend for any losses or costs they
may incur as a result of this lawsuit. We are unable to estimate
the maximum potential impact of these obligations on our future
results of operations. In February 2004, a motion to dismiss the
amended complaint was granted by the court insofar as
Messrs. Schwartz and Townsend are concerned.

In addition, the primary insurer under
Lorals directors and officers liability insurance policy
has denied coverage for the Globalstar-related case filed by
Loral shareholders under the policy and, on March 24, 2003,
filed a lawsuit in the Supreme Court of New York County seeking
a declaratory judgment upholding its coverage position. In May
2003, we and the other defendants served our answer and filed
counterclaims seeking a declaration that the insurer is
obligated to provide coverage and damages for breach of contract
and the implied covenant of good faith. In May 2003, we and the
other defendants also filed a third party complaint against the
excess insurers seeking a declaration that they are obligated to
provide coverage. We believe that the insurers have wrongfully
denied coverage and intend to defend against the denial
vigorously. As a result of the commencement of the
Chapter 11 Cases, however, this lawsuit is subject to the
automatic stay and further proceedings in the matter have been
suspended insofar as Loral is concerned but are proceeding as to
the other defendants.

16.     Loss Per
Share

Basic loss per share is computed based upon the
weighted average number of shares of common stock outstanding.
Diluted loss per share excludes the assumed conversion of the
Series C Preferred Stock (936,371 shares) and the
Series D Preferred Stock (185,104 shares), as their effect
would have been antidilutive. For both the three and six months
ended June 30, 2004 and 2003, there were 2,387,213 and
2,618,184 weighted options as calculated using the treasury
stock method, that were excluded from the calculation of diluted
loss per share.

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LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth the computation of
basic and diluted loss per share (in thousands, except per share
data):

|                                                |                                                                        |                    |       |                  |   |      |       |          |   |   |       |          |   |   |       |          |  
|----------------------------------------------- | ---------------------------------------------------------------------- | ------------------ | ----- | ---------------- | - | ---- | ----- | -------- | - | - | ----- | -------- | - | - | ----- | -------- | -
|                                                |                                                                        |                    |       |                 
|                                                |                                                                        | Three Months Ended |       | Six Months Ended
|                                                |                                                                        | June 30,           |       | June 30,        
|                                                |                                                                        |                    |       |                 
|                                                |                                                                        | 2004               |       | 2003             |   | 2004 |       | 2003    
|                                                |                                                                        |                    |       |                  |   |      |       |         
|Numerator for basic and diluted loss per share: |                                                                        |                    |       |                  |   |      |       |          |   |   |       |          |   |   |       |         
|                                                | Loss from continuing operations                                        |                    | $     | (22,827          | ) |      | $     | (117,684 | ) |   | $     | (90,843  | ) |   | $     | (175,819 | )
|                                                | Income (loss) from discontinued operations                             |                    |       | 158              |   |      |       | 8,280    |   |   |       | (11,462  | ) |   |       | 18,241   |  
|                                                |                                                                        |                    |       |                  |   |      |       |          |   |   |       |          |   |   |       |         
|                                                | Loss before extraordinary gain on acquisition of
    minority interest |                    |       | (22,669          | ) |      |       | (109,404 | ) |   |       | (102,305 | ) |   |       | (157,578 | )
|                                                | Extraordinary gain on acquisition of minority
    interest             |                    |       |                 |   |      |       | 13,615   |   |   |       |         |   |   |       | 13,615   |  
|                                                |                                                                        |                    |       |                  |   |      |       |          |   |   |       |          |   |   |       |         
|                                                | Net loss                                                               |                    |       | (22,669          | ) |      |       | (95,789  | ) |   |       | (102,305 | ) |   |       | (143,963 | )
|                                                | Preferred dividends                                                    |                    |       |                 |   |      |       | (3,359   | ) |   |       |         |   |   |       | (6,719   | )
|                                                |                                                                        |                    |       |                  |   |      |       |          |   |   |       |          |   |   |       |         
|                                                | Net loss applicable to common shareholders                             |                    | $     | (22,669          | ) |      | $     | (99,148  | ) |   | $     | (102,305 | ) |   | $     | (150,682 | )
|                                                |                                                                        |                    |       |                  |   |      |       |          |   |   |       |          |   |   |       |         
|Denominator:                                    |                                                                        |                    |       |                  |   |      |       |          |   |   |       |          |   |   |       |         
|                                                | Weighted average common shares outstanding                             |                    |       | 44,125           |   |      |       | 43,850   |   |   |       | 44,125   |   |   |       | 43,531   |  
|                                                |                                                                        |                    |       |                  |   |      |       |          |   |   |       |          |   |   |       |         
|Basic and diluted (loss) earnings per share:    |                                                                        |                    |       |                  |   |      |       |          |   |   |       |          |   |   |       |         
|                                                | Continuing operations                                                  |                    | $     | (0.51            | ) |      | $     | (2.76    | ) |   | $     | (2.06    | ) |   | $     | (4.19    | )
|                                                | Discontinued operations                                                |                    |       |                 |   |      |       | 0.19     |   |   |       | (0.26    | ) |   |       | 0.42     |  
|                                                |                                                                        |                    |       |                  |   |      |       |          |   |   |       |          |   |   |       |         
|                                                | Before extraordinary gain on acquisition of
    minority interest      |                    |       | (0.51            | ) |      |       | (2.57    | ) |   |       | (2.32    | ) |   |       | (3.77    | )
|                                                | Extraordinary gain on acquisition of minority
    interest             |                    |       |                 |   |      |       | 0.31     |   |   |       |         |   |   |       | 0.31     |  
|                                                |                                                                        |                    |       |                  |   |      |       |          |   |   |       |          |   |   |       |         
|Loss per share                                  |                                                                        | $                  | (0.51 | )                |   | $    | (2.26 | )        |   | $ | (2.32 | )        |   | $ | (3.46 | )       
|                                                |                                                                        |                    |       |                  |   |      |       |          |   |   |       |          |   |   |       |         

17.  Segments

We are organized into two operating segments:
Satellite Services and Satellite Manufacturing (see Note 2
and Note 4 regarding the sale of our North American
satellites and related assets).

The common definition of EBITDA is Earnings
Before Interest, Taxes, Depreciation and Amortization. In
evaluating financial performance, we use revenues and operating
income (loss) from continuing operations before
depreciation and amortization, including amortization of
unearned stock compensation, and reorganization expenses due to
bankruptcy (Adjusted EBITDA) as the measure of a
segments profit or loss. Adjusted EBITDA is equivalent to
the common definition of EBITDA before amortization of stock
compensation; reorganization expenses due to bankruptcy; gain
(loss) on investments and debt exchanges; equity in net
losses of affiliates, net of tax; minority interest, net of tax;
income (loss) from discontinued operations; cumulative
effect of change in accounting principle, net of tax; and
extraordinary gain on acquisition of minority interest, net of
tax. Interest expense has been excluded from Adjusted EBITDA to
maintain comparability with the performance of competitors using
similar measures with different capital structures. During the
period we are in Chapter 11, we only recognize interest
expense on the actual interest payments we make. During this
period, we do not expect to make any further interest payments
on debt obligations after March 17, 2004, the date we
repaid our bank debt. Reorganization expenses are only incurred
during the period we are in Chapter 11. These expenses have
been excluded from Adjusted EBITDA to maintain comparability
with our results during periods we are not in Chapter 11
and with the results of competitors using similar measures.
Adjusted EBITDA should be used in conjunction with U.S. GAAP

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LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

financial measures and is not presented as an
alternative to cash flow from operations as a measure of our
liquidity or as an alternative to net income as an indicator of
our operating performance.

We believe the use of Adjusted EBITDA along with
U.S. GAAP financial measures enhances the understanding of our
operating results and is useful to investors in comparing
performance with competitors, estimating enterprise value and
making investment decisions. Adjusted EBITDA allows investors to
compare operating results of competitors exclusive of
depreciation and amortization, net losses of affiliates, and
minority interest. Adjusted EBITDA is a useful tool given the
significant variation that can result from the timing of capital
expenditures, the amount of intangible assets recorded, the
differences in assets lives, the timing and amount of
investments, and the effects of investments not managed by us.
Adjusted EBITDA as used here may not be comparable to similarly
titled measures reported by competitors. We also use Adjusted
EBITDA to evaluate operating performance, to allocate resources
and capital, to measure performance for incentive compensation
programs and to evaluate future growth opportunities.

Intersegment revenues consist primarily of
satellites under construction by Satellite Manufacturing for
Satellite Services and the leasing of transponder capacity by
Satellite Manufacturing from Satellite Services.

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




Three Months Ended June 30,
2004

|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |         |  
|-------------------------------------------------- |  | --------- | ----- | ------------- |  | ------------ | ----- | ----- |  | - | ---- | - |  | - | ------- | -
|                                                   |  | Satellite |       | Satellite     |  |              |       |      
|                                                   |  | Services  |       | Manufacturing |  | Corporate(1) |       | Total
|                                                   |  |           |       |               |  |              |       |      
|Revenues and Adjusted EBITDA:                      |  |           |       |               |  |              |       |       |  |   |      |   |  |   |         |  
|Revenue from external customers(2)                 |  | $         | 39.0  |               |  | $            | 75.0  |       |  |   |      |   |  | $ | 114.0   |  
|Intersegment revenues                              |  |           | 1.2   |               |  |              | 38.8  |       |  |   |      |   |  |   | 40.0    |  
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |         |  
|Operating segment revenues                         |  | $         | 40.2  |               |  | $            | 113.8 |       |  |   |      |   |  |   | 154.0   |  
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |         |  
|Eliminations(3)                                    |  |           |       |               |  |              |       |       |  |   |      |   |  |   | (40.3   | )
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |         |  
|Operating revenues as reported                     |  |           |       |               |  |              |       |       |  |   |      |   |  | $ | 113.7   |  
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |         |  
|Segment Adjusted EBITDA before
    eliminations(4) |  | $         | 9.0   |               |  | $            | 2.2   |       |  | $ | (8.9 | ) |  | $ | 2.3     |  
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |         |  
|Eliminations(3)                                    |  |           |       |               |  |              |       |       |  |   |      |   |  |   | (8.3    | )
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |         |  
|Adjusted EBITDA                                    |  |           |       |               |  |              |       |       |  |   |      |   |  |   | (6.0    | )
|Depreciation and amortization(5)(6)                |  | $         | (35.5 | )             |  | $            | (7.3  | )     |  | $ | (0.1 | ) |  |   | (42.9   | )
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |         |  
|Reorganization expenses due to bankruptcy          |  |           |       |               |  |              |       |       |  |   |      |   |  |   | (9.6    | )
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |         |  
|Operating loss from continuing operations          |  |           |       |               |  |              |       |       |  |   |      |   |  |   | (58.5   | )
|Interest and investment income                     |  |           |       |               |  |              |       |       |  |   |      |   |  |   | 2.5     |  
|Interest expense                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   | (1.8    | )
|Income tax provision                               |  |           |       |               |  |              |       |       |  |   |      |   |  |   | (12.0   | )
|Equity income in affiliates                        |  |           |       |               |  |              |       |       |  |   |      |   |  |   | 47.0    |  
|Minority interest                                  |  |           |       |               |  |              |       |       |  |   |      |   |  |   |        |  
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |         |  
|Loss from continuing operations                    |  |           |       |               |  |              |       |       |  |   |      |   |  | $ | (22.8   | )
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |         |  
|Other Data:                                        |  |           |       |               |  |              |       |       |  |   |      |   |  |   |         |  
|Total assets(6)                                    |  | $         | 920.4 |               |  | $            | 436.3 |       |  | $ | 75.4 |   |  | $ | 1,432.1 |  
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |         |  

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LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Six Months Ended June 30, 2004

|                                                   |  |           |       |               |  |              |       |       |  |   |       |   |  |   |        |  
|-------------------------------------------------- |  | --------- | ----- | ------------- |  | ------------ | ----- | ----- |  | - | ----- | - |  | - | ------ | -
|                                                   |  | Satellite |       | Satellite     |  |              |       |      
|                                                   |  | Services  |       | Manufacturing |  | Corporate(1) |       | Total
|                                                   |  |           |       |               |  |              |       |      
|Revenues and Adjusted EBITDA:                      |  |           |       |               |  |              |       |       |  |   |       |   |  |   |        |  
|Revenue from external customers(2)                 |  | $         | 69.0  |               |  | $            | 149.4 |       |  |   |       |   |  | $ | 218.4  |  
|Intersegment revenues                              |  |           | 2.3   |               |  |              | 65.4  |       |  |   |       |   |  |   | 67.7   |  
|                                                   |  |           |       |               |  |              |       |       |  |   |       |   |  |   |        |  
|Operating segment revenues                         |  | $         | 71.3  |               |  | $            | 214.8 |       |  |   |       |   |  |   | 286.1  |  
|                                                   |  |           |       |               |  |              |       |       |  |   |       |   |  |   |        |  
|Eliminations(3)                                    |  |           |       |               |  |              |       |       |  |   |       |   |  |   | (68.7  | )
|                                                   |  |           |       |               |  |              |       |       |  |   |       |   |  |   |        |  
|Operating revenues as reported                     |  |           |       |               |  |              |       |       |  |   |       |   |  | $ | 217.4  |  
|                                                   |  |           |       |               |  |              |       |       |  |   |       |   |  |   |        |  
|Segment Adjusted EBITDA before
    eliminations(4) |  | $         | (1.2  | )             |  | $            | 5.8   |       |  | $ | (17.5 | ) |  | $ | (12.9  | )
|                                                   |  |           |       |               |  |              |       |       |  |   |       |   |  |   |        |  
|Eliminations(3)                                    |  |           |       |               |  |              |       |       |  |   |       |   |  |   | (11.7  | )
|                                                   |  |           |       |               |  |              |       |       |  |   |       |   |  |   |        |  
|Adjusted EBITDA                                    |  |           |       |               |  |              |       |       |  |   |       |   |  |   | (24.6  | )
|Depreciation and amortization(5)(6)                |  | $         | (71.5 | )             |  | $            | (12.3 | )     |  | $ | (0.3  | ) |  |   | (84.1  | )
|                                                   |  |           |       |               |  |              |       |       |  |   |       |   |  |   |        |  
|Reorganization expenses due to bankruptcy          |  |           |       |               |  |              |       |       |  |   |       |   |  |   | (17.9  | )
|                                                   |  |           |       |               |  |              |       |       |  |   |       |   |  |   |        |  
|Operating loss from continuing operations          |  |           |       |               |  |              |       |       |  |   |       |   |  |   | (126.6 | )
|Interest and investment income                     |  |           |       |               |  |              |       |       |  |   |       |   |  |   | 5.1    |  
|Interest expense                                   |  |           |       |               |  |              |       |       |  |   |       |   |  |   | (3.8   | )
|Income tax provision                               |  |           |       |               |  |              |       |       |  |   |       |   |  |   | (12.2  | )
|Equity income in affiliates                        |  |           |       |               |  |              |       |       |  |   |       |   |  |   | 46.6   |  
|Minority interest                                  |  |           |       |               |  |              |       |       |  |   |       |   |  |   | 0.1    |  
|                                                   |  |           |       |               |  |              |       |       |  |   |       |   |  |   |        |  
|Loss from continuing operations                    |  |           |       |               |  |              |       |       |  |   |       |   |  | $ | (90.8  | )
|                                                   |  |           |       |               |  |              |       |       |  |   |       |   |  |   |        |  

27



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Three Months Ended June 30,
2003(7)

|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |        |  
|-------------------------------------------------- |  | --------- | ----- | ------------- |  | ------------ | ----- | ----- |  | - | ---- | - |  | - | ------ | -
|                                                   |  | Satellite |       | Satellite     |  |              |       |      
|                                                   |  | Services  |       | Manufacturing |  | Corporate(1) |       | Total
|                                                   |  |           |       |               |  |              |       |      
|Revenues and Adjusted EBITDA:                      |  |           |       |               |  |              |       |       |  |   |      |   |  |   |        |  
|Revenue from external customers(2)                 |  | $         | 39.4  |               |  | $            | 71.2  |       |  |   |      |   |  | $ | 110.6  |  
|Intersegment revenues                              |  |           | 1.1   |               |  |              | 9.9   |       |  |   |      |   |  |   | 11.0   |  
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |        |  
|Operating segment revenues                         |  | $         | 40.5  |               |  | $            | 81.1  |       |  |   |      |   |  |   | 121.6  |  
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |        |  
|Eliminations(3)                                    |  |           |       |               |  |              |       |       |  |   |      |   |  |   | (11.6  | )
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |        |  
|Operating revenues as reported                     |  |           |       |               |  |              |       |       |  |   |      |   |  | $ | 110.0  |  
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |        |  
|Segment Adjusted EBITDA before
    eliminations(8) |  | $         | 5.3   |               |  | $            | (88.5 | )     |  | $ | (9.9 | ) |  | $ | (93.1  | )
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |        |  
|Eliminations(3)                                    |  |           |       |               |  |              |       |       |  |   |      |   |  |   | (2.3   | )
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |        |  
|Adjusted EBITDA                                    |  |           |       |               |  |              |       |       |  |   |      |   |  |   | (95.4  | )
|Depreciation and amortization(5)(6)                |  | $         | (22.3 | )             |  | $            | (7.2  | )     |  | $ | (0.1 | ) |  |   | (29.6  | )
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |        |  
|Operating loss from continuing operations          |  |           |       |               |  |              |       |       |  |   |      |   |  |   | (125.0 | )
|Interest and investment income                     |  |           |       |               |  |              |       |       |  |   |      |   |  |   | 3.8    |  
|Interest expense                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   | (7.9   | )
|Gain on investments                                |  |           |       |               |  |              |       |       |  |   |      |   |  |   | 16.8   |  
|Income tax benefit                                 |  |           |       |               |  |              |       |       |  |   |      |   |  |   | 2.9    |  
|Equity losses in affiliates                        |  |           |       |               |  |              |       |       |  |   |      |   |  |   | (8.3   | )
|Minority interest                                  |  |           |       |               |  |              |       |       |  |   |      |   |  |   |       |  
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |        |  
|Loss from continuing operations                    |  |           |       |               |  |              |       |       |  |   |      |   |  | $ | (117.7 | )
|                                                   |  |           |       |               |  |              |       |       |  |   |      |   |  |   |        |  

28



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Six Months Ended June 30,
2003(7)

|                                                   |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|-------------------------------------------------- |  | --------- | ----- | ------------- |  | ------------ | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                                                   |  | Satellite |       | Satellite     |  |              |        |      
|                                                   |  | Services  |       | Manufacturing |  | Corporate(1) |        | Total
|                                                   |  |           |       |               |  |              |        |      
|Revenues and Adjusted EBITDA:                      |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Revenue from external customers(2)                 |  | $         | 80.5  |               |  | $            | 186.2  |       |  |   |       |   |  | $ | 266.7  |  
|Intersegment revenues                              |  |           | 2.1   |               |  |              | 26.4   |       |  |   |       |   |  |   | 28.5   |  
|                                                   |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Operating segment revenues                         |  | $         | 82.6  |               |  | $            | 212.6  |       |  |   |       |   |  |   | 295.2  |  
|                                                   |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Eliminations(3)                                    |  |           |       |               |  |              |        |       |  |   |       |   |  |   | (29.8  | )
|                                                   |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Operating revenues as reported                     |  |           |       |               |  |              |        |       |  |   |       |   |  | $ | 265.4  |  
|                                                   |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Segment Adjusted EBITDA before
    eliminations(8) |  | $         | 9.0   |               |  | $            | (101.0 | )     |  | $ | (19.0 | ) |  | $ | (111.0 | )
|                                                   |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Eliminations(3)                                    |  |           |       |               |  |              |        |       |  |   |       |   |  |   | (7.4   | )
|                                                   |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Adjusted EBITDA                                    |  |           |       |               |  |              |        |       |  |   |       |   |  |   | (118.4 | )
|Depreciation and amortization(5)(6)                |  | $         | (45.5 | )             |  | $            | (13.9  | )     |  | $ | (0.3  | ) |  |   | (59.7  | )
|                                                   |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Operating loss from continuing operations          |  |           |       |               |  |              |        |       |  |   |       |   |  |   | (178.1 | )
|Interest and investment income                     |  |           |       |               |  |              |        |       |  |   |       |   |  |   | 10.8   |  
|Interest expense                                   |  |           |       |               |  |              |        |       |  |   |       |   |  |   | (16.4  | )
|Gain on investments                                |  |           |       |               |  |              |        |       |  |   |       |   |  |   | 17.9   |  
|Income tax benefit                                 |  |           |       |               |  |              |        |       |  |   |       |   |  |   | 6.8    |  
|Equity losses in affiliates                        |  |           |       |               |  |              |        |       |  |   |       |   |  |   | (16.8  | )
|Minority interest                                  |  |           |       |               |  |              |        |       |  |   |       |   |  |   |       |  
|                                                   |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Loss from continuing operations                    |  |           |       |               |  |              |        |       |  |   |       |   |  | $ | (175.8 | )
|                                                   |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents corporate expenses incurred in support
    of our operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(2) | Includes revenues from affiliates of
    $2.1 million and $8.1 million for the three months
    ended June 30, 2004 and 2003, respectively, and
    $5.2 million and $23.2 million for the six months
    ended June 30, 2004 and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(3) | Represents the elimination of intercompany sales
    and intercompany Adjusted EBITDA, primarily for satellites under
    construction by SS/ L for wholly owned subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(4) | Satellite manufacturing excludes charges of
    $2 million and $22 million for the three and six
    months ended June 30, 2004, respectively, as a result of
    the settlement of all orbital receivables on satellites sold to
    Intelsat. This settlement had the effect of reducing future
    orbital receipts by $25 million, including $15 million
    relating to a satellite currently under construction. Consistent
    with our internal reporting for satellite manufacturing, this
    decrease in contract value for the satellite currently under
    construction is not being reflected as a decrease in satellite
    manufacturing revenues. These charges had no effect on our
    consolidated results. Satellite Services includes an impairment
    charge of $12 million for the six months ended
    June 30, 2004, relating to our Telstar 14/ Estrela do Sul-1
    satellite and related assets.
|   
|(5) | Includes additional depreciation expense of
    $10 million and $24 million for the three and six
    months ended June 30, 2004, respectively, relating to the
    shortening in the estimated life of our Telstar 11 satellite,
    which, we determined in the fourth quarter of 2003, would go out
    of service in June 2004 (earlier than its previously expected
    end of life of March 2005). Also, includes amortization of
    unearned stock compensation charges.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(6) | Amounts are presented after the elimination of
    intercompany profit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(7) | The 2003 segment information has been adjusted to
    remove the operations of the North American satellites and
    related assets sold, which has been reclassified to discontinued
    operations (see Note 4).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(8) | Satellite Manufacturing Adjusted EBITDA for the
    three and six months ended June 30, 2003 includes:
    (i) a charge of $24 million due to cancellation of a
    deposit on a launch vehicle contract; (ii) provisions for
    inventory obsolescence of $24 million primarily due to the
    absence of new satellite awards since December 2001;
    (iii) a charge of $13 million on the settlement of all
    outstanding issues with Alcatel including a contract dispute
    that was in arbitration; and (iv) a loss of
    $11 million on the acceleration of receipt of long-term
    receivables. For the six months ended June 30, 2003,
    Satellite Manufacturing Adjusted EBITDA includes a charge of
    $10 million on SS/ L-provided vendor financing,
    representing the difference between                                                                                                            

