<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                   FORM 10-Q
 
            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
 
                         COMMISSION FILE NUMBER 1-14180
 
                       LORAL SPACE & COMMUNICATIONS LTD.
                         C/O LORAL SPACECOM CORPORATION
                                600 THIRD AVENUE
                            NEW YORK, NEW YORK 10016
                            TELEPHONE (212) 697-1105
 
                     JURISDICTION OF INCORPORATION: BERMUDA
 
                     IRS IDENTIFICATION NUMBER: 13-3867424
 
     The registrant has filed all reports required to be filed by section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
has been subject to such filing requirements for the past 90 days.
 
     As of July 31, 1998, there were 242,986,597 shares of Loral Space &
Communications Ltd. common stock outstanding.
 
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--------------------------------------------------------------------------------
<PAGE>   2
 
                         PART 1. FINANCIAL INFORMATION
 
                       LORAL SPACE & COMMUNICATIONS LTD.
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                  (Unaudited)
 
<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED       SIX MONTHS ENDED
                                                        JUNE 30,                JUNE 30,
                                                  --------------------    --------------------
                                                    1998        1997        1998        1997
                                                  --------    --------    --------    --------
<S>                                               <C>         <C>         <C>         <C>
Revenues........................................  $248,260    $291,148    $543,473    $631,501
Costs and expenses..............................   274,526     293,653     568,757     624,669
                                                  --------    --------    --------    --------
Operating income (loss).........................   (26,266)     (2,505)    (25,284)      6,832
Interest and investment income..................    16,524      11,071      25,190      31,165
Interest expense................................    21,557       5,446      23,277      15,401
                                                  --------    --------    --------    --------
Income (loss) before income taxes, minority
  interest and equity in net loss of
  affiliates....................................   (31,299)      3,120     (23,371)     22,596
Income tax expense (benefit)....................    (9,714)      3,636      (6,651)     12,975
                                                  --------    --------    --------    --------
Income (loss) before minority interest and
  equity in net loss of affiliates..............   (21,585)       (516)    (16,720)      9,621
Minority interest...............................     3,569      (1,690)      3,631      (5,056)
Equity in net loss of affiliates................   (40,957)     (8,090)    (61,327)    (15,267)
                                                  --------    --------    --------    --------
Net loss........................................   (58,973)    (10,296)    (74,416)    (10,702)
Preferred dividends and accretion...............   (11,607)     (2,947)    (23,213)     (2,947)
                                                  --------    --------    --------    --------
Net loss applicable to common stockholders......  $(70,580)   $(13,243)   $(97,629)   $(13,649)
                                                  ========    ========    ========    ========
Earnings (loss) per share:
  Basic.........................................  $  (0.27)   $  (0.06)   $  (0.38)   $  (0.06)
                                                  ========    ========    ========    ========
  Diluted.......................................  $  (0.27)   $  (0.06)   $  (0.38)   $  (0.06)
                                                  ========    ========    ========    ========
Weighted average shares outstanding:
  Basic.........................................   265,769     238,186     257,553     237,588
                                                  ========    ========    ========    ========
  Diluted.......................................   265,769     238,186     257,553     237,588
                                                  ========    ========    ========    ========
</TABLE>
 
           See notes to condensed consolidated financial statements.
                                        1
<PAGE>   3
 
                       LORAL SPACE & COMMUNICATIONS LTD.
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                       (In thousands, except share data)
 
<TABLE>
<CAPTION>
                                                               JUNE 30,      DECEMBER 31,
                                                                 1998            1997
                                                              -----------    ------------
                                                              (Unaudited)       (Note)
<S>                                                           <C>            <C>
                                         ASSETS
Current assets:
     Cash and cash equivalents..............................  $  876,530      $  226,547
     Contracts in process...................................     452,122         378,134
     Inventories............................................     129,230          98,325
     Restricted current assets..............................      50,068
     Other current assets...................................      49,692          51,612
                                                              ----------      ----------
Total current assets........................................   1,557,642         754,618
Property, plant and equipment, net..........................   1,532,923         926,679
Cost in excess of net assets acquired, net..................     958,225         361,411
Long-term receivables.......................................     182,943         168,639
Restricted assets...........................................      84,482
Investments in affiliates...................................     472,440         499,235
Deposits....................................................     114,470         154,970
Other assets................................................     162,854         139,384
                                                              ----------      ----------
                                                              $5,065,979      $3,004,936
                                                              ==========      ==========
                          LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Current portion of debt................................  $    5,500      $    2,146
     Accounts payable.......................................     187,109         189,790
     Accrued employment costs...............................      45,112          38,797
     Customer advances......................................      31,738          68,287
     Accrued interest and preferred dividends...............      40,610          11,192
     Other current liabilities..............................      17,679          25,931
     Income taxes payable...................................      11,674          25,934
     Deferred income taxes..................................       1,683           4,187
                                                              ----------      ----------
Total current liabilities...................................     341,105         366,264
Deferred income taxes.......................................      51,710          99,696
Pension and other postretirement liabilities................      51,091          48,398
Long-term liabilities.......................................     121,377          73,117
Long-term debt..............................................   1,518,266         433,252
Minority interest...........................................      19,380          10,964
Commitments and contingencies (Notes 6 and 9)
Shareholders' equity:
     Series A convertible preferred stock, par value $.01...         459             459
     Series B preferred stock, par value $.01...............
     6% Series C convertible redeemable preferred stock
       ($745,472 redemption value)..........................     734,598         733,762
     Common stock, par value $.01...........................       2,430           2,010
     Paid-in capital........................................   2,313,290       1,216,377
     Treasury stock, at cost................................      (3,360)         (1,680)
     Unearned compensation..................................      (9,679)           (249)
     Cumulative translation adjustment......................         375
     Retained earnings (deficit)............................     (75,063)         22,566
                                                              ----------      ----------
Total shareholders' equity..................................   2,963,050       1,973,245
                                                              ----------      ----------
                                                              $5,065,979      $3,004,936
                                                              ==========      ==========
</TABLE>
 
---------------
Note: The December 31, 1997 balance sheet has been derived from the audited
      consolidated financial statements at that date.
 
           See notes to condensed consolidated financial statements.
                                        2
<PAGE>   4
 
                       LORAL SPACE & COMMUNICATIONS LTD.
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                  (Unaudited)
 
<TABLE>
<CAPTION>
                                                              SIX MONTHS ENDED JUNE 30,
                                                              -------------------------
                                                                 1998          1997
                                                              ----------    -----------
<S>                                                           <C>           <C>
Operating activities:
  Net loss..................................................  $ (74,416)    $  (10,702)
  Equity in net loss of affiliates..........................     61,327         15,267
  Minority interest.........................................     (3,631)         5,056
  Deferred taxes............................................     13,176         12,961
  Depreciation and amortization.............................     55,869         24,100
  Contracts in process and inventories......................    (91,854)       (61,837)
  Deposits..................................................     40,500        (42,400)
  Long term receivables.....................................    (14,304)         5,498
  Accounts payable..........................................    (28,890)        81,294
  Accrued expenses..........................................      6,128        (51,151)
  Taxes payable.............................................    (24,306)        (2,212)
  Customer advances.........................................    (36,549)       (74,123)
  Long-term liabilities.....................................     29,291         (1,314)
  Other.....................................................        305        (16,164)
                                                              ---------     ----------
Cash used in operating activities...........................    (67,354)      (115,727)
                                                              ---------     ----------
Investing activities:
  Cash acquired in connection with Orion acquisition........     53,801
  Acquisition of businesses, net of cash acquired...........                  (561,639)
  Investments in affiliates.................................    (22,216)      (132,273)
  Use of restricted assets..................................    199,336
  Capital expenditures, net.................................   (304,276)      (129,539)
                                                              ---------     ----------
Cash used in investing activities...........................    (73,355)      (823,451)
                                                              ---------     ----------
Financing activities:
  Proceeds from the issuance of common stock, net...........    602,600
  Borrowings under revolving credit facility, net...........    185,506         79,048
  Repayment of notes payable................................       (265)
  Repayment of Export-Import credit facility................     (1,073)
  Contribution from minority partner........................      9,996
  Proceeds from exercise of stock options and issuances to
     employee savings plan..................................     17,141          1,228
  Preferred dividends.......................................    (23,213)        (2,947)
                                                              ---------     ----------
Cash provided by financing activities.......................    790,692         77,329
                                                              ---------     ----------
Increase (decrease) in cash and cash equivalents............    649,983       (861,849)
Cash and cash equivalents -- beginning of period............    226,547      1,180,752
                                                              ---------     ----------
Cash and cash equivalents -- end of period..................  $ 876,530     $  318,903
                                                              =========     ==========
Non-cash activities:
  Common stock issued to acquire Orion......................  $ 469,000
                                                              =========
  Mandatory exchange of Convertible Preferred Equivalent
     Obligations............................................                $  583,282
                                                                            ==========
  Issuance of Loral Common Stock to acquire equity interest
     in SS/L................................................                $  147,260
                                                                            ==========
  Issuance of Loral Common Stock to acquire equity interest
     in Globalstar..........................................                $   17,487
                                                                            ==========
Supplemental information:
  Interest paid.............................................  $  23,167     $   29,823
                                                              =========     ==========
  Taxes paid................................................  $   4,848     $    2,322
                                                              =========     ==========
</TABLE>
 
           See notes to condensed consolidated financial statements.
                                        3
<PAGE>   5
 
                       LORAL SPACE & COMMUNICATIONS LTD.
 
