##### 









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,
2003

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
[ü] No
[ ]

As of July 31, 2003, there were 44,107,782
shares of Loral Space & Communications Ltd. common stock
outstanding.



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##### 



PART 1.

FINANCIAL INFORMATION

LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION

CONDENSED CONSOLIDATED BALANCE
SHEETS

(In thousands, except par values)


(Unaudited)


|                                                        |                                                                                                                |                                             |           |              |           |   |           |            |           |  
|------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | --------- | ------------ | --------- | - | --------- | ---------- | --------- | -
|                                                        |                                                                                                                | June 30,                                    |           | December 31,
|                                                        |                                                                                                                | 2003                                        |           | 2002        
|                                                        |                                                                                                                |                                             |           |             
|ASSETS                                                 
|Current assets:                                         |                                                                                                                |                                             |           |              |           |   |           |           
|                                                        | Cash and cash equivalents                                                                                      |                                             | $         | 127,767      |           |   | $         | 65,936     |          
|                                                        | Accounts receivable, net                                                                                       |                                             |           | 31,603       |           |   |           | 28,893     |          
|                                                        | Contracts-in-process                                                                                           |                                             |           | 34,312       |           |   |           | 113,154    |          
|                                                        | Vendor financing receivables                                                                                   |                                             |           |            |           |   |           | 38,016     |          
|                                                        | Inventories                                                                                                    |                                             |           | 73,459       |           |   |           | 95,733     |          
|                                                        | Other current assets                                                                                           |                                             |           | 37,554       |           |   |           | 48,695     |          
|                                                        |                                                                                                                |                                             |           |              |           |   |           |           
|                                                        |                                                                                                                | Total current assets                        |           |              | 304,695   |   |           |            | 390,427   |  
|Property, plant and equipment, net                      |                                                                                                                |                                             | 1,866,453 |              |           |   | 1,897,343 |           
|Long-term receivables                                   |                                                                                                                |                                             | 78,086    |              |           |   | 163,191   |           
|Investments in and advances to affiliates               |                                                                                                                |                                             | 87,807    |              |           |   | 95,443    |           
|Deposits                                                |                                                                                                                |                                             | 34,750    |              |           |   | 58,250    |           
|Other assets                                            |                                                                                                                |                                             | 76,475    |              |           |   | 88,148    |           
|                                                        |                                                                                                                |                                             |           |              |           |   |           |           
|                                                        |                                                                                                                | Total assets                                |           | $            | 2,448,266 |   |           | $          | 2,692,802 |  
|                                                        |                                                                                                                |                                             |           |              |           |   |           |           
|LIABILITIES AND SHAREHOLDERS
    DEFICIT              
|Current liabilities:                                    |                                                                                                                |                                             |           |              |           |   |           |           
|                                                        | Current portion of long-term debt                                                                              |                                             | $         | 2,244,002    |           |   | $         | 131,898    |          
|                                                        | Accounts payable                                                                                               |                                             |           | 44,735       |           |   |           | 58,323     |          
|                                                        | Accrued employment costs                                                                                       |                                             |           | 29,295       |           |   |           | 34,531     |          
|                                                        | Customer advances                                                                                              |                                             |           | 63,293       |           |   |           | 114,080    |          
|                                                        | Accrued interest and preferred dividends                                                                       |                                             |           | 44,746       |           |   |           | 37,370     |          
|                                                        | Income taxes payable                                                                                           |                                             |           | 37,064       |           |   |           | 37,936     |          
|                                                        | Other current liabilities                                                                                      |                                             |           | 52,024       |           |   |           | 47,005     |          
|                                                        |                                                                                                                |                                             |           |              |           |   |           |           
|                                                        |                                                                                                                | Total current liabilities                   |           |              | 2,515,159 |   |           |            | 461,143   |  
|Pension and other postretirement liabilities            |                                                                                                                |                                             | 129,672   |              |           |   | 124,193   |           
|Long-term liabilities                                   |                                                                                                                |                                             | 178,616   |              |           |   | 207,835   |           
|Long-term debt                                          |                                                                                                                |                                             |          |              |           |   | 2,112,627 |           
|Minority interest                                       |                                                                                                                |                                             | 2,559     |              |           |   | 16,150    |           
|Convertible redeemable preferred stock:                 |                                                                                                                |                                             |           |              |           |   |           |           
|                                                        | 6% Series C ($106,009 redemption value),
    $.01 par value                                                    |                                             |           |             |           |   |           | 104,582    |          
|                                                        | 6% Series D ($21,122 redemption value), $.01
    par value                                                     |                                             |           |             |           |   |           | 20,499     |          
|Commitments and contingencies (Notes 2, 10,
    and 12) |                                                                                                                |                                             |           |              |           |   |           |           
|Shareholders deficit:                                  |                                                                                                                |                                             |           |              |           |   |           |           
|                                                        | 6% Series C convertible redeemable preferred
    stock ($187,274 and $81,265 redemption value), $.01 par value |                                             |           | 184,753      |           |   |           | 80,171     |          
|                                                        | 6% Series D convertible redeemable preferred
    stock ($36,707 and $15,585 redemption value), $.01 par value  |                                             |           | 35,624       |           |   |           | 15,125     |          
|                                                        | Common stock, $.10 par value                                                                                   |                                             |           | 4,409        |           |   |           | 4,293      |          
|                                                        | Paid-in capital                                                                                                |                                             |           | 3,392,821    |           |   |           | 3,389,035  |          
|                                                        | Treasury stock                                                                                                 |                                             |           | (3,360       | )         |   |           | (3,360     | )        
|                                                        | Unearned compensation                                                                                          |                                             |           | (208         | )         |   |           | (151       | )        
|                                                        | Retained deficit                                                                                               |                                             |           | (3,932,790   | )         |   |           | (3,782,107 | )        
|                                                        | Accumulated other comprehensive loss                                                                           |                                             |           | (58,989      | )         |   |           | (57,233    | )        
|                                                        |                                                                                                                |                                             |           |              |           |   |           |           
|                                                        |                                                                                                                | Total shareholders deficit                 |           |              | (377,740  | ) |           |            | (354,227  | )
|                                                        |                                                                                                                |                                             |           |              |           |   |           |           
|                                                        |                                                                                                                | Total liabilities and shareholders deficit |           | $            | 2,448,266 |   |           | $          | 2,692,802 |  
|                                                        |                                                                                                                |                                             |           |              |           |   |           |           

See notes to condensed consolidated financial
statements.

2



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##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION



CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


(Unaudited)


|                                                                                                                                                                                                            |                                                                                                                               |                    |          |                           |   |      |         |              |   |   |          |         |   |   |          |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | ------------------ | -------- | ------------------------- | - | ---- | ------- | ------------ | - | - | -------- | ------- | - | - | -------- | ------- | -
|                                                                                                                                                                                                            |                                                                                                                               |                    |          |                           |   |     
|                                                                                                                                                                                                            |                                                                                                                               | Three Months Ended |          |                          
|                                                                                                                                                                                                            |                                                                                                                               | June 30,           |          | Six Months Ended June 30,
|                                                                                                                                                                                                            |                                                                                                                               |                    |          |                          
|                                                                                                                                                                                                            |                                                                                                                               | 2003               |          | 2002                      |   | 2003 |         | 2002        
|                                                                                                                                                                                                            |                                                                                                                               |                    |          |                           |   |      |         |             
|                                                                                                                                                                                                            |                                                                                                                               |                    |          | As Restated               |   |      |         | As Restated 
|                                                                                                                                                                                                            |                                                                                                                               |                    |          | (See Note 4)              |   |      |         | (See Note 4)
|Revenues from satellite sales                                                                                                                                                                               |                                                                                                                               | $                  | 71,207   |                           |   | $    | 214,579 |              |   | $ | 186,244  |         |   | $ | 413,050  |        
|Revenues from satellite services                                                                                                                                                                            |                                                                                                                               |                    | 71,442   |                           |   |      | 101,781 |              |   |   | 154,638  |         |   |   | 211,486  |        
|                                                                                                                                                                                                            |                                                                                                                               |                    |          |                           |   |      |         |              |   |   |          |         |   |   |          |        
|                                                                                                                                                                                                            | Total revenues                                                                                                                |                    |          | 142,649                   |   |      |         | 316,360      |   |   |          | 340,882 |   |   |          | 624,536 |  
|Cost of satellite sales                                                                                                                                                                                     |                                                                                                                               |                    | 153,281  |                           |   |      | 202,890 |              |   |   | 283,417  |         |   |   | 389,318  |        
|Cost of satellite services                                                                                                                                                                                  |                                                                                                                               |                    | 51,844   |                           |   |      | 62,422  |              |   |   | 113,010  |         |   |   | 128,718  |        
|Selling, general and administrative expenses                                                                                                                                                                |                                                                                                                               |                    | 38,400   |                           |   |      | 42,373  |              |   |   | 74,330   |         |   |   | 83,120   |        
|                                                                                                                                                                                                            |                                                                                                                               |                    |          |                           |   |      |         |              |   |   |          |         |   |   |          |        
|Operating (loss) income                                                                                                                                                                                     |                                                                                                                               |                    | (100,876 | )                         |   |      | 8,675   |              |   |   | (129,875 | )       |   |   | 23,380   |        
|Interest and investment income                                                                                                                                                                              |                                                                                                                               |                    | 3,795    |                           |   |      | 4,452   |              |   |   | 10,841   |         |   |   | 9,861    |        
|Interest expense                                                                                                                                                                                            |                                                                                                                               |                    | (18,929  | )                         |   |      | (18,385 | )            |   |   | (35,733  | )       |   |   | (36,955  | )      
|Gain on investment                                                                                                                                                                                          |                                                                                                                               |                    | 16,793   |                           |   |      |        |              |   |   | 17,900   |         |   |   |         |        
|                                                                                                                                                                                                            |                                                                                                                               |                    |          |                           |   |      |         |              |   |   |          |         |   |   |          |        
|Loss before income taxes, equity in net losses of
    affiliates, minority interest, cumulative effect of change in
    accounting principle and extraordinary gain on acquisition of
    minority interest |                                                                                                                               |                    | (99,217  | )                         |   |      | (5,258  | )            |   |   | (136,867 | )       |   |   | (3,714   | )      
|Income tax provision                                                                                                                                                                                        |                                                                                                                               |                    | (1,867   | )                         |   |      | (4,043  | )            |   |   | (3,849   | )       |   |   | (9,571   | )      
|                                                                                                                                                                                                            |                                                                                                                               |                    |          |                           |   |      |         |              |   |   |          |         |   |   |          |        
|Loss before equity in net losses of affiliates,
    minority interest, cumulative effect of change in accounting
    principle and extraordinary gain on acquisition of minority
    interest               |                                                                                                                               |                    | (101,084 | )                         |   |      | (9,301  | )            |   |   | (140,716 | )       |   |   | (13,285  | )      
|Equity in net losses of affiliates, net of taxes                                                                                                                                                            |                                                                                                                               |                    | (8,335   | )                         |   |      | (13,200 | )            |   |   | (16,838  | )       |   |   | (29,150  | )      
|Minority interest, net of taxes                                                                                                                                                                             |                                                                                                                               |                    | 15       |                           |   |      | (68     | )            |   |   | (24      | )       |   |   | 6        |        
|                                                                                                                                                                                                            |                                                                                                                               |                    |          |                           |   |      |         |              |   |   |          |         |   |   |          |        
|Loss before cumulative effect of change in
    accounting principle and extraordinary gain on acquisition of
    minority interest                                                                          |                                                                                                                               |                    | (109,404 | )                         |   |      | (22,569 | )            |   |   | (157,578 | )       |   |   | (42,429  | )      
|Cumulative effect of change in accounting
    principle, net of taxes of $13,809 in 2002                                                                                                                    |                                                                                                                               |                    |         |                           |   |      |        |              |   |   |         |         |   |   | (876,500 | )      
|Extraordinary gain on acquisition of minority
    interest, net of taxes                                                                                                                                    |                                                                                                                               |                    | 13,615   |                           |   |      |        |              |   |   | 13,615   |         |   |   |         |        
|                                                                                                                                                                                                            |                                                                                                                               |                    |          |                           |   |      |         |              |   |   |          |         |   |   |          |        
|Net loss                                                                                                                                                                                                    |                                                                                                                               |                    | (95,789  | )                         |   |      | (22,569 | )            |   |   | (143,963 | )       |   |   | (918,929 | )      
|Preferred dividends                                                                                                                                                                                         |                                                                                                                               |                    | (3,360   | )                         |   |      | (46,810 | )            |   |   | (6,720   | )       |   |   | (58,773  | )      
|                                                                                                                                                                                                            |                                                                                                                               |                    |          |                           |   |      |         |              |   |   |          |         |   |   |          |        
|Net loss applicable to common shareholders                                                                                                                                                                  |                                                                                                                               | $                  | (99,149  | )                         |   | $    | (69,379 | )            |   | $ | (150,683 | )       |   | $ | (977,702 | )      
|                                                                                                                                                                                                            |                                                                                                                               |                    |          |                           |   |      |         |              |   |   |          |         |   |   |          |        
|Basic and diluted loss per share:                                                                                                                                                                           |                                                                                                                               |                    |          |                           |   |      |         |              |   |   |          |         |   |   |          |        
|                                                                                                                                                                                                            | Before cumulative effect of change in accounting
    principle and extraordinary gain on acquisition of minority
    interest |                    | $        | (2.57                     | ) |      | $       | (1.94        | ) |   | $        | (3.77   | ) |   | $        | (2.91   | )
|                                                                                                                                                                                                            | Cumulative effect of change in accounting
    principle                                                                       |                    |          |                          |   |      |         |             |   |   |          |        |   |   |          | (25.22  | )
|                                                                                                                                                                                                            | Extraordinary gain on acquisition of minority
    interest                                                                    |                    |          | 0.31                      |   |      |         |             |   |   |          | 0.31    |   |   |          |        |  
|                                                                                                                                                                                                            |                                                                                                                               |                    |          |                           |   |      |         |              |   |   |          |         |   |   |          |        
|                                                                                                                                                                                                            | Loss per share                                                                                                                |                    | $        | (2.26                     | ) |      | $       | (1.94        | ) |   | $        | (3.46   | ) |   | $        | (28.13  | )
|                                                                                                                                                                                                            |                                                                                                                               |                    |          |                           |   |      |         |              |   |   |          |         |   |   |          |        
|Weighted average shares outstanding:                                                                                                                                                                        |                                                                                                                               |                    |          |                           |   |      |         |              |   |   |          |         |   |   |          |        
|                                                                                                                                                                                                            | Basic and diluted                                                                                                             |                    |          | 43,850                    |   |      |         | 35,817       |   |   |          | 43,531  |   |   |          | 34,761  |  
|                                                                                                                                                                                                            |                                                                                                                               |                    |          |                           |   |      |         |              |   |   |          |         |   |   |          |        

See notes to condensed consolidated financial
statements.

3



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##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION



CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


(Unaudited)


|                                                    |                                                                                                                                            |                                                                          |         |              |         |   |          |          |         |  
|--------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------ | ------- | ------------ | ------- | - | -------- | -------- | ------- | -
|                                                    |                                                                                                                                            |                                                                         
|                                                    |                                                                                                                                            | Six Months Ended                                                        
|                                                    |                                                                                                                                            | June 30,                                                                
|                                                    |                                                                                                                                            |                                                                         
|                                                    |                                                                                                                                            | 2003                                                                     |         | 2002        
|                                                    |                                                                                                                                            |                                                                          |         |             
|                                                    |                                                                                                                                            |                                                                          |         | As Restated 
|                                                    |                                                                                                                                            |                                                                          |         | (See Note 4)
|Operating activities:                               |                                                                                                                                            |                                                                          |         |              |         |   |          |         
|                                                    | Net loss                                                                                                                                   |                                                                          | $       | (143,963     | )       |   | $        | (918,929 | )      
|                                                    | Non-cash items:                                                                                                                            |                                                                          |         |              |         |   |          |          |        
|                                                    |                                                                                                                                            | Equity in net losses of affiliates, net of taxes                         |         |              | 16,838  |   |          |          | 37,348  |  
|                                                    |                                                                                                                                            | Minority interest, net of taxes                                          |         |              | 24      |   |          |          | (6      | )
|                                                    |                                                                                                                                            | Cumulative effect of change in accounting
    principle, net of taxes    |         |              |        |   |          |          | 876,500 |  
|                                                    |                                                                                                                                            | Extraordinary gain on acquisition of minority
    interest, net of taxes |         |              | (13,615 | ) |          |          |        |  
|                                                    |                                                                                                                                            | Deferred taxes                                                           |         |              | 3,395   |   |          |          | 13,232  |  
|                                                    |                                                                                                                                            | Depreciation and amortization                                            |         |              | 89,215  |   |          |          | 95,222  |  
|                                                    |                                                                                                                                            | Provisions for inventory obsolescence                                    |         |              | 23,957  |   |          |          | 12,338  |  
|                                                    |                                                                                                                                            | Loss on cancellation of deposit                                          |         |              | 23,500  |   |          |          |        |  
|                                                    |                                                                                                                                            | Loss on acceleration of receipt of long-term
    receivables             |         |              | 10,893  |   |          |          |        |  
|                                                    |                                                                                                                                            | Charge on vendor financing receivables                                   |         |              | 10,008  |   |          |          |        |  
|                                                    |                                                                                                                                            | Accrual for Alcatel settlement                                           |         |              | 8,000   |   |          |          |        |  
|                                                    |                                                                                                                                            | Provisions for bad debts                                                 |         |              | 1,799   |   |          |          | 1,735   |  
|                                                    |                                                                                                                                            | Gain on investment                                                       |         |              | (17,900 | ) |          |          |        |  
|                                                    |                                                                                                                                            | Interest                                                                 |         |              | (845    | ) |          |          | (529    | )
|                                                    | Changes in operating assets and liabilities:                                                                                               |                                                                          |         |              |         |   |          |          |        
|                                                    |                                                                                                                                            | Accounts receivable                                                      |         |              | (4,509  | ) |          |          | (2,799  | )
|                                                    |                                                                                                                                            | Contracts-in-process                                                     |         |              | 68,359  |   |          |          | (4,774  | )
|                                                    |                                                                                                                                            | Inventories                                                              |         |              | (1,683  | ) |          |          | (10,856 | )
|                                                    |                                                                                                                                            | Long-term receivables                                                    |         |              | 54,588  |   |          |          | (2,268  | )
|                                                    |                                                                                                                                            | Deposits                                                                 |         |              |        |   |          |          | 50,200  |  
|                                                    |                                                                                                                                            | Other current assets and other assets                                    |         |              | 25,082  |   |          |          | 17,188  |  
|                                                    |                                                                                                                                            | Accounts payable                                                         |         |              | (13,480 | ) |          |          | (31,112 | )
|                                                    |                                                                                                                                            | Accrued expenses and other current liabilities                           |         |              | (9,116  | ) |          |          | 5,986   |  
|                                                    |                                                                                                                                            | Customer advances                                                        |         |              | (50,787 | ) |          |          | (10,940 | )
|                                                    |                                                                                                                                            | Income taxes payable                                                     |         |              | (872    | ) |          |          | 540     |  
|                                                    |                                                                                                                                            | Pension and other postretirement liabilities                             |         |              | 5,479   |   |          |          | 4,425   |  
|                                                    |                                                                                                                                            | Long-term liabilities                                                    |         |              | (6,263  | ) |          |          | (19,626 | )
|                                                    |                                                                                                                                            | Other                                                                    |         |              | (110    | ) |          |          | 88      |  
|                                                    |                                                                                                                                            |                                                                          |         |              |         |   |          |         
|Net cash provided by operating activities           |                                                                                                                                            |                                                                          | 77,994  |              |         |   | 112,963  |         
|                                                    |                                                                                                                                            |                                                                          |         |              |         |   |          |         
|Investing activities:                               |                                                                                                                                            |                                                                          |         |              |         |   |          |         
|                                                    | Capital expenditures                                                                                                                       |                                                                          |         | (49,900      | )       |   |          | (97,294  | )      
|                                                    | Proceeds from sale of investment                                                                                                           |                                                                          |         | 45,908       |         |   |          |         |        
|                                                    | Investments in and advances to affiliates                                                                                                  |                                                                          |         | (11,715      | )       |   |          | (21,714  | )      
|                                                    |                                                                                                                                            |                                                                          |         |              |         |   |          |         
|Net cash used in investing activities               |                                                                                                                                            |                                                                          | (15,707 | )            |         |   | (119,008 | )       
|                                                    |                                                                                                                                            |                                                                          |         |              |         |   |          |         
|Financing activities:                               |                                                                                                                                            |                                                                          |         |              |         |   |          |         
|                                                    | Borrowings under revolving credit facilities                                                                                               |                                                                          |         | 66,000       |         |   |          | 86,000   |        
|                                                    | Repayments under term loans                                                                                                                |                                                                          |         | (32,500      | )       |   |          | (32,500  | )      
|                                                    | Repayments under revolving credit facilities                                                                                               |                                                                          |         |             |         |   |          | (84,000  | )      
|                                                    | Interest payments on 10% senior notes                                                                                                      |                                                                          |         | (30,635      | )       |   |          |         |        
|                                                    | Repayments of other long-term obligations                                                                                                  |                                                                          |         | (2,007       | )       |   |          | (2,000   | )      
|                                                    | Payment of bank amendment costs                                                                                                            |                                                                          |         | (5,131       | )       |   |          |         |        
|                                                    | Preferred dividends                                                                                                                        |                                                                          |         |             |         |   |          | (20,878  | )      
|                                                    | Proceeds from stock issuances                                                                                                              |                                                                          |         | 3,817        |         |   |          | 7,154    |        
|                                                    |                                                                                                                                            |                                                                          |         |              |         |   |          |         
|Net cash used in financing activities               |                                                                                                                                            |                                                                          | (456    | )            |         |   | (46,224  | )       
|                                                    |                                                                                                                                            |                                                                          |         |              |         |   |          |         
|Increase (decrease) in cash and cash equivalents    |                                                                                                                                            |                                                                          | 61,831  |              |         |   | (52,269  | )       
|Cash and cash equivalents  beginning
    of period |                                                                                                                                            |                                                                          | 65,936  |              |         |   | 159,949  |         
|                                                    |                                                                                                                                            |                                                                          |         |              |         |   |          |         
|Cash and cash equivalents  end of
    period       |                                                                                                                                            | $                                                                        | 127,767 |              |         | $ | 107,680  |         
|                                                    |                                                                                                                                            |                                                                          |         |              |         |   |          |         
|Non-cash activities:                                |                                                                                                                                            |                                                                          |         |              |         |   |          |         
|                                                    | Unrealized (losses) gains on available-for-sale
    securities, net of taxes                                                               |                                                                          | $       | (2,513       | )       |   | $        | 1,516    |        
|                                                    |                                                                                                                                            |                                                                          |         |              |         |   |          |         
|                                                    | Accrual of preferred dividends                                                                                                             |                                                                          | $       | 6,720        |         |   |          |         |        
|                                                    |                                                                                                                                            |                                                                          |         |              |         |   |          |         
|                                                    | Unrealized net gains (losses) on derivatives, net
    of taxes                                                                             |                                                                          | $       | 332          |         |   | $        | (779     | )      
|                                                    |                                                                                                                                            |                                                                          |         |              |         |   |          |         
|                                                    | Conversion of Series C preferred stock and
    Series D preferred stock and related issuance of additional
    common shares on conversion |                                                                          | $       |             |         |   | $        | 256,444  |        
|                                                    |                                                                                                                                            |                                                                          |         |              |         |   |          |         

See notes to condensed consolidated financial
statements.