29



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##### Table of Contents



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR IN POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the carrying value of SS/ Ls receivables of
    $38 million and the value of the common shares received by
    SS/ L based on the trading price of Sirius Satellite Radio, Inc.
    (Sirius) common stock on March 7, 2003 of
    $28 million.



|    |                              
|--- | -----------------------------
|18. | New Accounting Pronouncements



| |        
| | -------
| | FIN 46R

Financial Accounting Standards Board
(FASB) Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51 (FIN 46) and its
amendment entitled FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities
(FIN 46R) were first issued by the FASB in January
2003 and revised in December 2003. FIN 46R requires certain
variable interest entities to be consolidated by the primary
beneficiary of the entity if (a) the equity investors in
the entity do not have the characteristics of a controlling
financial interest or (b) do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. We determined
that there was no effect on our condensed consolidated financial
position or results of operations from the adoption of FIN 46R
during the quarter ended March 31, 2004.



|    |                                                                                             
|--- | --------------------------------------------------------------------------------------------
|19. | Financial Information for Subsidiary Issuer
    and Guarantor and Non-Guarantor Subsidiaries

Loral is a holding company (the Parent
Company), which is the ultimate parent of all Loral
subsidiaries. The 10% senior notes issued by Loral Orion (the
Subsidiary Issuer), our wholly owned subsidiary, are
fully and unconditionally guaranteed, on a joint and several
basis, by the Parent Company and several of Loral Orions
wholly owned subsidiaries (the Guarantor
Subsidiaries). The Parent Company, the Subsidiary Issuer
and the Guarantor Subsidiaries, as well as certain other
non-guarantor subsidiaries of the Parent Company (including the
Sellers and SS/L) filed voluntary petitions for reorganization
under Chapter 11 of the Bankruptcy Code on July 15,
2003.

Presented below is condensed consolidating
financial information for the Parent Company, the Subsidiary
Issuer, the Guarantor Subsidiaries and the other wholly owned
subsidiaries of the Parent Company (the Non-Guarantor
Subsidiaries) as of June 30, 2004 and
December 31, 2003 and for the three and six months ended
June 30, 2004 and 2003. The unaudited condensed
consolidating financial information has been presented to show
the nature of assets held, results of operations and cash flows
of the Parent Company, Subsidiary Issuer, Guarantor Subsidiaries
and Non-Guarantor Subsidiaries.

The supplemental condensed consolidating
financial information reflects the investments of the Parent
Company in the Subsidiary Issuer, the Guarantor Subsidiaries and
the Non-Guarantor Subsidiaries using the equity method of
accounting. Our significant transactions with our subsidiaries,
other than the investment account and related equity in net loss
of unconsolidated subsidiaries, are intercompany payables and
receivables between our subsidiaries resulting primarily from
the funding of the construction of satellites for the Satellite
Services segment. Lorals $200 million note receivable
from unconsolidated subsidiaries is due from Loral
Space & Communications Corporation (LSCC)
and bears interest at 8.2% per annum. Loral SpaceCom (a
non-guarantor subsidiary) holds a $29.7 million
subordinated note receivable from the Subsidiary Issuer. The
note is subordinated to all existing and future indebtedness of
the Subsidiary Issuer and guaranteed by the Parent Company. The
note bears interest at a rate of 10% per annum. Loral Satellite
has provided $59.8 million to Loral as of June 30,
2004, in the form of a note receivable which bears no interest
and is payable upon maturity of the Loral Satellite Credit
Agreement. As a result of filing Chapter 11, the accrual of
interest on all related party notes in the following condensed
consolidating financial statements was suspended.

30



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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE
SHEET

June 30, 2004


(In thousands)


(Unaudited)


|                                             |                                        |                                                   |                                                          |            |       |              |           |               |         |              |          |              |     |         |            |            |         |            |           |           |   |           |           |            |         |           |  
|-------------------------------------------- | -------------------------------------- | ------------------------------------------------- | -------------------------------------------------------- | ---------- | ----- | ------------ | --------- | ------------- | ------- | ------------ | -------- | ------------ | --- | ------- | ---------- | ---------- | ------- | ---------- | --------- | --------- | - | --------- | --------- | ---------- | ------- | --------- | -
|                                             |                                        | Parent                                            |                                                          | Subsidiary |       | Guarantor    |           | Non-Guarantor |         |              |          |             
|                                             |                                        | Company                                           |                                                          | Issuer     |       | Subsidiaries |           | Subsidiaries  |         | Eliminations |          | Consolidated
|                                             |                                        |                                                   |                                                          |            |       |              |           |               |         |              |          |             
|Current assets:                              |                                        |                                                   |                                                          |            |       |              |           |               |         |              |          |              |     |         |            |            |         |            |           |           |   |           |           |           
|                                             | Cash and cash equivalents              |                                                   | $                                                        | 3,919      |       |              | $         | 47,621        |         |              | $        |             |     |         | $          | 135,119    |         |            | $         |          |   |           | $         | 186,659    |        
|                                             | Accounts receivable, net               |                                                   |                                                          |           |       |              |           | 5,792         |         |              |          | 272          |     |         |            | 7,752      |         |            |           |          |   |           |           | 13,816     |        
|                                             | Contracts-in-process                   |                                                   |                                                          |           |       |              |           |              |         |              |          |             |     |         |            | 46,658     |         |            |           |          |   |           |           | 46,658     |        
|                                             | Inventories                            |                                                   |                                                          |           |       |              |           |              |         |              |          |             |     |         |            | 38,929     |         |            |           |          |   |           |           | 38,929     |        
|                                             | Other current assets                   |                                                   |                                                          | 5,082      |       |              |           | 5,918         |         |              |          | 1,913        |     |         |            | 10,708     |         |            |           | (7        | ) |           |           | 23,614     |        
|                                             |                                        |                                                   |                                                          |            |       |              |           |               |         |              |          |              |     |         |            |            |         |            |           |           |   |           |           |           
|                                             |                                        |                                                   | Total current assets                                     |            |       | 9,001        |           |               |         | 59,331       |          |              |     | 2,185   |            |            |         | 239,166    |           |           |   | (7        | )         |            |         | 309,676   |  
|Property, plant and equipment, net           |                                        |                                                   |                                                         |            |       |              | 351,808   |               |         |              | 173,181  |              |     |         | 425,467    |            |         |            | (21,106   | )         |   |           | 929,350   |           
|Long-term receivables                        |                                        |                                                   |                                                         |            |       |              |          |               |         |              |         |              |     |         | 82,105     |            |         |            |          |           |   |           | 82,105    |           
|Due to (from) unconsolidated subsidiaries    |                                        |                                                   | (11,164                                                  | )          |       |              | (27,581   | )             |         |              | 31,331   |              |     |         | 60,553     |            |         |            | (53,139   | )         |   |           |          |           
|Investments in unconsolidated subsidiaries   |                                        |                                                   | (465,219                                                 | )          |       |              | 307,972   |               |         |              | (271,698 | )            |     |         | (1,616,278 | )          |         |            | 2,045,223 |           |   |           |          |           
|Investments in and advances to affiliates    |                                        |                                                   | 20                                                       |            |       |              |          |               |         |              |         |              |     |         | 48,173     |            |         |            |          |           |   |           | 48,193    |           
|Deposits                                     |                                        |                                                   |                                                         |            |       |              |          |               |         |              |         |              |     |         | 9,000      |            |         |            |          |           |   |           | 9,000     |           
|Other assets                                 |                                        |                                                   | 4,253                                                    |            |       |              | 3,644     |               |         |              | 463      |              |     |         | 45,439     |            |         |            |          |           |   |           | 53,799    |           
|                                             |                                        |                                                   |                                                          |            |       |              |           |               |         |              |          |              |     |         |            |            |         |            |           |           |   |           |           |           
|                                             |                                        |                                                   | Total assets                                             |            | $     | (463,109     | )         |               | $       | 695,174      |          |              | $   | (64,538 | )          |            | $       | (706,375   | )         |           | $ | 1,970,971 |           |            | $       | 1,432,123 |  
|                                             |                                        |                                                   |                                                          |            |       |              |           |               |         |              |          |              |     |         |            |            |         |            |           |           |   |           |           |           
|Liabilities not subject to compromise:       |                                        |                                                   |                                                          |            |       |              |           |               |         |              |          |              |     |         |            |            |         |            |           |           |   |           |           |           
|                                             | Current liabilities:                   |                                                   |                                                          |            |       |              |           |               |         |              |          |              |     |         |            |            |         |            |           |           |   |           |           |            |        
|                                             |                                        | Accounts payable                                  |                                                          | $          |      |              |           | $             | 2,007   |              |          | $            | 250 |         |            | $          | 29,984  |            |           | $         |  |           |           | $          | 32,241  |          
|                                             |                                        | Accrued employment costs                          |                                                          |            |      |              |           |               |        |              |          |              |    |         |            |            | 28,861  |            |           |           |  |           |           |            | 28,861  |          
|                                             |                                        | Customer advances and billings in excess of costs |                                                          |            |      |              |           |               | 125,454 |              |          |              | (83 | )       |            |            | 210,528 |            |           |           |  |           |           |            | 335,899 |          
|                                             |                                        | Deferred gain on sales of assets                  |                                                          |            |      |              |           |               |        |              |          |              |    |         |            |            | 20,646  |            |           |           |  |           |           |            | 20,646  |          
|                                             |                                        | Income taxes payable                              |                                                          |            |      |              |           |               |        |              |          |              |    |         |            |            | 5,236   |            |           |           |  |           |           |            | 5,236   |          
|                                             |                                        | Other current liabilities                         |                                                          |            | 1,514 |              |           |               |        |              |          |              |    |         |            |            | 17,679  |            |           |           |  |           |           |            | 19,193  |          
|                                             |                                        |                                                   |                                                          |            |       |              |           |               |         |              |          |              |     |         |            |            |         |            |           |           |   |           |           |           
|                                             |                                        |                                                   | Total current liabilities                                |            |       | 1,514        |           |               |         | 127,461      |          |              |     | 167     |            |            |         | 312,934    |           |           |   |          |           |            |         | 442,076   |  
|Pension and other postretirement liabilities |                                        |                                                   |                                                         |            |       |              |          |               |         |              |         |              |     |         | 21,116     |            |         |            |          |           |   |           | 21,116    |           
|Long-term liabilities                        |                                        |                                                   | 52,233                                                   |            |       |              | 3,693     |               |         |              | 14,459   |              |     |         | 10,604     |            |         |            | (36,085   | )         |   |           | 44,904    |           
|                                             |                                        |                                                   |                                                          |            |       |              |           |               |         |              |          |              |     |         |            |            |         |            |           |           |   |           |           |           
|                                             |                                        |                                                   | Total liabilities not subject to compromise              |            |       | 53,747       |           |               |         | 131,154      |          |              |     | 14,626  |            |            |         | 344,654    |           |           |   | (36,085   | )         |            |         | 508,096   |  
|Liabilities subject to compromise            |                                        |                                                   | 434,452                                                  |            |       |              | 1,112,282 |               |         |              | (116,662 | )            |     |         | 447,070    |            |         |            | (4,196    | )         |   |           | 1,872,946 |           
|Minority interest                            |                                        |                                                   |                                                         |            |       |              |          |               |         |              |         |              |     |         | 2,389      |            |         |            |          |           |   |           | 2,389     |           
|Shareholders (deficit) equity:              |                                        |                                                   |                                                          |            |       |              |           |               |         |              |          |              |     |         |            |            |         |            |           |           |   |           |           |           
|                                             | Common stock                           |                                                   |                                                          | 4,413      |       |              |           |              |         |              |          |             |     |         |            |           |         |            |           |          |   |           |           | 4,413      |        
|                                             | Paid-in capital                        |                                                   |                                                          | 3,392,829  |       |              |           | 604,166       |         |              |          |             |     |         |            |           |         |            |           | (604,166  | ) |           |           | 3,392,829  |        
|                                             | Treasury stock, at cost                |                                                   |                                                          | (3,360     | )     |              |           |              |         |              |          |             |     |         |            |           |         |            |           |          |   |           |           | (3,360     | )      
|                                             | Unearned compensation                  |                                                   |                                                          | (127       | )     |              |           |              |         |              |          |             |     |         |            |           |         |            |           |          |   |           |           | (127       | )      
|                                             | Due from related parties               |                                                   |                                                          |           |       |              |           | (53,996       | )       |              |          |             |     |         |            | 53,996     |         |            |           |          |   |           |           |           |        
|                                             | Retained (deficit) earnings            |                                                   |                                                          | (4,273,841 | )     |              |           | (1,098,432    | )       |              |          | 37,498       |     |         |            | (1,554,484 | )       |            |           | 2,615,418 |   |           |           | (4,273,841 | )      
|                                             | Accumulated other comprehensive income |                                                   |                                                          | (71,222    | )     |              |           |              |         |              |          |             |     |         |            |           |         |            |           |          |   |           |           | (71,222    | )      
|                                             |                                        |                                                   |                                                          |            |       |              |           |               |         |              |          |              |     |         |            |            |         |            |           |           |   |           |           |           
|                                             |                                        |                                                   | Total shareholders (deficit) equity                     |            |       | (951,308     | )         |               |         | (548,262     | )        |              |     | 37,498  |            |            |         | (1,500,488 | )         |           |   | 2,011,252 |           |            |         | (951,308  | )
|                                             |                                        |                                                   |                                                          |            |       |              |           |               |         |              |          |              |     |         |            |            |         |            |           |           |   |           |           |           
|                                             |                                        |                                                   | Total liabilities and shareholders
    (deficit) equity |            | $     | (463,109     | )         |               | $       | 695,174      |          |              | $   | (64,538 | )          |            | $       | (706,375   | )         |           | $ | 1,970,971 |           |            | $       | 1,432,123 |  
|                                             |                                        |                                                   |                                                          |            |       |              |           |               |         |              |          |              |     |         |            |            |         |            |           |           |   |           |           |           

31



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CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS

Three Months Ended June 30,
2004


(In thousands)


(Unaudited)


|                                                                                                                                                               |                |         |         |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |         | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------- | ------- | ---------- |  | ------------ | ------- | ------------- |  | ------------ | ------ | ------------ |  | - | ------- | ------- |  | - | ------- | ------- | - | - | ------- | ------- | 
|                                                                                                                                                               |                | Parent  |         | Subsidiary |  | Guarantor    |         | Non-Guarantor |  |              |        |             
|                                                                                                                                                               |                | Company |         | Issuer     |  | Subsidiaries |         | Subsidiaries  |  | Eliminations |        | Consolidated
|                                                                                                                                                               |                |         |         |            |  |              |         |               |  |              |        |             
|Revenues from satellite services                                                                                                                               |                | $       |        |            |  | $            | 21,507  |               |  | $            | 9,635  |              |  | $ | 19,011  |         |  | $ | (11,423 | )       |   | $ | 38,730  |        
|Revenues from satellite manufacturing                                                                                                                          |                |         |        |            |  |              |        |               |  |              |       |              |  |   | 81,452  |         |  |   | (6,479  | )       |   |   | 74,973  |        
|                                                                                                                                                               |                |         |         |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |        
|                                                                                                                                                               | Total revenues |         |         |           |  |              |         | 21,507        |  |              |        | 9,635        |  |   |         | 100,463 |  |   |         | (17,902 | ) |   |         | 113,703 | 
|Cost of satellite services                                                                                                                                     |                |         |        |            |  |              | 32,625  |               |  |              | 9,696  |              |  |   | 20,914  |         |  |   | (10,624 | )       |   |   | 52,611  |        
|Cost of satellite manufacturing                                                                                                                                |                |         |        |            |  |              |        |               |  |              |       |              |  |   | 84,985  |         |  |   | (5,753  | )       |   |   | 79,232  |        
|Selling, general and administrative expenses                                                                                                                   |                |         | 2,045   |            |  |              | 6,340   |               |  |              | 3,429  |              |  |   | 18,980  |         |  |   |        |         |   |   | 30,794  |        
|                                                                                                                                                               |                |         |         |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |        
|Operating loss before reorganization expenses due
    to bankruptcy                                                                                            |                |         | (2,045  | )          |  |              | (17,458 | )             |  |              | (3,490 | )            |  |   | (24,416 | )       |  |   | (1,525  | )       |   |   | (48,934 | )      
|Reorganization expenses due to bankruptcy                                                                                                                      |                |         | (1,021  | )          |  |              | (1,973  | )             |  |              |       |              |  |   | (6,561  | )       |  |   |        |         |   |   | (9,555  | )      
|                                                                                                                                                               |                |         |         |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |        
|Operating loss from continuing operations                                                                                                                      |                |         | (3,066  | )          |  |              | (19,431 | )             |  |              | (3,490 | )            |  |   | (30,977 | )       |  |   | (1,525  | )       |   |   | (58,489 | )      
|Interest and investment income                                                                                                                                 |                |         |        |            |  |              |        |               |  |              |       |              |  |   | 2,473   |         |  |   |        |         |   |   | 2,473   |        
|Interest expense                                                                                                                                               |                |         |        |            |  |              | (220    | )             |  |              |       |              |  |   | (2,235  | )       |  |   | 609     |         |   |   | (1,846  | )      
|                                                                                                                                                               |                |         |         |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |        
|Loss from continuing operations before income
    taxes, equity in net income (losses) of unconsolidated
    subsidiaries and affiliates and minority interest |                |         | (3,066  | )          |  |              | (19,651 | )             |  |              | (3,490 | )            |  |   | (30,739 | )       |  |   | (916    | )       |   |   | (57,862 | )      
|Income tax (provision) benefit                                                                                                                                 |                |         |        |            |  |              | (1,409  | )             |  |              | 1,222  |              |  |   | (12,613 | )       |  |   | 813     |         |   |   | (11,987 | )      
|                                                                                                                                                               |                |         |         |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |        
|Loss from continuing operations before equity in
    net income (losses) of unconsolidated subsidiaries and
    affiliates and minority interest               |                |         | (3,066  | )          |  |              | (21,060 | )             |  |              | (2,268 | )            |  |   | (43,352 | )       |  |   | (103    | )       |   |   | (69,849 | )      
|Equity in net losses of unconsolidated
    subsidiaries                                                                                                        |                |         | (19,603 | )          |  |              | (2,268  | )             |  |              |       |              |  |   |        |         |  |   | 21,871  |         |   |   |        |        
|Equity in net income of affiliates                                                                                                                             |                |         |        |            |  |              |        |               |  |              |       |              |  |   | 46,983  |         |  |   |        |         |   |   | 46,983  |        
|Minority interest                                                                                                                                              |                |         |        |            |  |              |        |               |  |              |       |              |  |   | 39      |         |  |   |        |         |   |   | 39      |        
|                                                                                                                                                               |                |         |         |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |        
|(Loss) income from continuing operations                                                                                                                       |                |         | (22,669 | )          |  |              | (23,328 | )             |  |              | (2,268 | )            |  |   | 3,670   |         |  |   | 21,768  |         |   |   | (22,827 | )      
|Income from discontinued operations                                                                                                                            |                |         |        |            |  |              |        |               |  |              |       |              |  |   | 158     |         |  |   |        |         |   |   | 158     |        
|                                                                                                                                                               |                |         |         |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |        
|Net (loss) income                                                                                                                                              |                | $       | (22,669 | )          |  | $            | (23,328 | )             |  | $            | (2,268 | )            |  | $ | 3,828   |         |  | $ | 21,768  |         |   | $ | (22,669 | )      
|                                                                                                                                                               |                |         |         |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |        

32



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CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS

Six Months Ended June 30, 2004


(In thousands)