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1)  ORGANIZATION AND PRINCIPAL BUSINESS
 
          Loral Space & Communications Ltd. and subsidiaries (the "Company" or
     "Loral") is one of the world's leading satellite companies, with
     substantial activities in satellite manufacturing and satellite-based
     communications services. Space Systems/Loral, Inc. ("SS/L") is a leading
     designer and manufacturer of space systems. Loral Skynet ("Skynet"),
     acquired March 14, 1997, is a leading provider of satellite communications
     services in the United States. Skynet owns and operates the Telstar
     satellite network and is expanding its business internationally. Loral
     Orion, Inc. ("Orion"), acquired on March 20, 1998, provides satellite-based
     communications services, focused primarily on private communications
     network services, Internet services and video distribution and other
     satellite transmission services. On November 17, 1997, a joint venture
     including Loral and another partner acquired 75% of Satelites Mexicanos,
     S.A. de C.V. ("SatMex"), a satellite services provider to Mexico and South
     America. Loral also manages and is the largest equity owner of Globalstar,
     L.P. ("Globalstar"), a global, mobile satellite telephony system scheduled
     to begin commercial service in the second quarter of 1999. Loral is
     pursuing additional satellite-based communications service opportunities
     including CyberStar, a proposed worldwide high-speed broadband data
     services system which will initiate service using leased Ku-band
     transponder capacity on Skynet's Telstar 5 satellite.
 
2)  BASIS OF PRESENTATION
 
          The accompanying unaudited condensed consolidated financial statements
     have been prepared by Loral pursuant to the rules of the Securities and
     Exchange Commission ("SEC") and, in the opinion of the Company, include all
     adjustments (consisting of normal recurring accruals) necessary for a fair
     presentation of results of operations, financial position and cash flows.
     Certain information and footnote disclosures normally included in financial
     statements prepared in accordance with generally accepted accounting
     principles have been condensed or omitted pursuant to such SEC rules. The
     Company believes that the disclosures made are adequate to keep the
     information presented from being misleading. The results of operations for
     the three and six months ended June 30, 1998, are not necessarily
     indicative of the results to be expected for the full year. It is suggested
     that these financial statements be read in conjunction with the audited
     consolidated financial statements and notes thereto of Loral included in
     Loral's latest annual report on Form 10-K.
 
3)  ACCOUNTING POLICIES
 
    COMPREHENSIVE INCOME
 
          As of January 1, 1998, Loral adopted Statement of Financial Accounting
     Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130
     established new rules for the reporting and display of comprehensive income
     and its components. SFAS 130 requires unrealized gains or losses on the
     Company's foreign currency translation adjustments to be included in other
     comprehensive income.
 
                                        4
<PAGE>   6
                       LORAL SPACE & COMMUNICATIONS LTD.
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Total comprehensive loss for the six months ended June 30, 1998 and 1997
amounted to approximately $97.3 million and $13.6 million, respectively. The
following are the components of comprehensive loss:
 
<TABLE>
<CAPTION>
                                                           SIX MONTHS ENDED
                                                               JUNE 30,
                                                         --------------------
                                                           1998        1997
                                                         --------    --------
                                                            (IN THOUSANDS)
<S>                                                      <C>         <C>
Net loss applicable to common shareholders.............  $(97,629)   $(13,649)
Cumulative translation adjustment......................       375
                                                         --------    --------
Comprehensive loss applicable to common shareholders...  $(97,254)   $(13,649)
                                                         ========    ========
</TABLE>
 
    RESTRICTED ASSETS
 
          In connection with the Orion acquisition, Loral acquired cash and cash
     equivalents which are restricted in use to the construction of two
     satellites and payment of interest on Orion's senior notes. At June 30,
     1998, these restricted assets aggregated $134.6 million of which $50.1
     million is current.
 
    RECLASSIFICATIONS
 
          Certain reclassifications have been made to conform prior period
     amounts to the current period presentation.
 
4)  ACQUISITIONS AND INVESTMENTS IN AFFILIATES
 
     ACQUISITIONS
 
          In February 1997, Loral agreed to acquire the remaining 49% of the
     common stock of SS/L held by four international aerospace and
     communications companies (the "Alliance Partners") for $374 million paid in
     cash and Loral securities. On March 14, 1997, Loral acquired Skynet for
     $462.1 million in cash.
 
          On March 20, 1998, Loral acquired all of the outstanding stock of
     Orion in exchange for Loral common stock. Loral issued 17.9 million shares
     of its common stock and assumed existing Orion options and warrants to
     purchase 1.9 million shares of Loral common stock representing an aggregate
     purchase price of $469 million. Orion currently has one satellite in orbit
     and two satellites under construction. The assets and liabilities recorded
     in connection with the purchase price allocation based on preliminary
     estimates were $1.43 billion and $957.2 million, respectively.
 
          The acquisition of Skynet and Orion and the remaining equity interest
     in SS/L have been accounted for as purchases. Loral's consolidated
     financial statements for the three and six months ended June 30, 1997,
     reflect the results of operations of SS/L from January 1, 1997, the
     elimination of the minority interest of the SS/L equity not owned by Loral
     during the period and the results of operations of Skynet from March 14,
     1997. Prior to January 1, 1997, SS/L was accounted for using the equity
     method of accounting. Loral's condensed consolidated statement of
     operations reflects the results of Orion commencing on April 1, 1998.
 
          Had the acquisitions of SS/L, Skynet, the investment in SatMex (see
     below -- Investments in Affiliates) and Orion occurred on January 1, 1997,
     the unaudited pro forma sales, operating loss, net loss applicable to
     common stockholders and related loss per share data for the six months
     ended June 30, 1998 and 1997 would have been: $562.3 million and $661.5
     million; $44.1 million and $20.9 million; $113.2 million and $75.5 million;
     and $0.41 and $0.29, respectively. These results, which are based on
 
                                        5
<PAGE>   7
                       LORAL SPACE & COMMUNICATIONS LTD.
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     various assumptions, are not necessarily indicative of what would have
     occurred had the acquisitions been consummated on January 1, 1997.
 
     INVESTMENTS IN AFFILIATES
 
          On April 30, 1998, Loral's holdings of Globalstar Telecommunications
     Limited ("GTL") Convertible Preferred Equivalent Obligations ("GTL CPEOs")
     were converted into 6,832,030 shares of GTL common stock including the
     additional shares issued in satisfaction of the required interest
     make-whole payment.
 
          At June 30, 1998, Loral owned directly and indirectly 22.5 million
     ordinary partnership interests (38.7%) of the total 58.2 million Globalstar
     ordinary partnership interests outstanding, (38.1% on a fully diluted
     basis) see Note 10. Loral's investment in Globalstar includes $32.3 million
     of capitalized interest at June 30, 1998.
 