4



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS



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

Loral Space & Communications Ltd.
(Loral or the Company, which terms shall
include its subsidiaries unless otherwise indicated or the
context requires) together with its subsidiaries is one of the
worlds leading satellite communications companies with
substantial activities in satellite-based communications
services and satellite manufacturing. Loral is organized into
two operating businesses (see Note 14):



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Fixed Satellite Services (FSS).The Company leases transponder
    capacity to customers for various applications, including
    television and cable broadcasting, news gathering, Internet
    access and transmission, private voice and data networks,
    business television, distance learning and direct-to-home
    television (DTH) and provides satellite telemetry,
    tracking and control (TT&C) and related
    professional services to its customers. Loral also provides
    network services such as managed communications networks,
    Internet and intranet services, business television and business
    media services to customers.
|
| | Satellite Manufacturing and Technology.The Company designs and manufactures
    satellites and space systems and develops satellite technology
    for a broad variety of customers and applications through Space
    Systems/ Loral, Inc. (SS/L).                                                                                                                                                                                                                                                                                                                                                                                                               



|   |                                                          
|-- | ---------------------------------------------------------
|2. | Recent Events  Sale of Assets and
    Bankruptcy Filings

On July 15, 2003, Loral Space &
Communications Corporation, Loral SpaceCom Corporation and Loral
Satellite, Inc. (collectively, the Sellers), direct
or indirect subsidiaries of Loral, entered into a definitive
agreement (the Asset Purchase Agreement) to sell to
Intelsat, Ltd. and Intelsat (Bermuda), Ltd. (together, the
Purchasers), all of the Sellers domestic fixed
satellite services satellites, comprised of five satellites
currently in-orbit (one of which has just been launched and is
undergoing in-orbit testing) and one under construction, as well
as certain other net assets for up to $1.1 billion in cash,
subject to certain price adjustments related to Sellers
ability to achieve specified operating parameters prior to the
closing. The net book value of the satellites to be sold was
approximately $940 million and the other net liabilities of
the disposal group was approximately $25 million as of
June 30, 2003. Consummation of the transaction is
conditioned on the conduct of an auction by the bankruptcy court
in Sellers Chapter 11 Cases (as defined below), that
certain operating parameters continue to be met with respect to
the assets being sold, receipt of the approval of the Federal
Communications Commission and certain other closing conditions
typical for transactions of this type. Loral expects to use most
of the proceeds from the sale of the assets to repay its
outstanding secured bank debt. The Chapter 11 Cases will
enable the Sellers to sell the six North American satellites to
the Purchasers free and clear of any encumbrances. There can be
no assurance, however, that the transaction contemplated by the
Asset Purchase Agreement will be consummated.

Also on July 15, 2003, Loral and certain of
its subsidiaries (the Debtor Subsidiaries),
including the Sellers, SS/ L and Loral Orion, Inc. (Loral
Orion), filed voluntary petitions for reorganization under
Chapter 11 of Title 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). Loral and its Debtor
Subsidiaries, including the Sellers, continue to manage their
properties and operate their 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 filed parallel insolvency proceedings in
the Supreme Court of Bermuda (the Bermuda Court). On
such date, the Bermuda Court granted an order appointing Philip
Wallace, Chris Laverty and Michael Morrison, partners of KPMG,
as Joint Provisional Liquidators (JPLs) in respect
of the Company and the Bermuda subsidiary. The Bermuda Court
granted the JPLs the power to oversee the continuation and
reorganization of these companies businesses under the

5



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 Lorals and the Debtor
Subsidiaries voluntary petitions for reorganization,
Lorals prepetition debt obligations (aggregating
approximately $2.1 billion at June 30, 2003) have been
accelerated and are immediately due and payable and Lorals
other prepetition debt obligations are subject to acceleration
(see Note 10). A creditors committee has been
appointed in the Chapter 11 Cases to represent all
unsecured creditors, including all holders of Lorals and
Loral Orions senior unsecured notes, and, in accordance
with the provisions of the Bankruptcy Code, will have the right
to be heard on all matters that come before the Bankruptcy
Court. At this point, it is not possible to predict with
certainty when a plan of reorganization will be confirmed by the
Bankruptcy Court in the Chapter 11 Cases or how any such
plan will treat the claims of prepetition creditors.

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

As a result of the commencement of the
Chapter 11 Cases, the pursuit of all pending claims and
litigation against Loral and its Debtor Subsidiaries 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, no
party may take any action to recover any prepetition claims,
enforce any lien against or obtain possession of any property
from Loral or its Debtor Subsidiaries. In addition, pursuant to
Section 365 of the Bankruptcy Code, Loral and its Debtor
Subsidiaries 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.

On July 15, 2003, the New York Stock
Exchange suspended trading of Lorals common stock and has
informed the Company that it intends to initiate proceedings to
delist Lorals securities. Lorals common stock is
being quoted under the ticker symbol LRLSQ on the Pink Sheets
Electronic Quotation Service and on the Over-The-Counter
Bulletin Board service. The Company anticipates that, in any
plan of reorganization ultimately confirmed by the Bankruptcy
Court, the common and preferred stock of the Company will, at
best, be severely diluted and may be eliminated entirely, with
the result that common and preferred stockholders would receive
no distribution.

3.     Basis of
Presentation

The condensed consolidated financial statements
have been prepared assuming the Company in its current structure
will continue as a going concern. The factors mentioned in
Note 2 above, however, among other things, raise
substantial doubt about Lorals ability to continue as a
going concern. The condensed financial statements do not include
any adjustments that might result from the outcome of this
uncertainty. The ability of the Company to continue as a going
concern is dependent on a number of factors including, but not
limited to, the Companys development of a plan of
reorganization, confirmation of the plan by the Bankruptcy
Court, customer and employee retention and the Companys
ability to continue to provide high quality services. If a plan
of reorganization is not confirmed and implemented, the Company
may be forced to liquidate under applicable provisions of the
Bankruptcy Code. There can be no assurance of the level of
recovery that the Companys creditors would receive in such
liquidation. The condensed consolidated financial

6



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 the Company is forced to liquidate.

During 2002 and the first six months of 2003,
Loral took a number of steps to conserve cash on hand by
reducing its operating expenses, suspending payment of cash
dividends on its preferred stock and closely monitoring capital
expenditures. While Loral believes that it currently has
adequate cash on hand and cash flow from operations to continue
normal operations and customer support through October 2003, it
is reviewing the need to obtain third-party debtor-in-possession
(DIP) financing, as it continues to evaluate its liquidity needs
on an ongoing basis.

The accompanying unaudited condensed consolidated
financial statements have been prepared pursuant to the rules of
the Securities and Exchange Commission (SEC) and, in
the opinion of the Company, include all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation
of results of operations, financial position and cash flows as
of and for the periods presented. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the U.S. have been condensed or omitted pursuant to
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, 2003 are not necessarily indicative
of the results to be expected for the full year. The
December 31, 2002 balance sheet has been derived from the
audited consolidated financial statements at that date. It is
suggested that these condensed consolidated 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.

On June 4, 2003, the Companys Board of
Directors approved a reverse stock split of the Companys
common stock at a ratio of one-for-ten, resulting in a new par
value of $0.10 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 prior periods presented have been retroactively restated to
reflect this reverse stock split.



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

Loral continues to record a 100% valuation
allowance against its domestic net deferred tax asset under the
criteria of SFAS No. 109, Accounting for Income Taxes.
Therefore, no benefit was recorded on the domestic loss for the
three and six months ended June 30, 2003, while a provision
was recorded on the domestic income for the three and six months
ended June 30, 2002.



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

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

4.     Restatement

Prior to the first quarter of 2003, management
evaluated the financial performance of the satellite
manufacturing and technology segment in accordance with
accounting principles applicable to government contracts,
whereby all costs incurred, including general and administrative
costs, were allocated to programs. The required adjustment to
conform to U.S. generally accepted accounting principles
for commercial contracts and self constructed assets was
previously reflected in consolidation eliminations. Subsequent
to the filing of the Companys September 30, 2002
Form 10-Q, the Company determined that it had miscalculated
this adjustment in its eliminations and has restated its
reported results for the second quarter of 2002 to reflect

7



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the correct amounts. The following is a summary
of the significant effects of the restatement (in thousands,
except per share amounts):

|                                                                                                                                  |                                                                |                    |         |                  |   |            |         |             |   |   |          |        |   |   |          |        |  
|--------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------ | ------- | ---------------- | - | ---------- | ------- | ----------- | - | - | -------- | ------ | - | - | -------- | ------ | -
|                                                                                                                                  |                                                                |                    |         |                 
|                                                                                                                                  |                                                                | Three Months Ended |         | Six Months Ended
|                                                                                                                                  |                                                                | June 30, 2002      |         | June 30, 2002   
|                                                                                                                                  |                                                                |                    |         |                 
|                                                                                                                                  |                                                                | Previously         |         | As               |   | Previously |         |            
|                                                                                                                                  |                                                                | Reported           |         | Restated         |   | Reported   |         | As Restated
|                                                                                                                                  |                                                                |                    |         |                  |   |            |         |            
|Total revenues                                                                                                                    |                                                                | $                  | 316,360 |                  |   | $          | 316,360 |             |   | $ | 624,536  |        |   | $ | 624,536  |       
|Cost of satellite sales                                                                                                           |                                                                |                    | 193,857 |                  |   |            | 202,890 |             |   |   | 380,288  |        |   |   | 389,318  |       
|Operating income                                                                                                                  |                                                                |                    | 17,708  |                  |   |            | 8,675   |             |   |   | 32,413   |        |   |   | 23,380   |       
|Income tax provision                                                                                                              |                                                                |                    | (7,724  | )                |   |            | (4,043  | )           |   |   | (13,252  | )      |   |   | (9,571   | )     
|Loss before equity in net losses of affiliates,
    minority interest and cumulative effect of change in accounting
    principle |                                                                |                    | (3,949  | )                |   |            | (9,301  | )           |   |   | (7,933   | )      |   |   | (13,285  | )     
|Equity in net losses of affiliates, net of taxes                                                                                  |                                                                |                    | (12,644 | )                |   |            | (13,200 | )           |   |   | (28,594  | )      |   |   | (29,150  | )     
|Loss before cumulative effect of change in
    accounting principle                                                               |                                                                |                    | (16,661 | )                |   |            | (22,569 | )           |   |   | (36,521  | )      |   |   | (42,429  | )     
|Cumulative effect of change in accounting
    principle, net of taxes                                                             |                                                                |                    |        |                  |   |            |        |             |   |   | (876,500 | )      |   |   | (876,500 | )     
|Net loss applicable to common shareholders                                                                                        |                                                                |                    | (63,471 | )                |   |            | (69,379 | )           |   |   | (971,794 | )      |   |   | (977,702 | )     
|Loss per share:                                                                                                                   |                                                                |                    |         |                  |   |            |         |             |   |   |          |        |   |   |          |       
|                                                                                                                                  | Before cumulative effect of change in accounting
    principle |                    | $       | (1.77            | ) |            | $       | (1.94       | ) |   | $        | (2.74  | ) |   | $        | (2.91  | )
|                                                                                                                                  | Cumulative effect of change in accounting
    principle        |                    |         |                 |   |            |         |            |   |   |          | (25.22 | ) |   |          | (25.22 | )
|                                                                                                                                  |                                                                |                    |         |                  |   |            |         |             |   |   |          |        |   |   |          |       
|                                                                                                                                  | Loss per share                                                 |                    | $       | (1.77            | ) |            | $       | (1.94       | ) |   | $        | (27.96 | ) |   | $        | (28.13 | )
|                                                                                                                                  |                                                                |                    |         |                  |   |            |         |             |   |   |          |        |   |   |          |       

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 the pro forma results as if
the Company applied 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
through the use of option pricing models, even though such
models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting
restrictions, which significantly differ from the Companys
stock option awards. These models also require subjective
assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated
values. The Companys calculations were made using the
Black-Scholes option pricing model with the following weighted
average assumptions: 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 no dividends
during the expected term. The Companys calculations are
based on a multiple option valuation approach and forfeitures
are recognized as they occur. The following table summarizes
what the

8



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Companys pro forma net loss and pro forma
loss per share would have been if the fair value method under
SFAS 123 was used (in millions, except per share amounts):

|                                                                                                                                                                         |  |                    |        |                  |  |      |       |             |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ---------------- |  | ---- | ----- | ----------- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                                                         |  |                    |        |                 
|                                                                                                                                                                         |  | Three Months Ended |        | Six Months Ended
|                                                                                                                                                                         |  | June 30,           |        | June 30,        
|                                                                                                                                                                         |  |                    |        |                 
|                                                                                                                                                                         |  | 2003               |        | 2002             |  | 2003 |       | 2002       
|                                                                                                                                                                         |  |                    |        |                  |  |      |       |            
|                                                                                                                                                                         |  |                    |        | As Restated      |  |      |       | As Restated
|Reported loss before cumulative effect of change
    in accounting principle and extraordinary gain on acquisition of
    minority interest                              |  | $                  | (109.4 | )                |  | $    | (22.6 | )           |  | $ | (157.6 | ) |  | $ | (42.4  | )
|Add: Total stock based compensation charged to
    operations under the intrinsic value method, net of taxes                                                             |  |                    |       |                  |  |      |      |             |  |   |       |   |  |   | 0.6    |  
|Less: Total stock based employee compensation
    determined under the fair value method for all awards, net of
    taxes                                                |  |                    | (1.7   | )                |  |      | (2.2  | )           |  |   | (2.3   | ) |  |   | (5.0   | )
|                                                                                                                                                                         |  |                    |        |                  |  |      |       |             |  |   |        |   |  |   |        |  
|Pro forma net loss before cumulative effect of
    change in accounting principle and extraordinary gain on
    acquisition of minority interest                         |  |                    | (111.1 | )                |  |      | (24.8 | )           |  |   | (159.9 | ) |  |   | (46.8  | )
|Cumulative effect of change in accounting
    principle, net of taxes                                                                                                    |  |                    |       |                  |  |      |      |             |  |   |       |   |  |   | (876.5 | )
|                                                                                                                                                                         |  |                    |        |                  |  |      |       |             |  |   |        |   |  |   |        |  
|Extraordinary gain on acquisition of minority
    interest, net of taxes                                                                                                 |  |                    | 13.6   |                  |  |      |      |             |  |   | 13.6   |   |  |   |       |  
|                                                                                                                                                                         |  |                    |        |                  |  |      |       |             |  |   |        |   |  |   |        |  
|Pro forma net loss                                                                                                                                                       |  |                    | (97.5  | )                |  |      | (24.8 | )           |  |   | (146.3 | ) |  |   | (923.3 | )
|Preferred dividends                                                                                                                                                      |  |                    | (3.4   | )                |  |      | (46.8 | )           |  |   | (6.7   | ) |  |   | (58.8  | )
|                                                                                                                                                                         |  |                    |        |                  |  |      |       |             |  |   |        |   |  |   |        |  
|Pro forma net loss applicable to common
    shareholders                                                                                                                 |  | $                  | (100.9 | )                |  | $    | (71.6 | )           |  | $ | (153.0 | ) |  | $ | (982.1 | )
|                                                                                                                                                                         |  |                    |        |                  |  |      |       |             |  |   |        |   |  |   |        |  
|Reported basic and diluted loss per share before
    cumulative effect of change in accounting principle and
    extraordinary gain on acquisition of minority interest  |  | $                  | (2.57  | )                |  | $    | (1.94 | )           |  | $ | (3.77  | ) |  | $ | (2.91  | )
|Pro forma basic and diluted loss per share before
    cumulative effect of change in accounting principle and
    extraordinary gain on acquisition of minority interest |  | $                  | (2.61  | )                |  |      | (2.00 | )           |  | $ | (3.83  | ) |  |   | (3.04  | )
|Reported loss per share applicable to common
    shareholders                                                                                                            |  | $                  | (2.26  | )                |  |      | (1.94 | )           |  | $ | (3.46  | ) |  |   | (28.13 | )
|Pro forma loss per share applicable to common
    shareholders                                                                                                           |  | $                  | (2.30  | )                |  |      | (2.00 | )           |  | $ | (3.51  | ) |  |   | (28.25 | )

9



---



##### 



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,        
|                                                                                                                                         |  |                    |          |                 
|                                                                                                                                         |  | 2003               |          | 2002             |  | 2003 |         | 2002       
|                                                                                                                                         |  |                    |          |                  |  |      |         |            
|                                                                                                                                         |  |                    |          | As Restated      |  |      |         | As Restated
|Net loss                                                                                                                                 |  | $                  | (95,789  | )                |  | $    | (22,569 | )           |  | $ | (143,963 | ) |  | $ | (918,929 | )
|Cumulative translation adjustment                                                                                                        |  |                    | 5        |                  |  |      | 332     |             |  |   | 426      |   |  |   | 88       |  
|Unrealized (losses) gains on available-for-sale
    securities, net of taxes                                                             |  |                    | (2,513   | )                |  |      | (4,978  | )           |  |   | (2,513   | ) |  |   | 1,516    |  
|Net increase (decrease) in foreign currency
    exchange contracts                                                                       |  |                    | 223      |                  |  |      | (1,996  | )           |  |   | 453      |   |  |   | (1,279   | )
|Reclassifications into revenue and cost of sales
    from other comprehensive income                                                     |  |                    | (260     | )                |  |      | 1,145   |             |  |   | 382      |   |  |   | 500      |  
|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                                                                                                                       |  | $                  | (108,814 | )                |  | $    | (28,066 | )           |  | $ | (145,719 | ) |  | $ | (918,104 | )
|                                                                                                                                         |  |                    |          |                  |  |      |         |             |  |   |          |   |  |   |          |  

7.     Contracts-in-Process

|                     |  |                |        |              |  |   |         | 
|-------------------- |  | -------------- | ------ | ------------ |  | - | ------- | 
|                     |  | June 30,       |        | December 31,
|                     |  | 2003           |        | 2002        
|                     |  |                |        |             
|                     |  |               
|                     |  | (In thousands)
|Amounts billed       |  | $              | 25,618 |              |  | $ | 63,737  | 
|Unbilled receivables |  |                | 8,694  |              |  |   | 49,417  | 
|                     |  |                |        |              |  |   |         | 
|                     |  | $              | 34,312 |              |  | $ | 113,154 | 
|                     |  |                |        |              |  |   |         | 

Unbilled amounts include recoverable costs and
accrued profit on progress completed, which have not been
billed. 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.

Recently, counterparties have declined to renew
yen denominated forward contracts. 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, 2003,
SS/L had the following amounts denominated in Japanese Yen that
were substantially hedged (in millions):

|                     |  |              |        |        |  |   |      | 
|-------------------- |  | ------------ | ------ | ------ |  | - | ---- | 
|                     |  | Japanese Yen |        | U.S. $
|                     |  |              |        |       
|Future revenues      |  |              | ¥3,646 |        |  | $ | 30.5 | 
|Future expenditures  |  |              | 860    |        |  |   | 7.3  | 
|Contracts-in-process |  |              | 1,991  |        |  |   | 16.6 | 

Upon filing Chapter 11, SS/Ls hedges
were cancelled leaving SS/L vulnerable to foreign currency
fluctuations in the future.