(Unaudited)


|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |          |         | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------- | -------- | ---------- |  | ------------ | ------- | ------------- |  | ------------ | ------ | ------------ |  | - | ------- | ------- |  | - | ------- | ------- | - | - | -------- | ------- | 
|                                                                                                                                                               |                | Parent  |          | Subsidiary |  | Guarantor    |         | Non-Guarantor |  |              |        |             
|                                                                                                                                                               |                | Company |          | Issuer     |  | Subsidiaries |         | Subsidiaries  |  | Eliminations |        | Consolidated
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |             
|Revenues from satellite services                                                                                                                               |                | $       |         |            |  | $            | 40,422  |               |  | $            | 17,061 |              |  | $ | 30,724  |         |  | $ | (20,226 | )       |   | $ | 67,981   |        
|Revenues from satellite manufacturing                                                                                                                          |                |         |         |            |  |              |        |               |  |              |       |              |  |   | 155,804 |         |  |   | (6,398  | )       |   |   | 149,406  |        
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |          |        
|                                                                                                                                                               | Total revenues |         |          |           |  |              |         | 40,422        |  |              |        | 17,061       |  |   |         | 186,528 |  |   |         | (26,624 | ) |   |          | 217,387 | 
|Cost of satellite services                                                                                                                                     |                |         |         |            |  |              | 68,529  |               |  |              | 16,777 |              |  |   | 49,642  |         |  |   | (18,756 | )       |   |   | 116,192  |        
|Cost of satellite manufacturing                                                                                                                                |                |         |         |            |  |              |        |               |  |              |       |              |  |   | 153,244 |         |  |   | (5,713  | )       |   |   | 147,531  |        
|Selling, general and administrative expenses                                                                                                                   |                |         | 4,279    |            |  |              | 10,684  |               |  |              | 3,814  |              |  |   | 43,584  |         |  |   |        |         |   |   | 62,361   |        
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |          |        
|Operating loss before reorganization expenses due
    to bankruptcy                                                                                            |                |         | (4,279   | )          |  |              | (38,791 | )             |  |              | (3,530 | )            |  |   | (59,942 | )       |  |   | (2,155  | )       |   |   | (108,697 | )      
|Reorganization expenses due to bankruptcy                                                                                                                      |                |         | (1,977   | )          |  |              | (3,851  | )             |  |              |       |              |  |   | (12,042 | )       |  |   |        |         |   |   | (17,870  | )      
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |          |        
|Operating loss from continuing operations                                                                                                                      |                |         | (6,256   | )          |  |              | (42,642 | )             |  |              | (3,530 | )            |  |   | (71,984 | )       |  |   | (2,155  | )       |   |   | (126,567 | )      
|Interest and investment income                                                                                                                                 |                |         |         |            |  |              |        |               |  |              |       |              |  |   | 5,034   |         |  |   |        |         |   |   | 5,034    |        
|Interest expense                                                                                                                                               |                |         |         |            |  |              | (220    | )             |  |              |       |              |  |   | (4,831  | )       |  |   | 1,218   |         |   |   | (3,833   | )      
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |          |        
|Loss from continuing operations before income
    taxes, equity in net income (losses) of unconsolidated
    subsidiaries and affiliates and minority interest |                |         | (6,256   | )          |  |              | (42,862 | )             |  |              | (3,530 | )            |  |   | (71,781 | )       |  |   | (937    | )       |   |   | (125,366 | )      
|Income tax (provision) benefit                                                                                                                                 |                |         |         |            |  |              | (2,116  | )             |  |              | 1,236  |              |  |   | (12,116 | )       |  |   | 813     |         |   |   | (12,183  | )      
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |          |        
|Loss from continuing operations before equity in
    net income (losses) of unconsolidated subsidiaries and
    affiliates and minority interest               |                |         | (6,256   | )          |  |              | (44,978 | )             |  |              | (2,294 | )            |  |   | (83,897 | )       |  |   | (124    | )       |   |   | (137,549 | )      
|Equity in net losses of unconsolidated
    subsidiaries                                                                                                        |                |         | (96,049  | )          |  |              | (2,294  | )             |  |              |       |              |  |   |        |         |  |   | 98,343  |         |   |   |         |        
|Equity in net income of affiliates                                                                                                                             |                |         |         |            |  |              |        |               |  |              |       |              |  |   | 46,580  |         |  |   |        |         |   |   | 46,580   |        
|Minority interest                                                                                                                                              |                |         |         |            |  |              |        |               |  |              |       |              |  |   | 126     |         |  |   |        |         |   |   | 126      |        
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |          |        
|Loss from continuing operations                                                                                                                                |                |         | (102,305 | )          |  |              | (47,272 | )             |  |              | (2,294 | )            |  |   | (37,191 | )       |  |   | 98,219  |         |   |   | (90,843  | )      
|Loss from discontinued operations                                                                                                                              |                |         |         |            |  |              |        |               |  |              |       |              |  |   | (11,462 | )       |  |   |        |         |   |   | (11,462  | )      
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |          |        
|Net (loss) income                                                                                                                                              |                | $       | (102,305 | )          |  | $            | (47,272 | )             |  | $            | (2,294 | )            |  | $ | (48,653 | )       |  | $ | 98,219  |         |   | $ | (102,305 | )      
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |          |        

33



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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS

Six Months Ended June 30, 2004


(In thousands)


(Unaudited)


|                                                        |                                                   |                                                                   |       |            |        |              |         |               |        |              |   |              |        |   |          |          |         |   |         |         |         |   |          |          |         |  
|------------------------------------------------------- | ------------------------------------------------- | ----------------------------------------------------------------- | ----- | ---------- | ------ | ------------ | ------- | ------------- | ------ | ------------ | - | ------------ | ------ | - | -------- | -------- | ------- | - | ------- | ------- | ------- | - | -------- | -------- | ------- | -
|                                                        |                                                   | Parent                                                            |       | Subsidiary |        | Guarantor    |         | Non-Guarantor |        |              |   |             
|                                                        |                                                   | Company                                                           |       | Issuer     |        | Subsidiaries |         | Subsidiaries  |        | Eliminations |   | Consolidated
|                                                        |                                                   |                                                                   |       |            |        |              |         |               |        |              |   |             
|Operating activities:                                   |                                                   |                                                                   |       |            |        |              |         |               |        |              |   |              |        |   |          |          |         |   |         |         |         |   |          |         
|                                                        | Net loss                                          |                                                                   | $     | (102,305   | )      |              | $       | (47,272       | )      |              | $ | (2,294       | )      |   | $        | (48,653  | )       |   | $       | 98,219  |         |   | $        | (102,305 | )      
|                                                        | Non-cash items:                                   |                                                                   |       |            |        |              |         |               |        |              |   |              |        |   |          |          |         |   |         |         |         |   |          |          |        
|                                                        |                                                   | Loss from discontinued operations                                 |       |            |       |              |         |               |       |              |   |              |       |   |          |          | 11,462  |   |         |         |        |   |          |          | 11,462  |  
|                                                        |                                                   | Equity in net income of affiliates                                |       |            |       |              |         |               |       |              |   |              |       |   |          |          | (46,580 | ) |         |         |        |   |          |          | (46,580 | )
|                                                        |                                                   | Minority interest                                                 |       |            |       |              |         |               |       |              |   |              |       |   |          |          | (126    | ) |         |         |        |   |          |          | (126    | )
|                                                        |                                                   | Equity in net losses of unconsolidated
    subsidiaries           |       |            | 96,049 |              |         |               | 2,294  |              |   |              |       |   |          |          |        |   |         |         | (98,343 | ) |          |          |        |  
|                                                        |                                                   | Deferred taxes                                                    |       |            |       |              |         |               |       |              |   |              | 1,597  |   |          |          | 11,434  |   |         |         | (1,597  | ) |          |          | 11,434  |  
|                                                        |                                                   | Depreciation and amortization                                     |       |            |       |              |         |               | 50,825 |              |   |              | 10,506 |   |          |          | 22,790  |   |         |         |        |   |          |          | 84,121  |  
|                                                        |                                                   | Provisions for bad debts                                          |       |            |       |              |         |               | 965    |              |   |              | (257   | ) |          |          | (350    | ) |         |         |        |   |          |          | 358     |  
|                                                        |                                                   | Impairment charge on satellite and related assets                 |       |            |       |              |         |               |       |              |   |              |       |   |          |          | 11,989  |   |         |         |        |   |          |          | 11,989  |  
|                                                        |                                                   | Provisions for inventory obsolescence                             |       |            |       |              |         |               |       |              |   |              |       |   |          |          | 287     |   |         |         |        |   |          |          | 287     |  
|                                                        |                                                   | Adjustment to revenue straightlining assessment                   |       |            |       |              |         |               | 105    |              |   |              |       |   |          |          | 1,044   |   |         |         |        |   |          |          | 1,149   |  
|                                                        |                                                   | Net interest and (gain) loss on foreign
    currency transactions |       |            |       |              |         |               |       |              |   |              |       |   |          |          | (2,230  | ) |         |         |        |   |          |          | (2,230  | )
|Changes in operating assets and liabilities:            |                                                   |                                                                   |       |            |        |              |         |               |        |              |   |              |        |   |          |          |         |   |         |         |         |   |          |         
|                                                        | Accounts receivable, net                          |                                                                   |       |           |        |              |         | 155           |        |              |   | 953          |        |   |          | 6,978    |         |   |         |        |         |   |          | 8,086    |        
|                                                        | Contracts-in-process                              |                                                                   |       |           |        |              |         |              |        |              |   |             |        |   |          | 29,856   |         |   |         |        |         |   |          | 29,856   |        
|                                                        | Inventories                                       |                                                                   |       |           |        |              |         |              |        |              |   |             |        |   |          | 3,240    |         |   |         |        |         |   |          | 3,240    |        
|                                                        | Long-term receivables                             |                                                                   |       |           |        |              |         |              |        |              |   |             |        |   |          | (6,264   | )       |   |         |        |         |   |          | (6,264   | )      
|                                                        | Due (to) from unconsolidated subsidiaries         |                                                                   |       | 8,070      |        |              |         | 3,192         |        |              |   | (13,729      | )      |   |          | (13,484  | )       |   |         | 15,951  |         |   |          |         |        
|                                                        | Other current assets and other assets             |                                                                   |       | (2,701     | )      |              |         | (2,714        | )      |              |   | 3,058        |        |   |          | (342     | )       |   |         |        |         |   |          | (2,699   | )      
|                                                        | Accounts payable                                  |                                                                   |       |           |        |              |         | 1,183         |        |              |   | 250          |        |   |          | (9,885   | )       |   |         |        |         |   |          | (8,452   | )      
|                                                        | Accrued expenses and other current liabilities    |                                                                   |       | 325        |        |              |         | 107           |        |              |   |             |        |   |          | (2,396   | )       |   |         |        |         |   |          | (1,964   | )      
|                                                        | Customer advances                                 |                                                                   |       |           |        |              |         | 3,882         |        |              |   | (84          | )      |   |          | 68,422   |         |   |         |        |         |   |          | 72,220   |        
|                                                        | Income taxes payable                              |                                                                   |       |           |        |              |         |              |        |              |   |             |        |   |          | (814     | )       |   |         |        |         |   |          | (814     | )      
|                                                        | Pension and other postretirement liabilities      |                                                                   |       |           |        |              |         |              |        |              |   |             |        |   |          | 9,039    |         |   |         |        |         |   |          | 9,039    |        
|                                                        | Long-term liabilities                             |                                                                   |       |           |        |              |         | (951          | )      |              |   |             |        |   |          | (2,411   | )       |   |         |        |         |   |          | (3,362   | )      
|                                                        | Other                                             |                                                                   |       |           |        |              |         |              |        |              |   |             |        |   |          | 6        |         |   |         |        |         |   |          | 6        |        
|                                                        |                                                   |                                                                   |       |            |        |              |         |               |        |              |   |              |        |   |          |          |         |   |         |         |         |   |          |         
|Net cash provided by (used in) operating
    activities |                                                   |                                                                   | (562  | )          |        |              | 11,771  |               |        |              |  |              |        |   | 43,012   |          |         |   | 14,230  |         |         |   | 68,451   |         
|                                                        |                                                   |                                                                   |       |            |        |              |         |               |        |              |   |              |        |   |          |          |         |   |         |         |         |   |          |         
|Net cash provided by discontinued operations            |                                                   |                                                                   |      |            |        |              |        |               |        |              |  |              |        |   | 28,348   |          |         |   |        |         |         |   | 28,348   |         
|                                                        |                                                   |                                                                   |       |            |        |              |         |               |        |              |   |              |        |   |          |          |         |   |         |         |         |   |          |         
|Investing activities:                                   |                                                   |                                                                   |       |            |        |              |         |               |        |              |   |              |        |   |          |          |         |   |         |         |         |   |          |         
|                                                        | Capital expenditures for continuing operations    |                                                                   |       |           |        |              |         | (10,981       | )      |              |   |             |        |   |          | 1,581    |         |   |         | (14,230 | )       |   |          | (23,630  | )      
|                                                        | Capital expenditures for discontinued operations  |                                                                   |       |           |        |              |         |              |        |              |   |             |        |   |          | (11,185  | )       |   |         |        |         |   |          | (11,185  | )      
|                                                        | Proceeds from the sale of assets, net of expenses |                                                                   |       |           |        |              |         |              |        |              |   |             |        |   |          | 953,619  |         |   |         |        |         |   |          | 953,619  |        
|                                                        | Investments in and advances to affiliates         |                                                                   |       |           |        |              |         |              |        |              |   |             |        |   |          | (4,798   | )       |   |         |        |         |   |          | (4,798   | )      
|                                                        |                                                   |                                                                   |       |            |        |              |         |               |        |              |   |              |        |   |          |          |         |   |         |         |         |   |          |         
|Net cash provided by (used in) investing
    activities |                                                   |                                                                   |      |            |        |              | (10,981 | )             |        |              |  |              |        |   | 939,217  |          |         |   | (14,230 | )       |         |   | 914,006  |         
|                                                        |                                                   |                                                                   |       |            |        |              |         |               |        |              |   |              |        |   |          |          |         |   |         |         |         |   |          |         
|Financing activities:                                   |                                                   |                                                                   |       |            |        |              |         |               |        |              |   |              |        |   |          |          |         |   |         |         |         |   |          |         
|                                                        | Repayments of term loans                          |                                                                   |       |           |        |              |         |              |        |              |   |             |        |   |          | (576,500 | )       |   |         |        |         |   |          | (576,500 | )      
|                                                        | Repayments of revolving credit facilities         |                                                                   |       |           |        |              |         |              |        |              |   |             |        |   |          | (390,387 | )       |   |         |        |         |   |          | (390,387 | )      
|                                                        |                                                   |                                                                   |       |            |        |              |         |               |        |              |   |              |        |   |          |          |         |   |         |         |         |   |          |         
|Net cash used in financing activities                   |                                                   |                                                                   |      |            |        |              |        |               |        |              |  |              |        |   | (966,887 | )        |         |   |        |         |         |   | (966,887 | )       
|                                                        |                                                   |                                                                   |       |            |        |              |         |               |        |              |   |              |        |   |          |          |         |   |         |         |         |   |          |         
|Increase (decrease) in cash and cash
    equivalents    |                                                   |                                                                   | (562  | )          |        |              | 790     |               |        |              |  |              |        |   | 44,787   |          |         |   |        |         |         |   | 45,015   |         
|Cash and cash equivalentsbeginning of period           |                                                   |                                                                   | 4,481 |            |        |              | 46,831  |               |        |              |  |              |        |   | 90,332   |          |         |   |        |         |         |   | 141,644  |         
|                                                        |                                                   |                                                                   |       |            |        |              |         |               |        |              |   |              |        |   |          |          |         |   |         |         |         |   |          |         
|Cash and cash equivalentsend of period                 |                                                   | $                                                                 | 3,919 |            |        | $            | 47,621  |               |        | $            |  |              |        | $ | 135,119  |          |         | $ |        |         |         | $ | 186,659  |         
|                                                        |                                                   |                                                                   |       |            |        |              |         |               |        |              |   |              |        |   |          |          |         |   |         |         |         |   |          |         

34



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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE
SHEET

December 31, 2003


(In thousands)


|                                             |                                      |                                          |                                                          |            |       |              |           |               |         |              |          |              |   |         |            |            |         |            |           |           |   |           |           |            |         |           |  
|-------------------------------------------- | ------------------------------------ | ---------------------------------------- | -------------------------------------------------------- | ---------- | ----- | ------------ | --------- | ------------- | ------- | ------------ | -------- | ------------ | - | ------- | ---------- | ---------- | ------- | ---------- | --------- | --------- | - | --------- | --------- | ---------- | ------- | --------- | -
|                                             |                                      | Parent                                   |                                                          | Subsidiary |       | Guarantor    |           | Non-Guarantor |         |              |          |             
|                                             |                                      | Company                                  |                                                          | Issuer     |       | Subsidiaries |           | Subsidiaries  |         | Eliminations |          | Consolidated
|                                             |                                      |                                          |                                                          |            |       |              |           |               |         |              |          |             
|Current assets:                              |                                      |                                          |                                                          |            |       |              |           |               |         |              |          |              |   |         |            |            |         |            |           |           |   |           |           |           
|                                             | Cash and cash equivalents            |                                          | $                                                        | 4,481      |       |              | $         | 46,831        |         |              | $        |             |   |         | $          | 90,332     |         |            | $         |          |   |           | $         | 141,644    |        
|                                             | Accounts receivable, net             |                                          |                                                          |           |       |              |           | 6,912         |         |              |          | 968          |   |         |            | 15,089     |         |            |           |          |   |           |           | 22,969     |        
|                                             | Contracts-in-process                 |                                          |                                                          |           |       |              |           |              |         |              |          |             |   |         |            | 62,063     |         |            |           |          |   |           |           | 62,063     |        
|                                             | Inventories                          |                                          |                                                          |           |       |              |           |              |         |              |          |             |   |         |            | 42,456     |         |            |           |          |   |           |           | 42,456     |        
|                                             | Insurance proceeds receivable        |                                          |                                                          |           |       |              |           |              |         |              |          |             |   |         |            | 122,770    |         |            |           |          |   |           |           | 122,770    |        
|                                             | Other current assets                 |                                          |                                                          | 2,341      |       |              |           | 2,925         |         |              |          | 5,859        |   |         |            | 25,859     |         |            |           | (980      | ) |           |           | 36,004     |        
|                                             |                                      |                                          |                                                          |            |       |              |           |               |         |              |          |              |   |         |            |            |         |            |           |           |   |           |           |           
|                                             |                                      |                                          | Total current assets                                     |            |       | 6,822        |           |               |         | 56,668       |          |              |   | 6,827   |            |            |         | 358,569    |           |           |   | (980      | )         |            |         | 427,906   |  
|Property, plant and equipment, net           |                                      |                                          |                                                         |            |       |              | 390,649   |               |         |              | 183,688  |              |   |         | 1,289,281  |            |         |            | (35,336   | )         |   |           | 1,828,282 |           
|Long-term receivables                        |                                      |                                          |                                                         |            |       |              |          |               |         |              |         |              |   |         | 70,749     |            |         |            |          |           |   |           | 70,749    |           
|Due (to) from unconsolidated subsidiaries    |                                      |                                          | (3,055                                                   | )          |       |              | (24,395   | )             |         |              | 17,598   |              |   |         | 47,199     |            |         |            | (37,347   | )         |   |           |          |           
|Investments in unconsolidated subsidiaries   |                                      |                                          | (375,795                                                 | )          |       |              | 311,487   |               |         |              | (271,698 | )            |   |         | (1,625,765 | )          |         |            | 1,961,771 |           |   |           |          |           
|Investments in and advances to affiliates    |                                      |                                          | 20                                                       |            |       |              |          |               |         |              |         |              |   |         | 46,654     |            |         |            |          |           |   |           | 46,674    |           
|Deposits                                     |                                      |                                          |                                                         |            |       |              |          |               |         |              |         |              |   |         | 9,000      |            |         |            |          |           |   |           | 9,000     |           
|Other assets                                 |                                      |                                          | 4,253                                                    |            |       |              | 5,030     |               |         |              | 549      |              |   |         | 63,298     |            |         |            |          |           |   |           | 73,130    |           
|                                             |                                      |                                          |                                                          |            |       |              |           |               |         |              |          |              |   |         |            |            |         |            |           |           |   |           |           |           
|                                             |                                      |                                          | Total assets                                             |            | $     | (367,755     | )         |               | $       | 739,439      |          |              | $ | (63,036 | )          |            | $       | 258,985    |           |           | $ | 1,888,108 |           |            | $       | 2,455,741 |  
|                                             |                                      |                                          |                                                          |            |       |              |           |               |         |              |          |              |   |         |            |            |         |            |           |           |   |           |           |           
|Liabilities not subject to compromise:       |                                      |                                          |                                                          |            |       |              |           |               |         |              |          |              |   |         |            |            |         |            |           |           |   |           |           |           
|                                             | Current liabilities:                 |                                          |                                                          |            |       |              |           |               |         |              |          |              |   |         |            |            |         |            |           |           |   |           |           |            |        
|                                             |                                      | Accounts payable                         |                                                          | $          |      |              |           | $             | 824     |              |          | $            |  |         |            | $          | 49,832  |            |           | $         |  |           |           | $          | 50,656  |          
|                                             |                                      | Accrued employment costs                 |                                                          |            |      |              |           |               |        |              |          |              |  |         |            |            | 23,532  |            |           |           |  |           |           |            | 23,532  |          
|                                             |                                      | Customer advances                        |                                                          |            |      |              |           |               | 120,386 |              |          |              |  |         |            |            | 118,839 |            |           |           |  |           |           |            | 239,225 |          
|                                             |                                      | Accrued interest and preferred dividends |                                                          |            |      |              |           |               |        |              |          |              |  |         |            |            | 1,319   |            |           |           |  |           |           |            | 1,319   |          
|                                             |                                      | Income taxes payable                     |                                                          |            |      |              |           |               |        |              |          |              |  |         |            |            | 269     |            |           |           |  |           |           |            | 269     |          
|                                             |                                      | Other current liabilities                |                                                          |            | 1,191 |              |           |               |        |              |          |              |  |         |            |            | 8,679   |            |           |           |  |           |           |            | 9,870   |          
|                                             |                                      |                                          |                                                          |            |       |              |           |               |         |              |          |              |   |         |            |            |         |            |           |           |   |           |           |           
|                                             |                                      |                                          | Total current liabilities                                |            |       | 1,191        |           |               |         | 121,210      |          |              |   |        |            |            |         | 202,470    |           |           |   |          |           |            |         | 324,871   |  
|Pension and other postretirement liabilities |                                      |                                          |                                                         |            |       |              |          |               |         |              |         |              |   |         | 10,983     |            |         |            |          |           |   |           | 10,983    |           
|Long-term liabilities                        |                                      |                                          | 52,233                                                   |            |       |              | 4,302     |               |         |              | 13,835   |              |   |         | 32,038     |            |         |            | (35,461   | )         |   |           | 66,947    |           
|                                             |                                      |                                          |                                                          |            |       |              |           |               |         |              |          |              |   |         |            |            |         |            |           |           |   |           |           |           
|                                             |                                      |                                          | Total liabilities not subject to compromise              |            |       | 53,424       |           |               |         | 125,512      |          |              |   | 13,835  |            |            |         | 245,491    |           |           |   | (35,461   | )         |            |         | 402,801   |  
|Liabilities subject to compromise            |                                      |                                          | 434,491                                                  |            |       |              | 1,113,705 |               |         |              | (116,663 | )            |   |         | 1,478,985  |            |         |            | (4,423    | )         |   |           | 2,906,095 |           
|Minority interest                            |                                      |                                          |                                                         |            |       |              |          |               |         |              |         |              |   |         | 2,515      |            |         |            |          |           |   |           | 2,515     |           
|Shareholders (deficit) equity:              |                                      |                                          |                                                          |            |       |              |           |               |         |              |          |              |   |         |            |            |         |            |           |           |   |           |           |           
|                                             | Common stock                         |                                          |                                                          | 4,413      |       |              |           |              |         |              |          |             |   |         |            |           |         |            |           |          |   |           |           | 4,413      |        
|                                             | Paid-in capital                      |                                          |                                                          | 3,392,829  |       |              |           | 604,166       |         |              |          |             |   |         |            |           |         |            |           | (604,166  | ) |           |           | 3,392,829  |        
|                                             | Treasury stock, at cost              |                                          |                                                          | (3,360     | )     |              |           |              |         |              |          |             |   |         |            |           |         |            |           |          |   |           |           | (3,360     | )      
|                                             | Unearned compensation                |                                          |                                                          | (168       | )     |              |           |              |         |              |          |             |   |         |            |           |         |            |           |          |   |           |           | (168       | )      
|                                             | Due from related parties             |                                          |                                                          |           |       |              |           | (52,784       | )       |              |          |             |   |         |            | 52,784     |         |            |           |          |   |           |           |           |        
|                                             | Retained (deficit) earnings          |                                          |                                                          | (4,171,536 | )     |              |           | (1,051,160    | )       |              |          | 39,792       |   |         |            | (1,520,790 | )       |            |           | 2,532,158 |   |           |           | (4,171,536 | )      
|                                             | Accumulated other comprehensive loss |                                          |                                                          | (77,848    | )     |              |           |              |         |              |          |             |   |         |            |           |         |            |           |          |   |           |           | (77,848    | )      
|                                             |                                      |                                          |                                                          |            |       |              |           |               |         |              |          |              |   |         |            |            |         |            |           |           |   |           |           |           
|                                             |                                      |                                          | Total shareholders (deficit) equity                     |            |       | (855,670     | )         |               |         | (499,778     | )        |              |   | 39,792  |            |            |         | (1,468,006 | )         |           |   | 1,927,992 |           |            |         | (855,670  | )
|                                             |                                      |                                          |                                                          |            |       |              |           |               |         |              |          |              |   |         |            |            |         |            |           |           |   |           |           |           
|                                             |                                      |                                          | Total liabilities and shareholders
    (deficit) equity |            | $     | (367,755     | )         |               | $       | 739,439      |          |              | $ | (63,036 | )          |            | $       | 258,985    |           |           | $ | 1,888,108 |           |            | $       | 2,455,741 |  
|                                             |                                      |                                          |                                                          |            |       |              |           |               |         |              |          |              |   |         |            |            |         |            |           |           |   |           |           |           