          In connection with the privatization by the Federal Government of
     Mexico (the "Mexican Government") of its fixed satellite services business,
     Loral and Telefonica Autrey, S.A. de C.V. ("Telefonica Autrey") formed a
     joint venture, Firmamento Mexicano, S. de R.L. de C.V. ("Holdings").
     Holdings acquired 75% of the outstanding capital stock of SatMex for $646.8
     million. The purchase price was financed by a Loral equity contribution of
     $94.6 million, a Telefonica Autrey equity contribution of $50.9 million and
     debt issued by Holdings. As part of the acquisition, Servicios Corporativos
     Satelitales, S.A. de C.V. ("Servicios"), a wholly owned subsidiary of
     Holdings issued a $125.1 million seven year obligation bearing interest at
     6.03% to the Mexican Government (the "Government Obligation") in
     consideration for the assumption by SatMex of the debt incurred in
     connection with the acquisition. The debt of SatMex and Servicios is
     non-recourse to Loral and Telefonica Autrey. However, Loral and Telefonica
     Autrey have agreed to maintain assets in a collateral trust in an amount
     equal to the value of the Government Obligation through December 30, 2000
     and, thereafter, in an amount equal to 1.2 times the Government Obligation
     until maturity. Loral has a 65% economic interest in Holdings and a 49%
     indirect economic interest in SatMex.
 
          Loral, together with Telefonica Autrey, are responsible for managing
     SatMex and will receive an aggregate management fee, based on a sliding
     scale, applied to SatMex's quarterly gross revenues up to a maximum of
     3.75% of cumulative gross revenues. In addition, Loral Skynet had licensed
     certain intellectual property to SatMex for a fee of 1.5% of SatMex's gross
     revenues. Such fees earned by Loral for the six months ended June 30, 1998,
     were approximately $872,000.
 
          In February 1998, Loral and Alcatel Alsthom ("Alcatel") announced that
     they will jointly build and operate Europe*Star, a geostationary satellite
     system that will provide broadcast and telecommunications services to
     Europe, the Middle East, Southeast Asia, India and South Africa. Alcatel
     will serve as the primary contractor of the Europe*Star turnkey system.
     SS/L will provide the satellite bus and test and integrate the satellites.
     Loral's initial investment in this joint venture was $5 million.
 
          In June, 1997 Loral and Alcatel formed a strategic partnership to
     jointly develop, deploy and operate high-speed global multimedia satellite
     networks that will bring high-bandwidth services to businesses and to
     consumers. The agreement includes cross investments in Loral's
     geostationary (GEO) satellite-based CyberStar project and Alcatel's
     low-earth-orbit (LEO) satellite-based SkyBridge project. Each company will
     participate in the development of the two projects, and have initially
     committed to invest up to $30 million in the other's respective project.
     Each project will be managed separately, but the two companies have agreed
     to facilitate a coordinated approach to the two networks, including
     integrated marketing.
 
                                        6
<PAGE>   8
                       LORAL SPACE & COMMUNICATIONS LTD.
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
          Investments in affiliates is summarized as follows:
 
<TABLE>
<CAPTION>
                                                                  JUNE 30,    DECEMBER 31,
                                                                    1998          1997
                                                                  --------    ------------
                                                                       (IN THOUSANDS)
    <S>                                                           <C>         <C>
    Globalstar..................................................  $368,133      $383,714
    SatMex......................................................    78,106        88,925
    Europe*Star.................................................     5,037
    Skybridge...................................................    14,258        17,268
    Other affiliates............................................     6,906         9,328
                                                                  --------      --------
                                                                  $472,440      $499,235
                                                                  ========      ========
</TABLE>
 
          Equity in net loss of affiliates consists of:
 
<TABLE>
<CAPTION>
                                                                  SIX MONTHS ENDED JUNE 30,
                                                                  --------------------------
                                                                     1998           1997
                                                                  -----------    -----------
                                                                        (IN THOUSANDS)
    <S>                                                           <C>            <C>
    Globalstar..................................................   $(28,020)      $(15,267)
    SatMex......................................................    (11,848)
    Skybridge...................................................    (15,891)
    Other affiliates............................................     (5,568)
                                                                   --------       --------
                                                                   $(61,327)      $(15,267)
                                                                   ========       ========
</TABLE>
 
          The following table represents the summary of results of operations of
     certain of Loral's affiliates for the six months ended June 30, 1998 and
     1997:
 
<TABLE>
<CAPTION>
                                                                     1998                 1997
                                                            ----------------------     ----------
                                                            GLOBALSTAR     SATMEX      GLOBALSTAR
                                                            ----------    --------     ----------
                                                                       (IN THOUSANDS)
    <S>                                                     <C>           <C>          <C>
    Sales.................................................   $     --     $ 51,160      $     --
    Operating income (loss)...............................    (53,040)      15,046       (39,363)
    Net loss..............................................    (43,220)     (17,375)      (32,254)
    Net loss applicable to ordinary partnership
      interests...........................................    (65,417)                   (42,855)
</TABLE>
 
                                        7
<PAGE>   9
                       LORAL SPACE & COMMUNICATIONS LTD.
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
5)  CONTRACTS IN PROCESS
 
<TABLE>
<CAPTION>
                                                                  JUNE 30,     DECEMBER 31,
                                                                    1998           1997
                                                                  ---------    ------------
                                                                       (IN THOUSANDS)
    <S>                                                           <C>          <C>
    U.S. Government contracts:
      Amounts billed............................................     $5,587          $5,243
      Unbilled contract receivables.............................     15,172          10,274
                                                                  ---------    ------------
                                                                     20,759          15,517
                                                                  ---------    ------------
    Commercial contracts:
      Amounts billed............................................    291,614         194,997
      Unbilled contract receivables.............................    139,749         167,620
                                                                  ---------    ------------
                                                                    431,363         362,617
                                                                  ---------    ------------
                                                                   $452,122        $378,134
                                                                  =========    ============
</TABLE>
 
          Unbilled amounts include recoverable costs and accrued profit on
     progress completed which have not been billed. Such amounts are billed upon
     shipment of the product, achievement of contractual milestones, or
     completion of the contract and are reclassified to billed receivables.
 
6)  LONG TERM DEBT
 
<TABLE>
<CAPTION>
                                                              JUNE 30,     DECEMBER 31,
                                                                1998           1997
                                                             ----------    ------------
                                                                   (IN THOUSANDS)
<S>                                                          <C>           <C>
Term loan, 6.785% and 7.2% at June 30 and December 31,
  respectively.............................................  $  275,000      $275,000
Revolving credit facility, 6.785% and 7.2% at June 30 and
  December 31, respectively................................     220,000        55,000
Note purchase facility.....................................     108,430        88,234
Export-Import credit facility..............................      16,091        17,164
Other......................................................      10,576
Non-recourse debt of Orion:
     Senior notes due 2007 (principal amount $445
       million)............................................     505,267
     Senior discount notes due 2007 (principal amount $484
       million)............................................     388,402
                                                             ----------      --------
Total debt.................................................   1,523,766       435,398
Less, current maturities...................................       5,500         2,146
                                                             ----------      --------
                                                             $1,518,266      $433,252
                                                             ==========      ========
</TABLE>
 
          In connection with the Orion acquisition, Loral did not assume Orion's
     senior notes and senior discount notes. Such debt remains outstanding and
     is non-recourse to Loral. The carrying value of the Orion senior notes and
     senior discount notes has been increased to reflect a fair value
     adjustment, of $148.6 million based on quoted market prices at March 31,
     1998.
 
          The Orion senior notes are due in 2007, bear interest of 11.25% and
     pay interest semi-annually on January 15 and July 15 of each year. The
     Orion senior discount notes are due in 2007, bear interest of 12.5% and pay
     interest semi-annually on January 15 and July 15 commencing on July 15,
     2002. On April 17, 1998, Orion made an offer to purchase its senior notes
     and senior discount notes. Substantially all of Orion's senior notes and
     senior discount notes remained outstanding following the expiration of the
     offer. The offer by Orion to repurchase such notes was made pursuant to the
     applicable indentures as a result of the change in control of Orion in
     connection with its acquisition by Loral.
 
                                        8
<PAGE>   10
                       LORAL SPACE & COMMUNICATIONS LTD.
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
7)  STOCKHOLDER'S EQUITY
 
          On June 29, 1998, Loral sold 23 million shares of its common stock for
     $27.00 per share. The net proceeds were $602.6 million, of which Loral used
     $175 million, net, to fund the Globalstar Purchase (see Note 10) and Loral
     intends to use the remainder for general corporate purposes, including
     investment in its existing core businesses, to pursue emerging satellite
     service opportunities worldwide and for possible acquisitions.
 