10



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Investments in
and Advances to Affiliates

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

|                          |                                                                            |          |        |              |  |   |        |        | 
|------------------------- | -------------------------------------------------------------------------- | -------- | ------ | ------------ |  | - | ------ | ------ | 
|                          |                                                                            | June 30, |        | December 31,
|                          |                                                                            | 2003     |        | 2002        
|                          |                                                                            |          |        |             
|Satmex equity investments |                                                                            | $        | 38,046 |              |  | $ | 50,761 |       
|XTAR equity investments   |                                                                            |          | 32,167 |              |  |   | 24,575 |       
|Globalstar:               |                                                                            |          |        |              |  |   |        |       
|                          | Acquired notes and loans ($630 million
    principal and accrued interest) |          |        | 17,594       |  |   |        | 20,107 | 
|                          | Vendor financing ($250 million principal and
    accrued interest)         |          |        |             |  |   |        |       | 
|                          |                                                                            |          |        |              |  |   |        |       
|                          |                                                                            | $        | 87,807 |              |  | $ | 95,443 |       
|                          |                                                                            |          |        |              |  |   |        |       

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

|                                                            |  |                    |        |                  |  |      |         |             |  |   |         |   |  |   |         |  
|----------------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------- | ----------- |  | - | ------- | - |  | - | ------- | -
|                                                            |  |                    |        |                 
|                                                            |  | Three Months Ended |        | Six Months Ended
|                                                            |  | June 30,           |        | June 30,        
|                                                            |  |                    |        |                 
|                                                            |  | 2003               |        | 2002             |  | 2003 |         | 2002       
|                                                            |  |                    |        |                  |  |      |         |            
|                                                            |  |                    |        | As Restated      |  |      |         | As Restated
|Satmex                                                      |  | $                  | (7,822 | )                |  | $    | (3,437  | )           |  | $ | (13,334 | ) |  | $ | (11,033 | )
|XTAR                                                        |  |                    | (957   | )                |  |      | (739    | )           |  |   | (4,152  | ) |  |   | (1,092  | )
|Europe*Star                                                 |  |                    |       |                  |  |      | (7,568  | )           |  |   |        |   |  |   | (13,683 | )
|Globalstar and Globalstar service provider
    partnerships |  |                    | 444    |                  |  |      | (1,456  | )           |  |   | 648     |   |  |   | (3,342  | )
|                                                            |  |                    |        |                  |  |      |         |             |  |   |         |   |  |   |         |  
|                                                            |  | $                  | (8,335 | )                |  | $    | (13,200 | )           |  | $ | (16,838 | ) |  | $ | (29,150 | )
|                                                            |  |                    |        |                  |  |      |         |             |  |   |         |   |  |   |         |  

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,        
|                                                                                                           |  |                    |        |                 
|                                                                                                           |  | 2003               |        | 2002             |  | 2003 |        | 2002       
|                                                                                                           |  |                    |        |                  |  |      |        |            
|                                                                                                           |  |                    |        | As Restated      |  |      |        | As Restated
|Revenues                                                                                                   |  | $                  | 8,244  |                  |  | $    | 27,947 |             |  | $ | 23,934 |   |  | $ | 50,589 |  
|Investment income                                                                                          |  |                    | 295    |                  |  |      | 294    |             |  |   | 589    |   |  |   | 588    |  
|Interest expense capitalized on development stage
    enterprise                                           |  |                    |       |                  |  |      | 270    |             |  |   | 428    |   |  |   | 397    |  
|Profits relating to affiliate transactions not
    eliminated, net of taxes                                |  |                    | 1,604  |                  |  |      | 1,452  |             |  |   | 2,288  |   |  |   | 2,608  |  
|Elimination of Lorals proportionate share
    of profits relating to affiliate transactions, net of taxes |  |                    | (1,695 | )                |  |      | (1,514 | )           |  |   | (2,814 | ) |  |   | (2,639 | )
|Amortization of deferred credit and profits
    relating to investments in affiliates                      |  |                    | 262    |                  |  |      | 326    |             |  |   | 523    |   |  |   | 254    |  

Satmex

In order to fund the construction, insurance and
launch of Satmex 6, Satmex has obtained preliminary
approvals for export credit agency financings and is working on
a proposed private placement of $70 million of secured
notes. These financings, however, are subject to, among other
things, the extension of Satmexs 2004

11



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

debt maturities. To conserve cash, Satmex did not
make the August 1, 2003 interest payment of
$16.2 million on those notes and has until August 30,
2003 to cure such default. If Satmex is unable to complete its
proposed financing transactions, it will not have sufficient
liquidity to complete the launch of Satmex 6 or service its
debt. In that case, Satmex would default on its outstanding
indebtedness and would seek to reorganize under either
Chapter 11 of the United States Bankruptcy Code or Mexican
reorganization law or both. In such event, the Companys
investment in Satmex of $38 million at June 30, 2003
would be materially and adversely affected. Moreover, while
Satmex has previously deposited the remaining milestone payments
due under its satellite construction contract with SS/L in a
trust account for the benefit of SS/L, SS/Ls ability to
recover any other amounts due under the contract, including
orbital incentive payments, would be materially and adversely
affected.

XTAR

XTAR, L.L.C. (XTAR), a joint venture
between Loral 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, plans to construct and
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. XTAR is owned 56% by Loral
(accounted for under the equity method since the Company does
not control certain significant operating decisions) and 44% by
Hisdesat. 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, 2003, the
partners in proportion to their respective ownership interests
have contributed $55 million to XTAR. XTAR is seeking to
raise the remaining amount of the funds it needs to construct
and launch its satellite through vendor and other third-party
financings. If XTAR is unable to raise the remaining funds it
needs to construct, launch and operate its satellite, the
Companys investment in XTAR of $32 million at
June 30, 2003 would be adversely affected. Due to the
uncertainty regarding XTARs ability to raise the remaining
funds, SS/L stopped recognizing revenues and profits associated
with the construction of the satellite as of April 1, 2003,
and has treated the unpaid costs incurred during the second
quarter of 2003 associated with such satellite (aggregating
$11 million) as an increase to Lorals investment
account balance.

Globalstar

The Company accounts for its investment in
Globalstar, L.P.s (Globalstar)
$500 million credit facility at fair value, with changes in
the value (net of taxes) recorded as a component of other
comprehensive loss.

During the second quarter of 2002, the Company
recorded a $9 million charge to equity in net losses of
affiliates relating to liabilities it had guaranteed in
connection with a Globalstar service provider partnership.

In connection with recording its share of
Globalstars operating losses in 2000, the Company recorded
as a charge to equity in net losses of affiliates
$22.3 million representing the estimated probable
uncollectible costs relating to subcontractor obligations to be
incurred by the Company on Globalstars behalf. In the
second quarter of 2002, the Company recovered a claim from a
vendor on the Globalstar program. Of this recovery,
$14 million ($8 million after taxes) is reflected in
the statement of operations as equity income related to
Globalstar, which, when combined with the recovery of
$8.5 million ($5.5 million, after taxes) recorded in
2001, fully offset the probable uncollectible costs originally
recorded.

On April 8, 2003, Loral signed a settlement
and release agreement with Globalstar and Globalstars
official creditors committee to resolve certain issues related
to Globalstar and Globalstars restructuring (the
Settlement). The Settlement was approved on
April 14, 2003 by the Bankruptcy Court (the
Court) and closed on July 10, 2003. Among other
things, the Settlement provided that Globalstar grants to Loral,
subject to certain conditions, a general release of all claims
Globalstar might have against Loral; approximately 50% of
Lorals unsecured claims against Globalstar are allowed, or
approximately $438 million; and the debt owed to Globalstar
by three foreign service providers, in which Loral has a
substantial equity interest (Globalstar do

12



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Brasil, Globalstar de Mexico and GlobalTel), of
an aggregate of $5.5 million has been set off against
amounts otherwise due to Loral from the Globalstar Canadian
service providers. In consideration, Loral has transferred to
Globalstar eight spare satellites ordered by Globalstar but not
fully paid for; certain agreements relating to a joint venture
in which Loral is a participant and that provided the joint
venture with exclusivity in marketing certain Globalstar
services in the U.S. have been terminated, with a new joint
venture formed between Globalstar (75%) and Loral (25%), which
is under the management and control of Globalstar, to be the
exclusive reseller of Globalstar encrypted, end-to-end services
to certain governmental agencies in the U.S. and non-exclusively
to other customers in the U.S.; the FCC license authorizing the
Globalstar service, which in any event was being held by a joint
venture in which Loral is a participant for the exclusive
benefit of Globalstar, will be transferred to Globalstar;
Lorals equity interest in the Globalstar Canadian service
providers have been transferred to Globalstar; a
$11.5 million obligation of the Canadian service providers
owed to Loral has been reduced by $5.5 million (described
above) and the remaining debt obligation has been converted from
a demand note into two five-year term notes of $4.4 million
and $1.6 million, respectively; Lorals unsecured
claims against Globalstar will be reduced by approximately 50%
or approximately $438 million when Globalstar emerges from
bankruptcy; the unused prepayment ($2,260,000) on a Globalstar
contract under which there is a stop work order has been
returned to Globalstar by Loral; a $250,000 termination fee that
may come due under that contract has been waived; Loral will
cooperate toward a reorganization of Globalstar; and the Loral
employees on Globalstars management committee have
resigned. Loral does not expect any material impact on its
results of operations or financial position as a result of this
Settlement.

One of Globalstars creditors filed with the
Court on April 24, 2003 a motion seeking reconsideration by the
Court of the Courts approval of the Settlement. The Court
denied this motion for reconsideration on May 30, 2003,
and, on June 9, 2003, the creditor filed a notice of appeal
of the Courts order approving the Settlement. Although the
Company believes 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.

On April 28, 2003, Globalstar and ICO Global
Communications (Holdings) Limited (ICO) received
Court approval for ICO to acquire a majority interest in a
reorganized Globalstar. The Court approved the sale of
Globalstars assets to a new company to be controlled by
ICO in exchange for an investment of $55 million for which
ICO will receive a 54% equity stake in the new operating
company. Closing of the transaction is subject to regulatory
approvals prior to any license transfers and to consent by
QUALCOMM Incorporated to several business issues and certain
conditions precedent. The Court-approved sale supersedes an
earlier proposal that had been made by Thermo Capital Partners.
In addition to ICOs 54% stake in the newly-formed company,
the remaining equity will be distributed to Globalstars
creditors, which include Loral (approximately 6%), QUALCOMM
Incorporated and holders of Globalstar bonds. Globalstar will
file a plan of reorganization with the Court, and has stated
that it expects to complete its Chapter 11 process later
this year.

Europe*Star

In the fourth quarter of 2002, the Companys
investment in Europe*Star Limited (Europe*Star) was
reduced to zero. Accordingly, there is no longer any requirement
for Loral to provide for its allocated share of
Europe*Stars net losses subsequent to December 31,
2002. In addition, pursuant to the master settlement agreement
with Alcatel, on June 30, 2003, Loral transferred to
Alcatel its minority interest in Europe*Star (see Note 12).

13



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table presents summary statement of
operations data of Lorals affiliates Satmex and
Europe*Star (in thousands):

|                                           |  |                             |        |             |  |        |         |             |  |   |        |   |  |   |         |  
|------------------------------------------ |  | --------------------------- | ------ | ----------- |  | ------ | ------- | ----------- |  | - | ------ | - |  | - | ------- | -
|                                           |  |                            
|                                           |  | Three Months Ended June 30,
|                                           |  |                            
|                                           |  |                             |        |            
|                                           |  | 2003                        |        | 2002       
|                                           |  |                             |        |            
|                                           |  | Satmex                      |        | Europe*Star |  | Satmex |         | Europe*Star
|                                           |  |                             |        |             |  |        |         |            
|Statement of operations data:              |  |                             |        |             |  |        |         |             |  |   |        |   |  |   |         |  
|Revenues                                   |  | $                           | 19,385 |             |  | $      | 5,727   |             |  | $ | 20,400 |   |  | $ | 3,622   |  
|Operating loss                             |  |                             | (1,364 | )           |  |        | (3,105  | )           |  |   | (708   | ) |  |   | (6,244  | )
|Net loss                                   |  |                             | (7,200 | )           |  |        | (13,827 | )           |  |   | (87    | ) |  |   | (14,680 | )
|Net loss applicable to common shareholders |  |                             | (7,577 | )           |  |        |         |             |  |   | (464   | ) |  |   |         |  
|Net loss applicable to shareholders        |  |                             |        |             |  |        | (13,827 | )           |  |   |        |   |  |   | (14,680 | )

|                                           |  |                           |         |             |  |        |         |             |  |   |        |   |  |   |         |  
|------------------------------------------ |  | ------------------------- | ------- | ----------- |  | ------ | ------- | ----------- |  | - | ------ | - |  | - | ------- | -
|                                           |  |                          
|                                           |  | Six Months Ended June 30,
|                                           |  |                          
|                                           |  |                           |         |            
|                                           |  | 2003                      |         | 2002       
|                                           |  |                           |         |            
|                                           |  | Satmex                    |         | Europe*Star |  | Satmex |         | Europe*Star
|                                           |  |                           |         |             |  |        |         |            
|Statement of operations data:              |  |                           |         |             |  |        |         |             |  |   |        |   |  |   |         |  
|Revenues                                   |  | $                         | 40,188  |             |  | $      | 10,218  |             |  | $ | 43,009 |   |  | $ | 8,119   |  
|Operating (loss) income                    |  |                           | (2,075  | )           |  |        | (7,376  | )           |  |   | 467    |   |  |   | (12,683 | )
|Net loss                                   |  |                           | (13,904 | )           |  |        | (31,080 | )           |  |   | (7,740 | ) |  |   | (28,781 | )
|Net loss applicable to common shareholders |  |                           | (14,658 | )           |  |        |         |             |  |   | (8,494 | ) |  |   |         |  
|Net loss applicable to shareholders        |  |                           |         |             |  |        | (31,080 | )           |  |   |        |   |  |   | (28,781 | )

9.     Accounting for
Goodwill and Other Acquired Intangible Assets

On January 1, 2002, the Company adopted
SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS 142), which addresses the initial
recognition and measurement of intangible assets acquired
outside of a business combination and the accounting for
goodwill and other intangible assets subsequent to their
acquisition. SFAS 142 provides that intangible assets with
finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives not be amortized, but
rather be tested at least annually for impairment. SFAS 142
also changed the evaluation criteria for testing goodwill for
impairment from an undiscounted cash flow approach, which was
previously utilized under the guidance in Accounting Principles
Board Opinion No. 17, Intangible Assets, to a test based on
fair value. Fair value is determined by the amount at which an
asset or liability could be bought or sold in a current
transaction between willing parties, that is, other than in a
forced or liquidation sale. Quoted market prices in active
markets are the best evidence of fair value and must be used as
the basis for the measurement, if available. If quoted market
prices are not available, the estimate of fair value must be
based on the best information available, including prices for
similar assets and liabilities and the results of using other
valuation techniques, such as public company trading multiples,
future discounted cash flows and merger and acquisition
transaction multiples.

Goodwill

In accordance with SFAS 142, the Companys
previously recognized cost in excess of net assets acquired
(goodwill) of $892 million for business
acquisitions accounted for under the purchase method of
accounting completed prior to July 1, 2001, was reviewed
under the new transitional guidance as of January 1, 2002.
Goodwill had been previously assigned to the Companys
business segments as follows (based on the net book value at
December 31, 2001): FSS $606 million and satellite
manufacturing and technology $286 million. The Company hired
professionals in the valuation consulting business to determine
the fair value of each of the Companys reporting units.
Since there were no quoted market prices in active markets for
the Companys reporting units, the measurement of fair
value for each reporting unit was based on the best information
available for that reporting unit, including reasonable and
supportable assumptions and projections, as follows:
(1) FSS  public company trading multiples and
merger and acquisition transaction multiples and (2) satel-

14



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

lite manufacturing and technology 
future discounted cash flows. Based on the fair values concluded
on by those professionals, management determined that the
goodwill for each of the Companys reporting units under
the new guidance in SFAS 142 was fully impaired.
Accordingly, as of January 1, 2002, the Company recorded a
non-cash charge for the cumulative effect of the change in
accounting principle of $892 million before taxes
($877 million after taxes).

The charge is the result of a change in the
evaluation criteria for goodwill from an undiscounted cash flow
approach which was previously utilized under the guidance in
Accounting Principles Board Opinion No. 17, Intangible
Assets, to the fair value approach which is stipulated in
SFAS 142.

Other
Acquired Intangible Assets

The Company evaluated the useful lives of its
other acquired intangible assets in connection with the adoption
of SFAS 142 and determined that no changes to the useful
lives were necessary.

Other acquired intangible assets are included in
other assets in the Companys condensed consolidated
balance sheets as follows (in millions):

|                  |       |               |      |                   |  |        |      |              |   |   |      |      |  |   |      |       |  
|----------------- | ----- | ------------- | ---- | ----------------- |  | ------ | ---- | ------------ | - | - | ---- | ---- |  | - | ---- | ----- | -
|                  |       |               |      |                  
|                  |       | June 30, 2003 |      | December 31, 2002
|                  |       |               |      |                  
|                  |       | Gross         |      | Accumulated       |  | Gross  |      | Accumulated 
|                  |       | Amount        |      | Amortization      |  | Amount |      | Amortization
|                  |       |               |      |                   |  |        |      |             
|Regulatory fees   |       | $             | 22.7 |                   |  | $      | (5.4 | )            |   | $ | 22.7 |      |  | $ | (4.6 | )    
|Other intangibles |       |               | 13.0 |                   |  |        | (9.3 | )            |   |   | 13.0 |      |  |   | (8.4 | )    
|                  |       |               |      |                   |  |        |      |              |   |   |      |      |  |   |      |      
|                  | Total |               | $    | 35.7              |  |        | $    | (14.7        | ) |   | $    | 35.7 |  |   | $    | (13.0 | )
|                  |       |               |      |                   |  |        |      |              |   |   |      |      |  |   |      |      

The weighted average remaining amortization
period for regulatory fees was 12 years and for other
intangibles was two years, as of June 30, 2003.

Total pre-tax amortization expense for other
acquired intangible assets was $0.9 for both the three months
ended June 30, 2003 and 2002 and $1.7 million for both
the six months ended June 30, 2003 and 2002. Annual pre-tax
amortization expense for other acquired intangible assets for
the five years ended December 31, 2007 is estimated to be
as follows (in millions):

|     |  |   |     | 
|---- |  | - | --- | 
|2003 |  | $ | 3.4 | 
|2004 |  |   | 3.3 | 
|2005 |  |   | 2.5 | 
|2006 |  |   | 1.4 | 
|2007 |  |   | 1.4 | 

15



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |     
|--- | ----
|10. | Debt

|                                                                                                                        |                                                                                                                        |                |           |              |  |   |           |         | 
|----------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | -------------- | --------- | ------------ |  | - | --------- | ------- | 
|                                                                                                                        |                                                                                                                        | June 30,       |           | December 31,
|                                                                                                                        |                                                                                                                        | 2003           |           | 2002        
|                                                                                                                        |                                                                                                                        |                |           |             
|                                                                                                                        |                                                                                                                        |               
|                                                                                                                        |                                                                                                                        | (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      |  |   |           | 245,080 | 
|Loral Satellite term loan, 5.75% and 5.60% at
    June 30, 2003 and
    December 31, 2002, respectively                 |                                                                                                                        |                | 226,500   |              |  |   | 249,000   |        
|Loral Satellite revolving credit facility, 5.75%
    and 4.67% at June 30, 2003 and December 31, 2002,
    respectively |                                                                                                                        |                | 200,000   |              |  |   | 179,000   |        
|Loral SpaceCom term loan facility, 5.25% and
    5.03% at June 30, 2003 and December 31, 2002,
    respectively         |                                                                                                                        |                | 350,000   |              |  |   | 360,000   |        
|Loral SpaceCom revolving credit facility, 5.25%
    and 5.05% at June 30, 2003 and December 31, 2002,
    respectively  |                                                                                                                        |                | 185,000   |              |  |   | 140,000   |        
|9.50% Senior notes due 2006                                                                                             |                                                                                                                        |                | 350,000   |              |  |   | 350,000   |        
|Export-import credit facility                                                                                           |                                                                                                                        |                | 5,361     |              |  |   | 6,434     |        
|Other                                                                                                                   |                                                                                                                        |                |          |              |  |   | 535       |        
|Non-recourse debt of Loral Orion:                                                                                       |                                                                                                                        |                |           |              |  |   |           |        
|                                                                                                                        | 11.25% Senior notes due 2007 (principal amount
    $37 million)                                                        |                |           | 39,431       |  |   |           | 39,762  | 
|                                                                                                                        | 12.50% Senior discount notes due 2007 (principal
    amount at maturity and accreted principal amount
    $49 million) |                |           | 53,469       |  |   |           | 53,982  | 
|                                                                                                                        | Other                                                                                                                  |                |           | 7,091        |  |   |           | 8,028   | 
|                                                                                                                        |                                                                                                                        |                |           |              |  |   |           |        
|Total debt                                                                                                              |                                                                                                                        |                | 2,244,002 |              |  |   | 2,244,525 |        
|Less, current maturities                                                                                                |                                                                                                                        |                | 2,244,002 |              |  |   | 131,898   |        
|                                                                                                                        |                                                                                                                        |                |           |              |  |   |           |        
|                                                                                                                        |                                                                                                                        | $              |          |              |  | $ | 2,112,627 |        
|                                                                                                                        |                                                                                                                        |                |           |              |  |   |           |        

Loral currently has approximately
$2.2 billion in debt (including future accrued interest of
$214 million associated with the deferred gain on the Loral
Orion debt exchanges), which mainly resulted from its
investments in Globalstar as well as the rapid build-up of its
FSS fleet. This debt includes $962 million of bank debt
that is secured by liens on the assets of Loral SpaceCom
Corporation (Loral SpaceCom) and Loral Satellite,
Inc. (Loral Satellite), consisting primarily of
Lorals satellite manufacturing and domestic FSS assets. As
a result of filing Chapter 11, Loral expects that it will
continue to pay interest only on its bank debt, which will
significantly reduce its cash interest payments. Loral expects
to use most of the proceeds from the sale of the North American
satellites to the Purchasers to repay its outstanding secured
bank debt.