35



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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS

Three Months Ended June 30,
2003


(In thousands)


(Unaudited)


|                                                                                                                                                               |                |         |         |            |  |              |        |               |  |              |       |              |  |   |          |        |  |   |         |         |   |   |          |         | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------- | ------- | ---------- |  | ------------ | ------ | ------------- |  | ------------ | ----- | ------------ |  | - | -------- | ------ |  | - | ------- | ------- | - | - | -------- | ------- | 
|                                                                                                                                                               |                | Parent  |         | Subsidiary |  | Guarantor    |        | Non-Guarantor |  |              |       |             
|                                                                                                                                                               |                | Company |         | Issuer     |  | Subsidiaries |        | Subsidiaries  |  | Eliminations |       | Consolidated
|                                                                                                                                                               |                |         |         |            |  |              |        |               |  |              |       |             
|Revenues from satellite services                                                                                                                               |                | $       |        |            |  | $            | 22,949 |               |  | $            | 9,732 |              |  | $ | 17,008   |        |  | $ | (10,897 | )       |   | $ | 38,792   |        
|Revenues from satellite manufacturing                                                                                                                          |                |         |        |            |  |              |       |               |  |              |      |              |  |   | 74,797   |        |  |   | (3,590  | )       |   |   | 71,207   |        
|Management fee to parent                                                                                                                                       |                |         |        |            |  |              |       |               |  |              |      |              |  |   | 109      |        |  |   | (109    | )       |   |   |         |        
|                                                                                                                                                               |                |         |         |            |  |              |        |               |  |              |       |              |  |   |          |        |  |   |         |         |   |   |          |        
|                                                                                                                                                               | Total revenues |         |         |           |  |              |        | 22,949        |  |              |       | 9,732        |  |   |          | 91,914 |  |   |         | (14,596 | ) |   |          | 109,999 | 
|Costs of satellite services                                                                                                                                    |                |         |        |            |  |              | 23,594 |               |  |              | 7,882 |              |  |   | 25,825   |        |  |   | (10,316 | )       |   |   | 46,985   |        
|Costs of satellite manufacturing                                                                                                                               |                |         |        |            |  |              |       |               |  |              |      |              |  |   | 155,308  |        |  |   | (2,027  | )       |   |   | 153,281  |        
|Selling, general and administrative expenses                                                                                                                   |                |         | 2,762   |            |  |              | 385    |               |  |              | 296   |              |  |   | 31,266   |        |  |   |        |         |   |   | 34,709   |        
|Management fee expense                                                                                                                                         |                |         | 109     |            |  |              |       |               |  |              |      |              |  |   |         |        |  |   | (109    | )       |   |   |         |        
|                                                                                                                                                               |                |         |         |            |  |              |        |               |  |              |       |              |  |   |          |        |  |   |         |         |   |   |          |        
|Operating (loss) income                                                                                                                                        |                |         | (2,871  | )          |  |              | (1,030 | )             |  |              | 1,554 |              |  |   | (120,485 | )      |  |   | (2,144  | )       |   |   | (124,976 | )      
|Interest and investment income                                                                                                                                 |                |         | 5,781   |            |  |              | (32    | )             |  |              |      |              |  |   | 4,646    |        |  |   | (6,600  | )       |   |   | 3,795    |        
|Interest expense                                                                                                                                               |                |         | (9,859  | )          |  |              | (2,728 | )             |  |              |      |              |  |   | (2,605   | )      |  |   | 7,250   |         |   |   | (7,942   | )      
|Gain on investments                                                                                                                                            |                |         |        |            |  |              |       |               |  |              |      |              |  |   | 16,793   |        |  |   |        |         |   |   | 16,793   |        
|                                                                                                                                                               |                |         |         |            |  |              |        |               |  |              |       |              |  |   |          |        |  |   |         |         |   |   |          |        
|(Loss) income from continuing operations before
    income taxes, equity in net losses of unconsolidated
    subsidiaries and affiliates and minority interest |                |         | (6,949  | )          |  |              | (3,790 | )             |  |              | 1,554 |              |  |   | (101,651 | )      |  |   | (1,494  | )       |   |   | (112,330 | )      
|Income tax benefit (provision)                                                                                                                                 |                |         | (1,732  | )          |  |              | (698   | )             |  |              | (543  | )            |  |   | 4,469    |        |  |   | 1,470   |         |   |   | 2,966    |        
|                                                                                                                                                               |                |         |         |            |  |              |        |               |  |              |       |              |  |   |          |        |  |   |         |         |   |   |          |        
|(Loss) income from continuing operations before
    equity in net losses of unconsolidated subsidiaries and
    affiliates and minority interest               |                |         | (8,681  | )          |  |              | (4,488 | )             |  |              | 1,011 |              |  |   | (97,182  | )      |  |   | (24     | )       |   |   | (109,364 | )      
|Equity in net income (losses) of
    unconsolidated subsidiaries                                                                                               |                |         | (79,621 | )          |  |              | 1,011  |               |  |              |      |              |  |   |         |        |  |   | 78,610  |         |   |   |         |        
|Equity in net income (losses) of affiliates                                                                                                                    |                |         | (7,487  | )          |  |              |       |               |  |              |      |              |  |   | (848     | )      |  |   |        |         |   |   | (8,335   | )      
|Minority interest                                                                                                                                              |                |         |        |            |  |              |       |               |  |              |      |              |  |   | 15       |        |  |   |        |         |   |   | 15       |        
|                                                                                                                                                               |                |         |         |            |  |              |        |               |  |              |       |              |  |   |          |        |  |   |         |         |   |   |          |        
|(Loss) income from continuing operations                                                                                                                       |                |         | (95,789 | )          |  |              | (3,477 | )             |  |              | 1,011 |              |  |   | (98,015  | )      |  |   | 78,586  |         |   |   | (117,684 | )      
|Income from discontinued operations                                                                                                                            |                |         |        |            |  |              |       |               |  |              |      |              |  |   | 8,280    |        |  |   |        |         |   |   | 8,280    |        
|                                                                                                                                                               |                |         |         |            |  |              |        |               |  |              |       |              |  |   |          |        |  |   |         |         |   |   |          |        
|(Loss) income before extraordinary gain on
    acquisition of minority interest                                                                                |                |         | (95,789 | )          |  |              | (3,477 | )             |  |              | 1,011 |              |  |   | (89,735  | )      |  |   | 78,586  |         |   |   | (109,404 | )      
|Extraordinary gain on acquisition of minority
    interest                                                                                                     |                |         |        |            |  |              |       |               |  |              |      |              |  |   | 13,615   |        |  |   |        |         |   |   | 13,615   |        
|                                                                                                                                                               |                |         |         |            |  |              |        |               |  |              |       |              |  |   |          |        |  |   |         |         |   |   |          |        
|Net (loss) income                                                                                                                                              |                | $       | (95,789 | )          |  | $            | (3,477 | )             |  | $            | 1,011 |              |  | $ | (76,120  | )      |  | $ | 78,586  |         |   | $ | (95,789  | )      
|                                                                                                                                                               |                |         |         |            |  |              |        |               |  |              |       |              |  |   |          |        |  |   |         |         |   |   |          |        

36



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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS

Six Months Ended June 30, 2003


(In thousands)


(Unaudited)


|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |         | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------- | -------- | ---------- |  | ------------ | ------- | ------------- |  | ------------ | ------ | ------------ |  | - | -------- | ------- |  | - | ------- | ------- | - | - | -------- | ------- | 
|                                                                                                                                                               |                | Parent  |          | Subsidiary |  | Guarantor    |         | Non-Guarantor |  |              |        |             
|                                                                                                                                                               |                | Company |          | Issuer     |  | Subsidiaries |         | Subsidiaries  |  | Eliminations |        | Consolidated
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |             
|Revenues from satellite services                                                                                                                               |                | $       |         |            |  | $            | 46,024  |               |  | $            | 20,669 |              |  | $ | 35,067   |         |  | $ | (22,559 | )       |   | $ | 79,201   |        
|Revenues from satellite manufacturing                                                                                                                          |                |         |         |            |  |              |        |               |  |              |       |              |  |   | 193,690  |         |  |   | (7,446  | )       |   |   | 186,244  |        
|Management fee to parent                                                                                                                                       |                |         |         |            |  |              |        |               |  |              |       |              |  |   | 109      |         |  |   | (109    | )       |   |   |         |        
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|                                                                                                                                                               | Total revenues |         |          |           |  |              |         | 46,024        |  |              |        | 20,669       |  |   |          | 228,866 |  |   |         | (30,114 | ) |   |          | 265,445 | 
|Costs of satellite services                                                                                                                                    |                |         |         |            |  |              | 48,196  |               |  |              | 15,765 |              |  |   | 51,133   |         |  |   | (21,216 | )       |   |   | 93,878   |        
|Costs of satellite manufacturing                                                                                                                               |                |         |         |            |  |              |        |               |  |              |       |              |  |   | 288,581  |         |  |   | (5,164  | )       |   |   | 283,417  |        
|Selling, general and administrative expenses                                                                                                                   |                |         | 4,184    |            |  |              | 4,361   |               |  |              | 570    |              |  |   | 57,084   |         |  |   |        |         |   |   | 66,199   |        
|Management fee expense                                                                                                                                         |                |         | 109      |            |  |              |        |               |  |              |       |              |  |   |         |         |  |   | (109    | )       |   |   |         |        
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|Operating (loss) income                                                                                                                                        |                |         | (4,293   | )          |  |              | (6,533  | )             |  |              | 4,334  |              |  |   | (167,932 | )       |  |   | (3,625  | )       |   |   | (178,049 | )      
|Interest and investment income                                                                                                                                 |                |         | 11,328   |            |  |              | 5       |               |  |              |       |              |  |   | 12,468   |         |  |   | (12,960 | )       |   |   | 10,841   |        
|Interest expense                                                                                                                                               |                |         | (19,669  | )          |  |              | (5,648  | )             |  |              |       |              |  |   | (5,391   | )       |  |   | 14,260  |         |   |   | (16,448  | )      
|Gain on investment                                                                                                                                             |                |         |         |            |  |              |        |               |  |              |       |              |  |   | 17,900   |         |  |   |        |         |   |   | 17,900   |        
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|(Loss) income from continuing operations before
    income taxes, equity in net losses of unconsolidated
    subsidiaries and affiliates and minority interest |                |         | (12,634  | )          |  |              | (12,176 | )             |  |              | 4,334  |              |  |   | (142,955 | )       |  |   | (2,325  | )       |   |   | (165,756 | )      
|Income tax benefit (provision)                                                                                                                                 |                |         | (3,395   | )          |  |              | (890    | )             |  |              | (1,515 | )            |  |   | 9,913    |         |  |   | 2,686   |         |   |   | 6,799    |        
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|(Loss) income from continuing operations before
    equity in net losses of unconsolidated subsidiaries and
    affiliates and minority interest               |                |         | (16,029  | )          |  |              | (13,066 | )             |  |              | 2,819  |              |  |   | (133,042 | )       |  |   | 361     |         |   |   | (158,957 | )      
|Equity in net income (losses) of
    unconsolidated subsidiaries                                                                                               |                |         | (115,141 | )          |  |              | 2,819   |               |  |              |       |              |  |   |         |         |  |   | 112,322 |         |   |   |         |        
|Equity in net losses of affiliates                                                                                                                             |                |         | (12,793  | )          |  |              |        |               |  |              |       |              |  |   | (4,045   | )       |  |   |        |         |   |   | (16,838  | )      
|Minority interest                                                                                                                                              |                |         |         |            |  |              |        |               |  |              |       |              |  |   | (24      | )       |  |   |        |         |   |   | (24      | )      
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|(Loss) income from continuing operations                                                                                                                       |                |         | (143,963 | )          |  |              | (10,247 | )             |  |              | 2,819  |              |  |   | (137,111 | )       |  |   | 112,683 |         |   |   | (175,819 | )      
|Income from discontinued operations                                                                                                                            |                |         |         |            |  |              |        |               |  |              |       |              |  |   | 18,241   |         |  |   |        |         |   |   | 18,241   |        
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|(Loss) income before extraordinary gain on
    acquisition of minority interest                                                                                |                |         | (143,963 | )          |  |              | (10,247 | )             |  |              | 2,819  |              |  |   | (118,870 | )       |  |   | 112,683 |         |   |   | (157,578 | )      
|Extraordinary gain on acquisition of minority
    interest                                                                                                     |                |         |         |            |  |              |        |               |  |              |       |              |  |   | 13,615   |         |  |   |        |         |   |   | 13,615   |        
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|Net (loss) income                                                                                                                                              |                | $       | (143,963 | )          |  | $            | (10,247 | )             |  | $            | 2,819  |              |  | $ | (105,255 | )       |  | $ | 112,683 |         |   | $ | (143,963 | )      
|                                                                                                                                                               |                |         |          |            |  |              |         |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        

37



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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS

Six Months Ended June 30, 2003


(In thousands)


(Unaudited)