8)  EARNINGS PER SHARE
 
          Basic earnings per share is computed based on the weighted average
     number of shares of common stock and the Series A Preferred Stock
     outstanding. Diluted earnings per share excludes the assumed conversion of
     the Series C Preferred Stock and stock options as the effect would have
     been antidilutive.
 
          The following table sets forth the computation of basic and diluted
     earnings per share:
 
<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED       SIX MONTHS ENDED
                                                        JUNE 30,                JUNE 30,
                                                  --------------------    --------------------
                                                    1998        1997        1998        1997
                                                  --------    --------    --------    --------
                                                     (In thousands, except per share data)
    <S>                                           <C>         <C>         <C>         <C>
    Numerator:
      Net loss..................................  $(58,973)   $(10,296)   $(74,416)   $(10,702)
      Preferred stock dividends and accretion...   (11,607)     (2,947)    (23,213)     (2,947)
                                                  --------    --------    --------    --------
      Numerator for basic and diluted earnings
         per share -- net loss applicable to
         common stockholders....................  $(70,580)   $(13,243)   $(97,629)   $(13,649)
                                                  ========    ========    ========    ========
    Denominator:
      Weighted average shares:
         Common stock...........................   219,872     192,289     211,656     191,691
         Series A Preferred Stock...............    45,897      45,897      45,897      45,897
                                                  --------    --------    --------    --------
      Denominator for basic earnings per
         share..................................   265,769     238,186     257,553     237,588
      Effect of dilutive securities:
         Series C Preferred Stock...............         *           *           *           *
         Employee stock options.................         *           *           *           *
                                                  --------    --------    --------    --------
      Denominator for diluted earnings per
         share..................................   265,769     238,186     257,553     237,588
                                                  ========    ========    ========    ========
    Basic earnings per share....................  $  (0.27)   $  (0.06)   $  (0.38)   $  (0.06)
                                                  ========    ========    ========    ========
    Diluted earnings per share..................  $  (0.27)   $  (0.06)   $  (0.38)   $  (0.06)
                                                  ========    ========    ========    ========
</TABLE>
 
---------------
 
* Effect is antidilutive.
 
9)  CONTINGENCIES
 
          In 1997, two in-orbit satellites built by SS/L experienced some solar
     array circuit failures. One of the customers has asserted that, in light of
     the failures and uncertainty as to future failure, it has not accepted the
     satellite. The Company believes that the customer was contractually
     required to accept the satellite at completion of in-orbit testing and that
     risk of loss has passed to the customer. In addition, due to a delay caused
     by the replacement on a satellite under construction of solar arrays
     similar to those that
 
                                        9
<PAGE>   11
                       LORAL SPACE & COMMUNICATIONS LTD.
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     have experienced failures, another customer has requested that SS/L
     structure an arrangement whereby the satellite would be sold to another
     customer. Management believes that these matters will not have a material
     adverse effect on the financial position or results of operations of the
     Company.
 
          The Company is aware of a grand jury investigation being conducted by
     the office of the U.S. Attorney for the District of Columbia with respect
     to possible violations of export control laws that may have occurred in
     connection with the participation of SS/L employees on a committee formed
     in the wake of the 1996 crash of a Long March rocket in China and whose
     purpose was to consider whether studies of the crash made by the Chinese
     had correctly identified the cause of the failure. While the grand jury
     investigation appears to be in its preliminary stages, and SS/L is not in a
     position to predict its direction or outcome, if SS/L were to be indicted
     and convicted of a criminal violation of the Arms Export Control Act, it
     would be subject to a fine of $1 million per violation and could be
     debarred from certain export privileges and, possibly, from participation
     in government contracts. Since many of SS/L's satellites are built for
     foreign customers and/or launched on foreign rockets, such a debarment
     would have a material adverse effect on SS/L's business, which is important
     to the Company. Indictment for such violations would subject SS/L to
     discretionary debarment from further export licenses. Whether or not SS/L
     is indicted or convicted, SS/L will remain subject to the State
     Department's general statutory authority to prohibit exports of satellites
     and related services if it finds a violation of the Arms Export Control Act
     that puts the party's reliability in question, and it can suspend export
     privileges whenever it determines that grounds for debarment exist and that
     such suspension "is reasonably necessary to protect world peace or the
     security or foreign policy of the United States."
 
          As far as SS/L can determine, no sensitive information or technology
     was conveyed to the Chinese, and no secret or classified information was
     discussed with or reported to them. SS/L believes that its employees acted
     openly and in good faith and that none engaged in intentional misconduct.
     Accordingly, the Company does not believe that SS/L has committed a
     criminal violation of the export control laws. The Company does not expect
     the grand jury investigation or its outcome to result in a material adverse
     effect upon its business. However, especially in view of the early stage of
     the proceedings, there can be no assurance as to those conclusions.
 
          On May 21, 1998, the House of Representatives passed a bill which, if
     passed by the Senate and enacted into law, would prohibit exports of
     satellites of U.S. origin to the People's Republic of China, whether or not
     an export license had theretofore been obtained. The United States Senate
     has not acted on this bill. If enacted into law, these provisions would
     prohibit further launches of U.S.-made satellites, including those
     manufactured by SS/L, on the Long March rocket. SS/L is under contract to
     build one satellite which is to be launched on a Long March rocket, for
     which SS/L currently holds an export license. As of June 30, 1998, SS/L has
     expended $65.0 million on the satellite, of which $49.0 million has been
     used to acquire common parts that could be applied to other satellite
     programs if this program is canceled. In addition, SS/L has expended $52.5
     million in connection with the launcher. If the House bill or similar
     legislation is enacted, or if SS/L's export license is revoked
     administratively, the satellite's buyers may be entitled to terminate this
     contract for cause and require SS/L to refund approximately $119 million as
     of June 30, 1998. In such an event, SS/L would attempt to resell the
     satellite and launcher to other parties and/or use some or all of the parts
     on other programs. Such resales or reuse would likely result in a loss to
     SS/L, which could be substantial, and the amount of which would be affected
     by a number of factors beyond the control of the Company, including the
     date on which the program is terminated and how long any embargo on Chinese
     launchers would last, as well as market conditions for satellites and
     launchers. Loss of Long March availability would disable all U.S. satellite
     manufacturers, including SS/L, from competing for satellite contract awards
     from customers who, for political or economic reasons, desire Long March
     launches and would benefit foreign satellite manufacturers at the expense
     of the Company and other domestic manufacturers.
 
                                       10
<PAGE>   12
                       LORAL SPACE & COMMUNICATIONS LTD.
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
          Several Congressional committees have held hearings or announced plans
     to hold hearings on U.S. satellite export policy toward China, alleged
     influence of campaign contributions (including contributions made by
     Loral's Chairman and CEO) on the Clinton Administration's export policy
     toward China and related matters. The Company cannot predict what, if any,
     legislative initiatives will result from these hearings, although they
     could result in passage of the House bill described above or other
     legislation that could adversely affect the Company's business.
 
10)  SUBSEQUENT EVENT
 
    PURCHASE OF GLOBALSTAR PARTNERSHIP INTERESTS
 
          On July 6, 1998, Loral, the managing general partner of Globalstar,
     purchased 4.2 million Globalstar ordinary partnership interests
     (corresponding to 16.8 million shares of GTL common stock) from certain
     founding service provider partners of Globalstar for $420 million in cash
     (the "Globalstar Purchase"). The founding service provider partners
     participating in the transaction have deposited one half of their proceeds
     ($210 million) into an escrow account to be used for the purchase of
     Globalstar gateways and user terminals. Loral used $175 million of the
     proceeds from its equity offering, see Note 7, to finance the Globalstar
     Purchase and the remaining balance was provided through the concurrent sale
     by Loral of 8.4 million shares of GTL common stock owned by Loral to
     persons or entities advised by or associated with Soros Fund Management
     L.L.C. ("Soros") for $245 million in cash.
 
          After giving effect to these transactions, Loral's fully diluted
     ownership in Globalstar increased from approximately 38% to 42% and Soros
     owns GTL shares equating to approximately 4% of Globalstar. Soros acquired
     from Loral, in lieu of Globalstar limited partnership interests, shares of
     GTL common stock, which are restricted for U.S. securities law purposes,
     and for which GTL has agreed to file a shelf registration statement and
     have such registration statement declared effective within one year. Soros
     paid Loral a premium of $4.1667 per share of GTL common stock over the
     price paid by Loral in the Globalstar Purchase, which represents a pre-tax
     gain of approximately $35 million.
 