As a result of Lorals and the Debtor
Subsidiaries voluntary petitions for reorganization,
Lorals prepetition debt obligations (aggregating
approximately $2.1 billion at June 30, 2003) have been
accelerated and are immediately due and payable and Lorals
other prepetition debt obligations are subject to acceleration
and have been reclassified to current liabilities. A
creditors committee has been appointed in the
Chapter 11 Cases to represent all unsecured creditors,
including all holders of Lorals and Loral Orions
senior unsecured notes, and, in accordance with the provisions
of the Bankruptcy Code, will have the right to be heard on all
matters that come before the Bankruptcy Court. At this point, it
is not possible to predict with certainty when a plan of
reorganization will be confirmed by the Bankruptcy Court in the
Chapter 11 Cases or how any such plan will treat the claims
of prepetition creditors.

As stated above, substantially all of the assets
of Loral SpaceCom and Loral Satellite constitute collateral
security for the obligations that are owed to their bank
lenders. Under the provisions of the Bankruptcy Code, Loral
SpaceCom and Loral Satellite are not authorized to use the
existing cash or cash proceeds of this

16



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##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

collateral (the Cash Collateral)
without either an order of the Bankruptcy Court authorizing the
use of the Cash Collateral or the consent of their bank lenders.

On the date the Chapter 11 cases were
commenced, the Bankruptcy Court entered an order authorizing the
debtors to use the Cash 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. The use of the Cash Collateral can be
terminated by the bank lenders upon the occurrence of certain
events specified in the order, including the failure of the
debtors and the bank lenders to agree on a budget for the
further use of the Cash Collateral for the period subsequent to
September 9, 2003, the failure of the debtors to comply
with certain obligations contained in the order, or the failure
of the debtors to achieve certain milestones with respect to the
proposed sale of certain of the debtors assets to the
Purchasers. In the event the debtors ability to use the
Cash Collateral were terminated, the debtors would still have
the right to seek the authority of the Bankruptcy Court to use
the Cash Collateral notwithstanding any objection by the bank
lenders. There can be no assurance that the Bankruptcy Court
would grant such request.

11.     Equity

As a result of the Companys voluntary
petitions for reorganization, on July 15, 2003, the New
York Stock Exchange (NYSE) suspended trading of
Lorals common stock and has informed the Company that it
intends to initiate proceedings to delist Lorals
securities. Lorals common stock is being quoted under the
ticker symbol LRLSQ on the Pink Sheets Electronic Quotation
Service and on the Over-The-Counter Bulletin Board service. The
Company anticipates that in any plan of reorganization
ultimately confirmed by the Bankruptcy Court, the common and
preferred stock of the Company will, at best, be severely
diluted and may be eliminated entirely, with the result that
common and preferred stockholders would receive no distribution.



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

In August 2002, the Company received notice from
the NYSE that its common stock price failed to meet the NYSE
listing requirement of maintaining a trading price over $1.00.
In response, the Company requested from its shareholders, and
received at its May 29, 2003 annual shareholders
meeting, authority to effect a reverse stock split of the
Companys common stock. On June 4, 2003, the
Companys Board of Directors approved the reverse stock
split of the Companys 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 approximately 440 million to
approximately 44 million.

At its annual shareholders meeting on
May 29, 2003, the Company obtained shareholder approval to
increase the authorized number of shares of its common stock
from 75,000,000 to 125,000,000 (as adjusted for the
above-mentioned reverse stock split).

Loral completed an exchange offer for certain of
its outstanding stock options on March 7, 2003. In
connection with this exchange offer, Loral accepted and
cancelled existing stock options to purchase an aggregate of
1,488,440 shares of common stock that were tendered in the
exchange offer and agreed to grant, in exchange, new stock
options to purchase an aggregate of 602,149 shares of
common stock. The new options were to have been granted, subject
to the terms and conditions of the exchange offer, on
September 8, 2003. As a result of Lorals
Chapter 11 filing, however, Loral will not be able to grant
the new stock options. Any claims or rights that option holders
whose options were cancelled may have, will be addressed in the
context of the Chapter 11 Cases.

17



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##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                
| | ---------------
| | Preferred Stock

The Companys 6% Series C convertible
redeemable preferred stock (the Series C Preferred
Stock) and 6% Series D convertible redeemable
preferred stock (the Series D Preferred Stock)
have mandatory redemption dates in 2006 and 2007, respectively.
The Company has the right to make mandatory redemption payments
to the holders in either cash or common stock, or a combination
of the two. As a result of obtaining shareholder approval to
increase the authorized number of shares of the Companys
common stock to 125,000,000, the Company would be able to effect
payment of the total mandatory redemptions in common stock based
on the volume weighted average daily price of the Companys
common stock as defined at June 30, 2003. Accordingly, as
of June 30, 2003, all of the Companys outstanding
preferred stock was classified within the shareholders
deficit section of the condensed consolidated balance sheet (see
Note 15).

Based upon the price of the Companys common
stock at December 31, 2002, the Company did not have
available a sufficient number of authorized shares of its common
stock to effect payment of the total mandatory redemptions in
common stock in 2006 and 2007. Accordingly, as of
December 31, 2002, the Company classified an aggregate of
$125 million of its Series C Preferred Stock and
Series D Preferred Stock outside the shareholders
deficit section of the balance sheet, based on the average of
the volume weighted average daily price of the Companys
common stock as defined. As a consequence of the Chapter 11
Cases, it is not likely that a mandatory redemption will occur.

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,
Loral has deferred the payments of quarterly dividends due on
its Series C Preferred Stock and the payments of quarterly
dividends due on its Series D Preferred Stock. Dividends on
the two series continue to accrue. In the event accrued and
unpaid dividends accumulate to an amount equal to six quarterly
dividends on the Series C Preferred Stock, subject to the
applicable effects of the Chapter 11 Cases and Lorals
Bermuda insolvency proceedings, the terms of the Series C
Preferred Stock provide that holders of the majority of the
outstanding Series C Preferred Stock will be entitled to
elect two additional members to Lorals Board of Directors.
In the event accrued and unpaid dividends accumulate to an
amount equal to six consecutive quarterly dividends on the
Series D Preferred Stock, subject to the applicable effects
of the Chapter 11 Cases and Lorals Bermuda insolvency
proceedings, the terms of the Series D Preferred Stock provide
that holders of the majority of the outstanding Series D
Preferred will be entitled to elect two additional members to
Lorals Board of Directors. As of June 30, 2003,
accrued and unpaid dividends of $12 million represented
three quarterly dividend payments outstanding.

During the second quarter of 2002, in privately
negotiated exchange transactions, Loral converted
1.8 million shares of its Series C Preferred Stock and
2.7 million shares of its Series D Preferred Stock
into 3.1 million shares of its common stock. In connection
with these transactions, Loral incurred non-cash dividend
charges of $38 million, which primarily relate to the
difference between the value of the common stock issued in the
exchanges and the value of the shares that were issuable under
the stated conversion terms of the preferred stock. The non-cash
dividend charges had no impact on Lorals total
shareholders deficit as the offset was an increase in
common stock and paid-in capital.

18



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##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12.     Commitments
and Contingencies

SS/L has deferred revenue and established
warranty obligations relating to satellites sold to customers
which could be impacted by future performance. A reconciliation
of such deferred amounts for the six months ended June 30,
2003 is as follows (in millions):

|                                                                                 |  |   |      | 
|-------------------------------------------------------------------------------- |  | - | ---- | 
|Balance of deferred amounts at January 1,
    2003                               |  | $ | 14.1 | 
|Accruals for deferred amounts issued during the
    period                       |  |   |     | 
|Accruals relating to pre-existing contracts
    (including changes in estimates) |  |   | 2.3  | 
|                                                                                 |  |   |      | 
|Balance of deferred amounts at June 30, 2003                                     |  | $ | 16.4 | 
|                                                                                 |  |   |      | 

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, Loral Skynet continues to operate the satellites
which carry the transponders and originally provided for a
warranty for a period of 10 to 14 years, in the case of
sales contracts and other arrangements (19 transponders), and
the lease term, in the case of the prepaid leases (six
transponders). Depending on the contract, Loral Skynet may be
required to replace transponders which do not meet operating
specifications. 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 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. In the case of 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, seven of which are owned and operated by
Lorals subsidiaries or affiliates, have experienced minor
losses of power from their solar arrays. Although to date,
neither the Company nor any of the customers using the affected
satellites have experienced any degradation in performance,
there can be no assurance that one or more of the affected
satellites will not experience additional power loss that could
result in performance degradation, including loss of transponder
capacity 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 the number
and type of use being made of transponders then in service. 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 of the
remaining transponders. In the case of one satellite, Loral
Skynet has removed one transponder from service in order to
maintain proper power balance for the remaining transponders,
none of which have been degraded in performance as a result of
the power loss. A complete or partial loss of satellites could
result in a loss of orbital incentive payments and, in the case
of satellites owned by Loral subsidiaries and affiliates, a loss
of revenues and profits. 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, the Company believes that this
matter will not have a material adverse effect on the
consolidated financial position or results of operations of
Loral.

19



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##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. Also, the PAS 8 satellite has
experienced minor losses of power from its solar arrays, the
cause of which is unrelated to the loss of power on the
PAS 7 satellite. On June 30, 2003, PanAmSat commenced
an arbitration claiming that under its contract with SS/L it is
entitled to $23.7 million as a result of these losses. As a
result of SS/Ls Chapter 11 filing, this arbitration
is subject to the automatic stay and further proceedings in the
matter have been suspended. See Part II, Item 1, Legal
Proceedings. In addition, a Loral Skynet satellite has
experienced a minor loss of power from its solar arrays, the
cause of which may be similar to the cause of the PAS 7
anomaly. SS/L believes, however, 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.

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 since December 2001 while the customer and SS/L
were in discussions to resolve a dispute under the contract. 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, 2003, SS/L had billed and
unbilled accounts receivable and vendor financing arrangements
of $51 million including accrued interest with this
customer. Under the agreement, the customer will pay the
remainder of the purchase price under the contract of
$68.1 million (including $51 million owed to SS/L at
June 30, 2003) in installments over time, a portion of
which will be due subsequent to completion of the satellite.

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. The agreements
between Alcatel and SS/L were terminable on one years
notice, and, on February 22, 2001, Loral gave notice to
Alcatel that they would expire on February 22, 2002. In
April 2001, Alcatel commenced an arbitration proceeding
challenging the effectiveness of Lorals notice of
termination and asserting various alleged breaches of the
agreements by SS/L relating to the exchange of information and
other procedural or administrative matters. In February 2002,
the arbitral tribunal issued a partial decision, which upheld
the validity of Lorals termination effective
February 22, 2002 and Alcatels claims as to certain
breaches. The partial decision was confirmed by the District
Court for the Southern District of New York on June 25,
2002. The arbitral tribunal provided both parties with an
opportunity to file any additional claims or counterclaims they
had. In March 2002, Alcatel submitted additional claims against
Loral and SS/L and sought at least $350 million in damages
in respect of all of its claims. On January 27, 2003, Loral
and SS/L received from the arbitral tribunal a partial decision
on the additional claims and counterclaims. The arbitral
tribunal ruled in favor of Alcatel on most of its claims
alleging breaches of the Operational Agreement or Alliance
Agreement and ruled against Loral and SS/L on the counterclaims.
The arbitral tribunal deferred, pending additional submissions
and hearings, a determination whether any of the breaches caused
Alcatel to suffer injury and a determination of the amount of
damages, if any.

On June 30, 2003, Loral, SS/L and Alcatel
entered into a master settlement agreement in settlement of all
claims among the parties. 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, L.P.,
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, L.P., Loral recognized an
extraordinary gain of $14 million, which represents the
minority interest liability in excess of the fair value of the
acquired net assets. Under the terms of the agreement, the
arbitration and a related court proceeding to confirm the
arbitral tribunals January partial award were suspended,
with termination to occur on the date of confirmation of a

20



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##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 agreement, 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
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. On
December 23, 1998, the Office of Defense Trade Controls, or
ODTC, of the U.S. Department of State temporarily suspended
a previously approved technical assistance agreement under which
SS/L had been preparing for the launch of the ChinaSat-8
satellite. In addition, SS/L was required to re-apply for new
export licenses from the State Department to permit the launch
of ChinaSat-8 on a Long March launch vehicle when the old export
licenses issued by the Commerce Department, the agency that
previously had jurisdiction over satellite licensing, expired in
March 2000. On January 4, 2001, the ODTC, while not
rejecting these license applications, notified SS/L that they
were being returned without action. On January 9, 2002,
Loral, SS/L and the United States Department of State entered
into a consent agreement (the Consent Agreement)
settling and disposing of all civil charges, penalties and
sanctions associated with alleged violations by SS/L of the Arms
Export Control Act and its implementing regulations. The Company
recorded a $12 million charge in 2001 for the penalties
associated with the Consent Agreement. The Consent Agreement
provides that the State Department agrees, assuming the
Companys and SS/Ls faithful adherence to the terms
of the Consent Agreement, and the Arms Export Control Act and
its implementing regulations, that decisions concerning export
licenses for the ChinaSat-8 spacecraft will be made on the basis
of the security and foreign policy interests of the United
States, including matters relating to U.S. relations with the
Peoples Republic of China, without reference to the State
Departments previously expressed concerns regarding
SS/Ls reliability, which concerns are considered to be
appropriately mitigated through the operation of various
provisions of the Consent Agreement. Discussions between SS/L
and the State Department regarding SS/Ls obtaining the
approvals required for the launch of ChinaSat-8 are continuing.

If ChinaSat were to terminate its contract with
SS/L for ChinaSat-8 as a result of these delays, ChinaSat may
seek a refund of $134 million for payments made to SS/L as
well as penalties of up to $11 million. The Company does
not believe that ChinaSat is entitled to such a refund or
penalties and would vigorously contest any such claims by
ChinaSat. A portion of the potential claim relates to amounts
that were paid to a launch vehicle provider. To the extent that
SS/L or ChinaSat is able to recover some or all of the
$52 million deposit payment on the Chinese launch vehicle,
this recovery would reduce the amount of any claim. SS/L
believes that ChinaSat bears the risk of loss in the event that
the deposit payments are not refunded by the launch vehicle
provider. SS/L has commenced discussions with the launch vehicle
provider to recover this deposit. There can be no assurance,
however, that SS/L will be able either to obtain a refund from
the launch provider or to find a replacement customer for the
Chinese launch vehicle. If ChinaSat were to terminate the
contract, SS/L estimates that it would incur costs of
approximately $38 million to refurbish and retrofit the
satellite so that it could be sold to another customer, which
resale cannot be guaranteed.

21



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##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On September 20, 2002, Loral entered into an
agreement with APT for the 50/50 joint acquisition of the
Apstar V satellite, a satellite under construction by SS/L
for APT. Lorals aggregate purchase price for its 50%
interest in the satellite will be 50% of the project cost of
constructing, launching and insuring the satellite. At launch,
Loral will obtain title to 25% of the satellite, in return for
payment by Loral of half of its purchase price, a portion of
which is being funded by existing launch vehicle deposits. At
June 30, 2003, the total purchase price for Lorals
50% interest in the satellite was estimated at
$113 million. Subject to certain acceleration rights on the
part of Loral, the remainder of the estimated purchase price
will be paid by Loral as follows: $7 million for
2.5 additional transponders on the second anniversary of
the satellites in-service date; $13 million for three
additional transponders on the third anniversary; and $18
million for four additional transponders on each of the fourth
and fifth anniversary. Amounts incurred to date attributable to
the transponders to be acquired from APT in the future of
$25 million, are being treated for accounting purposes as a
repurchase obligation based on the present value of such
obligations and are included in satellites under construction
and long-term liabilities on Lorals condensed consolidated
balance sheet as of June 30, 2003.

In March 2003, as a result of finalizing launch
arrangements for the satellite, Loral agreed to take two fewer
transponder (resulting in a reduction in the satellite
percentage ownership allocation between APT and Loral from 50/50
to 54/46), without changing the 50/50 cost allocation in the
satellite as described above. More recently and in response to
concerns regarding the timely receipt of necessary export
licenses to transfer title of the satellite from SS/L to APT,
Loral and APT have been engaged in discussions to revise their
existing arrangement to provide for transfer at launch of a
prepaid leasehold interest, instead of title, to APT. Under this
arrangement, Loral would hold title to the satellite, with APT
leasing on a prepaid basis 77% of the transponders on the
satellite commencing at launch. APTs leasehold interest in
the satellite would be reduced over time (ultimately to 54%) as
Loral makes additional payments towards its share of the
satellite project cost. Other than the retention of title,
neither Lorals economic interest nor its payment
obligations with respect to the satellite would be changed as a
result of this arrangement. This new arrangement may be subject
to Bankruptcy Court approval.

Sirius, a customer of SS/L, is currently in the
process of rolling out its business. On March 7, 2003,
Sirius completed its recapitalization plan and received
$200 million in cash from third party investors and
exchanged approximately $636 million of its debt and all of
its $525 million of preferred stock into common stock. As
part of this recapitalization, SS/L converted all of its vendor
financing receivables of approximately $76 million into
58,964,981 shares of common stock of Sirius. For the three
and six months ended June 30, 2003, SS/L realized net
proceeds of $36 million and $46 million, respectively,
from the sale of 41 million shares and 59 million
shares, respectively, of the Sirius common stock that it
received in the recapitalization, and realized gains on such
sales of $17 million and $18 million, respectively. As
of June 30, 2003, SS/L had sold all of its shares of Sirius
common stock. At December 31, 2002, the receivables from
Sirius were classified as short-term vendor financing
receivables. In the first quarter of 2003, SS/L recorded a
charge on the vendor financing receivables due from Sirius of
$10 million, 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s common stock on March 7,
2003 of $28 million. The increase in the value of
Sirius common stock from March 7, 2003 to
March 31, 2003 of $10 million was recorded as an
adjustment to accumulated other comprehensive income
(loss) as of March 31, 2003.

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. Through the assignment of satellites to launch
vehicles, refunds and cancellations (as a result of current
market conditions), SS/L has reduced its launch deposits by
$111 million from December 31, 2001 through
June 30, 2003. SS/L had launch services agreements with
International Launch Services (ILS) which covered
three launches. 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, purporting to terminate all three launches and
asserting a right to retain $42.5 million in deposits,
without

22



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##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

prejudice to any other legal claims or remedies.
Despite ILSs termination of 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,
and 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 in the second
quarter of 2003 with respect to this launch. SS/L believes that
ILSs claims are without merit and intends to defend
against them vigorously and to seek recovery of its deposits and
termination liabilities. The Company does not believe that this
matter will have a material adverse effect on its consolidated
financial position and its results of operations, although no
assurances can be provided.

While the Company has in the past, consistent
with industry practice and the requirements in the
Companys debt agreements, typically obtained in-orbit
insurance for its satellites, the Company cannot guarantee that,
upon a policys expiration, the Company will 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. Five satellites
owned by Loral Skynet and Loral Orion have the same solar array
configuration as two other 1300 class satellites manufactured by
SS/L that have experienced solar array failures. 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, the Company does not believe that these
anomalies will affect these satellites. The insurance coverage
for Telstar 10/Apstar IIR, however, provides for coverage of
losses due to solar array failures only in the event of a
capacity loss of 75% or more. The Company believes, that the
insurers will require either exclusions of, or limitations on,
coverage due to solar array failures in connection with renewals
of insurance for the other four satellites in 2003 and 2004. An
uninsured loss of a satellite would have a material adverse
effect on the Companys consolidated financial position and
its results of operations. Moreover, the Company is required
under the terms of its bank facilities and cash collateral order
to use the insurance proceeds from any launch or in-orbit
failure of a satellite owned by Loral SpaceCom or Loral
Satellite to prepay the bank loans, and as a result, these
insurance proceeds would not be available to Loral to build a
replacement for the lost satellite, which would result in an
adverse effect on its future revenue.