|                                                           |                                              |                                                                            |         |            |         |              |         |               |         |              |   |              |         |   |         |          |         |   |        |         |          |   |         |          |         |  
|---------------------------------------------------------- | -------------------------------------------- | -------------------------------------------------------------------------- | ------- | ---------- | ------- | ------------ | ------- | ------------- | ------- | ------------ | - | ------------ | ------- | - | ------- | -------- | ------- | - | ------ | ------- | -------- | - | ------- | -------- | ------- | -
|                                                           |                                              | Parent                                                                     |         | Subsidiary |         | Guarantor    |         | Non-Guarantor |         |              |   |             
|                                                           |                                              | Company                                                                    |         | Issuer     |         | Subsidiaries |         | Subsidiaries  |         | Eliminations |   | Consolidated
|                                                           |                                              |                                                                            |         |            |         |              |         |               |         |              |   |             
|Operating activities:                                      |                                              |                                                                            |         |            |         |              |         |               |         |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|                                                           | Net (loss) income                            |                                                                            | $       | (143,963   | )       |              | $       | (10,247       | )       |              | $ | 2,819        |         |   | $       | (105,255 | )       |   | $      | 112,683 |          |   | $       | (143,963 | )      
|                                                           | Non-cash items:                              |                                                                            |         |            |         |              |         |               |         |              |   |              |         |   |         |          |         |   |        |         |          |   |         |          |        
|                                                           |                                              | Income from discontinued operations                                        |         |            |        |              |         |               |        |              |   |              |        |   |         |          | (18,241 | ) |        |         |         |   |         |          | (18,241 | )
|                                                           |                                              | Equity in net losses of affiliates                                         |         |            | 12,793  |              |         |               |        |              |   |              |        |   |         |          | 4,045   |   |        |         |         |   |         |          | 16,838  |  
|                                                           |                                              | Minority interest                                                          |         |            |        |              |         |               |        |              |   |              |        |   |         |          | 24      |   |        |         |         |   |         |          | 24      |  
|                                                           |                                              | Extraordinary gain on acquisition of minority
    interest                 |         |            |        |              |         |               |        |              |   |              |        |   |         |          | (13,615 | ) |        |         |         |   |         |          | (13,615 | )
|                                                           |                                              | Equity in net losses of unconsolidated
    subsidiaries                    |         |            | 115,141 |              |         |               | (2,819  | )            |   |              |        |   |         |          |        |   |        |         | (112,322 | ) |         |          |        |  
|                                                           |                                              | Deferred taxes                                                             |         |            | 3,395   |              |         |               |        |              |   |              | 2,285   |   |         |          |        |   |        |         | (2,285   | ) |         |          | 3,395   |  
|                                                           |                                              | Depreciation and amortization                                              |         |            |        |              |         |               | 27,140  |              |   |              | 10,507  |   |         |          | 22,001  |   |        |         |         |   |         |          | 59,648  |  
|                                                           |                                              | Loss on acceleration of receipt of long-term
    receivables               |         |            |        |              |         |               |        |              |   |              |        |   |         |          | 10,893  |   |        |         |         |   |         |          | 10,893  |  
|                                                           |                                              | Valuation allowance on vendor financing
    receivables                    |         |            |        |              |         |               |        |              |   |              |        |   |         |          | 10,008  |   |        |         |         |   |         |          | 10,008  |  
|                                                           |                                              | Loss on cancellation of deposits                                           |         |            |        |              |         |               |        |              |   |              |        |   |         |          | 23,500  |   |        |         |         |   |         |          | 23,500  |  
|                                                           |                                              | Provisions for inventory obsloesence                                       |         |            |        |              |         |               |        |              |   |              |        |   |         |          | 23,957  |   |        |         |         |   |         |          | 23,957  |  
|                                                           |                                              | Accrual for Alcatel settlement                                             |         |            |        |              |         |               |        |              |   |              |        |   |         |          | 8,000   |   |        |         |         |   |         |          | 8,000   |  
|                                                           |                                              | Provisions for bad debts                                                   |         |            |        |              |         |               | 802     |              |   |              | 36      |   |         |          | 961     |   |        |         |         |   |         |          | 1,799   |  
|                                                           |                                              | Adjustment to revenue straightlining assessment                            |         |            |        |              |         |               |        |              |   |              |        |   |         |          | 2,547   |   |        |         |         |   |         |          | 2,547   |  
|                                                           |                                              | Loss on equipment disposals                                                |         |            |        |              |         |               |        |              |   |              |        |   |         |          | 86      |   |        |         |         |   |         |          | 86      |  
|                                                           |                                              | Gain on investments                                                        |         |            |        |              |         |               |        |              |   |              |        |   |         |          | (17,900 | ) |        |         |         |   |         |          | (17,900 | )
|                                                           |                                              | Non-cash net (gain) loss on foreign currency
    transactions and interest |         |            |        |              |         |               | 740     |              |   |              |        |   |         |          | 6,061   |   |        |         |         |   |         |          | 6,801   |  
|                                                           | Changes in operating assets and liabilities: |                                                                            |         |            |         |              |         |               |         |              |   |              |         |   |         |          |         |   |        |         |          |   |         |          |        
|                                                           |                                              | Accounts receivable, net                                                   |         |            |        |              |         |               | (4,584  | )            |   |              | 72      |   |         |          | 3       |   |        |         |         |   |         |          | (4,509  | )
|                                                           |                                              | Contracts-in-process                                                       |         |            |        |              |         |               |        |              |   |              |        |   |         |          | 68,359  |   |        |         |         |   |         |          | 68,359  |  
|                                                           |                                              | Inventories                                                                |         |            |        |              |         |               |        |              |   |              |        |   |         |          | (1,683  | ) |        |         |         |   |         |          | (1,683  | )
|                                                           |                                              | Long-term receivables                                                      |         |            |        |              |         |               |        |              |   |              |        |   |         |          | 54,588  |   |        |         |         |   |         |          | 54,588  |  
|                                                           |                                              | Due to (from) unconsolidated subsidiaries                                  |         |            | (306    | )            |         |               | 11,586  |              |   |              | (20,905 | ) |         |          | 5,727   |   |        |         | 3,898    |   |         |          |        |  
|                                                           |                                              | Other current assets and other assets                                      |         |            | (4,883  | )            |         |               | 816     |              |   |              | 5,698   |   |         |          | 5,593   |   |        |         |         |   |         |          | 7,224   |  
|                                                           |                                              | Accounts payable                                                           |         |            |        |              |         |               | (746    | )            |   |              | (232    | ) |         |          | (12,502 | ) |        |         |         |   |         |          | (13,480 | )
|                                                           |                                              | Accrued expenses and other current liabilities                             |         |            | (960    | )            |         |               | (42     | )            |   |              |        |   |         |          | (8,056  | ) |        |         |         |   |         |          | (9,058  | )
|                                                           |                                              | Customer advances                                                          |         |            |        |              |         |               | 1,282   |              |   |              | (280    | ) |         |          | (47,184 | ) |        |         |         |   |         |          | (46,182 | )
|                                                           |                                              | Income taxes payable                                                       |         |            |        |              |         |               |        |              |   |              |        |   |         |          | (471    | ) |        |         | (401     | ) |         |          | (872    | )
|                                                           |                                              | Pension and other postretirement liabilities                               |         |            |        |              |         |               |        |              |   |              |        |   |         |          | 5,479   |   |        |         |         |   |         |          | 5,479   |  
|                                                           |                                              | Long-term liabilities                                                      |         |            |        |              |         |               | (843    | )            |   |              |        |   |         |          | (4,337  | ) |        |         |         |   |         |          | (5,180  | )
|                                                           |                                              | Other                                                                      |         |            | 28      |              |         |               |        |              |   |              |        |   |         |          | (110    | ) |        |         |         |   |         |          | (82     | )
|                                                           |                                              |                                                                            |         |            |         |              |         |               |         |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|Net cash provided by (used in) operating
    activities    |                                              |                                                                            | (18,755 | )          |         |              | 23,085  |               |         |              |  |              |         |   | 22,478  |          |         |   | 1,573  |         |          |   | 28,381  |         
|                                                           |                                              |                                                                            |         |            |         |              |         |               |         |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|Net cash provided by (used in) discontinued
    operations |                                              |                                                                            |        |            |         |              |        |               |         |              |  |              |         |   | 48,764  |          |         |   |       |         |          |   | 48,764  |         
|                                                           |                                              |                                                                            |         |            |         |              |         |               |         |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|Investing activities:                                      |                                              |                                                                            |         |            |         |              |         |               |         |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|                                                           |                                              | Capital expenditures for continuing operations                             |         |            |        |              |         |               | (3,752  | )            |   |              |        |   |         |          | (27,625 | ) |        |         | (1,573   | ) |         |          | (32,950 | )
|                                                           |                                              | Capital expenditures for discontinued operations                           |         |            |        |              |         |               |        |              |   |              |        |   |         |          | (17,036 | ) |        |         |         |   |         |          | (17,036 | )
|                                                           |                                              | Proceeds from sale of investments                                          |         |            |        |              |         |               |        |              |   |              |        |   |         |          | 45,908  |   |        |         |         |   |         |          | 45,908  |  
|                                                           |                                              | Investments in and advances to unconsolidated
    subsidiaries             |         |            | 491     |              |         |               |        |              |   |              |        |   |         |          | (491    | ) |        |         |         |   |         |          |        |  
|                                                           |                                              | Investments in and advances to affiliates                                  |         |            |        |              |         |               |        |              |   |              |        |   |         |          | (11,715 | ) |        |         |         |   |         |          | (11,715 | )
|                                                           |                                              |                                                                            |         |            |         |              |         |               |         |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|Net cash (used in) provided by in investing
    activities |                                              |                                                                            | 491     |            |         |              | (3,752  | )             |         |              |  |              |         |   | (10,959 | )        |         |   | (1,573 | )       |          |   | (15,793 | )       
|                                                           |                                              |                                                                            |         |            |         |              |         |               |         |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|Financing activities:                                      |                                              |                                                                            |         |            |         |              |         |               |         |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|                                                           |                                              | Borrowings under revolving credit facilities                               |         |            |        |              |         |               |        |              |   |              |        |   |         |          | 66,000  |   |        |         |         |   |         |          | 66,000  |  
|                                                           |                                              | Repayments of term loans                                                   |         |            |        |              |         |               |        |              |   |              |        |   |         |          | (32,500 | ) |        |         |         |   |         |          | (32,500 | )
|                                                           |                                              | Interest payments on 10% senior notes                                      |         |            |        |              |         |               | (30,634 | )            |   |              |        |   |         |          | (1      | ) |        |         |         |   |         |          | (30,635 | )
|                                                           |                                              | Repayments of other long-term obligations                                  |         |            |        |              |         |               |        |              |   |              |        |   |         |          | (1,072  | ) |        |         |         |   |         |          | (1,072  | )
|                                                           |                                              | Note receivable from unconsolidated affiliate                              |         |            | 17,284  |              |         |               |        |              |   |              |        |   |         |          | (17,284 | ) |        |         |         |   |         |          |        |  
|                                                           |                                              | Proceeds from stock issuances                                              |         |            | 3,817   |              |         |               |        |              |   |              |        |   |         |          |        |   |        |         |         |   |         |          | 3,817   |  
|                                                           |                                              | Payment of bank amendment costs                                            |         |            |        |              |         |               |        |              |   |              |        |   |         |          | (5,131  | ) |        |         |         |   |         |          | (5,131  | )
|                                                           |                                              |                                                                            |         |            |         |              |         |               |         |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|Net cash provided by (used in) financing
    activities    |                                              |                                                                            | 21,101  |            |         |              | (30,634 | )             |         |              |  |              |         |   | 10,012  |          |         |   |       |         |          |   | 479     |         
|                                                           |                                              |                                                                            |         |            |         |              |         |               |         |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|Increase (decrease) in cash and cash
    equivalents       |                                              |                                                                            | 2,837   |            |         |              | (11,301 | )             |         |              |  |              |         |   | 70,295  |          |         |   |       |         |          |   | 61,831  |         
|Cash and cash equivalents  beginning
    of period        |                                              |                                                                            | 1,514   |            |         |              | 42,964  |               |         |              |  |              |         |   | 21,458  |          |         |   |       |         |          |   | 65,936  |         
|                                                           |                                              |                                                                            |         |            |         |              |         |               |         |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|Cash and cash equivalents  end of
    period              |                                              | $                                                                          | 4,351   |            |         | $            | 31,663  |               |         | $            |  |              |         | $ | 91,753  |          |         | $ |       |         |          | $ | 127,767 |         
|                                                           |                                              |                                                                            |         |            |         |              |         |               |         |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         

38



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##### Table of Contents





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis should
be read in conjunction with our unaudited condensed consolidated
financial statements (financial statements) included
in Item 1 and our latest Annual Report on
Form 10-K.

We use the terms Loral, the
Company, we, our, and
us in this report to refer to Loral Space &
Communications Ltd. and its subsidiaries. When we use the term
Loral Skynet or Skynet, we are, unless
the context provides otherwise, referring to our entire
Satellite Services business, the assets of which are held in
various companies.

Disclosure Regarding Forward-Looking
Statements

Except for the historical information
contained in the following discussion and analysis, the matters
discussed below 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, we or our representatives have made and may continue
to make forward-looking statements, orally or in writing, in
other contexts. These forward-looking statements can be
identified by the use of words such as believes,
expects, plans, may,
will, would, could,
should, anticipates,
estimates, project, intend,
or outlook or other variations of these words. These
statements are not guarantees of future performance and involve
risks and uncertainties that are difficult to predict or
quantify. Actual events or results may differ materially as a
result of a wide variety of factors and conditions, many of
which are beyond our control. These include the development of a
plan of reorganization, confirmation of the plan by the
Bankruptcy Court, and our ability to maintain good relations
with our customers, suppliers and employees. For a detailed
discussion of these and other factors and conditions, please
refer to the Commitments and Contingencies section below and to
the other periodic reports filed with the Securities and
Exchange Commission (SEC) by Loral and our wholly
owned subsidiary Loral Orion, Inc. (Loral Orion). We
operate in an industry sector in which securities values may be
volatile and may be influenced by economic and other factors
beyond our control. We undertake no obligation to update any
forward-looking statements.

Overview



| |           
| | ----------
| | Businesses

We are a leading satellite communications company
organized into two operating segments: Satellite Services and
Satellite Manufacturing. Revenues as reported for the three and
six months ended June 30, 2004 were $114 million and
$217 million, respectively.



| |                   
| | ------------------
| | Satellite Services

Through our Loral Skynet division, we lease
satellite capacity and platforms to our customers for video and
direct-to-home (DTH) broadcasting, high-speed data
distribution, Internet access, communications and networking
services. The satellite services business is capital intensive
and highly competitive. We compete with other satellite
operators and with ground-based service providers. The build-out
of a satellite fleet requires substantial investment. Once these
investments are made, however, the costs to maintain and operate
the fleet are relatively low. The upfront investments are earned
back through the leasing of transponders to customers over the
life of the satellite. Beyond construction, one of the major
cost factors is in-orbit insurance, an essential component given
the harsh and unpredictable environment in which the satellites
operate. Annual receipts from this business are fairly
predictable because they are derived from an established base of
long-term customer contracts.

The satellite services market has been
characterized in recent years by over-capacity, pricing pressure
and competition from fiber. The downturn in the
telecommunications sector led many existing Skynet customers,
hampered by a slow-down in demand and lack of access to the
capital markets, to postpone expansion plans. Similarly, several
start-up companies that leased Skynets satellite capacity
for the delivery of new applications failed to meet their
business objectives. Following the closing of the Intelsat
transaction on March 17, 2004,

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Skynets growth will depend on its ability
to differentiate itself from the competition through customized
product offerings, its superior customer service and its
successful marketing of available capacity on its international
fleet which is well positioned to serve regions of the world
where we expect demand to grow.


Approximately 70 employees of Loral Skynet are
union members and are subject to a collective bargaining
agreement that expired in late May 2004. In mid-July 2004, after
discussions between Loral Skynet and the union regarding the
terms of an extension to the agreement did not result in a new
agreement, 61 satellite controllers and technicians who are
union members commenced a strike at two of Loral Skynets
satellite control centers. Loral Skynet immediately implemented
its strike contingency plan, and service to our customers has
not been affected. In early August 2004, Loral Skynet reached
agreement with the union on a new three-year agreement, and the
striking union members have returned to work.



| |                        
| | -----------------------
| | Satellite Manufacturing

Our Space Systems/ Loral (SS/L)
subsidiary designs and manufactures satellites, space systems
and space systems components for customers in the commercial and
government sectors for applications including satellite
services, DTH broadcasting, broadband data distribution,
wireless telephony, digital radio, military communications,
weather monitoring and air traffic management.

While its requirement for ongoing capital
investment is low, the satellite manufacturing industry is a
knowledge-intensive business, the success of which relies
heavily on its technological heritage and the skills of its
workforce. The breadth and depth of talent and experience
resident in SS/Ls workforce of approximately 1,400
employees is one of our key competitive advantages.

Satellite manufacturers have high fixed costs
relating primarily to labor and overhead. Based on its current
cost structure, we estimate that SS/L covers its fixed costs
with an average of four satellite awards a year. In October
2003, SS/L entered into binding authorizations to proceed for
two satellites, and in March and April 2004, SS/L entered into
contracts for two additional satellites. Cash flow in the
satellite manufacturing business tends to be uneven. It takes
two to three years to complete a satellite project and numerous
assumptions are built into the estimated costs. Cash receipts
are tied to the achievement of contract milestones, which depend
in part on the ability of our subcontractors to deliver on time.
In addition, the timing of satellite awards is difficult to
predict, contributing to the unevenness of revenue and making it
more challenging to match the workforce to the workflow.

Satellites are extraordinarily complex devices
designed to operate in the very hostile environment of space.
This complexity may lead to unanticipated costs during the
design, manufacture and testing of a satellite. SS/L establishes
provisions for costs based on historical experience and program
complexity to cover anticipated costs. Since most of SS/Ls
contracts are fixed price, cost increases in excess of the
provisions reduce profitability and may result in losses borne
solely by SS/L, which may be material. The satellite
manufacturing industry is highly competitive and, in recent
years, order levels reached an unprecedented low level,
resulting in manufacturing over-capacity. Buyers, as a result,
are in the advantageous position of being able to negotiate
contracts with favorable prices, terms and conditions. In the
latter part of 2003, the order rate for new commercial
satellites picked up and was expected to continue into 2004.
This anticipated trend of increased orders has not continued in
the first half of 2004 and is not expected for the remainder of
2004.



| |                       
| | ----------------------
| | Bankruptcy Proceedings

We operate in extremely competitive markets
characterized in recent years by over-capacity and pricing
pressures brought on by the downturn in the telecommunications
sector. Our existing and potential customers, having limited
access to the capital markets, postponed or reduced the scope of
their planned satellite-based applications and services. This
resulted in an excess of transponder capacity and a standstill
in satellite orders. In the face of these pressures, we further
increased our emphasis on cash conservation, reducing operating
expenses, suspending dividend payments on our preferred stock,
and closely monitoring capital expenditures. The sustained and
unprecedented decline in demand for our satellites and satellite
services, however, exacerbated our already strained financial
condition brought on primarily by the investments we had
previously made in Globalstar, L.P. (Globalstar) and
subsequently wrote-off.

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On July 15, 2003, Loral and certain of its
subsidiaries (the Debtor Subsidiaries and
collectively with Loral, the Debtors), including
Loral Space & Communications Corporation, Loral SpaceCom
Corporation (Loral SpaceCom), Loral Satellite, Inc.
(Loral Satellite), SS/L and Loral Orion, Inc.
(Loral Orion), filed voluntary petitions for
reorganization under chapter 11 of title 11
(Chapter 11) of the United States Code (the
Bankruptcy Code) in the United States Bankruptcy
Court for the Southern District of New York (the
Bankruptcy Court) (Lead Case No. 03-41710
(RDD), Case Nos. 03-41709 (RDD) through 03-41728
(RDD)) (the Chapter 11 Cases). We and our
Debtor Subsidiaries continue to manage our properties and
operate our businesses as debtors in possession
under the jurisdiction of the Bankruptcy Court and in accordance
with the provisions of the Bankruptcy Code. As a result of our
Chapter 11 filing, all of our prepetition debt obligations
were accelerated. On July 15, 2003, we also suspended
interest payments on all of our unsecured debt obligations. As
of June 30, 2004, the principal amounts of our prepetition
outstanding debt obligations were $1.049 billion.

For the duration of the bankruptcy proceedings,
our businesses are subject to risks and uncertainties of
bankruptcy.



| |               
| | --------------
| | Sale of Assets

In order to strengthen our balance sheet, on
July 15, 2003 we agreed to sell our North American
satellites and related assets to Intelsat. On March 5,
2004, we and Intelsat entered into the final amendment to the
Asset Purchase Agreement, which was approved by the Bankruptcy
Court and Intelsats bank lenders on March 16, 2004.
On March 17, 2004, we completed the sale of such assets to
Intelsat. We used the proceeds from the sale of the assets to
repay our outstanding secured bank debt (see Notes 2 and 4 to
the financial statements).



| |               
| | --------------
| | Future Outlook

We intend to reorganize around our satellite
manufacturing operations and our remaining fleet of
international satellites, which will cover regions with high
growth potential, such as Southeast Asia, the Middle East and
South America, where the ground infrastructure is inadequate to
support increased demand. We consider these operations to be a
viable foundation for the further expansion of our company. We
anticipate using excess cash flows from operations to populate
our available slots with new satellites to meet market demand.
We are in the process now of completing our long-term business
plan. We believe that we will not require any additional
financing to fund operations. At this time, however, it is
impossible to predict accurately the effect of the
Chapter 11 reorganization on us, when we may emerge from
Chapter 11 and what our capital structure will be. The
rights and claims of various creditors and security holders will
be determined by our plan of reorganization.

On July 22, 2004, we announced that we had
reached an agreement with the creditors committee in our
Chapter 11 Cases on the principal terms of a plan of
reorganization.

Critical success factors for us include
maintaining our reputation for reliability, quality and superior
customer service. During reorganization, in particular, these
factors are vital to securing new customers and retaining
current ones. In addition, we must align our workforce levels
with the needs of the business, continue to contain costs, and
maximize the efficiency of both of our operations. Loral Skynet
is focused on increasing the capacity utilization of its
satellite fleet and successfully introducing new value-added
services to its markets. SS/L is focused on increased bookings
and backlog in 2004.

See Note 2 to the financial statements for a
description of our Chapter 11 Cases and our reorganization
plans.

Consolidated Operating Results

See Critical Accounting Matters in our latest
Annual Report on Form 10-K filed with the SEC and
Note 17 to the financial statements.

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The accompanying financial statements have been
prepared assuming Loral, in its current structure, will continue
as a going concern. However, the factors mentioned above, among
other things, raise substantial doubt about our ability to
continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of
this uncertainty. Our ability to continue as a going concern is
dependent on a number of factors including, but not limited to,
our submission of a plan of reorganization, the Bankruptcy
Courts confirmation of a plan and maintaining good
relations with our customers, suppliers and employees. If a plan
of reorganization is not confirmed and implemented, we may be
forced to liquidate under applicable provisions of the
Bankruptcy Code. We cannot give any assurance of the level of
recovery our creditors would receive in a liquidation. The
financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and
classification of assets or the amounts and classification of
liabilities if we were forced to liquidate.

The following discussion of revenues and Adjusted
EBITDA (see Note 17 to the financial statements) reflects
the results of our operating businesses for the three and six
months ended June 30, 2004 and 2003. The balance of the
discussion relates to our condensed consolidated results, unless
otherwise noted. Both of our business segments have been
adversely affected by the downturn in the telecommunications
sector, which has caused a delay in demand for new
telecommunications applications and services.

The sale of our North American satellites and
related assets to Intelsat has been accounted for as a
discontinued operation, resulting in our historical condensed
consolidated statements of operations and statements of cash
flows being reclassified to reflect such discontinued operations
separately from continuing operations (see Note 2 and
Note 4 to the financial statements).