                                       11
<PAGE>   13
 
                       LORAL SPACE & COMMUNICATIONS LTD.
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
     This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
from time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but are not limited to, various filings made by
the Company with the Securities and Exchange Commission, press releases or oral
statements made by or with the approval of an authorized executive officer of
the Company. Actual results could differ materially from those projected or
suggested in any forward-looking statements as a result of a wide variety of
factors and conditions. See the section of Loral's registration statement on
Form S-3 (File No. 333-51133), entitled "Risk Factors." In addition, with
respect to Loral's interest in Globalstar and Globalstar Telecommunications
Limited ("GTL"), see the section of GTL's and Globalstar's registration
statement on Form S-4 (File No. 333-57749) entitled "Risk Factors". With regard
to forward-looking statements concerning Orion see the section of Orion's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, entitled
"Forward Looking Statements".
 
     Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Results of
Operations and Financial Condition of the Company, Globalstar, SatMex and Orion,
are forward-looking statements that involve risks and uncertainties, many of
which may be beyond the companies' control. The actual results that the
companies achieve may differ materially from any forward-looking projections due
to such risks and uncertainties.
 
     Loral Space & Communications Ltd. and subsidiaries (the "Company" or
"Loral") is one of the world's leading satellite companies, with substantial
activities in satellite manufacturing and satellite-based communications
services. Space Systems/Loral, Inc. ("SS/L") is a leading designer and
manufacturer of space systems. Loral Skynet ("Skynet"), acquired March 14, 1997,
is a leading provider of satellite communications services in the United States.
Skynet owns and operates the Telstar satellite network and is expanding its
business internationally. Loral Orion, Inc. ("Orion"), acquired on March 20,
1998, provides satellite-based communications services, focused primarily on
private communications network services, Internet services and video
distribution and other satellite transmission services. On November 17, 1997, a
joint venture including Loral and another partner acquired 75% of Satellites
Mexicanos, S.A. de C.V. ("SatMex"), a satellite services provider to Mexico and
South America. Loral also manages and is the largest equity owner of Globalstar,
L.P. ("Globalstar"), a global, mobile satellite telephony system scheduled to
begin commercial service in the second quarter of 1999. Loral is pursuing
additional satellite-based communications service opportunities including
CyberStar, a proposed worldwide high-speed broadband data services system which
will initiate service using leased Ku-band transponder capacity on Skynet's
Telstar 5 satellite.
 
RESULTS OF OPERATIONS
 
     In 1997 and 1998, Loral accelerated its transformation from a company with
extensive equity investments to a major satellite manufacturer and provider of
satellite services by making a number of acquisitions that significantly
affected its results of operations.
 
     In February 1997, Loral agreed to acquire the remaining 49% of the common
stock of SS/L held by four international aerospace and communications companies
(the "Alliance Partners") for $374 million paid in cash and Loral securities. On
March 14, 1997, Loral acquired Skynet for $462.1 million in cash.
 
     The acquisition of Skynet and the remaining equity interest in SS/L have
been accounted for as purchases. Loral's consolidated financial statements for
the three and six months ended June 30, 1997, reflect the results of operations
of SS/L from January 1, 1997, the elimination of the minority interest of the
SS/L equity not owned by Loral during the period and the results of operations
of Skynet from March 14, 1997. Prior to January 1, 1997, SS/L was accounted for
using the equity method of accounting.
 
     In connection with the privatization by the Mexican Government of its fixed
satellite services business, Loral and Telefonica Autrey, S.A. de C.V.
("Telefonica Autrey") formed a joint venture, Firmamento
 
                                       12
<PAGE>   14
 
Mexicano, S. de R.L. de C.V. ("Holdings"). On November 17, 1997, Holdings
acquired 75% of the outstanding capital stock of SatMex for $646.8 million. The
purchase price was financed by a Loral equity contribution of $94.6 million, a
Telefonica Autrey equity contribution of $50.9 million and debt issued by a
subsidiary of Holdings. As part of the acquisition, Servicios Corporativos
Sateliates, S.A. de C.V., a wholly owned subsidiary of Holdings issued a $125.1
million seven year government obligation ("Government Obligation") bearing
interest at 6.03% to the Mexican Government in consideration for the assumption
by SatMex of the debt incurred by Holdings in connection with the acquisition.
The debt of SatMex and Holdings is non-recourse to Loral and Telefonica Autrey.
However, Loral and Telefonica Autrey have agreed to maintain assets in a
collateral trust in an amount equal to the value of the Government Obligation
through December 31, 2000 and, thereafter, in an amount equal to 1.2 times the
value of the Government Obligation until maturity. Loral has a 65% economic
interest in Holdings and a 49% indirect economic interest in SatMex. Loral
accounts for SatMex using the equity method from November 17, 1997.
 
     On March 20, 1998, Loral acquired all of the outstanding stock of Orion in
exchange for Loral common stock. Loral issued 17.9 million shares of its common
stock and assumed existing Orion options and warrants to purchase 1.9 million
shares of Loral common stock representing an aggregate purchase price of $469
million. Loral's consolidated statement of operations reflects the results of
Orion commencing April 1, 1998.
 
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
THE THREE MONTHS ENDED JUNE 30, 1997.
 
     Revenues for the quarter ended June 30, 1998 totaled $379.8 million, before
elimination of intercompany sales of $131.6 million, compared to revenues of
$380.3 million and elimination of intercompany sales of $89.1 million for the
quarter ended June 30, 1997. SS/L's 1998 revenues were $330.1 million before
intercompany eliminations of $130.5 million compared to revenues of $358.5
million and intercompany eliminations of $89.1 million in 1997. The decrease in
SS/L sales is primarily due to the stoppage of work on three Asian satellites in
the fourth quarter of 1997. The increase in the intercompany eliminations
reflects the classification of the construction of the Orion 2 satellite by SS/L
as intercompany sales subsequent to the acquisition of Orion offset by reduced
intercompany sales to Skynet. Skynet's revenues for the quarter ended June 30,
1998 were $29.5 million compared to $21.8 million for the quarter ended June 30,
1997, reflecting the effect of Skynet's Telstar 5 satellite which was placed in
service in July 1997. Orion's revenues for the quarter ended June 30, 1998 were
$20.2 million.
 
     Earnings before interest, taxes, depreciation and amortization
("EBITDA")(1) for the three months ended June 30, 1998 and 1997 were as follows
(in millions):
 
<TABLE>
<CAPTION>
                                                               1998          1997
                                                              ------        ------
<S>                                                           <C>           <C>
SS/L........................................................  $ 18.1        $ 17.4
Skynet -- from March 14, 1997...............................    17.5          15.9
Orion -- from April 1, 1998.................................     0.8
Corporate expenses and intercompany eliminations............   (16.2)        (12.5)
                                                              ------        ------
EBITDA before CyberStar and Globalstar development costs....    20.2          20.8
SatMex(2)...................................................    10.1
                                                              ------        ------
Adjusted EBITDA before CyberStar and Globalstar development
  costs(3)..................................................  $ 30.3        $ 20.8
                                                              ======        ======
</TABLE>
 
---------------
(1) EBITDA is provided because it is a measure commonly used in the
    communications industry to analyze companies on the basis of operating
    performance, leverage and liquidity and is presented to enhance the
    understanding of Loral's operating results. However, EBITDA should not be
    construed as an alternative to net income as an indicator of a company's
    operating performance, or cash flow from operations as a measure of a
    company's liquidity. EBITDA as presented may be calculated differently and,
    therefore, may not be comparable to similarly titled measures reported by
    other companies.
(2) Represents Loral's proportionate share of SatMex's EBITDA.
(3) Development costs for the three months ended June 30, 1998 and 1997, for
    CyberStar were $8.1 million and $8.9 million, respectively and Loral's
    proportionate share of Globalstar's development costs were $11.4 million and
    $8.2 million, respectively.
 
     EBITDA before development costs was $20.2 million for 1998 compared to
$20.8 million for 1997. CyberStar development costs were $8.1 million in 1998
compared to $8.9 million in 1997. Depreciation and amortization was $38.4
million and $14.5 million for 1998 and 1997, respectively. The increase in
depreciation
 
                                       13
<PAGE>   15
 
and amortization in 1998 primarily results from the inclusion of Orion's
depreciation of fixed assets and amortization of cost in excess of net assets
acquired, of $16.1 million, for a full quarter and the inclusion of depreciation
of Skynet's Telstar 5 satellite which was placed in service on July 1, 1997. As
a result of the above, the operating loss was $26.3 million for 1998 compared to
$2.5 million for 1997.
 