In an order released on August 8, 2003, the
FCC added Telstar 13 to the Permitted Space Station
List in the C-Band frequency at 121 degrees W.L. As a
result of this action, earth stations located in the U.S. will
be able to communicate with the Telstar 13 satellite, which
was successfully launched on August 7, 2003, and
Telstar 13 will be permitted to operate in the U.S. using a
non-U.S. ITU filing. The order contains several conditions on
this authorization, including (1) a requirement that
Telstar 13 be in compliance with all applicable current and
future operational requirements as a result of coordination
agreements reached with other satellite systems; and
(2) that, in the absence of a coordination agreement with a
satellite network with higher ITU priority, Telstar 13 must
cease service to the U.S. market immediately upon launch and
operation of the higher ITU priority satellite, or be subject to
further conditions designed to address potential harmful
interference to a satellite with ITU date precedence. New Skies
Satellites has asserted that its non-U.S. ITU filing at
120.8 degrees W.L. has ITU priority over Telstar 13.
Loral Skynet is continuing its international coordination of the
121 degrees W.L. slot. There can be no assurance, however,
that coordination discussions will be successful.

On October 21, 2002, National Telecom of
India Ltd. (Natelco) filed suit against Loral and
Loral CyberStar 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.
Loral believes that the claims are without merit and intends to
vigorously defend

23



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

against them. As a result of Lorals
Chapter 11 filing, this lawsuit is subject to the automatic
stay and further proceedings in the matter have been suspended.
See Part II, Item 1, Legal Proceedings.

The Company is subject to various other legal
proceedings and claims, either asserted or unasserted, that
arise in the ordinary course of business. Although the outcome
of these claims cannot be predicted with certainty, the Company
does not believe that any of these other existing legal matters
will have a material adverse effect on its consolidated
financial position or results of operations. These claims
against the Company are subject to the automatic stay as a
result of the commencement of the Chapter 11 Cases. See
Part II, Item 1, Legal Proceedings.

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 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 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 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 or
affiliated therewith. 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. Loral believes that it has meritorious defenses to this
class action lawsuit and intends to pursue them vigorously. As a
result of Lorals Chapter 11 filing, 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. See Part II,
Item 1, Legal Proceedings.

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 common stock of Loral Space & Communications Ltd.
(Loral) 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 or affiliated therewith. Loral and
Messrs. Schwartz and Townsend have filed a motion to
dismiss the complaint in

24



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

its entirety. At oral argument on the motion on
May 9, 2003, the Court indicated its intent to dismiss the
complaint but gave the plaintiffs thirty days to amend their
complaint to state a cause of action. In the interim, the Court
denied the motion without prejudice to its renewal. On
June 9, 2003, the plaintiffs filed an amended complaint
alleging essentially the same claims as in the original amended
complaint. As a result of Lorals Chapter 11 filing,
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 who
served a motion to dismiss the amended complaint on
July 31, 2003. See Part II, Item 1, Legal
Proceedings.

In addition, the primary insurer under
Lorals directors and officers liability insurance policy
has denied coverage for the 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 their coverage position. In May 2003, Loral
and the other defendants served their 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, Loral and
the other defendants also filed a third party complaint against
the excess insurers seeking a declaration that they are
obligated to provide coverage. Loral believes that the insurers
have wrongfully denied coverage and intends to defend against
the denial vigorously. As a result of Lorals
Chapter 11 filing, 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. See Part II, Item 1, Legal Proceedings.

13.     Loss Per
Share

Basic loss per share is computed based upon the
weighted average number of shares of common stock outstanding.
For the three and six months ended June 30, 2003 and 2002,
diluted loss per share excludes the assumed conversion of the
Companys outstanding Series C Preferred Stock and the
Series D Preferred Stock into shares of common stock, as
their effect would have been antidilutive. For the three months
ended June 30, 2003 and 2002, weighted options equating to
zero shares and approximately 0.2 million shares of common
stock, respectively, and for the six months ended June 30,
2003 and 2002 weighted options equating to zero shares and
approximately 0.3 million shares of common stock,
respectively, as calculated using the treasury stock method,
were excluded from the calculation of diluted loss per share, as
the effect would have been antidilutive.

25



---



##### 



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,        
|                                                  |                                                                                                                                    |                    |   |                 
|                                                  |                                                                                                                                    | 2003               |   | 2002             |   | 2003 |   | 2002       
|                                                  |                                                                                                                                    |                    |   |                  |   |      |   |            
|                                                  |                                                                                                                                    |                    |   | As Restated      |   |      |   | As Restated
|Numerator:                                        |                                                                                                                                    |                    |   |                  |   |      |   |             |   |  |   |          |   |  |   |         
|                                                  | Loss before cumulative effect of change in
    accounting principle and extraordinary gain on acquisition of
    minority interest |                    | $ | (109,404         | ) |      | $ | (22,569     | ) |  | $ | (157,578 | ) |  | $ | (42,429  | )
|                                                  | Cumulative effect of change in accounting
    principle, net of taxes                                                              |                    |   |                 |   |      |   |            |   |  |   |         |   |  |   | (876,500 | )
|                                                  | Extraordinary gain on acquisition of minority
    interest, net of taxes                                                           |                    |   | 13,615           |   |      |   |            |   |  |   | 13,615   |   |  |   |         |  
|                                                  |                                                                                                                                    |                    |   |                  |   |      |   |             |   |  |   |          |   |  |   |         
|                                                  | Net loss                                                                                                                           |                    |   | (95,789          | ) |      |   | (22,569     | ) |  |   | (143,963 | ) |  |   | (918,929 | )
|                                                  | Preferred dividends                                                                                                                |                    |   | (3,360           | ) |      |   | (46,810     | ) |  |   | (6,720   | ) |  |   | (58,773  | )
|                                                  |                                                                                                                                    |                    |   |                  |   |      |   |             |   |  |   |          |   |  |   |         
|                                                  | Numerator for basic and diluted loss per
    share  net loss applicable to common shareholders                                    |                    | $ | (99,149          | ) |      | $ | (69,379     | ) |  | $ | (150,683 | ) |  | $ | (977,702 | )
|                                                  |                                                                                                                                    |                    |   |                  |   |      |   |             |   |  |   |          |   |  |   |         
|Denominator for basic and diluted loss per share: |                                                                                                                                    |                    |   |                  |   |      |   |             |   |  |   |          |   |  |   |         
|                                                  | Weighted average shares of common stock                                                                                            |                    |   | 43,850           |   |      |   | 35,817      |   |  |   | 43,531   |   |  |   | 34,761   |  
|                                                  |                                                                                                                                    |                    |   |                  |   |      |   |             |   |  |   |          |   |  |   |         
|Basic and diluted loss per share:                 |                                                                                                                                    |                    |   |                  |   |      |   |             |   |  |   |          |   |  |   |         
|                                                  | Before cumulative effect of change in accounting
    principle and extraordinary gain on acquisition of minority
    interest      |                    | $ | (2.57            | ) |      | $ | (1.94       | ) |  | $ | (3.77    | ) |  | $ | (2.91    | )
|                                                  | Cumulative effect of change in accounting
    principle                                                                            |                    |   |                 |   |      |   |            |   |  |   |         |   |  |   | (25.22   | )
|                                                  | Extraordinary gain on acquisition of minority
    interest                                                                         |                    |   | 0.31             |   |      |   |            |   |  |   | 0.31     |   |  |   |         |  
|                                                  |                                                                                                                                    |                    |   |                  |   |      |   |             |   |  |   |          |   |  |   |         
|                                                  | Loss per share                                                                                                                     |                    | $ | (2.26            | ) |      | $ | (1.94       | ) |  | $ | (3.46    | ) |  | $ | (28.13   | )
|                                                  |                                                                                                                                    |                    |   |                  |   |      |   |             |   |  |   |          |   |  |   |         

14.     Segments

Loral is organized into two operating businesses:
fixed satellite services and satellite manufacturing and
technology (see Note 1).

In evaluating financial performance, management
uses revenues and operating income (loss) before depreciation
and amortization, including amortization of unearned stock
compensation (EBITDA) as the measure of a
segments profit or loss. Intersegment revenues primarily
consist of satellites under construction by SS/L for fixed
satellite services and the leasing of transponder capacity by
SS/L from fixed satellite services. In the first quarter of
2003, management changed its basis of evaluating and reporting
the financial performance of the satellite manufacturing and
technology segment to conform it to U.S. generally accepted
accounting principles for commercial contracts and has restated
the segment information for 2002 accordingly. Previously the
segment was evaluated and reported by management in accordance
with accounting principles applicable to government contracts
whereby all costs incurred, including general and administrative
costs were allocated to customer programs (see Note 4).

26



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

Three Months Ended June 30,
2003

|                                      |  |           |         |               |  |              |       |       |  |   |       |   |  |   |         |  
|------------------------------------- |  | --------- | ------- | ------------- |  | ------------ | ----- | ----- |  | - | ----- | - |  | - | ------- | -
|                                      |  |           |         | Satellite     |  |              |       |      
|                                      |  | Fixed     |         | Manufacturing |  |              |       |      
|                                      |  | Satellite |         | and           |  |              |       |      
|                                      |  | Services  |         | Technology    |  | Corporate(1) |       | Total
|                                      |  |           |         |               |  |              |       |      
|Revenues and EBITDA:                  |  |           |         |               |  |              |       |       |  |   |       |   |  |   |         |  
|Revenues from external customers(2)   |  | $         | 72.0    |               |  | $            | 71.2  |       |  |   |       |   |  | $ | 143.2   |  
|Intersegment revenues                 |  |           | 1.1     |               |  |              | 9.9   |       |  |   |       |   |  |   | 11.0    |  
|                                      |  |           |         |               |  |              |       |       |  |   |       |   |  |   |         |  
|Operating segment revenues            |  | $         | 73.1    |               |  | $            | 81.1  |       |  |   |       |   |  |   | 154.2   |  
|                                      |  |           |         |               |  |              |       |       |  |   |       |   |  |   |         |  
|Eliminations(3)                       |  |           |         |               |  |              |       |       |  |   |       |   |  |   | (11.6   | )
|                                      |  |           |         |               |  |              |       |       |  |   |       |   |  |   |         |  
|Operating revenues as reported        |  |           |         |               |  |              |       |       |  |   |       |   |  | $ | 142.6   |  
|                                      |  |           |         |               |  |              |       |       |  |   |       |   |  |   |         |  
|Segment EBITDA before eliminations(4) |  | $         | 44.2    |               |  | $            | (88.5 | )     |  | $ | (9.9  | ) |  | $ | (54.2   | )
|                                      |  |           |         |               |  |              |       |       |  |   |       |   |  |   |         |  
|Eliminations(3)                       |  |           |         |               |  |              |       |       |  |   |       |   |  |   | (2.3    | )
|                                      |  |           |         |               |  |              |       |       |  |   |       |   |  |   |         |  
|EBITDA(4)                             |  |           |         |               |  |              |       |       |  |   |       |   |  |   | (56.5   | )
|Depreciation and amortization(5)(6)   |  | $         | (37.1   | )             |  | $            | (7.2  | )     |  | $ | (0.1  | ) |  |   | (44.4   | )
|                                      |  |           |         |               |  |              |       |       |  |   |       |   |  |   |         |  
|Operating loss                        |  |           |         |               |  |              |       |       |  |   |       |   |  | $ | (100.9  | )
|                                      |  |           |         |               |  |              |       |       |  |   |       |   |  |   |         |  
|Other Data:                           |  |           |         |               |  |              |       |       |  |   |       |   |  |   |         |  
|Total assets(6)                       |  | $         | 1,884.4 |               |  | $            | 398.7 |       |  | $ | 165.2 |   |  | $ | 2,448.3 |  
|                                      |  |           |         |               |  |              |       |       |  |   |       |   |  |   |         |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents corporate expenses incurred in support
    of the Companys operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(2) | Includes revenues from affiliates of
    $8.2 million and $27.9 million for the three months
    ended June 30, 2003 and 2002, respectively and
    $23.9 million and $50.6 million for the six months
    ended June 30, 2003 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(3) | Represents the elimination of intercompany sales
    and EBITDA, primarily for satellites under construction by SS/L
    for wholly owned subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(4) | EBITDA (which is equivalent to operating income
    (loss) before depreciation and amortization, including
    amortization of unearned stock compensation) is provided because
    it is a measure commonly used in the communications industry to
    analyze companies on the basis of operating performance,
    leverage and liquidity and is presented to enhance the
    understanding of Lorals operating results. EBITDA is not
    an alternative to net income as an indicator of a companys
    operating performance, or cash flow from operations as a measure
    of a companys liquidity. EBITDA may be calculated
    differently and, therefore, may not be comparable to similarly
    titled measures reported by other companies.
|   
|(5) | Includes amortization of unearned stock
    compensation charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(6) | Amounts are presented after the elimination of
    intercompany profit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

27



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Six Months Ended June 30, 2003

|                                      |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|------------------------------------- |  | --------- | ----- | ------------- |  | ------------ | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                                      |  |           |       | Satellite     |  |              |        |      
|                                      |  | Fixed     |       | Manufacturing |  |              |        |      
|                                      |  | Satellite |       | and           |  |              |        |      
|                                      |  | Services  |       | Technology    |  | Corporate(1) |        | Total
|                                      |  |           |       |               |  |              |        |      
|Revenues and EBITDA:                  |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Revenues from external customers(2)   |  | $         | 156.0 |               |  | $            | 186.2  |       |  |   |       |   |  | $ | 342.2  |  
|Intersegment revenues                 |  |           | 2.1   |               |  |              | 26.4   |       |  |   |       |   |  |   | 28.5   |  
|                                      |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Operating segment revenues            |  | $         | 158.1 |               |  | $            | 212.6  |       |  |   |       |   |  |   | 370.7  |  
|                                      |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Eliminations(3)                       |  |           |       |               |  |              |        |       |  |   |       |   |  |   | (29.8  | )
|                                      |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Operating revenues as reported        |  |           |       |               |  |              |        |       |  |   |       |   |  | $ | 340.9  |  
|                                      |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Segment EBITDA before eliminations(4) |  | $         | 86.7  |               |  | $            | (101.0 | )     |  | $ | (19.0 | ) |  | $ | (33.3  | )
|                                      |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Eliminations(3)                       |  |           |       |               |  |              |        |       |  |   |       |   |  |   | (7.4   | )
|                                      |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|EBITDA(4)                             |  |           |       |               |  |              |        |       |  |   |       |   |  |   | (40.7  | )
|Depreciation and amortization(5)(6)   |  | $         | (75.0 | )             |  | $            | (13.9  | )     |  | $ | (0.3  | ) |  |   | (89.2  | )
|                                      |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  
|Operating loss                        |  |           |       |               |  |              |        |       |  |   |       |   |  | $ | (129.9 | )
|                                      |  |           |       |               |  |              |        |       |  |   |       |   |  |   |        |  

Three Months Ended June 30,
2002

As Restated


|                                      |  |           |       |               |  |              |       |       |  |   |      |   |  |   |       |  
|------------------------------------- |  | --------- | ----- | ------------- |  | ------------ | ----- | ----- |  | - | ---- | - |  | - | ----- | -
|                                      |  |           |       | Satellite     |  |              |       |      
|                                      |  | Fixed     |       | Manufacturing |  |              |       |      
|                                      |  | Satellite |       | and           |  |              |       |      
|                                      |  | Services  |       | Technology    |  | Corporate(1) |       | Total
|                                      |  |           |       |               |  |              |       |      
|Revenues and EBITDA:                  |  |           |       |               |  |              |       |       |  |   |      |   |  |   |       |  
|Revenues from external customers(2)   |  | $         | 101.8 |               |  | $            | 214.5 |       |  |   |      |   |  | $ | 316.3 |  
|Intersegment revenues                 |  |           | 1.1   |               |  |              | 35.5  |       |  |   |      |   |  |   | 36.6  |  
|                                      |  |           |       |               |  |              |       |       |  |   |      |   |  |   |       |  
|Operating segment revenues            |  | $         | 102.9 |               |  | $            | 250.0 |       |  |   |      |   |  |   | 352.9 |  
|                                      |  |           |       |               |  |              |       |       |  |   |      |   |  |   |       |  
|Eliminations(3)                       |  |           |       |               |  |              |       |       |  |   |      |   |  |   | (36.5 | )
|                                      |  |           |       |               |  |              |       |       |  |   |      |   |  |   |       |  
|Operating revenues as reported        |  |           |       |               |  |              |       |       |  |   |      |   |  | $ | 316.4 |  
|                                      |  |           |       |               |  |              |       |       |  |   |      |   |  |   |       |  
|Segment EBITDA before eliminations(4) |  | $         | 60.4  |               |  | $            | 9.7   |       |  | $ | (8.8 | ) |  | $ | 61.3  |  
|                                      |  |           |       |               |  |              |       |       |  |   |      |   |  |   |       |  
|Eliminations(3)                       |  |           |       |               |  |              |       |       |  |   |      |   |  |   | (4.5  | )
|                                      |  |           |       |               |  |              |       |       |  |   |      |   |  |   |       |  
|EBITDA(4)                             |  |           |       |               |  |              |       |       |  |   |      |   |  |   | 56.8  |  
|Depreciation and amortization(5)(6)   |  | $         | (38.4 | )             |  | $            | (9.5  | )     |  | $ | (0.2 | ) |  |   | (48.1 | )
|                                      |  |           |       |               |  |              |       |       |  |   |      |   |  |   |       |  
|Operating income                      |  |           |       |               |  |              |       |       |  |   |      |   |  | $ | 8.7   |  
|                                      |  |           |       |               |  |              |       |       |  |   |      |   |  |   |       |  

28



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Six Months Ended June 30, 2002

As Restated


|                                      |  |           |       |               |  |              |       |       |  |   |       |   |  |   |       |  
|------------------------------------- |  | --------- | ----- | ------------- |  | ------------ | ----- | ----- |  | - | ----- | - |  | - | ----- | -
|                                      |  |           |       | Satellite     |  |              |       |      
|                                      |  | Fixed     |       | Manufacturing |  |              |       |      
|                                      |  | Satellite |       | and           |  |              |       |      
|                                      |  | Services  |       | Technology    |  | Corporate(1) |       | Total
|                                      |  |           |       |               |  |              |       |      
|Revenues and EBITDA:                  |  |           |       |               |  |              |       |       |  |   |       |   |  |   |       |  
|Revenues from external customers(2)   |  | $         | 211.4 |               |  | $            | 413.0 |       |  |   |       |   |  | $ | 624.4 |  
|Intersegment revenues                 |  |           | 2.1   |               |  |              | 79.6  |       |  |   |       |   |  |   | 81.7  |  
|                                      |  |           |       |               |  |              |       |       |  |   |       |   |  |   |       |  
|Operating segment revenues            |  | $         | 213.5 |               |  | $            | 492.6 |       |  |   |       |   |  |   | 706.1 |  
|                                      |  |           |       |               |  |              |       |       |  |   |       |   |  |   |       |  
|Eliminations(3)                       |  |           |       |               |  |              |       |       |  |   |       |   |  |   | (81.6 | )
|                                      |  |           |       |               |  |              |       |       |  |   |       |   |  |   |       |  
|Operating revenues as reported        |  |           |       |               |  |              |       |       |  |   |       |   |  | $ | 624.5 |  
|                                      |  |           |       |               |  |              |       |       |  |   |       |   |  |   |       |  
|Segment EBITDA before eliminations(4) |  | $         | 126.4 |               |  | $            | 21.2  |       |  | $ | (17.5 | ) |  | $ | 130.1 |  
|                                      |  |           |       |               |  |              |       |       |  |   |       |   |  |   |       |  
|Eliminations(3)                       |  |           |       |               |  |              |       |       |  |   |       |   |  |   | (11.5 | )
|                                      |  |           |       |               |  |              |       |       |  |   |       |   |  |   |       |  
|EBITDA(4)                             |  |           |       |               |  |              |       |       |  |   |       |   |  |   | 118.6 |  
|Depreciation and amortization(5)(6)   |  | $         | (78.3 | )             |  | $            | (16.5 | )     |  | $ | (0.4  | ) |  |   | (95.2 | )
|                                      |  |           |       |               |  |              |       |       |  |   |       |   |  |   |       |  
|Operating income                      |  |           |       |               |  |              |       |       |  |   |       |   |  | $ | 23.4  |  
|                                      |  |           |       |               |  |              |       |       |  |   |       |   |  |   |       |  

15.     New
Accounting Pronouncements



| |         
| | --------
| | SFAS 143

In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations
(SFAS 143). SFAS 143 addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result
from the acquisition, construction, development and the normal
operation of a long-lived asset, except for certain obligations
of lessees. The Company has determined that there was no effect
on its consolidated financial position or results of operations
upon the adoption of SFAS 143 on January 1, 2003.

FIN 45

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Others (FIN 45).
FIN 45 elaborates on the disclosures to be made by the
guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. It
also requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this interpretation were applicable on
a prospective basis to guarantees issued or modified after
December 31, 2002; while the provisions of the disclosure
requirements were effective for financial statements of interim
or annual reports ending after December 15, 2002. The
Company adopted the disclosure provisions of FIN 45 during the
fourth quarter of 2002. The Company adopted the recognition
provisions of FIN 45 on January 1, 2003 and determined
that there was no effect on its consolidated financial position
or results of operations.