Revenues:

|                        |                         |               |       |            |  |      |       |       |  |   |       |       |  |   |       |       | 
|----------------------- | ----------------------- | ------------- | ----- | ---------- |  | ---- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                        |                         |               |       |           
|                        |                         | Three Months  |       | Six Months
|                        |                         | Ended         |       | Ended     
|                        |                         | June 30,      |       | June 30,  
|                        |                         |               |       |           
|                        |                         | 2004          |       | 2003       |  | 2004 |       | 2003 
|                        |                         |               |       |            |  |      |       |      
|                        |                         |              
|                        |                         | (in millions)
|Satellite services      |                         | $             | 40.2  |            |  | $    | 40.5  |       |  | $ | 71.3  |       |  | $ | 82.6  |      
|Satellite manufacturing |                         |               | 113.8 |            |  |      | 81.1  |       |  |   | 214.8 |       |  |   | 212.6 |      
|                        |                         |               |       |            |  |      |       |       |  |   |       |       |  |   |       |      
|Segment revenues        |                         |               | 154.0 |            |  |      | 121.6 |       |  |   | 286.1 |       |  |   | 295.2 |      
|Eliminations(1)         |                         |               | (40.3 | )          |  |      | (11.6 | )     |  |   | (68.7 | )     |  |   | (29.8 | )    
|                        |                         |               |       |            |  |      |       |       |  |   |       |       |  |   |       |      
|                        | Revenues as reported(2) |               | $     | 113.7      |  |      | $     | 110.0 |  |   | $     | 217.4 |  |   | $     | 265.4 | 
|                        |                         |               |       |            |  |      |       |       |  |   |       |       |  |   |       |      

Adjusted EBITDA:

|                           |                                             |               |      |            |   |      |       |       |   |   |       |       |   |   |        |        |  
|-------------------------- | ------------------------------------------- | ------------- | ---- | ---------- | - | ---- | ----- | ----- | - | - | ----- | ----- | - | - | ------ | ------ | -
|                           |                                             |               |      |           
|                           |                                             | Three Months  |      | Six Months
|                           |                                             | Ended         |      | Ended     
|                           |                                             | June 30,      |      | June 30,  
|                           |                                             |               |      |           
|                           |                                             | 2004          |      | 2003       |   | 2004 |       | 2003 
|                           |                                             |               |      |            |   |      |       |      
|                           |                                             |              
|                           |                                             | (in millions)
|Satellite services(3)      |                                             | $             | 9.0  |            |   | $    | 5.3   |       |   | $ | (1.2  | )     |   | $ | 9.0    |       
|Satellite manufacturing(4) |                                             |               | 2.2  |            |   |      | (88.5 | )     |   |   | 5.8   |       |   |   | (101.0 | )     
|Corporate expenses(5)      |                                             |               | (8.9 | )          |   |      | (9.9  | )     |   |   | (17.5 | )     |   |   | (19.0  | )     
|                           |                                             |               |      |            |   |      |       |       |   |   |       |       |   |   |        |       
|                           | Segment Adjusted EBITDA before eliminations |               |      | 2.3        |   |      |       | (93.1 | ) |   |       | (12.9 | ) |   |        | (111.0 | )
|Eliminations(1)            |                                             |               | (8.3 | )          |   |      | (2.3  | )     |   |   | (11.7 | )     |   |   | (7.4   | )     
|                           |                                             |               |      |            |   |      |       |       |   |   |       |       |   |   |        |       
|                           | Adjusted EBITDA                             |               | $    | (6.0       | ) |      | $     | (95.4 | ) |   | $     | (24.6 | ) |   | $      | (118.4 | )
|                           |                                             |               |      |            |   |      |       |       |   |   |       |       |   |   |        |       

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Reconciliation of Adjusted EBITDA to Net
Loss:

|                                                                       |                                           |               |       |            |   |      |        |        |   |   |        |        |   |   |        |        |  
|---------------------------------------------------------------------- | ----------------------------------------- | ------------- | ----- | ---------- | - | ---- | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                       |                                           |               |       |           
|                                                                       |                                           | Three Months  |       | Six Months
|                                                                       |                                           | Ended         |       | Ended     
|                                                                       |                                           | June 30,      |       | June 30,  
|                                                                       |                                           |               |       |           
|                                                                       |                                           | 2004          |       | 2003       |   | 2004 |        | 2003  
|                                                                       |                                           |               |       |            |   |      |        |       
|                                                                       |                                           |              
|                                                                       |                                           | (in millions)
|Adjusted EBITDA                                                        |                                           | $             | (6.0  | )          |   | $    | (95.4  | )      |   | $ | (24.6  | )      |   | $ | (118.4 | )     
|Depreciation and amortization(6)                                       |                                           |               | (42.9 | )          |   |      | (29.6  | )      |   |   | (84.1  | )      |   |   | (59.7  | )     
|Reorganization expenses due to bankruptcy                              |                                           |               | (9.6  | )          |   |      |       |        |   |   | (17.9  | )      |   |   |       |       
|                                                                       |                                           |               |       |            |   |      |        |        |   |   |        |        |   |   |        |       
|                                                                       | Operating loss from continuing operations |               |       | (58.5      | ) |      |        | (125.0 | ) |   |        | (126.6 | ) |   |        | (178.1 | )
|Interest and investment income                                         |                                           |               | 2.5   |            |   |      | 3.8    |        |   |   | 5.1    |        |   |   | 10.8   |       
|Interest expense                                                       |                                           |               | (1.8  | )          |   |      | (7.9   | )      |   |   | (3.8   | )      |   |   | (16.4  | )     
|Gain on investment                                                     |                                           |               |      |            |   |      | 16.8   |        |   |   |       |        |   |   | 17.9   |       
|Income tax benefit (provision)                                         |                                           |               | (12.0 | )          |   |      | 2.9    |        |   |   | (12.2  | )      |   |   | 6.8    |       
|Equity income (losses) in affiliates                                   |                                           |               | 47.0  |            |   |      | (8.3   | )      |   |   | 46.6   |        |   |   | (16.8  | )     
|Minority interest                                                      |                                           |               |      |            |   |      |       |        |   |   | 0.1    |        |   |   |       |       
|                                                                       |                                           |               |       |            |   |      |        |        |   |   |        |        |   |   |        |       
|Loss from continuing operations                                        |                                           |               | (22.8 | )          |   |      | (117.7 | )      |   |   | (90.8  | )      |   |   | (175.8 | )     
|Income (loss) from discontinued operations,
    net of taxes           |                                           |               | 0.1   |            |   |      | 8.3    |        |   |   | (11.5  | )      |   |   | 18.2   |       
|                                                                       |                                           |               |       |            |   |      |        |        |   |   |        |        |   |   |        |       
|Loss before extraordinary gain on acquisition of
    minority interest |                                           |               | (22.7 | )          |   |      | (109.4 | )      |   |   | (102.3 | )      |   |   | (157.6 | )     
|Extraordinary gain on acquisition of minority
    interest             |                                           |               |      |            |   |      | 13.6   |        |   |   |       |        |   |   | 13.6   |       
|                                                                       |                                           |               |       |            |   |      |        |        |   |   |        |        |   |   |        |       
|                                                                       | Net loss                                  |               | $     | (22.7      | ) |      | $      | (95.8  | ) |   | $      | (102.3 | ) |   | $      | (144.0 | )
|                                                                       |                                           |               |       |            |   |      |        |        |   |   |        |        |   |   |        |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the elimination of intercompany sales
    and intercompany Adjusted EBITDA, primarily for satellites under
    construction by SS/L for wholly owned subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(2) | Includes revenues from affiliates of
    $2.1 million and $8.1 million for the three months
    ended June 30, 2004 and 2003, respectively, and
    $5.2 million and $23.2 million for the six months
    ended June 30, 2004 and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(3) | The six months ended June 30, 2004 includes
    an impairment charge of $12 million relating to our Telstar
    14/Estrela do Sul-1 satellite and related assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(4) | Satellite manufacturing excludes charges of
    $2 million and $22 million for the three and six
    months ended June 30, 2004, respectively, as a result of
    the settlement of all orbital receivables on satellites sold to
    Intelsat. This settlement had the effect of reducing future
    orbital receipts by $25 million, including $15 million
    relating to a satellite currently under construction. Consistent
    with our internal reporting for satellite manufacturing, this
    decrease in contract value for the satellite currently under
    construction is not being reflected as a decrease in satellite
    manufacturing revenues. These charges had no effect on our
    consolidated results. The three and six months ended
    June 30, 2003 include: (i) a charge of
    $24 million due to cancellation of a deposit on a launch
    vehicle contract; (ii) provisions for inventory
    obsolescence of $24 million primarily due to the absence of
    new satellite awards since December 2001; (iii) a charge of
    $13 million on the settlement of all outstanding issues
    with Alcatel including a contract dispute that was in
    arbitration; and (iv) a loss of $11 million on the
    acceleration of receipt of long-term receivables. For the six
    months ended June 30, 2003, Satellite Manufacturing
    Adjusted EBITDA includes a charge of $10 million on
    SS/L-provided vendor financing, representing the difference
    between the carrying value of SS/Ls receivables of
    $38 million and the value of the common shares received by
    SS/L based on the trading price of Sirius Satellite Radio, Inc.
    (Sirius) common stock on March 7, 2003 of
    $28 million (see Gain on Investment).
|   
|(5) | Represents corporate expenses incurred in support
    of our operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(6) | Includes additional depreciation expense of
    $10 million and $24 million for the three and six
    months ended June 30, 2004, respectively, relating to the
    shortening in the estimated life of our Telstar 11
    satellite, which, we determined in the fourth quarter of 2003,
    would go out of service in June 2004 (earlier than its
    previously expected end of life of March 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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Three Months Ended June 30, 2004 Compared
With 2003



| |                                     
| | ------------------------------------
| | Revenues from Satellite
    Services

|                                             |  |               |    |             |  |            |    |   |  |  |     |   
|-------------------------------------------- |  | ------------- | -- | ----------- |  | ---------- | -- | - |  |  | --- | --
|                                             |  |               |    |            
|                                             |  | Three Months  |    |            
|                                             |  | Ended         |    |            
|                                             |  | June 30,      |    |            
|                                             |  |               |    | % Increase/
|                                             |  | 2004          |    | 2003        |  | (Decrease)
|                                             |  |               |    |             |  |           
|                                             |  |               |    |            
|                                             |  | (In millions) |    |            
|Revenues from satellite services             |  | $             | 40 |             |  | $          | 41 |   |  |  | (1  | )%
|Eliminations                                 |  |               | (1 | )           |  |            | (2 | ) |  |  | (17 | )%
|                                             |  |               |    |             |  |            |    |   |  |  |     |   
|Revenues from satellite services as reported |  | $             | 39 |             |  | $          | 39 |   |  |  |    |   
|                                             |  |               |    |             |  |            |    |   |  |  |     |   

Revenues from satellite services decreased
$1 million in the three months ended June 30, 2004, as
compared to 2003 primarily due to a decrease in rates of
$1 million, offset by an increase in transponder and
network utilization of $1 million. Eliminations primarily
consist of revenues from leasing transponder capacity to
Satellite Manufacturing and an adjustment to reduce revenues for
the implicit interest discount provided to customers who have
made prepayments under long-term contracts.



| |                                          
| | -----------------------------------------
| | Revenues from Satellite
    Manufacturing

|                                                  |  |               |     |             |  |            |     |   |  |  |     |  
|------------------------------------------------- |  | ------------- | --- | ----------- |  | ---------- | --- | - |  |  | --- | -
|                                                  |  |               |     |            
|                                                  |  | Three Months  |     |            
|                                                  |  | Ended         |     |            
|                                                  |  | June 30,      |     |            
|                                                  |  |               |     | % Increase/
|                                                  |  | 2004          |     | 2003        |  | (Decrease)
|                                                  |  |               |     |             |  |           
|                                                  |  |               |     |            
|                                                  |  | (In millions) |     |            
|Revenues from satellite manufacturing             |  | $             | 114 |             |  | $          | 81  |   |  |  | 40  | %
|Eliminations                                      |  |               | (39 | )           |  |            | (10 | ) |  |  | 293 | %
|                                                  |  |               |     |             |  |            |     |   |  |  |     |  
|Revenues from satellite manufacturing as reported |  | $             | 75  |             |  | $          | 71  |   |  |  | 5   | %
|                                                  |  |               |     |             |  |            |     |   |  |  |     |  

Revenues from satellite manufacturing increased
$33 million in the three months ended June 30, 2004,
as compared to 2003 primarily resulting from an increase in
revenues of $44 million from the new orders received in the
fourth quarter of 2003, offset by a decrease in revenues from
satellite programs nearing completion under the percentage of
completion method. Eliminations primarily consist of revenues
from satellites under construction by SS/L for Satellite
Services which increased due to the timing of work performed and
costs incurred under the percentage of completion method. As a
result of the above, revenues from satellite manufacturing as
reported increased $4 million in 2004 as compared to 2003.



| |                           
| | --------------------------
| | Cost of Satellite Services

|                                                                                 |                                  |               |     |             |  |            |     |    |  |  |    |     |   
|-------------------------------------------------------------------------------- | -------------------------------- | ------------- | --- | ----------- |  | ---------- | --- | -- |  |  | -- | --- | --
|                                                                                 |                                  |               |     |            
|                                                                                 |                                  | Three Months  |     |            
|                                                                                 |                                  | Ended         |     |            
|                                                                                 |                                  | June 30,      |     |            
|                                                                                 |                                  |               |     | % Increase/
|                                                                                 |                                  | 2004          |     | 2003        |  | (Decrease)
|                                                                                 |                                  |               |     |             |  |           
|                                                                                 |                                  |               |     |            
|                                                                                 |                                  | (In millions) |     |            
|Cost of satellite services includes:                                             |                                  |               |     |             |  |            |     |    |  |  |    |    
|                                                                                 | Depreciation and amortization    |               | $   | 35          |  |            | $   | 22 |  |  |    | 59  | % 
|                                                                                 | Other cost of satellite services |               |     | 18          |  |            |     | 25 |  |  |    | (31 | )%
|                                                                                 |                                  |               |     |             |  |            |     |    |  |  |    |    
|Cost of satellite services                                                       |                                  | $             | 53  |             |  | $          | 47  |    |  |  | 12 | %  
|                                                                                 |                                  |               |     |             |  |            |     |    |  |  |    |    
|Cost of satellite services as a % of satellite
    services revenues as reported |                                  |               | 136 | %           |  |            | 121 | %  |  |  |    |    

The increase of $6 million in the three
months ended June 30, 2004, as compared to 2003 was
primarily due to a net increase in depreciation expense of
$13 million primarily relating to the shortening in the
estimated life of the Telstar 11 satellite, which, we
determined in the fourth quarter of 2003, would go out of

44



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##### Table of Contents



service in June 2004 (earlier than its previously
expected end of life of March 2005) and depreciation for a
satellite which commenced service at the end of March 2004. This
was offset by reduced external satellite capacity costs of
$2 million, decreased insurance costs of $2 million
primarily resulting from non-renewal of insurance for
Telstar 11 in the fourth quarter of 2003 and from the lower
premium on renewal for Telstar 10/ Apstar IIR due to changes to
coverage and lower costs in 2004 due to headcount and other cost
reductions of approximately $3 million.




| |                                    
| | -----------------------------------
| | Cost of Satellite
    Manufacturing

|                                                                                          |                                                              |               |     |             |  |            |     |    |  |  |     |    | 
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------- | --- | ----------- |  | ---------- | --- | -- |  |  | --- | -- | 
|                                                                                          |                                                              |               |     |            
|                                                                                          |                                                              | Three Months  |     |            
|                                                                                          |                                                              | Ended         |     |            
|                                                                                          |                                                              | June 30,      |     |            
|                                                                                          |                                                              |               |     | % Increase/
|                                                                                          |                                                              | 2004          |     | 2003        |  | (Decrease)
|                                                                                          |                                                              |               |     |             |  |           
|                                                                                          |                                                              |               |     |            
|                                                                                          |                                                              | (In millions) |     |            
|Cost of satellite manufacturing includes:                                                 |                                                              |               |     |             |  |            |     |    |  |  |     |   
|                                                                                          | Loss on cancellation of deposits                             |               | $   |            |  |            | $   | 24 |  |  |     |    | 
|                                                                                          | Provisions for inventory obsolescence                        |               |     |            |  |            |     | 24 |  |  |     |    | 
|                                                                                          | Accrual for Alcatel settlement                               |               |     |            |  |            |     | 13 |  |  |     |    | 
|                                                                                          | Loss on acceleration of receipt of long-term
    receivables |               |     |            |  |            |     | 11 |  |  |     |    | 
|                                                                                          | Other cost of satellite manufacturing                        |               |     | 79          |  |            |     | 81 |  |  |     |    | 
|                                                                                          |                                                              |               |     |             |  |            |     |    |  |  |     |   
|Cost of satellite manufacturing                                                           |                                                              | $             | 79  |             |  | $          | 153 |    |  |  | (48 | )%
|                                                                                          |                                                              |               |     |             |  |            |     |    |  |  |     |   
|Cost of satellite manufacturing as a % of
    satellite manufacturing revenue as reported |                                                              |               | 106 | %           |  |            | 215 | %  |  |  |     |   

The decrease of $74 million in the three
months ended June 30, 2004, as compared to 2003 was
primarily due to the charges incurred in 2003 that were not
incurred in 2004 as detailed in the above table, lower overall
volume as satellite programs neared completion under the
percentage of completion method in 2004 and lower costs in 2004
due to headcount reductions. This was offset by costs incurred
on the new satellite orders received in the fourth quarter of
2003.



| |                                                 
| | ------------------------------------------------
| | Selling, General and Administrative
    Expenses

|                                             |  |               |    |             |  |            |    |   |  |  |     |   
|-------------------------------------------- |  | ------------- | -- | ----------- |  | ---------- | -- | - |  |  | --- | --
|                                             |  |               |    |            
|                                             |  | Three Months  |    |            
|                                             |  | Ended         |    |            
|                                             |  | June 30,      |    |            
|                                             |  |               |    | % Increase/
|                                             |  | 2004          |    | 2003        |  | (Decrease)
|                                             |  |               |    |             |  |           
|                                             |  |               |    |            
|                                             |  | (In millions) |    |            
|Selling, general and administrative expenses |  | $             | 31 |             |  | $          | 35 |   |  |  | (11 | )%
|% of revenues as reported                    |  |               | 27 | %           |  |            | 32 | % |  |  |     |   

The decrease in selling, general and
administrative expenses in the three months ended June 30,
2004, as compared to 2003 was primarily due to lower research
and development expenses and bid and proposal expenses of
$5 million at SS/L and lower corporate office expenses of
$1 million, offset by higher bad debt expense of
$2 million.



| |                                              
| | ---------------------------------------------
| | Reorganization Expenses Due to
    Bankruptcy

Reorganization expenses due to bankruptcy in 2004
were $10 million in the three months ended June 30,
2004, which includes professional fees of $5 million
associated with bankruptcy services, employee retention costs of
$4 million and severance costs of $1 million.

45



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##### Table of Contents





| |                                   
| | ----------------------------------
| | Interest and Investment
    Income

|                               |  |               |   |             |  |            |   |  |  |  |     |   
|------------------------------ |  | ------------- | - | ----------- |  | ---------- | - |  |  |  | --- | --
|                               |  |               |   |            
|                               |  | Three Months  |   |            
|                               |  | Ended         |   |            
|                               |  | June 30,      |   |            
|                               |  |               |   | % Increase/
|                               |  | 2004          |   | 2003        |  | (Decrease)
|                               |  |               |   |             |  |           
|                               |  |               |   |            
|                               |  | (In millions) |   |            
|Interest and investment income |  | $             | 2 |             |  | $          | 4 |  |  |  | (35 | )%

The decrease of $2 million in the three
months ended June 30, 2004, as compared to 2003 was due to
lower interest income earned on satellite manufacturing programs.



| |                 
| | ----------------
| | Interest Expense

|                                          |  |               |   |             |  |            |    |   |  |  |      |   
|----------------------------------------- |  | ------------- | - | ----------- |  | ---------- | -- | - |  |  | ---- | --
|                                          |  |               |   |            
|                                          |  | Three Months  |   |            
|                                          |  | Ended         |   |            
|                                          |  | June 30,      |   |            
|                                          |  |               |   | % Increase/
|                                          |  | 2004          |   | 2003        |  | (Decrease)
|                                          |  |               |   |             |  |           
|                                          |  |               |   |            
|                                          |  | (In millions) |   |            
|Interest cost before capitalized interest |  | $             | 2 |             |  | $          | 12 |   |  |  | (84  | )%
|Capitalized interest                      |  |               |  |             |  |            | (4 | ) |  |  | (100 | )%
|                                          |  |               |   |             |  |            |    |   |  |  |      |   
|Interest expense                          |  | $             | 2 |             |  | $          | 8  |   |  |  | (77  | )%
|                                          |  |               |   |             |  |            |    |   |  |  |      |   

Interest cost before capitalized interest
decreased $10 million in the three months ended
June 30, 2004, as compared to 2003. This was due to the
fact that subsequent to our voluntary petitions for
reorganization on July 15, 2003, we recognized and paid
interest only on our secured bank debt and stopped recognizing
and paying interest on all other outstanding debt obligations
and preferred stock. Capitalized interest decreased to zero in
the three months ended June 30, 2004, which was due to us
no longer incurring interest expense on our secured bank debt
that we repaid in March 2004. Interest cost will continue to be
minimal for the foreseeable future due to the repayment of all
of our secured bank debt on March 17, 2004. As a result of
the above, interest expense decreased $6 million in 2004 as
compared to 2003.



| |                   
| | ------------------
| | Gain on Investment

During the three months ended June 30, 2003,
we realized a $17 million gain on the sale of the remaining
41 million shares of our Sirius common stock.



| |                                   
| | ----------------------------------
| | Income Tax (Provision)
    Benefit

During 2004 and 2003, we continued to maintain
the 100% valuation allowance established at December 31,
2002 and recorded no benefit for our domestic loss. For the
three months ended June 30, 2004, we recorded a tax
provision of $12.0 million on a pre-tax loss of
$57.9 million, which primarily includes the additional
valuation allowance of $11.4 million related to the
reversal of deferred tax liabilities from Accumulated Other
Comprehensive Loss (see Notes 3 and 6 to the financial
statements) and a provision for foreign income taxes. For the
three months ended June 30, 2003, we recorded a tax benefit
of $3.0 million on a pre-tax loss of $112.3 million,
which primarily includes the reclassification of a tax provision
to income from discontinued operations offset by a deferred tax
liability recorded for certain foreign entities.