     Interest income for the quarter ended June 30, 1998, of $16.5 million
represents $14.8 million of interest earned on available cash during the period
and interest on GTL's Convertible Preferred Equivalent Obligations ("GTL
Convertible Preferreds") held by Loral, and $1.7 million of interest earned on
orbital incentive payments. Interest income for the quarter ended June 30, 1997,
of $11.1 million represents $9.8 million of interest earned on the investment of
available cash during the period and interest on the GTL Convertible Preferreds
held by Loral and $1.3 million of interest earned on orbital incentive payments.
 
     Interest expense of $21.6 million, net of capitalized interest of $10.7
million, for the quarter ended June 30, 1998 reflects interest on borrowings
under Loral's credit agreement and interest on Orion's outstanding debt.
Interest expense of $5.4 million, net of capitalized interest of $6.6 million,
for the quarter ended June 30, 1997, reflects the assumption of SS/L's debt and
interest on Loral's outstanding Convertible Preferred Equivalent Obligations
("CPEOs"). On June 5, 1997, the CPEOs were exchanged for Loral 6% Series C
Convertible Redeemable Preferred Stock ("Series C Preferred Stock").
 
     The Company's effective income tax rate was a 31.0% benefit for 1998 and a
116.5% provision for 1997. The change is caused by the impact of the Company's
foreign source net income which is not subject to Federal taxation on the
Company's pretax income (loss), state and local income taxes and the
non-deductible amortization of cost in excess of net assets acquired.
 
     The minority interest benefit in 1998 reflects the reduction of CyberStar's
loss attributed to CyberStar's other investor. The minority interest expense in
1997 reflects the reduction of SS/L's income attributed to the Alliance
Partners.
 
     The equity in net loss of affiliates was $41.0 million in 1998 compared to
$8.1 million for 1997. Loral's share of Globalstar's losses was $16.9 million in
1998 compared to $8.1 million in 1997 reflecting Globalstar's increased
development costs as well as an increased ownership percentage by Loral. Also
included in the equity in net loss of affiliates for 1998 is Loral's share of
SatMex's loss of $4.9 million, Loral's share of Skybridge's loss of $15.9
million and Loral's portion of losses from other affiliates of $3.3 million.
 
     Preferred dividends of $11.6 million in the three months ended June 30,
1998 relate to the Series C Preferred Stock. Preferred dividends of $2.9 million
in the three months ended June 30, 1997, relate to the Series C Preferred Stock
which was issued in June 1997.
 
     As a result of the above, net loss applicable to common stockholders for
1998 was $70.6 million or $0.27 per diluted share, compared to $13.2 million or
$0.06 per diluted share, for 1997. Diluted weighted average shares were 265.8
million for 1998 and 238.2 million for 1997.
 
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1997.
 
     Revenues for the six months ended June 30, 1998 totaled $716.8 million,
before elimination of intercompany sales of $173.3 million, compared to revenues
of $722.2 million and elimination of intercompany sales of $90.7 million for the
six months ended June 30, 1997. SS/L's 1998 revenues were $638.5 million before
intercompany eliminations of $171.3 million compared to revenues of $696.8
million and intercompany eliminations of $90.7 million in 1997. The decrease in
SS/L sales is primarily due to the stoppage of work on three Asian satellites in
the fourth quarter of 1997. The increase in the intercompany eliminations
reflects the classification of the construction of the Orion 2 satellite by SS/L
as intercompany sales subsequent to the acquisition of Orion, offset by a
reduction in intercompany sales to Skynet. Skynet's revenues for the six months
ended June 30, 1998 were $58.0 million compared to $25.4 million for the period
March 14, 1997 through June 30, 1997, reflecting the inclusion of a full six
months of Skynet's revenues in 1998 and the effect of the Telstar 5 satellite
which was placed in service in July 1997. Orion's revenues from the date of
acquisition, April 1, 1998, were $20.2 million.
 
                                       14
<PAGE>   16
 
     Earnings before interest, taxes, depreciation and amortization
("EBITDA")(1) for the six months ended June 30, 1998 and 1997 were as follows
(in millions):
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              ------    ------
<S>                                                           <C>       <C>
SS/L........................................................  $ 37.3    $ 39.9
Skynet -- from March 14, 1997...............................    33.0      17.6
Orion -- from April 1, 1998.................................     0.8
Corporate expenses and intercompany eliminations............   (25.1)    (15.1)
                                                              ------    ------
EBITDA before CyberStar and Globalstar development costs....    46.0      42.4
SatMex(2)...................................................    19.6
                                                              ------    ------
Adjusted EBITDA before CyberStar and Globalstar development
  costs(3)..................................................  $ 65.6    $ 42.4
                                                              ======    ======
</TABLE>
 
---------------
(1) EBITDA is provided because it is a measure commonly used in the
    communications industry to analyze companies on the basis of operating
    performance, leverage and liquidity and is presented to enhance the
    understanding of Loral's operating results. However, EBITDA should not be
    construed as an alternative to net income as an indicator of a company's
    operating performance, or cash flow from operations as a measure of a
    company's liquidity. EBITDA as presented may be calculated differently and,
    therefore, may not be comparable to similarly titled measures reported by
    other companies.
(2) Represents Loral's proportionate share of SatMex's EBITDA.
(3) Development costs for the six months ended June 30, 1998 and 1997, for
    CyberStar were $15.4 million and $11.5 million, respectively and Loral's
    proportionate share of Globalstar's development costs were $21.4 million and
    $14.5 million, respectively.
 
     EBITDA before development costs was $46.0 million for 1998 compared to
$42.4 million for 1997. CyberStar development costs were $15.4 million in 1998
compared to $11.5 million in 1997 reflecting increased spending levels in 1998
for product development, marketing expenditures and increased headcount.
Depreciation and amortization was $55.9 million and $24.1 million for 1998 and
1997, respectively. The increase in depreciation and amortization in 1998
primarily results from the inclusion of Orion's depreciation of fixed assets and
amortization of cost in excess of net assets acquired of $16.1 million for the
six month period and from the inclusion of depreciation and amortization related
to Skynet for a full six months including the depreciation of Skynet's Telstar 5
satellite which was placed in service on July 1, 1997. As a result of the above,
operating loss was $25.3 million for 1998 compared to operating income of $6.8
million for 1997.
 
     Interest income for the six months ended June 30, 1998, of $25.2 million
represents $21.4 million of interest earned on available cash during the period
and interest on the GTL Convertible Preferreds held by Loral, and $3.7 million
of interest earned on orbital incentive payments. Interest income for the six
months ended June 30, 1997, of $31.2 million represents $28.3 million of
interest earned on the investment of available cash during the period and
interest on the GTL Convertible Preferreds held by Loral and $2.9 million of
interest earned on orbital incentive payments.
 
     Interest expense of $23.3 million, net of capitalized interest of $20.2
million, for the six months ended June 30, 1998 reflects interest on borrowings
under Loral's credit agreement and interest on Orion's outstanding debt.
Interest expense of $15.4 million, net of capitalized interest of $9.1 million,
for the six months ended June 30, 1997, reflects the assumption of SS/L's debt
and interest on Loral's outstanding CPEOs. On June 5, 1997, the CPEOs were
exchanged for Series C Preferred Stock.
 
     The Company's effective income tax rate was a 28.5% benefit for 1998 and a
57.4% provision for 1997. The change is caused by the impact of the Company's
foreign source net income which is not subject to Federal taxation on the
Company's pretax income (loss), state and local income taxes and the
non-deductible amortization of cost in excess of net assets acquired.
 
     The minority interest benefit in 1998 reflects the reduction of CyberStar's
loss attributed to CyberStar's other investor. The minority interest expense in
1997 reflects the reduction of SS/L's income attributed to the Alliance
Partners.
 
     The equity in net loss of affiliates was $61.3 million in 1998 compared to
$15.3 million for 1997. Loral's share of Globalstar's losses was $28.0 million
in 1998 compared to $15.3 million in 1997 reflecting Globalstar's increased
development costs as well as an increased ownership percentage by Loral. Also
included in the
 
                                       15
<PAGE>   17
 
equity in net loss of affiliates for 1998 is Loral's share of SatMex's loss of
$11.8 million, Loral's share of Skybridge's loss of $15.9 million and Loral's
portion of losses from other affiliates of $5.6 million.
 