29



---



##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

FIN 46

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin
No. 51 (FIN 46). FIN 46 requires certain
variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated
financial support from other parties. FIN 46 is effective
for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN
46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company is currently
evaluating the provisions of FIN 46.

SFAS
149

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS 149). SFAS 149 amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives) and
for hedging activities under FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities.
SFAS 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships
designated after June 30, 2003, except for certain
provisions that relate to SFAS 133 Implementation Issues
that have been effective for fiscal quarters prior to
June 15, 2003. The Company is currently evaluating the
provisions of SFAS 149.

SFAS 150

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity
(SFAS 150). SFAS 150 establishes standards
for how an issuer classifies and measures in its statement of
financial position certain financial instruments with
characteristics of both liabilities and equity. SFAS 150
requires that an issuer classify a financial instrument that is
within the scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an
obligation of the issuer. SFAS 150 is effective for the
Company beginning on July 1, 2003. The Company is currently
evaluating the provisions of SFAS 150.



|    |                                                                                             
|--- | --------------------------------------------------------------------------------------------
|16. | 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 senior notes of Loral Orion (the
Subsidiary Issuer), Lorals 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 (including the Sellers and SS/L) of
Loral 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 (the Non-Guarantor Subsidiaries) of
Loral Orion as of June 30, 2003 and December 31, 2002
and for the three and six months ended June 30, 2003 and
2002. The 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. The
Companys significant transactions with its subsidiaries,
other than the investment account and related equity in net loss
of unconsolidated subsidiaries, are intercompany payables and
receivables between its subsidiaries resulting primarily from
the funding of the construction of satellites for the fixed
satellite services segment.

30



---



##### 



LORAL SPACE & COMMUNICATIONS LTD &
SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CONDENSED CONSOLIDATING BALANCE
SHEET

June 30, 2003


(in thousands)


|                                                           |                                                        |                                                          |          |            |          |              |          |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |            |           |  
|---------------------------------------------------------- | ------------------------------------------------------ | -------------------------------------------------------- | -------- | ---------- | -------- | ------------ | -------- | ------------- | -------- | ------------ | -------- | ------------ | ------ |  | ---------- | ---------- | ---------- | - | --------- | --------- | --------- | - | --------- | ---------- | --------- | -
|                                                           |                                                        | Parent                                                   |          | Subsidiary |          | Guarantor    |          | Non-Guarantor |          |              |          |             
|                                                           |                                                        | Company                                                  |          | Issuer     |          | Subsidiaries |          | Subsidiaries  |          | Eliminations |          | Consolidated
|                                                           |                                                        |                                                          |          |            |          |              |          |               |          |              |          |             
|Current assets:                                            |                                                        |                                                          |          |            |          |              |          |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           | Cash and cash equivalents                              |                                                          | $        | 4,351      |          |              | $        | 31,663        |          |              | $        |             |        |  | $          | 91,753     |            |   | $         |          |           |   | $         | 127,767    |          
|                                                           | Accounts receivable, net                               |                                                          |          |           |          |              |          | 11,259        |          |              |          | 30           |        |  |            | 20,314     |            |   |           |          |           |   |           | 31,603     |          
|                                                           | Contracts-in-process                                   |                                                          |          |           |          |              |          |              |          |              |          |             |        |  |            | 34,312     |            |   |           |          |           |   |           | 34,312     |          
|                                                           | Inventories                                            |                                                          |          |           |          |              |          |              |          |              |          |             |        |  |            | 73,459     |            |   |           |          |           |   |           | 73,459     |          
|                                                           | Other current assets                                   |                                                          |          | 6,221      |          |              |          | 5,182         |          |              |          | 3,872        |        |  |            | 23,203     |            |   |           | (924      | )         |   |           | 37,554     |          
|                                                           |                                                        |                                                          |          |            |          |              |          |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           |                                                        | Total current assets                                     |          |            | 10,572   |              |          |               | 48,104   |              |          |              | 3,902  |  |            |            | 243,041    |   |           |           | (924      | ) |           |            | 304,695   |  
|Property, plant and equipment, net                         |                                                        |                                                          |         |            |          |              | 297,622  |               |          |              | 194,194  |              |        |  | 1,397,340  |            |            |   | (22,703   | )         |           |   | 1,866,453 |           
|Long-term receivables                                      |                                                        |                                                          |         |            |          |              |         |               |          |              |         |              |        |  | 78,086     |            |            |   |          |           |           |   | 78,086    |           
|Notes receivable (payable) unconsolidated
    subsidiaries |                                                        |                                                          | 140,216  |            |          |              | (33,126  | )             |          |              |         |              |        |  | (107,090   | )          |            |   |          |           |           |   |          |           
|Due to (from) unconsolidated subsidiaries                  |                                                        |                                                          | 36,754   |            |          |              | (155,766 | )             |          |              | 130,195  |              |        |  | (26,468    | )          |            |   | 15,285    |           |           |   |          |           
|Investments in unconsolidated subsidiaries                 |                                                        |                                                          | (137,082 | )          |          |              | 313,234  |               |          |              | (271,698 | )            |        |  | (1,646,139 | )          |            |   | 1,741,685 |           |           |   |          |           
|Investments in and advances to affiliates                  |                                                        |                                                          | 8,223    |            |          |              |         |               |          |              |         |              |        |  | 79,584     |            |            |   |          |           |           |   | 87,807    |           
|Deposits                                                   |                                                        |                                                          |         |            |          |              |         |               |          |              |         |              |        |  | 34,750     |            |            |   |          |           |           |   | 34,750    |           
|Other assets                                               |                                                        |                                                          | 2,676    |            |          |              | 14,241   |               |          |              | 647      |              |        |  | 58,911     |            |            |   |          |           |           |   | 76,475    |           
|                                                           |                                                        |                                                          |          |            |          |              |          |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           |                                                        | Total assets                                             |          | $          | 61,359   |              |          | $             | 484,309  |              |          | $            | 57,240 |  |            | $          | 112,015    |   |           | $         | 1,733,343 |   |           | $          | 2,448,266 |  
|                                                           |                                                        |                                                          |          |            |          |              |          |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|Current liabilities:                                       |                                                        |                                                          |          |            |          |              |          |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           | Current portion of long-term debt                      |                                                          | $        | 350,000    |          |              | $        | 927,141       |          |              | $        |             |        |  | $          | 966,861    |            |   | $         |          |           |   | $         | 2,244,002  |          
|                                                           | Accounts payable                                       |                                                          |          | 1,445      |          |              |          | 447           |          |              |          | 962          |        |  |            | 41,881     |            |   |           |          |           |   |           | 44,735     |          
|                                                           | Accrued employment costs                               |                                                          |          |           |          |              |          |              |          |              |          |             |        |  |            | 29,295     |            |   |           |          |           |   |           | 29,295     |          
|                                                           | Customer advances                                      |                                                          |          |           |          |              |          | 4,223         |          |              |          | 293          |        |  |            | 58,777     |            |   |           |          |           |   |           | 63,293     |          
|                                                           | Accrued interest and preferred dividends               |                                                          |          | 27,559     |          |              |          | 4,700         |          |              |          |             |        |  |            | 12,487     |            |   |           |          |           |   |           | 44,746     |          
|                                                           | Income taxes payable                                   |                                                          |          | 8,123      |          |              |          |              |          |              |          |             |        |  |            | 30,761     |            |   |           | (1,820    | )         |   |           | 37,064     |          
|                                                           | Other current liabilities                              |                                                          |          |           |          |              |          | 50            |          |              |          |             |        |  |            | 51,974     |            |   |           |          |           |   |           | 52,024     |          
|                                                           |                                                        |                                                          |          |            |          |              |          |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           |                                                        | Total current liabilities                                |          |            | 387,127  |              |          |               | 936,561  |              |          |              | 1,255  |  |            |            | 1,192,036  |   |           |           | (1,820    | ) |           |            | 2,515,159 |  
|Pension and other postretirement liabilities               |                                                        |                                                          |         |            |          |              |         |               |          |              |         |              |        |  | 129,672    |            |            |   |          |           |           |   | 129,672   |           
|Long-term liabilities                                      |                                                        |                                                          | 51,972   |            |          |              | 7,979    |               |          |              | 15,964   |              |        |  | 136,990    |            |            |   | (34,289   | )         |           |   | 178,616   |           
|Minority interest                                          |                                                        |                                                          |         |            |          |              |         |               |          |              |         |              |        |  | 2,559      |            |            |   |          |           |           |   | 2,559     |           
|Shareholders (deficit) equity :                           |                                                        |                                                          |          |            |          |              |          |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           | 6% Series C convertible redeemable preferred
    stock |                                                          |          | 184,753    |          |              |          |              |          |              |          |             |        |  |            |           |            |   |           |          |           |   |           | 184,753    |          
|                                                           | 6% Series D convertible redeemable preferred
    stock |                                                          |          | 35,624     |          |              |          |              |          |              |          |             |        |  |            |           |            |   |           |          |           |   |           | 35,624     |          
|                                                           | Common stock                                           |                                                          |          | 4,409      |          |              |          |              |          |              |          |             |        |  |            |           |            |   |           |          |           |   |           | 4,409      |          
|                                                           | Paid-in capital                                        |                                                          |          | 3,392,821  |          |              |          | 604,166       |          |              |          |             |        |  |            |           |            |   |           | (604,166  | )         |   |           | 3,392,821  |          
|                                                           | Treasury stock, at cost                                |                                                          |          | (3,360     | )        |              |          |              |          |              |          |             |        |  |            |           |            |   |           |          |           |   |           | (3,360     | )        
|                                                           | Unearned compensation                                  |                                                          |          | (208       | )        |              |          |              |          |              |          |             |        |  |            |           |            |   |           |          |           |   |           | (208       | )        
|                                                           | Due from related parties                               |                                                          |          |           |          |              |          | (52,483       | )        |              |          |             |        |  |            |           |            |   |           | 52,483    |           |   |           |           |          
|                                                           | Retained (deficit) earnings                            |                                                          |          | (3,932,790 | )        |              |          | (1,011,914    | )        |              |          | 40,021       |        |  |            | (1,349,242 | )          |   |           | 2,321,135 |           |   |           | (3,932,790 | )        
|                                                           | Accumulated other comprehensive income                 |                                                          |          | (58,989    | )        |              |          |              |          |              |          |             |        |  |            |           |            |   |           |          |           |   |           | (58,989    | )        
|                                                           |                                                        |                                                          |          |            |          |              |          |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           |                                                        | Total shareholders (deficit) equity                     |          |            | (377,740 | )            |          |               | (460,231 | )            |          |              | 40,021 |  |            |            | (1,349,242 | ) |           |           | 1,769,452 |   |           |            | (377,740  | )
|                                                           |                                                        |                                                          |          |            |          |              |          |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           |                                                        | Total liabilities and shareholders
    (deficit) equity |          | $          | 61,359   |              |          | $             | 484,309  |              |          | $            | 57,240 |  |            | $          | 112,015    |   |           | $         | 1,733,343 |   |           | $          | 2,448,266 |  
|                                                           |                                                        |                                                          |          |            |          |              |          |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           

31



---



##### 



CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS


Three Months Ended June 30,
2003


(in thousands)


|                                                                                                                                                                                                |                |         |         |            |  |              |        |               |  |              |       |              |  |   |         |         |  |   |         |         |   |   |          |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------- | ------- | ---------- |  | ------------ | ------ | ------------- |  | ------------ | ----- | ------------ |  | - | ------- | ------- |  | - | ------- | ------- | - | - | -------- | ------- | 
|                                                                                                                                                                                                |                | Parent  |         | Subsidiary |  | Guarantor    |        | Non-Guarantor |  |              |       |             
|                                                                                                                                                                                                |                | Company |         | Issuer     |  | Subsidiaries |        | Subsidiaries  |  | Eliminations |       | Consolidated
|                                                                                                                                                                                                |                |         |         |            |  |              |        |               |  |              |       |             
|Revenues from satellite sales                                                                                                                                                                   |                | $       |        |            |  | $            |       |               |  | $            |      |              |  | $ | 74,797  |         |  | $ | (3,590  | )       |   | $ | 71,207   |        
|Revenues from satellite services                                                                                                                                                                |                |         |        |            |  |              | 22,949 |               |  |              | 9,732 |              |  |   | 49,658  |         |  |   | (10,897 | )       |   |   | 71,442   |        
|Management fee from parent                                                                                                                                                                      |                |         |        |            |  |              |       |               |  |              |      |              |  |   | 109     |         |  |   | (109    | )       |   |   |         |        
|                                                                                                                                                                                                |                |         |         |            |  |              |        |               |  |              |       |              |  |   |         |         |  |   |         |         |   |   |          |        
|                                                                                                                                                                                                | Total revenues |         |         |           |  |              |        | 22,949        |  |              |       | 9,732        |  |   |         | 124,564 |  |   |         | (14,596 | ) |   |          | 142,649 | 
|Costs of satellite sales                                                                                                                                                                        |                |         |        |            |  |              |       |               |  |              |      |              |  |   | 155,308 |         |  |   | (2,027  | )       |   |   | 153,281  |        
|Costs of satellite services                                                                                                                                                                     |                |         |        |            |  |              | 23,594 |               |  |              | 7,882 |              |  |   | 30,684  |         |  |   | (10,316 | )       |   |   | 51,844   |        
|Selling, general and administrative expenses                                                                                                                                                    |                |         | 2,762   |            |  |              | 385    |               |  |              | 296   |              |  |   | 34,957  |         |  |   |        |         |   |   | 38,400   |        
|Management fee expense                                                                                                                                                                          |                |         | 109     |            |  |              |       |               |  |              |      |              |  |   |        |         |  |   | (109    | )       |   |   |         |        
|                                                                                                                                                                                                |                |         |         |            |  |              |        |               |  |              |       |              |  |   |         |         |  |   |         |         |   |   |          |        
|Operating (loss) income                                                                                                                                                                         |                |         | (2,871  | )          |  |              | (1,030 | )             |  |              | 1,554 |              |  |   | (96,385 | )       |  |   | (2,144  | )       |   |   | (100,876 | )      
|Interest and investment income                                                                                                                                                                  |                |         | 5,781   |            |  |              | (32    | )             |  |              |      |              |  |   | 4,646   |         |  |   | (6,600  | )       |   |   | 3,795    |        
|Interest expense                                                                                                                                                                                |                |         | (9,859  | )          |  |              | (2,728 | )             |  |              |      |              |  |   | (13,592 | )       |  |   | 7,250   |         |   |   | (18,929  | )      
|Gain on investment                                                                                                                                                                              |                |         |        |            |  |              |       |               |  |              |      |              |  |   | 16,793  |         |  |   |        |         |   |   | 16,793   |        
|                                                                                                                                                                                                |                |         |         |            |  |              |        |               |  |              |       |              |  |   |         |         |  |   |         |         |   |   |          |        
|(Loss) income before income taxes, equity in net
    losses of unconsolidated subsidiaries and affiliates, minority
    interest and
    extraordinary gain on acquisition of minority interest |                |         | (6,949  | )          |  |              | (3,790 | )             |  |              | 1,554 |              |  |   | (88,538 | )       |  |   | (1,494  | )       |   |   | (99,217  | )      
|Income tax (provision) benefit                                                                                                                                                                  |                |         | (1,732  | )          |  |              | (698   | )             |  |              | (543  | )            |  |   | (364    | )       |  |   | 1,470   |         |   |   | (1,867   | )      
|                                                                                                                                                                                                |                |         |         |            |  |              |        |               |  |              |       |              |  |   |         |         |  |   |         |         |   |   |          |        
|(Loss) income before equity in net losses of
    unconsolidated subsidiaries and affiliates, minority interest
    and extraordinary gain on acquisition of minority interest                   |                |         | (8,681  | )          |  |              | (4,488 | )             |  |              | 1,011 |              |  |   | (88,902 | )       |  |   | (24     | )       |   |   | (101,084 | )      
|Equity in net income (losses) of
    unconsolidated subsidiaries                                                                                                                                |                |         | (79,621 | )          |  |              | 1,011  |               |  |              |      |              |  |   |        |         |  |   | 78,610  |         |   |   |         |        
|Equity in net losses of affiliates                                                                                                                                                              |                |         | (7,487  | )          |  |              |       |               |  |              |      |              |  |   | (848    | )       |  |   |        |         |   |   | (8,335   | )      
|Minority interest                                                                                                                                                                               |                |         |        |            |  |              |       |               |  |              |      |              |  |   | 15      |         |  |   |        |         |   |   | 15       |        
|                                                                                                                                                                                                |                |         |         |            |  |              |        |               |  |              |       |              |  |   |         |         |  |   |         |         |   |   |          |        
|(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  | )      
|                                                                                                                                                                                                |                |         |         |            |  |              |        |               |  |              |       |              |  |   |         |         |  |   |         |         |   |   |          |        

32



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##### 



CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS


Six Months Ended June 30, 2003


(In thousands)


|                                                                                                                                                                                                |                |         |          |            |  |              |         |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------- | -------- | ---------- |  | ------------ | ------- | ------------- |  | ------------ | ------ | ------------ |  | - | -------- | ------- |  | - | ------- | ------- | - | - | -------- | ------- | 
|                                                                                                                                                                                                |                | Parent  |          | Subsidiary |  | Guarantor    |         | Non-Guarantor |  |              |        |             
|                                                                                                                                                                                                |                | Company |          | Issuer     |  | Subsidiaries |         | Subsidiaries  |  | Eliminations |        | Consolidated
|                                                                                                                                                                                                |                |         |          |            |  |              |         |               |  |              |        |             
|Revenues from satellite sales                                                                                                                                                                   |                | $       |         |            |  | $            |        |               |  | $            |       |              |  | $ | 193,690  |         |  | $ | (7,446  | )       |   | $ | 186,244  |        
|Revenues from satellite services                                                                                                                                                                |                |         |         |            |  |              | 46,024  |               |  |              | 20,669 |              |  |   | 110,504  |         |  |   | (22,559 | )       |   |   | 154,638  |        
|Management fee from parent                                                                                                                                                                      |                |         |         |            |  |              |        |               |  |              |       |              |  |   | 109      |         |  |   | (109    | )       |   |   |         |        
|                                                                                                                                                                                                |                |         |          |            |  |              |         |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|                                                                                                                                                                                                | Total revenues |         |          |           |  |              |         | 46,024        |  |              |        | 20,669       |  |   |          | 304,303 |  |   |         | (30,114 | ) |   |          | 340,882 | 
|Costs of satellite sales                                                                                                                                                                        |                |         |         |            |  |              |        |               |  |              |       |              |  |   | 288,581  |         |  |   | (5,164  | )       |   |   | 283,417  |        
|Costs of satellite services                                                                                                                                                                     |                |         |         |            |  |              | 48,196  |               |  |              | 15,765 |              |  |   | 70,265   |         |  |   | (21,216 | )       |   |   | 113,010  |        
|Selling, general and administrative expenses                                                                                                                                                    |                |         | 4,184    |            |  |              | 4,361   |               |  |              | 570    |              |  |   | 65,215   |         |  |   |        |         |   |   | 74,330   |        
|Management fee expense                                                                                                                                                                          |                |         | 109      |            |  |              |        |               |  |              |       |              |  |   |         |         |  |   | (109    | )       |   |   |         |        
|                                                                                                                                                                                                |                |         |          |            |  |              |         |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|Operating (loss) income                                                                                                                                                                         |                |         | (4,293   | )          |  |              | (6,533  | )             |  |              | 4,334  |              |  |   | (119,758 | )       |  |   | (3,625  | )       |   |   | (129,875 | )      
|Interest and investment income                                                                                                                                                                  |                |         | 11,328   |            |  |              | 5       |               |  |              |       |              |  |   | 12,468   |         |  |   | (12,960 | )       |   |   | 10,841   |        
|Interest expense                                                                                                                                                                                |                |         | (19,669  | )          |  |              | (5,648  | )             |  |              |       |              |  |   | (24,676  | )       |  |   | 14,260  |         |   |   | (35,733  | )      
|Gain on investment                                                                                                                                                                              |                |         |         |            |  |              |        |               |  |              |       |              |  |   | 17,900   |         |  |   |        |         |   |   | 17,900   |        
|                                                                                                                                                                                                |                |         |          |            |  |              |         |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|(Loss) income before income taxes, equity in net
    losses of unconsolidated subsidiaries and affiliates, minority
    interest and extraordinary gain on acquisition of minority
    interest |                |         | (12,634  | )          |  |              | (12,176 | )             |  |              | 4,334  |              |  |   | (114,066 | )       |  |   | (2,325  | )       |   |   | (136,867 | )      
|Income tax (provision) benefit                                                                                                                                                                  |                |         | (3,395   | )          |  |              | (890    | )             |  |              | (1,515 | )            |  |   | (735     | )       |  |   | 2,686   |         |   |   | (3,849   | )      
|                                                                                                                                                                                                |                |         |          |            |  |              |         |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|(Loss) income before equity in net losses of
    unconsolidated subsidiaries and affiliates, minority interest
    and extraordinary gain on acquisition of minority interest                   |                |         | (16,029  | )          |  |              | (13,066 | )             |  |              | 2,819  |              |  |   | (114,801 | )       |  |   | 361     |         |   |   | (140,716 | )      
|Equity in net (losses) income 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 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 | )      
|                                                                                                                                                                                                |                |         |          |            |  |              |         |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        