46



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##### Table of Contents





| |                                         
| | ----------------------------------------
| | Equity Income (Losses) in
    Affiliates

|                                                            |  |               |    |      |  |   |    |  
|----------------------------------------------------------- |  | ------------- | -- | ---- |  | - | -- | -
|                                                            |  |              
|                                                            |  | Three Months 
|                                                            |  | Ended        
|                                                            |  | June 30,     
|                                                            |  |              
|                                                            |  | 2004          |    | 2003
|                                                            |  |               |    |     
|                                                            |  |              
|                                                            |  | (In millions)
|XTAR                                                        |  | $             |   |      |  | $ | (1 | )
|Satmex                                                      |  |               |   |      |  |   | (8 | )
|Globalstar and Globalstar service provider
    partnerships |  |               | 47 |      |  |   | 1  |  
|                                                            |  |               |    |      |  |   |    |  
|                                                            |  | $             | 47 |      |  | $ | (8 | )
|                                                            |  |               |    |      |  |   |    |  

In connection with Globalstars liquidation
on June 29, 2004, we recorded equity income of
$47 million relating to Globalstar, on the reversal of
vendor financing that was non-recourse to SS/L in the event of
non-payment by Globalstar. The decrease in equity losses in
Satmex of $8 million was due to our write-off of our
remaining investment of $29 million in Satmex in the third
quarter of 2003. Accordingly, there is no longer any requirement
for us to provide for our allocated share of Satmexs net
losses subsequent to September 30, 2003. Our losses from XTAR
also decreased in 2004 as compared to 2003 primarily due to
lower profit elimination, as the satellite nears completion. See
Note 9 to the financial statements.



| |                        
| | -----------------------
| | Discontinued Operations

Represents the results of the North American
satellites and related assets sold to Intelsat on March 17,
2004. For the purpose of this presentation, in accordance with
SFAS 144, all indirect costs normally associated with these
operations have been included in continuing operations. These
indirect costs include telemetry, tracking and control, access
control, maintenance and engineering, selling and marketing and
general and administrative. See Note 4 to the financial
statements.



| |                                                           
| | ----------------------------------------------------------
| | Extraordinary Gain on Acquisition of
    Minority Interest

As a result of receiving Alcatels minority
interest in CyberStar, L.P. on June 30, 2003 (as part of a
settlement arrangement with Alcatel), we recognized an
extraordinary gain of $14 million in the three months ended
June 30, 2003, which represents the extinguishment of the
minority interest liability less the fair value of the acquired
net assets.



| |                    
| | -------------------
| | Preferred Dividends

|                    |  |               |   |             |  |            |   |  |  |  |      |   
|------------------- |  | ------------- | - | ----------- |  | ---------- | - |  |  |  | ---- | --
|                    |  |               |   |            
|                    |  | Three Months  |   |            
|                    |  | Ended         |   |            
|                    |  | June 30,      |   |            
|                    |  |               |   | % Increase/
|                    |  | 2004          |   | 2003        |  | (Decrease)
|                    |  |               |   |             |  |           
|                    |  |               |   |            
|                    |  | (In millions) |   |            
|Preferred dividends |  | $             |  |             |  | $          | 3 |  |  |  | (100 | )%

The decrease of $3 million in the three
months ended June 30, 2004, as compared to 2003 was
primarily due to the adoption of Statement of Financial
Accounting Standards No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity (SFAS 150) on July 1, 2003,
which requires that dividends be included in interest expense
(see Interest Expense).

47



---



##### Table of Contents



Six Months Ended June 30, 2004 Compared
With 2003



| |                                     
| | ------------------------------------
| | Revenues from Satellite
    Services

|                                             |  |               |    |             |  |            |    |   |  |  |     |   
|-------------------------------------------- |  | ------------- | -- | ----------- |  | ---------- | -- | - |  |  | --- | --
|                                             |  |               |    |            
|                                             |  | Six Months    |    |            
|                                             |  | Ended         |    |            
|                                             |  | June 30,      |    |            
|                                             |  |               |    | % Increase/
|                                             |  | 2004          |    | 2003        |  | (Decrease)
|                                             |  |               |    |             |  |           
|                                             |  |               |    |            
|                                             |  | (In millions) |    |            
|Revenues from satellite services             |  | $             | 71 |             |  | $          | 83 |   |  |  | (14 | )%
|Eliminations                                 |  |               | (3 | )           |  |            | (4 | ) |  |  | (12 | )%
|                                             |  |               |    |             |  |            |    |   |  |  |     |   
|Revenues from satellite services as reported |  | $             | 68 |             |  | $          | 79 |   |  |  | (14 | )%
|                                             |  |               |    |             |  |            |    |   |  |  |     |   

Revenues from Satellite Services decreased
$12 million in the six months ended June 30, 2004, as
compared to 2003, primarily due to decreases in rates of
$5 million and reduced transponder and network utilization
of $6 million. Eliminations primarily consist of revenues
from leasing transponder capacity to Satellite Manufacturing and
an adjustment to reduce revenues for the implicit interest
discount provided to customers who have made prepayments under
long-term contracts.



| |                                          
| | -----------------------------------------
| | Revenues from Satellite
    Manufacturing

|                                                  |  |               |     |             |  |            |     |   |  |  |     |   
|------------------------------------------------- |  | ------------- | --- | ----------- |  | ---------- | --- | - |  |  | --- | --
|                                                  |  |               |     |            
|                                                  |  | Six Months    |     |            
|                                                  |  | Ended         |     |            
|                                                  |  | June 30,      |     |            
|                                                  |  |               |     | % Increase/
|                                                  |  | 2004          |     | 2003        |  | (Decrease)
|                                                  |  |               |     |             |  |           
|                                                  |  |               |     |            
|                                                  |  | (In millions) |     |            
|Revenues from satellite manufacturing             |  | $             | 215 |             |  | $          | 213 |   |  |  | 1   | % 
|Eliminations                                      |  |               | (66 | )           |  |            | (27 | ) |  |  | 148 | % 
|                                                  |  |               |     |             |  |            |     |   |  |  |     |   
|Revenues from satellite manufacturing as reported |  | $             | 149 |             |  | $          | 186 |   |  |  | (20 | )%
|                                                  |  |               |     |             |  |            |     |   |  |  |     |   

Revenues from Satellite Manufacturing increased
$2 million in the six months ended June 30, 2004, as
compared to 2003 primarily resulting from a $73 million
increase in revenues from the new orders received in the fourth
quarter of 2003, offset by a decrease in revenues from satellite
programs nearing completion under the percentage of completion
method. Eliminations primarily consist of revenues from
satellites under construction by SS/L for Satellite Services
which increased due to the timing of work performed and costs
incurred under the percentage of completion method. As a result
of the above, revenues from Satellite Manufacturing as reported
decreased $37 million in 2004 as compared to 2003.



| |                           
| | --------------------------
| | Cost of Satellite Services

|                                                                                 |                                  |               |     |             |  |            |     |    |  |  |    |    |   
|-------------------------------------------------------------------------------- | -------------------------------- | ------------- | --- | ----------- |  | ---------- | --- | -- |  |  | -- | -- | --
|                                                                                 |                                  |               |     |            
|                                                                                 |                                  | Six Months    |     |            
|                                                                                 |                                  | Ended         |     |            
|                                                                                 |                                  | June 30,      |     |            
|                                                                                 |                                  |               |     | % Increase/
|                                                                                 |                                  | 2004          |     | 2003        |  | (Decrease)
|                                                                                 |                                  |               |     |             |  |           
|                                                                                 |                                  |               |     |            
|                                                                                 |                                  | (In millions) |     |            
|Cost of satellite services includes:                                             |                                  |               |     |             |  |            |     |    |  |  |    |   
|                                                                                 | Depreciation and amortization    |               | $   | 72          |  |            | $   | 46 |  |  |    | 57 | % 
|                                                                                 | Other cost of satellite services |               |     | 44          |  |            |     | 48 |  |  |    | (8 | )%
|                                                                                 |                                  |               |     |             |  |            |     |    |  |  |    |   
|Cost of satellite services                                                       |                                  | $             | 116 |             |  | $          | 94  |    |  |  | 24 | % 
|                                                                                 |                                  |               |     |             |  |            |     |    |  |  |    |   
|Cost of satellite services as a % of satellite
    services revenues as reported |                                  |               | 171 | %           |  |            | 119 | %  |  |  |    |   

The increase of $22 million in the six
months ended June 30, 2004, as compared to 2003 was
primarily due to an increase in depreciation expense of
$26 million primarily relating to the shortening in the
estimated life of the Telstar 11 satellite, which, we
determined in the fourth quarter of 2003, would go out of
service in

48



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##### Table of Contents



June 2004 (earlier than its previously expected
end of life of March 2005) and depreciation for our
Telstar 14/Estrela do Sul-1 satellite which commenced
service at the end of March 2004 and an impairment charge of
$12 million for Telstar 14/Estrela do Sul-1 satellite
and related assets to reduce the carrying values to the expected
proceeds from insurance of $250 million. This was offset by
reduced external satellite capacity costs of $5 million,
decreased insurance costs of $4 million primarily resulting
from non-renewal of insurance for Telstar 11 in the fourth
quarter of 2003 and from the lower premium on renewal for
Telstar 10/ Apstar IIR due to changes to coverage and lower
costs in 2004 due to headcount and other cost reductions of
approximately $8 million. The increases in cost of
satellite services as a percentage of revenues in 2004 as
compared to 2003 was primarily due to the increase in
depreciation expense and reduced revenues.




| |                                    
| | -----------------------------------
| | Cost of Satellite
    Manufacturing

|                                                                                          |                                                              |               |     |             |  |            |     |     |  |  |     |    | 
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------- | --- | ----------- |  | ---------- | --- | --- |  |  | --- | -- | 
|                                                                                          |                                                              |               |     |            
|                                                                                          |                                                              | Six Months    |     |            
|                                                                                          |                                                              | Ended         |     |            
|                                                                                          |                                                              | June 30,      |     |            
|                                                                                          |                                                              |               |     | % Increase/
|                                                                                          |                                                              | 2004          |     | 2003        |  | (Decrease)
|                                                                                          |                                                              |               |     |             |  |           
|                                                                                          |                                                              |               |     |            
|                                                                                          |                                                              | (In millions) |     |            
|Cost of satellite manufacturing includes:                                                 |                                                              |               |     |             |  |            |     |     |  |  |     |   
|                                                                                          | Loss on cancellation of deposits                             |               | $   |            |  |            | $   | 24  |  |  |     |    | 
|                                                                                          | Provisions for inventory obsolescence                        |               |     |            |  |            |     | 24  |  |  |     |    | 
|                                                                                          | Accrual for Alcatel settlement                               |               |     |            |  |            |     | 13  |  |  |     |    | 
|                                                                                          | Loss on acceleration of receipt of long-term
    receivables |               |     |            |  |            |     | 11  |  |  |     |    | 
|                                                                                          | Valuation allowance on vendor financing
    receivables      |               |     |            |  |            |     | 10  |  |  |     |    | 
|                                                                                          | Other cost of satellite manufacturing                        |               |     | 147         |  |            |     | 201 |  |  |     |    | 
|                                                                                          |                                                              |               |     |             |  |            |     |     |  |  |     |   
|Cost of satellite manufacturing                                                           |                                                              | $             | 147 |             |  | $          | 283 |     |  |  | (48 | )%
|                                                                                          |                                                              |               |     |             |  |            |     |     |  |  |     |   
|Cost of satellite manufacturing as a % of
    satellite manufacturing revenue as reported |                                                              |               | 99  | %           |  |            | 152 | %   |  |  |     |   

The decrease of $136 million in the six months
ended June 30, 2004, as compared to 2003 was primarily due to
the charges incurred in 2003 that were not incurred in 2004 as
detailed in the above table, lower overall volume as satellite
programs neared completion under the percentage of completion
method in 2004 and lower costs in 2004 due to headcount
reductions. This was offset by costs incurred in 2004 on the new
satellite orders received in the fourth quarter of 2003.



| |                                                 
| | ------------------------------------------------
| | Selling, General and Administrative
    Expenses

|                                             |  |               |    |             |  |            |    |   |  |  |    |   
|-------------------------------------------- |  | ------------- | -- | ----------- |  | ---------- | -- | - |  |  | -- | --
|                                             |  |               |    |            
|                                             |  | Six Months    |    |            
|                                             |  | Ended         |    |            
|                                             |  | June 30,      |    |            
|                                             |  |               |    | % Increase/
|                                             |  | 2004          |    | 2003        |  | (Decrease)
|                                             |  |               |    |             |  |           
|                                             |  |               |    |            
|                                             |  | (In millions) |    |            
|Selling, general and administrative expenses |  | $             | 62 |             |  | $          | 66 |   |  |  | (6 | )%
|% of revenues as reported                    |  |               | 29 | %           |  |            | 25 | % |  |  |    |   

The decrease in selling, general and
administrative expenses in the six months ended June 30,
2004, as compared to 2003 was primarily due to lower research
and development expenses and bid and proposal expenses of
$2 million at SS/ L and lower corporate office expenses of
$2 million.



| |                                              
| | ---------------------------------------------
| | Reorganization Expenses Due to
    Bankruptcy

Reorganization expenses due to bankruptcy in the
six months ended June 30, 2004 were $18 million, which
includes professional fees of $10 million associated with
bankruptcy services, employee retention costs of $7 million
and severance costs of $1 million.

49



---



##### Table of Contents





| |                                   
| | ----------------------------------
| | Interest and Investment
    Income

|                               |  |               |   |             |  |            |    |  |  |  |     |   
|------------------------------ |  | ------------- | - | ----------- |  | ---------- | -- |  |  |  | --- | --
|                               |  |               |   |            
|                               |  | Six Months    |   |            
|                               |  | Ended         |   |            
|                               |  | June 30,      |   |            
|                               |  |               |   | % Increase/
|                               |  | 2004          |   | 2003        |  | (Decrease)
|                               |  |               |   |             |  |           
|                               |  |               |   |            
|                               |  | (In millions) |   |            
|Interest and investment income |  | $             | 5 |             |  | $          | 11 |  |  |  | (54 | )%

The decrease of $6 million in the six months
ended June 30, 2004, as compared to 2003 was due to lower
interest income earned on satellite manufacturing programs.



| |                 
| | ----------------
| | Interest Expense

|                                          |  |               |    |             |  |            |    |   |  |  |     |   
|----------------------------------------- |  | ------------- | -- | ----------- |  | ---------- | -- | - |  |  | --- | --
|                                          |  |               |    |            
|                                          |  | Six Months    |    |            
|                                          |  | Ended         |    |            
|                                          |  | June 30,      |    |            
|                                          |  |               |    | % Increase/
|                                          |  | 2004          |    | 2003        |  | (Decrease)
|                                          |  |               |    |             |  |           
|                                          |  |               |    |            
|                                          |  | (In millions) |    |            
|Interest cost before capitalized interest |  | $             | 5  |             |  | $          | 24 |   |  |  | (80 | )%
|Capitalized interest                      |  |               | (1 | )           |  |            | (8 | ) |  |  | (87 | )%
|                                          |  |               |    |             |  |            |    |   |  |  |     |   
|Interest expense                          |  | $             | 4  |             |  | $          | 16 |   |  |  | (77 | )%
|                                          |  |               |    |             |  |            |    |   |  |  |     |   

Interest cost before capitalized interest
decreased $19 million in the six months ended June 30,
2004, as compared to 2003. This was due to the fact that
subsequent to our voluntary petitions for reorganization on
July 15, 2003, we recognized and paid interest only on our
secured bank debt and stopped recognizing and paying interest on
all other outstanding debt obligations and preferred stock.
Capitalized interest decreased to $1 million for the six
months ended June 30, 2004, which was due to us no longer
incurring interest expense on our secured bank debt that we
repaid in March 2004. Interest cost will continue to be minimal
for the foreseeable future due to the repayment of all of our
secured bank debt on March 17, 2004. As a result of the
above, interest expense decreased $12 million in 2004 as
compared to 2003.



| |                   
| | ------------------
| | Gain on Investment

During the six months ended June 30, 2003,
we realized an $18 million gain on the sale of all
59 million shares of our Sirius common stock.



| |                                   
| | ----------------------------------
| | Income Tax (Provision)
    Benefit

During 2004 and 2003, we continued to maintain
the 100% valuation allowance established at December 31,
2002 and recorded no benefit for our domestic loss. For the six
months ended June 30, 2004, we recorded a tax provision of
$12.2 million on a pre-tax loss of $125.4 million,
which primarily includes the additional valuation allowance of
$11.4 million related to the reversal of deferred tax
liabilities from Accumulated Other Comprehensive Loss (see
Notes 3 and 6 to the financial statements) and a provision
for foreign income taxes. For the six months ended June 30,
2003, we recorded a tax benefit of $6.8 million on a
pre-tax loss of $165.8 million, which primarily includes
the reclassification of a tax provision to income from
discontinued operations offset by a deferred tax liability
recorded for certain foreign entities.

50



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| |                                         
| | ----------------------------------------
| | Equity Income (Losses) in
    Affiliates

|                                                            |  |               |    |      |  |   |     |  
|----------------------------------------------------------- |  | ------------- | -- | ---- |  | - | --- | -
|                                                            |  |              
|                                                            |  | Six Months   
|                                                            |  | Ended        
|                                                            |  | June 30,     
|                                                            |  |              
|                                                            |  | 2004          |    | 2003
|                                                            |  |               |    |     
|                                                            |  |              
|                                                            |  | (In millions)
|XTAR                                                        |  | $             |   |      |  | $ | (4  | )
|Satmex                                                      |  |               |   |      |  |   | (14 | )
|Globalstar and Globalstar service provider
    partnerships |  |               | 47 |      |  |   | 1   |  
|                                                            |  |               |    |      |  |   |     |  
|                                                            |  | $             | 47 |      |  | $ | (17 | )
|                                                            |  |               |    |      |  |   |     |  

In connection with Globalstars liquidation
on June 29, 2004, we recorded equity income of
$47 million relating to Globalstar, on the reversal of
vendor financing that was non-recourse to SS/L in the event of
non-payment by Globalstar. The decrease in equity losses in
Satmex of $14 million was due to our write-off of our
remaining investment of $29 million in Satmex in the third
quarter of 2003. Accordingly, there is no longer any requirement
for us to provide for our allocated share of Satmexs net
losses subsequent to September 30, 2003. Our losses from
XTAR also decreased in 2004 as compared to 2003 primarily due to
lower profit elimination, as the satellite nears completion. See
Note 9 to the financial statements.



| |                        
| | -----------------------
| | Discontinued Operations

Represents the results of the North American
satellites and related assets sold to Intelsat. In 2004, the
results of the discontinued operations are for the period from
January 1, 2004 to March 17, 2004, the date of the
sale and include the write-off of approximately $11 million
of debt issue costs to interest expense relating to our secured
debt that was repaid. For the purpose of this presentation, in
accordance with SFAS 144, all indirect costs normally
associated with these operations have been included in
continuing operations. These indirect costs include telemetry,
tracking and control, access control, maintenance and
engineering, selling and marketing and general and
administrative. See Note 4 to the financial statements.



| |                                                           
| | ----------------------------------------------------------
| | Extraordinary Gain on Acquisition of
    Minority Interest

As a result of receiving Alcatels minority
interest in CyberStar, L.P. on June 30, 2003 (as part of a
settlement arrangement with Alcatel), we recognized an
extraordinary gain of $14 million, which represents the
extinguishment of the minority interest liability less the fair
value of the acquired net assets.



| |                    
| | -------------------
| | Preferred Dividends

|                    |  |               |   |             |  |            |   |  |  |  |      |   
|------------------- |  | ------------- | - | ----------- |  | ---------- | - |  |  |  | ---- | --
|                    |  |               |   |            
|                    |  | Six Months    |   |            
|                    |  | Ended         |   |            
|                    |  | June 30,      |   |            
|                    |  |               |   | % Increase/
|                    |  | 2004          |   | 2003        |  | (Decrease)
|                    |  |               |   |             |  |           
|                    |  |               |   |            
|                    |  | (In millions) |   |            
|Preferred dividends |  | $             |  |             |  | $          | 7 |  |  |  | (100 | )%

The $7 million decrease in the six months
ended June 30, 2004, as compared to 2003 was primarily due
to the adoption of SFAS 150 on July 1, 2003, which
requires that dividends be included in interest expense (see
Interest expense).



| |                     
| | --------------------
| | Consolidated Backlog

Backlog before eliminations was $1.3 billion
at June 30, 2004 (including approximately $278 million
for Telstar 14/Estrela do Sul-1 that we will fully realize
assuming a replacement satellite is put in service) and
$1.8 billion (including $479 million related to the
North American satellites sold to Intelsat) at December 31,
2003, which includes $38 million and $45 million,
respectively, as a result of transactions entered into with
affiliates and related parties for the construction of
satellites (primarily with XTAR). Backlog at June 30, 2004
does not include approximately $119 million for the
construction of a satellite for a satellite order

51



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currently being finalized. Backlog at
December 31, 2003, did not include approximately
$240 million for the construction of two satellites for
satellite orders that were being finalized.