     Preferred distributions of $23.2 million in the six months ended June 30,
1998 relate to the Series C Preferred Stock. Preferred distributions of $2.9
million for the six months ended June 30, 1997, relate to the Series C Preferred
Stock which was issued in June 1997.
 
     As a result of the above, net loss applicable to common stockholders for
1998 was $97.6 million or $0.38 per diluted share, compared to $13.6 million or
$0.06 per diluted share, for 1997. Diluted weighted average shares were 257.6
million for 1998 and 237.6 million for 1997.
 
SUMMARY RESULTS OF OPERATIONS OF AFFILIATES
 
GLOBALSTAR
 
     Globalstar is a development stage partnership and has not commenced
commercial service operations. The net loss applicable to ordinary partnership
interests for the six months ended June 30, 1998 was $65.4 million as compared
to $42.9 million for the six months ended June 30, 1997. The net loss applicable
to ordinary partnership interests increased primarily as a result of increased
activity in the development of Globalstar user terminals, increased in-house
engineering and marketing efforts and the net effect of the RPPI conversion
during the quarter ended June 30, 1998. Globalstar is expending significant
funds for the construction, testing and deployment of the Globalstar System and
expects such losses to continue through commencement of revenue generating
service operations.
 
SATMEX
 
     For the six month ended June 30, 1998, SatMex had revenues, EBITDA,
operating income and a net loss of $51.2 million, $39.9 million, $15.1 million
and $17.4 million, respectively. The net loss is primarily attributed to
interest expense of $34.6 million on debt issued to finance the acquisition,
which includes a charge for $10.5 million of fees associated with debt
refinancing. SatMex expects such losses to continue through 1999 until funds
from operations are available to reduce outstanding debt.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Loral intends to capitalize on its innovative capabilities, market position
and advanced technologies to offer value-added satellite-based services as part
of the evolving worldwide communications networks and, where appropriate, to
form strategic alliances with major telecommunications service providers and
equipment manufacturers to enhance and expand its satellite-based communications
service opportunities. In order to pursue such opportunities, Loral may seek
funds from strategic partners and other investors, through incurrence of debt or
the issuance of additional equity.
 
     On June 29, 1998, Loral sold 23 million shares of its common stock for
$27.00 per share. The net proceeds were $602.6 million, of which Loral used $175
million, net, to fund the Globalstar Purchase (see below) and the remainder of
which Loral intends to use for general corporate purposes, including investing
in existing core businesses, to pursue emerging satellite service opportunities
worldwide and for possible acquisitions.
 
     On July 6, 1998, Loral, the managing general partner of Globalstar,
purchased 4.2 million Globalstar ordinary partnership interests (corresponding
to 16.8 million shares of GTL common stock) from certain founding service
provider partners of Globalstar for $420 million in cash (the "Globalstar
Purchase"). The founding service provider partners participating in the
transaction have deposited one half of their proceeds ($210 million) into an
escrow account to be used for the purchase of Globalstar gateways and user
terminals. Loral used $175 million of the net proceeds from its equity offering
to finance a portion of the Globalstar Purchase and the remaining balance was
provided through the concurrent sale by Loral of 8.4 million shares of GTL
common stock owned by Loral to persons or entities advised by or associated with
Soros Fund Management L.L.C. ("Soros") for $245 million in cash. After giving
effect to these transactions, Loral's fully diluted ownership in Globalstar
increased from approximately 38% to 42% and Soros owns GTL shares equating to
approximately 4% of Globalstar. Soros acquired from Loral, in lieu of Globalstar
limited partnership interests, shares of GTL common stock, which are restricted
for U.S. securities law purposes, and
 
                                       16
<PAGE>   18
 
for which GTL has agreed to file a shelf registration statement and have such
registration statement declared effective within one year. Soros paid Loral a
premium of $4.1667 per share of GTL common stock over the price paid by Loral in
the Globalstar Purchase, which represents a pre-tax gain of approximately $35
million.
 
     At June 30, 1998, Loral had $876.5 million of cash and cash equivalents.
Loral intends to utilize its existing capital base and access to the capital
markets to construct and operate additional satellites, make additional
investments in Globalstar and Globalstar service provider opportunities and
invest in current and additional satellite communications service opportunities.
 
     At June 30, 1998, Orion had $178.6 million of cash and restricted cash, to
be used for the satellites under construction and interest payments, and debt of
$904.2 million. Orion's outstanding debt is non-recourse to Loral.
 
     On November 14, 1997, the Company's wholly owned subsidiary Loral SpaceCom
Corporation, entered into a $850 million credit facility with a group of banks.
The facility consists of a $500 million revolving credit facility, a $275
million term loan and a $75 million letter of credit facility. The facility
replaced SS/L's existing credit facility. The facility is secured by the stock
of Loral SpaceCom Corporation and SS/L and contains various covenants including
an interest coverage ratio, debt to capitalization ratios and restrictions on
cash transfers to its parent. At June 30, 1998, there was $619.5 million of
borrowings outstanding under this agreement and other credit facilities.
 
     On April 17, 1998, Orion made an offer to purchase its senior notes and
senior discount notes. Substantially all of Orion's senior notes and senior
discount notes remained outstanding following the expiration of the offer. The
offer by Orion to repurchase such notes was made pursuant to the applicable
indentures as a result of the change in control of Orion in connection with its
acquisition by Loral.
 
     Skynet:  Skynet currently has two high-powered satellites operating in
orbit. Loral intends to expand Skynet's business to become a worldwide satellite
service provider through the construction of additional satellites and has four
satellites under construction by SS/L.
 
     Orion:  Orion currently has one satellite in orbit and two satellites under
construction (Orion 2 and Orion 3). The cost of Orion 3 is fully funded. Loral
intends to fund approximately $60 million of the construction cost of Orion 2.
All other costs related to Orion 2 are fully funded.
 
     Globalstar:  On February 14, 1998, Globalstar launched its first four
satellites and on April 24, 1998 four additional satellites were launched.
Globalstar expects to begin commercial service in the second quarter of 1999
following the launch of 36 additional satellites during 1998. The remaining 12
satellites, including eight in-orbit spares, will be launched in the first half
of 1999.
 
     As of July 31, 1998, Globalstar's budgeted expenditures for the design,
construction and deployment of the Globalstar System to commence commercial
service, including working capital, cash interest on borrowings and operating
expenses is approximately $2.8 billion. In addition to expenditures for
operating costs, working capital and debt service, Globalstar anticipates
additional expenditures on system software for the improvement of system
functionality and the addition of new features beyond those planned for the
commencement of commercial service. As of July 31, 1998, Globalstar had raised
or receive commitments for approximately $2.9 billion.
 
     In addition, Globalstar has agreed to purchase from SS/L eight additional
spare satellites at a cost estimated at $175 million. Further, in order to
accelerate the deployment of gateways around the world Globalstar has agreed to
finance approximately $80 million of the cost of up to 32 of the initial 38
gateways. In December 1997, Globalstar ordered 40,000 fixed access terminals for
$84 million. Globalstar has also agreed to finance approximately $67 million of
the cost of portable handsets. Globalstar expects to recoup the amounts financed
following the acceptance by the service providers of the gateways, fixed access
terminals and portable handsets.
 
     SS/L is the prime contractor for the design and construction of
Globalstar's satellites. In connection therewith, SS/L and its subcontractors
have committed $353 million of vendor financing to Globalstar, of which $121
million of such vendor financing is effectively borne by the subcontractors.
 
                                       17
<PAGE>   19
 
     Commitments and Contingencies:  In connection with the Merger between Loral
Corporation and Lockheed Martin Corporation ("Lockheed Martin"), Lockheed Martin
assumed approximately $206 million of the guarantee under the Globalstar credit
agreement. The balance of $44 million of the guarantee was assumed by various
Globalstar partners, including $11.7 million by SS/L. Loral has agreed to
indemnify Lockheed Martin for its liability, if any, in excess of $150 million
under its guarantee of the Globalstar credit agreement. Globalstar is currently
financed without recourse to Loral other than the indemnification described
above.
 