33



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##### 



CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS


Six Months Ended June 30, 2003


(In thousands)


|                                                        |                                                                |                                                              |         |            |         |              |         |               |        |              |   |              |         |   |         |          |         |   |        |         |          |   |         |          |         |  
|------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------------------------ | ------- | ---------- | ------- | ------------ | ------- | ------------- | ------ | ------------ | - | ------------ | ------- | - | ------- | -------- | ------- | - | ------ | ------- | -------- | - | ------- | -------- | ------- | -
|                                                        |                                                                | 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:                                                |                                                              |         |            |         |              |         |               |        |              |   |              |         |   |         |          |         |   |        |         |          |   |         |          |        
|                                                        |                                                                | 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                                |         |            | 28      |              |         |               | 27,140 |              |   |              | 10,507  |   |         |          | 51,540  |   |        |         |         |   |         |          | 89,215  |  
|                                                        |                                                                | Provisions for inventory obsolescence                        |         |            |        |              |         |               |       |              |   |              |        |   |         |          | 23,957  |   |        |         |         |   |         |          | 23,957  |  
|                                                        |                                                                | Loss on cancellation of deposit                              |         |            |        |              |         |               |       |              |   |              |        |   |         |          | 23,500  |   |        |         |         |   |         |          | 23,500  |  
|                                                        |                                                                | Loss on acceleration of receipt of long-term
    receivables |         |            |        |              |         |               |       |              |   |              |        |   |         |          | 10,893  |   |        |         |         |   |         |          | 10,893  |  
|                                                        |                                                                | Charge on vendor financing receivables                       |         |            |        |              |         |               |       |              |   |              |        |   |         |          | 10,008  |   |        |         |         |   |         |          | 10,008  |  
|                                                        |                                                                | Accrual for Alcatel settlement                               |         |            |        |              |         |               |       |              |   |              |        |   |         |          | 8,000   |   |        |         |         |   |         |          | 8,000   |  
|                                                        |                                                                | Provisions for bad debts                                     |         |            |        |              |         |               | 802    |              |   |              | 36      |   |         |          | 961     |   |        |         |         |   |         |          | 1,799   |  
|                                                        |                                                                | Gain on investment                                           |         |            |        |              |         |               |       |              |   |              |        |   |         |          | (17,900 | ) |        |         |         |   |         |          | (17,900 | )
|                                                        |                                                                | Interest                                                     |         |            |        |              |         |               | 740    |              |   |              |        |   |         |          | (1,585  | ) |        |         |         |   |         |          | (845    | )
|                                                        | 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   |   |         |          | 23,451  |   |        |         |         |   |         |          | 25,082  |  
|                                                        |                                                                | Accounts payable                                             |         |            |        |              |         |               | (746   | )            |   |              | (232    | ) |         |          | (12,502 | ) |        |         |         |   |         |          | (13,480 | )
|                                                        |                                                                | Accrued expenses and other current liabilities               |         |            | (960    | )            |         |               |       |              |   |              |        |   |         |          | (8,156  | ) |        |         |         |   |         |          | (9,116  | )
|                                                        |                                                                | Customer advances                                            |         |            |        |              |         |               | 1,282  |              |   |              | (280    | ) |         |          | (51,789 | ) |        |         |         |   |         |          | (50,787 | )
|                                                        |                                                                | Income taxes payable                                         |         |            |        |              |         |               |       |              |   |              |        |   |         |          | (471    | ) |        |         | (401     | ) |         |          | (872    | )
|                                                        |                                                                | Pension and other postretirement liabilities                 |         |            |        |              |         |               |       |              |   |              |        |   |         |          | 5,479   |   |        |         |         |   |         |          | 5,479   |  
|                                                        |                                                                | Long-term liabilities                                        |         |            |        |              |         |               |       |              |   |              |        |   |         |          | (6,263  | ) |        |         |         |   |         |          | (6,263  | )
|                                                        |                                                                | Other                                                        |         |            |        |              |         |               | 50     |              |   |              |        |   |         |          | (160    | ) |        |         |         |   |         |          | (110    | )
|                                                        |                                                                |                                                              |         |            |         |              |         |               |        |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|Net cash (used in) provided by operating
    activities |                                                                |                                                              | (18,755 | )          |         |              | 24,020  |               |        |              |  |              |         |   | 71,156  |          |         |   | 1,573  |         |          |   | 77,994  |         
|                                                        |                                                                |                                                              |         |            |         |              |         |               |        |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|Investing activities:                                   |                                                                |                                                              |         |            |         |              |         |               |        |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|                                                        | Capital expenditures                                           |                                                              |         |           |         |              |         | (3,752        | )      |              |   |             |         |   |         | (44,575  | )       |   |        | (1,573  | )        |   |         | (49,900  | )      
|                                                        | Proceeds from the sale of investment                           |                                                              |         |           |         |              |         |              |        |              |   |             |         |   |         | 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 provided by (used in) investing
    activities |                                                                |                                                              | 491     |            |         |              | (3,752  | )             |        |              |  |              |         |   | (10,873 | )        |         |   | (1,573 | )       |          |   | (15,707 | )       
|                                                        |                                                                |                                                              |         |            |         |              |         |               |        |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|Financing activities:                                   |                                                                |                                                              |         |            |         |              |         |               |        |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|                                                        | Borrowings under revolving credit facilities                   |                                                              |         |           |         |              |         |              |        |              |   |             |         |   |         | 66,000   |         |   |        |        |          |   |         | 66,000   |        
|                                                        | Repayments under term loans                                    |                                                              |         |           |         |              |         |              |        |              |   |             |         |   |         | (32,500  | )       |   |        |        |          |   |         | (32,500  | )      
|                                                        | Interest payments on 10% senior notes                          |                                                              |         |           |         |              |         | (30,634       | )      |              |   |             |         |   |         | (1       | )       |   |        |        |          |   |         | (30,635  | )      
|                                                        | Repayments of other long-term obligations                      |                                                              |         |           |         |              |         | (935          | )      |              |   |             |         |   |         | (1,072   | )       |   |        |        |          |   |         | (2,007   | )      
|                                                        | Payment of bank amendment costs                                |                                                              |         |           |         |              |         |              |        |              |   |             |         |   |         | (5,131   | )       |   |        |        |          |   |         | (5,131   | )      
|                                                        | Note receivable from unconsolidated affiliate                  |                                                              |         | 17,284     |         |              |         |              |        |              |   |             |         |   |         | (17,284  | )       |   |        |        |          |   |         |         |        
|                                                        | Proceeds from stock issuances                                  |                                                              |         | 3,817      |         |              |         |              |        |              |   |             |         |   |         |         |         |   |        |        |          |   |         | 3,817    |        
|                                                        |                                                                |                                                              |         |            |         |              |         |               |        |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|Net cash provided by (used in) financing
    activities |                                                                |                                                              | 21,101  |            |         |              | (31,569 | )             |        |              |  |              |         |   | 10,012  |          |         |   |       |         |          |   | (456    | )       
|                                                        |                                                                |                                                              |         |            |         |              |         |               |        |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         
|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 |         
|                                                        |                                                                |                                                              |         |            |         |              |         |               |        |              |   |              |         |   |         |          |         |   |        |         |          |   |         |         

34



---



##### 



CONDENSED CONSOLIDATING BALANCE SHEET


December 31, 2002


(In thousands)


|                                                           |                                                        |                                                          |         |            |          |              |         |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |            |           |  
|---------------------------------------------------------- | ------------------------------------------------------ | -------------------------------------------------------- | ------- | ---------- | -------- | ------------ | ------- | ------------- | -------- | ------------ | -------- | ------------ | ------ |  | ---------- | ---------- | ---------- | - | --------- | --------- | --------- | - | --------- | ---------- | --------- | -
|                                                           |                                                        | Parent                                                   |         | Subsidiary |          | Guarantor    |         | Non-Guarantor |          |              |          |             
|                                                           |                                                        | Company                                                  |         | Issuer     |          | Subsidiaries |         | Subsidiaries  |          | Eliminations |          | Consolidated
|                                                           |                                                        |                                                          |         |            |          |              |         |               |          |              |          |             
|Current assets:                                            |                                                        |                                                          |         |            |          |              |         |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           | Cash and cash equivalents                              |                                                          | $       | 1,514      |          |              | $       | 42,964        |          |              | $        |             |        |  | $          | 21,458     |            |   | $         |          |           |   | $         | 65,936     |          
|                                                           | Accounts receivable, net                               |                                                          |         |           |          |              |         | 7,477         |          |              |          | 138          |        |  |            | 21,278     |            |   |           |          |           |   |           | 28,893     |          
|                                                           | Contracts-in-process                                   |                                                          |         |           |          |              |         |              |          |              |          |             |        |  |            | 113,154    |            |   |           |          |           |   |           | 113,154    |          
|                                                           | Vendor financing receivable                            |                                                          |         |           |          |              |         |              |          |              |          |             |        |  |            | 38,016     |            |   |           |          |           |   |           | 38,016     |          
|                                                           | Inventories                                            |                                                          |         |           |          |              |         |              |          |              |          |             |        |  |            | 95,733     |            |   |           |          |           |   |           | 95,733     |          
|                                                           | Other current assets                                   |                                                          |         | 823        |          |              |         | 5,540         |          |              |          | 8,584        |        |  |            | 34,659     |            |   |           | (911      | )         |   |           | 48,695     |          
|                                                           |                                                        |                                                          |         |            |          |              |         |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           |                                                        | Total current assets                                     |         |            | 2,337    |              |         |               | 55,981   |              |          |              | 8,722  |  |            |            | 324,298    |   |           |           | (911      | ) |           |            | 390,427   |  
|Property, plant and equipment, net                         |                                                        |                                                          |        |            |          |              | 319,998 |               |          |              | 204,701  |              |        |  | 1,396,920  |            |            |   | (24,276   | )         |           |   | 1,897,343 |           
|Long-term receivables                                      |                                                        |                                                          |        |            |          |              |        |               |          |              |         |              |        |  | 163,191    |            |            |   |          |           |           |   | 163,191   |           
|Notes receivable (payable) unconsolidated
    subsidiaries |                                                        |                                                          | 157,500 |            |          |              | (31,540 | )             |          |              |         |              |        |  | (125,960   | )          |            |   |          |           |           |   |          |           
|Due to (from) unconsolidated subsidiaries                  |                                                        |                                                          | 36,448  |            |          |              | (97,652 | )             |          |              | 107,917  |              |        |  | (13,413    | )          |            |   | (33,300   | )         |           |   |          |           
|Investments in unconsolidated subsidiaries                 |                                                        |                                                          | (20,185 | )          |          |              | 304,590 |               |          |              | (271,698 | )            |        |  | (1,642,070 | )          |            |   | 1,629,363 |           |           |   |          |           
|Investments in and advances to affiliates                  |                                                        |                                                          | 21,507  |            |          |              |        |               |          |              |         |              |        |  | 73,936     |            |            |   |          |           |           |   | 95,443    |           
|Deposits                                                   |                                                        |                                                          |        |            |          |              |        |               |          |              |         |              |        |  | 58,250     |            |            |   |          |           |           |   | 58,250    |           
|Other assets                                               |                                                        |                                                          | 3,191   |            |          |              | 16,622  |               |          |              | 696      |              |        |  | 67,639     |            |            |   |          |           |           |   | 88,148    |           
|                                                           |                                                        |                                                          |         |            |          |              |         |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           |                                                        | Total assets                                             |         | $          | 200,798  |              |         | $             | 567,999  |              |          | $            | 50,338 |  |            | $          | 302,791    |   |           | $         | 1,570,876 |   |           | $          | 2,692,802 |  
|                                                           |                                                        |                                                          |         |            |          |              |         |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|Current liabilities:                                       |                                                        |                                                          |         |            |          |              |         |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           | Current portion of long-term debt                      |                                                          | $       |           |          |              | $       | 64,727        |          |              | $        |             |        |  | $          | 67,171     |            |   | $         |          |           |   | $         | 131,898    |          
|                                                           | Accounts payable                                       |                                                          |         | 2,404      |          |              |         | 1,194         |          |              |          | 1,193        |        |  |            | 53,532     |            |   |           |          |           |   |           | 58,323     |          
|                                                           | Accrued employment costs                               |                                                          |         |           |          |              |         |              |          |              |          |             |        |  |            | 34,531     |            |   |           |          |           |   |           | 34,531     |          
|                                                           | Customer advances                                      |                                                          |         |           |          |              |         | 1,208         |          |              |          | 521          |        |  |            | 112,351    |            |   |           |          |           |   |           | 114,080    |          
|                                                           | Accrued interest and preferred dividends               |                                                          |         | 20,840     |          |              |         | 4,700         |          |              |          |             |        |  |            | 11,830     |            |   |           |          |           |   |           | 37,370     |          
|                                                           | Income taxes payable                                   |                                                          |         | 8,123      |          |              |         |              |          |              |          |             |        |  |            | 31,232     |            |   |           | (1,419    | )         |   |           | 37,936     |          
|                                                           | Other current liabilities                              |                                                          |         |           |          |              |         | 1,968         |          |              |          | 35           |        |  |            | 45,002     |            |   |           |          |           |   |           | 47,005     |          
|                                                           |                                                        |                                                          |         |            |          |              |         |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           |                                                        | Total current liabilities                                |         |            | 31,367   |              |         |               | 73,797   |              |          |              | 1,749  |  |            |            | 355,649    |   |           |           | (1,419    | ) |           |            | 461,143   |  
|Pension and other postretirement liabilities               |                                                        |                                                          |        |            |          |              |        |               |          |              |         |              |        |  | 124,193    |            |            |   |          |           |           |   | 124,193   |           
|Long-term liabilities                                      |                                                        |                                                          | 48,577  |            |          |              | 7,743   |               |          |              | 11,387   |              |        |  | 172,119    |            |            |   | (31,991   | )         |           |   | 207,835   |           
|Long-term debt                                             |                                                        |                                                          | 350,000 |            |          |              | 894,829 |               |          |              |         |              |        |  | 867,798    |            |            |   |          |           |           |   | 2,112,627 |           
|Minority interest                                          |                                                        |                                                          |        |            |          |              |        |               |          |              |         |              |        |  | 16,150     |            |            |   |          |           |           |   | 16,150    |           
|                                                           | 6% Series C convertible redeemable preferred
    stock |                                                          |         | 104,582    |          |              |         |              |          |              |          |             |        |  |            |           |            |   |           |          |           |   |           | 104,582    |          
|                                                           | 6% Series D convertible redeemable preferred
    stock |                                                          |         | 20,499     |          |              |         |              |          |              |          |             |        |  |            |           |            |   |           |          |           |   |           | 20,499     |          
|Shareholders (deficit) equity:                            |                                                        |                                                          |         |            |          |              |         |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           | 6% Series C convertible redeemable preferred
    stock |                                                          |         | 80,171     |          |              |         |              |          |              |          |             |        |  |            |           |            |   |           |          |           |   |           | 80,171     |          
|                                                           | 6% Series D convertible redeemable preferred
    stock |                                                          |         | 15,125     |          |              |         |              |          |              |          |             |        |  |            |           |            |   |           |          |           |   |           | 15,125     |          
|                                                           | Common stock                                           |                                                          |         | 4,293      |          |              |         |              |          |              |          |             |        |  |            |           |            |   |           |          |           |   |           | 4,293      |          
|                                                           | Paid-in capital                                        |                                                          |         | 3,389,035  |          |              |         | 604,166       |          |              |          |             |        |  |            |           |            |   |           | (604,166  | )         |   |           | 3,389,035  |          
|                                                           | Treasury stock, at cost                                |                                                          |         | (3,360     | )        |              |         |              |          |              |          |             |        |  |            |           |            |   |           |          |           |   |           | (3,360     | )        
|                                                           | Unearned compensation                                  |                                                          |         | (151       | )        |              |         |              |          |              |          |             |        |  |            |           |            |   |           |          |           |   |           | (151       | )        
|                                                           | Retained (deficit) earnings                            |                                                          |         | (3,782,107 | )        |              |         | (1,012,536    | )        |              |          | 37,202       |        |  |            | (1,233,118 | )          |   |           | 2,208,452 |           |   |           | (3,782,107 | )        
|                                                           | Accumulated other comprehensive loss                   |                                                          |         | (57,233    | )        |              |         |              |          |              |          |             |        |  |            |           |            |   |           |          |           |   |           | (57,233    | )        
|                                                           |                                                        |                                                          |         |            |          |              |         |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           |                                                        | Total shareholders (deficit) equity                     |         |            | (354,227 | )            |         |               | (408,370 | )            |          |              | 37,202 |  |            |            | (1,233,118 | ) |           |           | 1,604,286 |   |           |            | (354,227  | )
|                                                           |                                                        |                                                          |         |            |          |              |         |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           
|                                                           |                                                        | Total liabilities and shareholders
    (deficit) equity |         | $          | 200,798  |              |         | $             | 567,999  |              |          | $            | 50,338 |  |            | $          | 302,791    |   |           | $         | 1,570,876 |   |           | $          | 2,692,802 |  
|                                                           |                                                        |                                                          |         |            |          |              |         |               |          |              |          |              |        |  |            |            |            |   |           |           |           |   |           |           

35



---



##### 



CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS


Three Months Ended June 30,
2002


As Restated


(In thousands)


|                                                                                                                                  |                |         |         |            |  |              |        |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |         | 
|--------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------- | ------- | ---------- |  | ------------ | ------ | ------------- |  | ------------ | ------ | ------------ |  | - | ------- | ------- |  | - | ------- | ------- | - | - | ------- | ------- | 
|                                                                                                                                  |                | Parent  |         | Subsidiary |  | Guarantor    |        | Non-Guarantor |  |              |        |             
|                                                                                                                                  |                | Company |         | Issuer     |  | Subsidiaries |        | Subsidiaries  |  | Eliminations |        | Consolidated
|                                                                                                                                  |                |         |         |            |  |              |        |               |  |              |        |             
|Revenues from satellite sales                                                                                                     |                | $       |        |            |  | $            |       |               |  | $            |       |              |  | $ | 214,579 |         |  | $ |        |         |   | $ | 214,579 |        
|Revenues from satellite services                                                                                                  |                |         |        |            |  |              | 24,971 |               |  |              | 11,281 |              |  |   | 77,227  |         |  |   | (11,698 | )       |   |   | 101,781 |        
|Management fee from parent                                                                                                        |                |         |        |            |  |              |       |               |  |              |       |              |  |   | (264    | )       |  |   | 264     |         |   |   |        |        
|                                                                                                                                  |                |         |         |            |  |              |        |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |        
|                                                                                                                                  | Total revenues |         |         |           |  |              |        | 24,971        |  |              |        | 11,281       |  |   |         | 291,542 |  |   |         | (11,434 | ) |   |         | 316,360 | 
|Costs of satellite sales                                                                                                          |                |         |        |            |  |              |       |               |  |              |       |              |  |   | 202,890 |         |  |   |        |         |   |   | 202,890 |        
|Costs of satellite services                                                                                                       |                |         |        |            |  |              | 24,104 |               |  |              | 7,098  |              |  |   | 36,993  |         |  |   | (5,773  | )       |   |   | 62,422  |        
|Selling, general and administrative expenses                                                                                      |                |         | 2,438   |            |  |              | 2,925  |               |  |              | 310    |              |  |   | 36,405  |         |  |   | 295     |         |   |   | 42,373  |        
|Management fee expense                                                                                                            |                |         | (264    | )          |  |              |       |               |  |              |       |              |  |   |        |         |  |   | 264     |         |   |   |        |        
|                                                                                                                                  |                |         |         |            |  |              |        |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |        
|Operating (loss) income                                                                                                           |                |         | (2,174  | )          |  |              | (2,058 | )             |  |              | 3,873  |              |  |   | 15,254  |         |  |   | (6,220  | )       |   |   | 8,675   |        
|Interest and investment income                                                                                                    |                |         | 5,387   |            |  |              | 81     |               |  |              |       |              |  |   | 3,491   |         |  |   | (4,507  | )       |   |   | 4,452   |        
|Interest expense                                                                                                                  |                |         | (9,805  | )          |  |              | (3,492 | )             |  |              |       |              |  |   | (10,282 | )       |  |   | 5,194   |         |   |   | (18,385 | )      
|                                                                                                                                  |                |         |         |            |  |              |        |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |        
|(Loss) income before income taxes, equity in net
    loss of unconsolidated subsidiaries and affiliates and minority
    interest |                |         | (6,592  | )          |  |              | (5,469 | )             |  |              | 3,873  |              |  |   | 8,463   |         |  |   | (5,533  | )       |   |   | (5,258  | )      
|Income tax (provision) benefit                                                                                                    |                |         | (1,605  | )          |  |              | (1,815 | )             |  |              | (1,371 | )            |  |   | (4,860  | )       |  |   | 5,608   |         |   |   | (4,043  | )      
|                                                                                                                                  |                |         |         |            |  |              |        |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |        
|(Loss) income before equity in net loss of
    unconsolidated subsidiaries and affiliates and minority interest                   |                |         | (8,197  | )          |  |              | (7,284 | )             |  |              | 2,502  |              |  |   | 3,603   |         |  |   | 75      |         |   |   | (9,301  | )      
|Equity in net income (loss) of
    unconsolidated subsidiaries                                                                    |                |         | 6,287   |            |  |              | 2,502  |               |  |              |       |              |  |   |        |         |  |   | (8,789  | )       |   |   |        |        
|Equity in net (loss) income of affiliates                                                                                         |                |         | (20,659 | )          |  |              |       |               |  |              |       |              |  |   | 7,459   |         |  |   |        |         |   |   | (13,200 | )      
|Minority interest                                                                                                                 |                |         |        |            |  |              |       |               |  |              |       |              |  |   | (68     | )       |  |   |        |         |   |   | (68     | )      
|                                                                                                                                  |                |         |         |            |  |              |        |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |        
|Net (loss) income                                                                                                                 |                | $       | (22,569 | )          |  | $            | (4,782 | )             |  | $            | 2,502  |              |  | $ | 10,994  |         |  | $ | (8,714  | )       |   | $ | (22,569 | )      
|                                                                                                                                  |                |         |         |            |  |              |        |               |  |              |        |              |  |   |         |         |  |   |         |         |   |   |         |        