Results by Operating Segment



| |                   
| | ------------------
| | Satellite Services

|                                             |  |               |     |               |  |                       |     |            |  |              |      |              |  |   |     |   |  |  |    |    |  |  |      |   
|-------------------------------------------- |  | ------------- | --- | ------------- |  | --------------------- | --- | ---------- |  | ------------ | ---- | ------------ |  | - | --- | - |  |  | -- | -- |  |  | ---- | --
|                                             |  |               |     |               |  |                       |     |            |  |             
|                                             |  |               |     |               |  | % Increase/(Decrease)
|                                             |  | Three Months  |     | Six Months    |  |                      
|                                             |  | Ended         |     | Ended         |  | Three Months          |     | Six Months
|                                             |  | June 30,      |     | June 30,      |  | Ended                 |     | Ended     
|                                             |  |               |     |               |  | June 30,              |     | June 30,  
|                                             |  | 2004          |     | 2003          |  | 2004                  |     | 2003       |  | 2004 v. 2003 |      | 2004 v. 2003
|                                             |  |               |     |               |  |                       |     |            |  |              |      |             
|                                             |  |               |     |               |  |                       |     |           
|                                             |  | (In millions) |     | (In millions) |  |                       |     |           
|Satellite services revenues                  |  | $             | 40  |               |  | $                     | 41  |            |  | $            | 71   |              |  | $ | 83  |   |  |  | (1 | )% |  |  | (14  | )%
|Cost of satellite services                   |  |               | (53 | )             |  |                       | (47 | )          |  |              | (116 | )            |  |   | (94 | ) |  |  | 12 | %  |  |  | 24   | % 
|Selling, general and administrative expenses |  |               | (13 | )             |  |                       | (11 | )          |  |              | (28  | )            |  |   | (26 | ) |  |  | 34 | %  |  |  | 9    | % 
|                                             |  |               |     |               |  |                       |     |            |  |              |      |              |  |   |     |   |  |  |    |    |  |  |      |   
|Operating loss                               |  |               | (26 | )             |  |                       | (17 | )          |  |              | (73  | )            |  |   | (37 | ) |  |  | 56 | %  |  |  | 99   | % 
|Add: depreciation and amortization           |  |               | 35  |               |  |                       | 22  |            |  |              | 72   |              |  |   | 46  |   |  |  | 59 | %  |  |  | 57   | % 
|                                             |  |               |     |               |  |                       |     |            |  |              |      |              |  |   |     |   |  |  |    |    |  |  |      |   
|Adjusted EBITDA before eliminations          |  | $             | 9   |               |  | $                     | 5   |            |  | $            | (1   | )            |  | $ | 9   |   |  |  | 67 | %  |  |  | (114 | )%
|                                             |  |               |     |               |  |                       |     |            |  |              |      |              |  |   |     |   |  |  |    |    |  |  |      |   

See Revenues from Satellite Services, Cost of
Satellite Servicesand Selling, General and
Administrative Expenses, for explanations of the changes in
these items for the periods presented. During the six months
ended June 30, 2004, Satellite Services recorded an
impairment charge of $12 million to reduce the carrying
value of its Telstar 14/Estrela do Sul-1 satellite
(EDS) and related assets to the expected proceeds
from insurance of $250 million (see Note 8 to the
financial statements). The net increase in depreciation and
amortization expense of $13 million and $26 million
for the three and six months ended June 30, 2004 and 2003,
respectively, was primarily due to the shortening in the
estimated life of a satellite and depreciation for EDS which
commenced service at the end of March 2004. As a result of the
above, Adjusted EBITDA before eliminations increased
$4 million for the three months ended June 30, 2004 as
compared to 2003 and decreased $10 million for the six
months ended June 30, 2004 as compared to 2003.

As of June 30, 2004, Satellite Services had
four satellites in-orbit (including EDS launched in January 2004
that did not fully deploy its solar array, see above, and
Telstar 18 launched in June 2004 that is expected to go
into service during the third quarter of 2004, see below). At
June 30, 2004, Satellite Services backlog totaled
approximately $798 million, including intercompany backlog
of approximately $35 million. At December 31, 2003,
satellite services backlog totaled approximately
$1.3 billion (including $479 million related to the
North American satellites sold to Intelsat and intercompany
backlog of approximately $37 million).

Following its launch on June 28, 2004, the
Telstar 18 satellite separated from its launch rockets
upper stage prematurely and was placed into a lower than
expected transfer orbit. Telstar 18 has since been raised to its
final orbital position and is in the process of completing
in-orbit testing. We believe, based on current available data,
that Telstar 18 has sufficient fuel remaining to exceed its
13-year specified design life.

52



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| |                        
| | -----------------------
| | Satellite Manufacturing

|                                             |  |               |      |               |  |                       |      |            |  |              |      |              |  |   |      |   |  |  |     |    |  |  |     |   
|-------------------------------------------- |  | ------------- | ---- | ------------- |  | --------------------- | ---- | ---------- |  | ------------ | ---- | ------------ |  | - | ---- | - |  |  | --- | -- |  |  | --- | --
|                                             |  |               |      |               |  |                       |      |            |  |             
|                                             |  |               |      |               |  | % Increase/(Decrease)
|                                             |  | Three Months  |      | Six Months    |  |                      
|                                             |  | Ended         |      | Ended         |  | Three Months          |      | Six Months
|                                             |  | June 30,      |      | June 30,      |  | Ended                 |      | Ended     
|                                             |  |               |      |               |  | June 30,              |      | June 30,  
|                                             |  | 2004          |      | 2003          |  | 2004                  |      | 2003       |  | 2004 v. 2003 |      | 2004 v. 2003
|                                             |  |               |      |               |  |                       |      |            |  |              |      |             
|                                             |  |               |      |               |  |                       |      |           
|                                             |  | (In millions) |      | (In millions) |  |                       |      |           
|Satellite manufacturing revenues             |  | $             | 114  |               |  | $                     | 81   |            |  | $            | 215  |              |  | $ | 213  |   |  |  | 40  | %  |  |  | 1   | % 
|Cost of satellite manufacturing              |  |               | (111 | )             |  |                       | (161 | )          |  |              | (204 | )            |  |   | (306 | ) |  |  | (31 | )% |  |  | (33 | )%
|Selling, general and administrative expenses |  |               | (8   | )             |  |                       | (16  | )          |  |              | (17  | )            |  |   | (22  | ) |  |  | (54 | )% |  |  | (22 | )%
|                                             |  |               |      |               |  |                       |      |            |  |              |      |              |  |   |      |   |  |  |     |    |  |  |     |   
|Operating loss                               |  |               | (5   | )             |  |                       | (96  | )          |  |              | (6   | )            |  |   | (115 | ) |  |  | (95 | )% |  |  | (94 | )%
|Add: depreciation and amortization           |  |               | 7    |               |  |                       | 7    |            |  |              | 12   |              |  |   | 14   |   |  |  | 2   | %  |  |  | (11 | )%
|                                             |  |               |      |               |  |                       |      |            |  |              |      |              |  |   |      |   |  |  |     |    |  |  |     |   
|Adjusted EBITDA before eliminations          |  | $             | 2    |               |  | $                     | (89  | )          |  | $            | 6    |              |  | $ | (101 | ) |  |  | 103 | %  |  |  | 106 | % 
|                                             |  |               |      |               |  |                       |      |            |  |              |      |              |  |   |      |   |  |  |     |    |  |  |     |   

See Revenues from Satellite Manufacturing,
Cost of Satellite Manufacturingand Selling, General and
Administrative Expenses,for explanations of the changes in
these items for the periods presented. Satellite
Manufacturings results for the three and six months ended
June 30, 2004 exclude charges of $2 million and
$22 million, respectively, as a result of the settlement of
all orbital receivables on satellites sold to Intelsat. These
charges had no effect on our consolidated results (see
Note 17 to the financial statements). The decrease of
$2 million in depreciation and amortization in the six
months ended June 30, 2004, as compared to 2003 was
primarily due to reduced capital spending from 2001 to 2003. As
a result of the above, Adjusted EBITDA before eliminations
increased $91 million and $107 million for the three
and six months ended June 30, 2004 and 2003, respectively.

As of June 30, 2004, backlog for SS/L was
approximately $462 million (which does not include
approximately $119 million for the construction of one
satellite for a satellite order that is currently being
finalized), including intercompany backlog of approximately
$79 million. At December 31, 2003, backlog for SS/L
was approximately $536 million (which did not include
approximately $240 million for the construction of two
satellites for satellite orders that were being finalized),
including intercompany backlog of approximately
$145 million.

Liquidity and Capital Resources



| |                          
| | -------------------------
| | Cash and Available Credit

As of June 30, 2004, we had
$187 million of available cash and $15 million of
restricted cash (supporting $10 million of letters of
credit) after repayment of all $967 million of our secured
bank debt on March 17, 2004 and had no further available
credit. Cash flow from Satellite Services is fairly predictable
because it is derived from an existing base of long-term
customer contracts. Cash flow from Satellite Manufacturing,
however, is not as predictable, because it depends on a number
of factors, some of which are not within SS/Ls control.
For example, it takes two to three years to complete a satellite
project and numerous assumptions are built into the estimated
costs. Cash receipts are tied to the achievement of contract
milestones, which depend in part on the ability of our
subcontractors to deliver on time. In addition, the timing of
satellite awards is difficult to predict, contributing to the
unevenness of revenue and making it more challenging to match
the workforce to the workflow. In light of our financial
condition, some of SS/Ls customers have requested the
posting of bid bonds, letters of credit and or other evidence of
a source of liquidity to support new satellite orders. It is
difficult to predict if such requests will be made in the
future, and if they are made, whether SS/L will be able to
satisfy such customer requests or what level of capital may be
required in order to do so.

53



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| |                        
| | -----------------------
| | Contractual Obligations

Contractual obligations, as previously disclosed
in our latest Annual Report on Form 10-K, have been reduced
by $967 million due to the repayment of all of our
outstanding secured bank debt on March 17, 2004 (see
Note 2 to the financial statements) and reduced by
$47 million due to the reversal of non-recourse vendor
financing upon Globalstars liquidation on June 29,
2004 (see Note 9 to the financial statements).



| |                
| | ---------------
| | Cash Collateral

On the date the Chapter 11 Cases were
commenced, the Bankruptcy Court entered an order authorizing the
Debtors to use their existing cash and cash proceeds of the bank
lenders collateral to fund all operating expenses
associated with their businesses in accordance with an agreed
upon budget and in accordance with certain other terms set forth
in the order. This order has been terminated, and, accordingly,
we are free to use our cash without further restriction or
requirement.



| |                                              
| | ---------------------------------------------
| | Net Cash Provided by Operating
    Activities

Net cash provided by operating activities in the
six months ended June 30, 2004 was $68 million. This
was primarily due to an increase in customer advances of
$72 million primarily due to the start up of new satellite
programs in 2004 and a decrease in contracts-in-process of
$30 million primarily resulting from net collections on
customer contracts, offset by net loss adjusted for non-cash
items of $30 million.

Net cash provided by operating activities in the
six months ended June 30, 2003 was $28 million. This
was primarily due to a decrease in contracts-in-process of
$68 million primarily resulting from net collections on
customer contracts and a decrease in long-term receivables of
$55 million primarily resulting from accelerated
collections of orbital receivables, offset by a decrease in
customer advances of $46 million primarily due to progress
on satellite programs and net loss adjusted for non-cash items
of $26 million.



| |                                                 
| | ------------------------------------------------
| | Net Cash Provided by Discontinued
    Operations

Represents the net cash provided from the North
American satellites and related equipment sold.



| |                                                        
| | -------------------------------------------------------
| | Net Cash Provided by (Used in) Investing
    Activities

Net cash provided by investing activities was
$914 million in the six months ended June 30, 2004.
This primarily resulted from the $954 million of proceeds
from the sale of our North American satellites and related
assets, net of expenses, offset by capital expenditures for
continuing operations of $24 million and capital
expenditures for discontinued operations of $11 million,
mainly for the construction of satellites, and investments in
and advances to affiliates of $5 million, primarily for
XTAR.

Net cash used in investing activities was
$16 million in the six months ended June 30, 2003.
This primarily resulted from capital expenditures for continuing
operations of $33 million and capital expenditures for
discontinued operations of $17 million mainly for the
construction of satellites, and advances to affiliates of
$12 million, primarily for XTAR, offset by $46 million of
proceeds from the sale of Sirius common stock.



| |                                                        
| | -------------------------------------------------------
| | Net Cash (Used in) Provided by Financing
    Activities

Net cash used in financing activities was
$967 million in the six months ended June 30, 2004,
resulting from our repayment of our bank term loans and
revolving credit facilities, primarily with the proceeds from
the sale of the North America satellites and related assets.

Net cash provided by financing activities was
$0.5 million in the six months ended June 30, 2003,
primarily due to net borrowings under revolving credit
facilities of $66 million, offset by debt amortization
payments of $64 million (including $31 million of
interest payments on the 10% senior notes).

54



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| |       
| | ------
| | Equity

On June 4, 2003, our Board of Directors
approved a reverse stock split of our common stock at a ratio of
one-for-ten, resulting in a new par value of $0.10 per common
share (previously $0.01 par value per common share). The reverse
stock split became effective after the close of business on
June 13, 2003. All references to common stock and per share
amounts for all periods presented have been retroactively
restated to reflect this reverse stock split.



| |                  
| | -----------------
| | Affiliate Matters

Loral has made certain investments in joint
ventures in the satellite services business that are accounted
for under the equity method of accounting. See Note 9 to
the financial statements.

Commitments and Contingencies



| |             
| | ------------
| | Risk Factors

Our business and operations are subject to a
significant number of risks. The most significant of these risks
are summarized in, and the readers attention is directed
to, the section of our Annual Report on Form 10-K for the
year ended December 31, 2003 entitled
Managements Discussion and Analysis of Results of
Operations and Financial Condition  Commitments and
Contingencies  Risk Factors. In addition, the
reader is referred to Note 15 (Commitments and
Contingencies) of the financial statements of this Quarterly
Report on Form 10-Q for further discussion of these risks.

Other Matters



| |                          
| | -------------------------
| | Accounting Pronouncements

During 2004, we adopted a new accounting
pronouncement (see Note 18 to the financial statements).



|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

When we filed Chapter 11, SS/Ls hedges
with counterparties (primarily yen-denominated forward
contracts) were cancelled leaving SS/L vulnerable to foreign
currency fluctuations in the future. The inability to enter into
forward contracts exposes SS/Ls future revenues, costs and
cash associated with anticipated yen denominated receipts and
payments to currency fluctuations. As of June 30, 2004,
SS/L had the following amounts denominated in Japanese yen
(which has been translated into U.S. dollars based on the June
30, 2004 exchange rate) that were unhedged (in millions):

|                                            |  |              |       |        |  |   |      | 
|------------------------------------------- |  | ------------ | ----- | ------ |  | - | ---- | 
|                                            |  | Japanese Yen |       | U.S. $
|                                            |  |              |       |       
|Future revenues                             |  | ¥            | 1,090 |        |  | $ | 10.1 | 
|Future expenditures                         |  |              | 1,134 |        |  |   | 10.5 | 
|Contracts-in-process (unbilled receivables) |  |              | 1,523 |        |  |   | 14.1 | 

At June 30, 2004, SS/L also had future
expenditures in euros of 1.8 million ($2.2 million
U.S.) that were unhedged.



|        |                                       
|------- | --------------------------------------
|Item 4. | Disclosure Controls and
    Procedures

(a) Disclosure controls and procedures.Our chief executive officer and our chief financial officer,
after evaluating the effectiveness of our disclosure
controls and procedures (as defined in the Securities and
Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of
June 30, 2004, have concluded that our disclosure controls
and procedures were effective and designed to ensure that
material information relating to Loral and its consolidated
subsidiaries required to be in our filings under the Securities
and Exchange Act of 1934 would be made known to them by others
within those entities in a timely manner.

55



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##### Table of Contents



(b) Internal control over financial
reporting.There were no changes in our internal control
over financial reporting (as defined in the Securities and
Exchange Act of 1934 Rules 13a-15(f) and 15-d-15(f)) during
the most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.




PART II.




OTHER INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

Loral and certain of its subsidiaries (the
Debtor Subsidiaries) filed voluntary petitions for
reorganization under chapter 11 of title 11 of the
United States Code (the Bankruptcy Code) on
July 15, 2003 in the United States Bankruptcy Court for the
Southern District of New York (the Bankruptcy
Court). We and our Debtor Subsidiaries continue to manage
our properties and operate our businesses as debtors in
possession under the jurisdiction of the Bankruptcy Court
and in accordance with the provisions of the Bankruptcy Code.

Also on July 15, 2003, Loral and one of its
Bermuda subsidiaries (the Bermuda Group) filed
parallel insolvency proceedings in the Supreme Court of Bermuda
(the Bermuda Court). On such date, the Bermuda Court
entered an order appointing Philip Wallace, Chris Laverty and
Michael Morrison, partners of KPMG, as Joint Provisional
Liquidators (JPLs) in respect of the Bermuda Group.
The Bermuda Court granted the JPLs the power to oversee the
continuation and reorganization of these companies
businesses under the control of their boards of directors and
under the supervision of the U.S. Bankruptcy Court and the
Bermuda Court. The JPLs have not audited the contents of this
report.

As a result of our commencement of the
Chapter 11 Cases, the pursuit of pending claims and
litigation against us arising prior to or relating to events
which occurred prior to the commencement of the Chapter 11
Cases is generally subject to an automatic stay under
Section 362 of the Bankruptcy Code, and, absent further
order of the Bankruptcy Court, a party is generally prohibited
from taking any action to recover any prepetition claims,
enforce any lien against or obtain possession of any property
from us. In addition, pursuant to Section 365 of the
Bankruptcy Code, we may reject or assume prepetition executory
contracts and unexpired leases, and parties affected by
rejections of these contracts or leases may file claims with the
Bankruptcy Court which will be addressed in the context of the
Chapter 11 Cases.

See Note 15 to the financial statements.






|        |                                    
|------- | -----------------------------------
|Item 3. | Defaults Upon Senior
    Securities

(a) On July 15, 2003, we and our Debtor
Subsidiaries filed voluntary petitions for reorganization under
the Bankruptcy Code in the Bankruptcy Court (Lead Case
No. 03-41710 (RDD), Case Nos. 03-41709 (RDD) through
03-41728 (RDD)). As a result of our voluntary petitions for
reorganization, our prepetition debt obligations were
accelerated (see Note 12 to the financial statements). On
July 15, 2003, we suspended interest payments on all of our
unsecured senior notes. As of June 30, 2004, the principal
amounts of our prepetition outstanding debt obligations were
$1.049 billion.

(b) In August 2002, our Board of Directors
approved a plan to suspend indefinitely the future payment of
dividends on Lorals Series C and D preferred stock.
Accordingly, we deferred the payment of quarterly dividends due
on our Series C preferred stock commencing on
November 1, 2002 and the payment of quarterly dividends due
on our Series D preferred stock commencing on
November 15, 2002. Because we have failed to pay dividends
on the Series C and the Series D preferred stock for
six consecutive quarters, holders of the majority of each class
of such preferred stock are now entitled, subject to the
applicable effects of the Chapter 11 Cases and Lorals
Bermuda insolvency proceedings, to elect two additional
directors, for a total of four directors, to Lorals Board
of Directors.

56



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We do not intend to make interest or dividend
payments to cure these defaults, and the lenders, noteholders
and preferred stockholders have not issued waivers related to
these defaults.






|        |                                     
|------- | ------------------------------------
|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

Exhibit 31.1  Certification of
Chief Executive Officer pursuant to 18 U.S.C. § 1350,
as adopted pursuant to § 302 of the Sarbanes-Oxley Act
of 2002

Exhibit 31.2  Certification of
Chief Financial Officer pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to § 302 of the
Sarbanes-Oxley Act of 2002

Exhibit 32.1  Certification of
Chief Executive Officer pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002

Exhibit 32.2  Certification of
Chief Financial Officer pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

|               |  |                                                                                 |  |                                                                                                                                                                                 
|-------------- |  | ------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date of Report |  |                                                                                 |  | Description                                                                                                                                                                     
|               |  |                                                                                 |  |                                                                                                                                                                                 
|April 1, 2004  |  | Item 2  Acquisition or Disposition of
    Assets                               |  | Closing of Intelsat transaction                                                                                                                                                 
|               |  | Item 7  Financial Statements, Pro
    Forma Financial Information and Exhibits |  | Pro forma financial statements reflecting the
    sale of assets                                                                                                                
|April 7, 2004  |  | Item 9  Regulation FD Disclosure                                               |  | Monthly Operating Report for the Period of
    January 24, 2004 through February 22, 2004 as filed
    with the U.S. Bankruptcy Court for the Southern District of
    New York.
|May 11, 2004   |  | Item 9  Regulation FD
    Disclosure                                           |  | Monthly Operating Report for the Period of
    February 23, 2004 through March 31, 2004 as filed with
    the U.S. Bankruptcy Court for the Southern District of New
    York.  
|June 4, 2004   |  | Item 9  Regulation FD Disclosure                                               |  | Monthly Operating Report for the Period of
    April 1, 2004 through April 23, 2004 as filed with the
    U.S. Bankruptcy Court for the Southern District of New York.          
|June 24, 2004  |  | Item 9  Regulation FD Disclosure                                               |  | Monthly Operating Report for the Period of
    April 24, 2004 through May 21, 2004 as filed with the
    U.S. Bankruptcy Court for the Southern District of New York.           
|June 30, 2004  |  | Item 5  Other Events and Required
    FD Disclosure                            |  | Telstar 18 launch anomoly                                                                                                                                                       

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SIGNATURES

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



| |                                        
| | ---------------------------------------
| | Registrant                             
|
| | LORAL SPACE & COMMUNICATIONS LTD.      
|
| | /s/ RICHARD J. TOWNSEND                
| |                                        
| | Richard J. Townsend                    
| | Executive Vice President and           
| | Chief Financial Officer                
| | (Principal Financial Officer)          
| | and Registrants Authorized
    Officer

Date: August 5, 2004

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##### Table of Contents






EXHIBIT INDEX

|             |  |   |  |                                                                                                                                              
|------------ |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No.  |  |   |  | Description                                                                                                                                  
|             |  |   |  |                                                                                                                                              
|Exhibit 12   |  |  |  | Computation of Deficiency of Earnings to Cover
    Fixed Charges                                                                             
|Exhibit 31.1 |  |  |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. § 1350, as adopted pursuant to
    § 302 of the Sarbanes-Oxley Act of 2002
|Exhibit 31.2 |  |  |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. § 1350, as adopted pursuant to
    § 302 of the Sarbanes-Oxley Act of 2002
|Exhibit 32.1 |  |  |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. § 1350, as adopted pursuant to
    § 906 of the Sarbanes-Oxley Act of 2002
|Exhibit 32.2 |  |  |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. § 1350, as adopted pursuant to
    § 906 of the Sarbanes-Oxley Act of 2002

59