     In 1997, two in-orbit satellites built by SS/L experienced solar array
circuit failures. One of the customers has asserted that, in light of the
failures and uncertainty as to further failures, it has not accepted the
satellite. Loral believes that the customer was contractually required to accept
the satellite at completion of in-orbit testing and that risk of loss has passed
to the customer. In addition, another customer has requested that SS/L structure
an arrangement whereby a satellite under construction would be sold to another
customer. Management believes that these matters will not have a material
adverse effect on the financial condition or results of operations of Loral.
 
     The Company is aware of a grand jury investigation being conducted by the
office of the U.S. Attorney for the District of Columbia with respect to
possible violations of export control laws that may have occurred in connection
with the participation of SS/L employees on a committee formed in the wake of
the 1996 crash of a Long March rocket in China and whose purpose was to consider
whether studies of the crash made by the Chinese had correctly identified the
cause of the failure. While the grand jury investigation appears to be in its
preliminary stages, and SS/L is not in a position to predict its direction or
outcome, if SS/L were to be indicted and convicted of a criminal violation of
the Arms Export Control Act, it would be subject to a fine of $1 million per
violation and could be debarred from certain export privileges and, possibly,
from participation in government contracts. Since many of SS/L's satellites are
built for foreign customers and/or launched on foreign rockets, such a debarment
would have a material adverse effect on SS/L's business, which is important to
the Company. Indictment for such violations would subject SS/L to discretionary
debarment from further export licenses. Whether or not SS/L is indicted or
convicted, SS/L will remain subject to the State Department's general statutory
authority to prohibit exports of satellites and related services if it finds a
violation of the Arms Export Control Act that puts the party's reliability in
question, and it can suspend export privileges whenever it determines that
grounds for debarment exist and that such suspension "is reasonably necessary to
protect world peace or the security or foreign policy of the United States."
 
     As far as SS/L can determine, no sensitive information or technology was
conveyed to the Chinese, and no secret or classified information was discussed
with or reported to them. SS/L believes that its employees acted openly and in
good faith and that none engaged in intentional misconduct. Accordingly, the
Company does not believe that SS/L has committed a criminal violation of the
export control laws. The Company does not expect the grand jury investigation or
its outcome to result in a material adverse effect upon its business. However,
especially in view of the early stage of the proceedings, there can be no
assurance as to those conclusions.
 
     On May 21, 1998, the House of Representatives passed a bill which, if
passed by the Senate and enacted into law, would prohibit exports of satellites
of U.S. origin to the People's Republic of China, whether or not an export
license had theretofore been obtained. The United States Senate has not acted on
this bill. If enacted into law, these provisions would prohibit further launches
of U.S.-made satellites, including those manufactured by SS/L, on the Long March
rocket. SS/L is under contract to build one satellite which is to be launched on
a Long March rocket, for which SS/L currently holds an export license. As of
June 30, 1998, SS/L has expended $65.0 million on the satellite, of which $49.0
million has been used to acquire common parts that could be applied to other
satellite programs if this program is canceled. In addition, SS/L has expended
$52.5 million in connection with the launcher. If the House bill or similar
legislation is enacted, or if SS/L's export license is revoked administratively,
the satellite's buyers may be entitled to terminate this contract for cause and
require SS/L to refund approximately $119 million as of June 30, 1998. In such
an event, SS/L would attempt to resell the satellite and launcher to other
parties and/or use some or all of the parts on other programs. Such resales or
reuse would likely result in a loss to SS/L, which could be substantial, and the
amount of which would be affected by a number of factors beyond the control of
the
 
                                       18
<PAGE>   20
 
Company, including the date on which the program is terminated and how long any
embargo on Chinese launchers would last, as well as market conditions for
satellites and launchers. Loss of Long March availability would disable all U.S.
satellite manufacturers, including SS/L, from competing for satellite contract
awards from customers who, for political or economic reasons, desire Long March
launches and would benefit foreign satellite manufacturers at the expense of the
Company and other domestic manufacturers.
 
     Several Congressional committees have held hearings or announced plans to
hold hearings on U.S. satellite export policy toward China, alleged influence of
campaign contributions (including contributions made by Loral's Chairman and
CEO) on the Clinton Administration's export policy toward China and related
matters. The Company cannot predict what, if any, legislative initiatives will
result from these hearings, although they could result in passage of the House
bill described above or other legislation that could adversely affect the
Company's business.
 
     Cash Used and Provided.  Cash used in operating activities for the six
months ended June 30, 1998 was $67.4 million, primarily due to changes in
satellite related assets and liabilities of $87.5 million due to the progress on
commercial satellite contracts and increases in component inventory, including
an increase in contracts in process and inventories of $91.9 million, a decrease
in customer advances of $36.6 million offset by a decrease in launch vehicle
deposits of $40.5 million. This was offset by funds generated by earnings before
depreciation and amortization, taxes, minority interest and equity in net loss
of affiliates of $32.5 million. Cash used in operating activities for 1997, was
$115.7 million, primarily due to an increase in satellite contracts in process
and component inventories of $61.8 million and a decrease in customer advances
of $74.1 million, offset by funds generated from earnings before depreciation
and amortization, taxes and equity in net loss of affiliates of $46.7 million.
 
     Cash used in investing activities for 1998 was $73.4 million primarily as a
result of $304.3 million of capital expenditures, $22.2 million of investments
in affiliates offset by a reduction in restricted cash of $199.3 million and
$53.8 million of cash acquired in connection with the Orion acquisition. Cash
used in investing activities for 1997 was $823.5 million primarily due to the
purchase of Skynet and the SS/L equity interests, the purchase of equity
interests in Globalstar and capital expenditures of $129.5 million primarily for
the construction of Skynet's satellites by SS/L and for facility expansion and
renovation at SS/L.
 
     Net cash provided by financing activities for 1998 was $790.7 million,
primarily from the net proceeds of the equity offering of $602.6 million and
borrowing under existing credit facilities. Cash provided by financing
activities for 1997 was $77.3 million, primarily as a result of borrowings under
credit facilities.
 
OTHER MATTERS
 
  Year 2000 Issue
 
     The Company is evaluating the potential effect on its information
processing systems to determine what actions will be necessary or appropriate in
connection with the "Year 2000 Issue." The Year 2000 Issue is the result of
computer programs which were written using two digits rather than four to
signify a year (i.e., the year 1997 is denoted "97" and not "1997"). Computer
programs written using only two digits may recognize the year 2000 as the year
1900. This could result in a system failure or miscalculations causing
disruption of operations. It is not known at this time what modifications, if
any, will be required. All costs associated with any modification will be
expensed as incurred. In addition, the Company has requested, and will continue
to seek information from third-party entities on which it relies, certifying
that their computer systems will not negatively affect Loral's operations. No
assurance can be given that there will not be some unforeseen issue, in
particular, in connection with third parties' systems, that may materially
affect Loral's operations.
 
  Accounting Pronouncements
 
     Effective January 1, 1998, Loral adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
established new rules for the reporting and display of comprehensive income and
its components. SFAS 130 requires unrealized gains or losses on the Company's
foreign currency translation adjustments to be included in other comprehensive
income. During the six months ended June 30, 1998 and 1997, comprehensive loss
was $97.3 million and $13.6 million, respectively.
 
                                       19
<PAGE>   21
 
     In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"), and in February 1998, issued Statement No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS
131 establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas and major customers. SFAS 132 expands and standardizes the
disclosure requirements for pensions and other postretirement benefits. The
Company is required to adopt SFAS 131 and SFAS 132 in 1998, and the Company's
consolidated financial statements will reflect the appropriate disclosures.
 
                                       20
<PAGE>   22
 
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
 
     (a)  Exhibits
 
     The following exhibits are filed as part of this report:
 
<TABLE>
<S>         <C>   <C>
Exhibit 12   --   Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27   --   Financial Data Schedule.
</TABLE>
 
     (b)  Reports on Form 8-K
 
<TABLE>
<CAPTION>
 DATE OF REPORT                            DESCRIPTION
 --------------                            -----------
<S>                <C>
June 9, 1998       Item 5 -- Other Events
June 18, 1998      Amendment No. 2 to Form 8-K dated March 20, 1998 to amend
                   Item 7, Pro Forma Financial Information
June 29, 1998      Item 5 -- Other Events, Loral issued 23 million shares of
                   its Common Stock on June 29, 1998.
</TABLE>
 
                                       21