36



---



##### 



CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS


Six Months Ended June 30, 2002


As Restated


(In thousands)


|                                                                                                                                                                                       |                |         |          |            |  |              |          |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |         | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------- | -------- | ---------- |  | ------------ | -------- | ------------- |  | ------------ | ------ | ------------ |  | - | -------- | ------- |  | - | ------- | ------- | - | - | -------- | ------- | 
|                                                                                                                                                                                       |                | Parent  |          | Subsidiary |  | Guarantor    |          | Non-Guarantor |  |              |        |             
|                                                                                                                                                                                       |                | Company |          | Issuer     |  | Subsidiaries |          | Subsidiaries  |  | Eliminations |        | Consolidated
|                                                                                                                                                                                       |                |         |          |            |  |              |          |               |  |              |        |             
|Revenues from satellite sales                                                                                                                                                          |                | $       |         |            |  | $            |         |               |  | $            |       |              |  | $ | 413,050  |         |  | $ |        |         |   | $ | 413,050  |        
|Revenues from satellite services                                                                                                                                                       |                |         |         |            |  |              | 51,807   |               |  |              | 24,173 |              |  |   | 161,965  |         |  |   | (26,459 | )       |   |   | 211,486  |        
|Management fee from parent                                                                                                                                                             |                |         |         |            |  |              |         |               |  |              |       |              |  |   | 27       |         |  |   | (27     | )       |   |   |         |        
|                                                                                                                                                                                       |                |         |          |            |  |              |          |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|                                                                                                                                                                                       | Total revenues |         |          |           |  |              |          | 51,807        |  |              |        | 24,173       |  |   |          | 575,042 |  |   |         | (26,486 | ) |   |          | 624,536 | 
|Costs of satellite sales                                                                                                                                                               |                |         |         |            |  |              |         |               |  |              |       |              |  |   | 389,318  |         |  |   |        |         |   |   | 389,318  |        
|Costs of satellite services                                                                                                                                                            |                |         |         |            |  |              | 49,879   |               |  |              | 14,196 |              |  |   | 84,119   |         |  |   | (19,476 | )       |   |   | 128,718  |        
|Selling, general and administrative expenses                                                                                                                                           |                |         | 2,457    |            |  |              | 5,629    |               |  |              | 714    |              |  |   | 74,320   |         |  |   |        |         |   |   | 83,120   |        
|Management fee expense                                                                                                                                                                 |                |         | 27       |            |  |              |         |               |  |              |       |              |  |   |         |         |  |   | (27     | )       |   |   |         |        
|                                                                                                                                                                                       |                |         |          |            |  |              |          |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|Operating (loss) income                                                                                                                                                                |                |         | (2,484   | )          |  |              | (3,701   | )             |  |              | 9,263  |              |  |   | 27,285   |         |  |   | (6,983  | )       |   |   | 23,380   |        
|Interest and investment income                                                                                                                                                         |                |         | 10,617   |            |  |              | 301      |               |  |              |       |              |  |   | 10,896   |         |  |   | (11,953 | )       |   |   | 9,861    |        
|Interest expense                                                                                                                                                                       |                |         | (19,652  | )          |  |              | (6,750   | )             |  |              |       |              |  |   | (23,880  | )       |  |   | 13,327  |         |   |   | (36,955  | )      
|                                                                                                                                                                                       |                |         |          |            |  |              |          |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|(Loss) income before income taxes, equity in net
    loss of unconsolidated subsidiaries and affiliates, minority
    interest and cumulative effect of change in accounting principle |                |         | (11,519  | )          |  |              | (10,150  | )             |  |              | 9,263  |              |  |   | 14,301   |         |  |   | (5,609  | )       |   |   | 3,714    |        
|Income tax (provision) benefit                                                                                                                                                         |                |         | (3,154   | )          |  |              | 2,349    |               |  |              | (3,228 | )            |  |   | (8,578   | )       |  |   | 3,040   |         |   |   | (9,571   | )      
|                                                                                                                                                                                       |                |         |          |            |  |              |          |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|(Loss) income before equity in net loss of
    unconsolidated subsidiaries and affiliates, minority interest
    and cumulative effect of change in accounting principle               |                |         | (14,673  | )          |  |              | (7,801   | )             |  |              | 6,035  |              |  |   | 5,723    |         |  |   | (2,569  | )       |   |   | (13,285  | )      
|Equity in net (loss) income of
    unconsolidated subsidiaries                                                                                                                         |                |         | (868,000 | )          |  |              | 6,035    |               |  |              |       |              |  |   |         |         |  |   | 861,965 |         |   |   |         |        
|Equity in net (loss) income of affiliates                                                                                                                                              |                |         | (36,256  | )          |  |              |         |               |  |              |       |              |  |   | 7,106    |         |  |   |        |         |   |   | (29,150  | )      
|Minority interest                                                                                                                                                                      |                |         |         |            |  |              |         |               |  |              |       |              |  |   | 6        |         |  |   |        |         |   |   | 6        |        
|                                                                                                                                                                                       |                |         |          |            |  |              |          |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|(Loss) income before cumulative effect of change
    in accounting principle                                                                                                           |                |         | (918,929 | )          |  |              | (1,766   | )             |  |              | 6,035  |              |  |   | 12,835   |         |  |   | 859,396 |         |   |   | (42,429  | )      
|Cumulative effect of change in accounting
    principle                                                                                                                                |                |         |         |            |  |              | (562,201 | )             |  |              |       |              |  |   | (314,299 | )       |  |   |        |         |   |   | (876,500 | )      
|                                                                                                                                                                                       |                |         |          |            |  |              |          |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        
|Net (loss) income                                                                                                                                                                      |                | $       | (918,929 | )          |  | $            | (563,967 | )             |  | $            | 6,035  |              |  | $ | (301,464 | )       |  | $ | 859,396 |         |   | $ | (918,929 | )      
|                                                                                                                                                                                       |                |         |          |            |  |              |          |               |  |              |        |              |  |   |          |         |  |   |         |         |   |   |          |        

37



---



##### 



CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS


Six Months Ended June 30, 2002


As Restated


(In thousands)


|                                                           |                                                                |                                                         |         |            |         |              |        |               |         |              |   |              |        |   |          |          |          |   |          |          |        |   |          |          |         |  
|---------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------------------- | ------- | ---------- | ------- | ------------ | ------ | ------------- | ------- | ------------ | - | ------------ | ------ | - | -------- | -------- | -------- | - | -------- | -------- | ------ | - | -------- | -------- | ------- | -
|                                                           |                                                                | Parent                                                  |         | Subsidiary |         | Guarantor    |        | Non-Guarantor |         |              |   |             
|                                                           |                                                                | Company                                                 |         | Issuer     |         | Subsidiaries |        | Subsidiaries  |         | Eliminations |   | Consolidated
|                                                           |                                                                |                                                         |         |            |         |              |        |               |         |              |   |             
|Operating activities:                                      |                                                                |                                                         |         |            |         |              |        |               |         |              |   |              |        |   |          |          |          |   |          |          |        |   |          |         
|                                                           | Net loss                                                       |                                                         | $       | (918,929   | )       |              | $      | (563,967      | )       |              | $ | 6,035        |        |   | $        | (301,464 | )        |   | $        | 859,396  |        |   | $        | (918,929 | )      
|                                                           | Non-cash items:                                                |                                                         |         |            |         |              |        |               |         |              |   |              |        |   |          |          |          |   |          |          |        |   |          |          |        
|                                                           |                                                                | Equity in net loss of affiliates                        |         |            | 36,256  |              |        |               |        |              |   |              |       |   |          |          | 1,092    |   |          |          |       |   |          |          | 37,348  |  
|                                                           |                                                                | Minority interest                                       |         |            |        |              |        |               |        |              |   |              |       |   |          |          | (6       | ) |          |          |       |   |          |          | (6      | )
|                                                           |                                                                | Cumulative effect of change in accounting
    principle |         |            |        |              |        |               | 562,201 |              |   |              |       |   |          |          | 314,299  |   |          |          |       |   |          |          | 876,500 |  
|                                                           |                                                                | Equity in net loss of unconsolidated subsidiaries       |         |            | 868,000 |              |        |               | (6,035  | )            |   |              |       |   |          |          | (861,965 | ) |          |          |       |   |          |          |        |  
|                                                           |                                                                | Deferred taxes                                          |         |            | 3,135   |              |        |               |        |              |   |              | 2,248  |   |          |          | 11,102   |   |          |          | (3,253 | ) |          |          | 13,232  |  
|                                                           |                                                                | Depreciation and amortization                           |         |            |        |              |        |               | 27,141  |              |   |              | 10,506 |   |          |          | 57,575   |   |          |          |       |   |          |          | 95,222  |  
|                                                           |                                                                | Provisions for inventory obsolescence                   |         |            |        |              |        |               |        |              |   |              |       |   |          |          | 12,338   |   |          |          |       |   |          |          | 12,338  |  
|                                                           |                                                                | Provisions for bad debts                                |         |            |        |              |        |               | 674     |              |   |              | 190    |   |          |          | 871      |   |          |          |       |   |          |          | 1,735   |  
|                                                           |                                                                | Interest                                                |         |            |        |              |        |               | (529    | )            |   |              |       |   |          |          |         |   |          |          |       |   |          |          | (529    | )
|Changes in operating assets and liabilities:               |                                                                |                                                         |         |            |         |              |        |               |         |              |   |              |        |   |          |          |          |   |          |          |        |   |          |         
|                                                           | Accounts receivable, net                                       |                                                         |         |           |         |              |        | 1,507         |         |              |   | (379         | )      |   |          | (3,927   | )        |   |          |         |        |   |          | (2,799   | )      
|                                                           | Contracts-in-process                                           |                                                         |         |           |         |              |        |              |         |              |   |             |        |   |          | (4,774   | )        |   |          |         |        |   |          | (4,774   | )      
|                                                           | Inventories                                                    |                                                         |         |           |         |              |        |              |         |              |   |             |        |   |          | (10,856  | )        |   |          |         |        |   |          | (10,856  | )      
|                                                           | Long-term receivables                                          |                                                         |         |           |         |              |        |              |         |              |   |             |        |   |          | (2,268   | )        |   |          |         |        |   |          | (2,268   | )      
|                                                           | Deposits                                                       |                                                         |         |           |         |              |        |              |         |              |   |             |        |   |          | 50,200   |          |   |          |         |        |   |          | 50,200   |        
|                                                           | Due to (from) unconsolidated subsidiaries                      |                                                         |         | (6,129     | )       |              |        | 15,369        |         |              |   | (20,151      | )      |   |          | 2,276    |          |   |          | 8,635    |        |   |          |         |        
|                                                           | Other current assets and other assets                          |                                                         |         | (2,098     | )       |              |        | 2,375         |         |              |   | 1,647        |        |   |          | 15,264   |          |   |          |         |        |   |          | 17,188   |        
|                                                           | Accounts payable                                               |                                                         |         | (317       | )       |              |        | (2,065        | )       |              |   |             |        |   |          | (28,730  | )        |   |          |         |        |   |          | (31,112  | )      
|                                                           | Accrued expenses and other current liabilities                 |                                                         |         | (1,897     | )       |              |        | 2,811         |         |              |   |             |        |   |          | 5,072    |          |   |          |         |        |   |          | 5,986    |        
|                                                           | Customer advances                                              |                                                         |         |           |         |              |        | (1,192        | )       |              |   | (40          | )      |   |          | (9,708   | )        |   |          |         |        |   |          | (10,940  | )      
|                                                           | Income taxes payable                                           |                                                         |         | 19         |         |              |        |              |         |              |   |             |        |   |          | 2,690    |          |   |          | (2,169   | )      |   |          | 540      |        
|                                                           | Pension and other postretirement liabilities                   |                                                         |         |           |         |              |        |              |         |              |   |             |        |   |          | 4,425    |          |   |          |         |        |   |          | 4,425    |        
|                                                           | Long-term liabilities                                          |                                                         |         |           |         |              |        | (1,971        | )       |              |   | (56          | )      |   |          | (17,599  | )        |   |          |         |        |   |          | (19,626  | )      
|                                                           | Other                                                          |                                                         |         | 165        |         |              |        |              |         |              |   |             |        |   |          | (77      | )        |   |          |         |        |   |          | 88       |        
|                                                           |                                                                |                                                         |         |            |         |              |        |               |         |              |   |              |        |   |          |          |          |   |          |          |        |   |          |         
|Net cash (used in) provided by operating
    activities    |                                                                |                                                         | (21,795 | )          |         |              | 36,319 |               |         |              |  |              |        |   | (764,170 | )        |          |   | 862,609  |          |        |   | 112,963  |         
|                                                           |                                                                |                                                         |         |            |         |              |        |               |         |              |   |              |        |   |          |          |          |   |          |          |        |   |          |         
|Investing activities:                                      |                                                                |                                                         |         |            |         |              |        |               |         |              |   |              |        |   |          |          |          |   |          |          |        |   |          |         
|                                                           | Capital expenditures                                           |                                                         |         |           |         |              |        |              |         |              |   |             |        |   |          | (96,704  | )        |   |          | (590     | )      |   |          | (97,294  | )      
|                                                           | Investments in and advances to unconsolidated
    subsidiaries |                                                         |         | (857       | )       |              |        |              |         |              |   |             |        |   |          | 862,876  |          |   |          | (862,019 | )      |   |          |         |        
|                                                           | Investments in and advances to affiliates                      |                                                         |         | (2,162     | )       |              |        |              |         |              |   |             |        |   |          | (19,552  | )        |   |          |         |        |   |          | (21,714  | )      
|                                                           |                                                                |                                                         |         |            |         |              |        |               |         |              |   |              |        |   |          |          |          |   |          |          |        |   |          |         
|Net cash (used in) provided by in investing
    activities |                                                                |                                                         | (3,019  | )          |         |              |       |               |         |              |  |              |        |   | 746,620  |          |          |   | (862,609 | )        |        |   | (119,008 | )       
|                                                           |                                                                |                                                         |         |            |         |              |        |               |         |              |   |              |        |   |          |          |          |   |          |          |        |   |          |         
|Financing activities:                                      |                                                                |                                                         |         |            |         |              |        |               |         |              |   |              |        |   |          |          |          |   |          |          |        |   |          |         
|                                                           | Borrowings under revolving credit facilities                   |                                                         |         |           |         |              |        |              |         |              |   |             |        |   |          | 86,000   |          |   |          |         |        |   |          | 86,000   |        
|                                                           | Repayments under term loans                                    |                                                         |         |           |         |              |        |              |         |              |   |             |        |   |          | (32,500  | )        |   |          |         |        |   |          | (32,500  | )      
|                                                           | Repayments under revolving credit facilities                   |                                                         |         |           |         |              |        |              |         |              |   |             |        |   |          | (84,000  | )        |   |          |         |        |   |          | (84,000  | )      
|                                                           | Repayments of other long-term obligations                      |                                                         |         |           |         |              |        | (918          | )       |              |   |             |        |   |          | (1,082   | )        |   |          |         |        |   |          | (2,000   | )      
|                                                           | Preferred dividends                                            |                                                         |         | (20,878    | )       |              |        |              |         |              |   |             |        |   |          |         |          |   |          |         |        |   |          | (20,878  | )      
|                                                           | Proceeds from stock issuances                                  |                                                         |         | 7,154      |         |              |        |              |         |              |   |             |        |   |          |         |          |   |          |         |        |   |          | 7,154    |        
|                                                           |                                                                |                                                         |         |            |         |              |        |               |         |              |   |              |        |   |          |          |          |   |          |          |        |   |          |         
|Net cash used in financing activities                      |                                                                |                                                         | (13,724 | )          |         |              | (918   | )             |         |              |  |              |        |   | (31,582  | )        |          |   |         |          |        |   | (46,224  | )       
|                                                           |                                                                |                                                         |         |            |         |              |        |               |         |              |   |              |        |   |          |          |          |   |          |          |        |   |          |         
|Increase (decrease) in cash and cash equivalents           |                                                                |                                                         | (38,538 | )          |         |              | 35,401 |               |         |              |  |              |        |   | (49,132  | )        |          |   |         |          |        |   | (52,269  | )       
|Cash and cash equivalentsbeginning of period              |                                                                |                                                         | 46,068  |            |         |              | 19,399 |               |         |              |  |              |        |   | 94,482   |          |          |   |         |          |        |   | 159,949  |         
|                                                           |                                                                |                                                         |         |            |         |              |        |               |         |              |   |              |        |   |          |          |          |   |          |          |        |   |          |         
|Cash and cash equivalentsend of period                    |                                                                | $                                                       | 7,530   |            |         | $            | 54,800 |               |         | $            |  |              |        | $ | 45,350   |          |          | $ |         |          |        | $ | 107,680  |         
|                                                           |                                                                |                                                         |         |            |         |              |        |               |         |              |   |              |        |   |          |          |          |   |          |          |        |   |          |         

38



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##### 



LORAL SPACE & COMMUNICATIONS LTD., A
DEBTOR-IN-POSSESSION

MANAGEMENTS DISCUSSION AND ANALYSIS
OF

RESULTS OF OPERATIONS AND FINANCIAL
CONDITION


Except for the historical information
contained herein, the matters discussed in the following
Managements Discussion and Analysis of Results of
Operations and Financial Condition of Loral Space &
Communications Ltd.(Loral or the
Company, which terms shall include its subsidiaries
unless otherwise indicated or the context requires) and its
subsidiaries are not historical facts, but are
forward-looking statements, as that term is defined
in the Private Securities Litigation Reform Act of 1995. In
addition, the Company or its representatives have made and may
continue to make forward-looking statements, orally or in
writing, in other contexts, such as in reports filed with the
SEC, press releases or statements made with the approval of an
authorized executive officer of the Company. These
forward-looking statements can be identified by the use of
forward-looking terminology such as believes,
expects, plans, may,
will, would, could,
should, anticipates,
estimates, project, intend,
or outlook or the negative of these words or other
variations of these words or other comparable words, or by
discussion of strategy that involves risks and uncertainties.
These forward-looking statements are only predictions, and
actual events or results may differ materially as a result of a
wide variety of factors and conditions, many of which are beyond
the Companys control. These include the Company developing
a plan of reorganization, confirmation of the plan by the
Bankruptcy Court, customer and employee retention and the
Companys ability to continue to provide high quality
services. For a detailed discussion of additional factors and
conditions, please also refer to the section of Lorals
latest Annual Report on Form 10-K titled Certain
Factors that May Affect Future Results beginning on page
13 and to the other periodic reports filed with the SEC by
Loral, its wholly owned subsidiary Loral Orion, Inc.
(Loral Orion), and the Companys affiliate
Satelites de Mexico, S.A. de C.V. (Satmex). In
addition, we caution you that the Company operates in an
industry sector where securities values may be volatile and may
be influenced by economic and other factors beyond the
Companys control. The Company undertakes no obligation to
update any forward-looking statements.

Loral is one of the worlds leading
satellite communications companies with substantial activities
in satellite-based communications services and satellite
manufacturing. Loral is organized into two operating businesses:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Fixed Satellite Services (FSS).Loral leases transponder capacity to
    customers for various applications, including television and
    cable broadcasting, news gathering, Internet access and
    transmission, private voice and data networks, business
    television, distance learning and direct-to-home television
    (DTH) and provides satellite telemetry, tracking and
    control (TT&C) and related professional services
    to its customers. Loral also provides network services such as
    managed communications networks, Internet and intranet services,
    business television and business media services to its customers.
|
| | Satellite Manufacturing and Technology.The Company designs and manufactures
    satellites and space systems and develops satellite technology
    for a broad variety of customers and applications through Space
    Systems/ Loral, Inc. (SS/ L).                                                                                                                                                                                                                                                                                                                                                                                                        

Recent Events  Sale of Assets and
Bankruptcy Filings

On July 15, 2003, Loral Space &
Communications Corporation, Loral SpaceCom Corporation and Loral
Satellite, Inc. (collectively, the Sellers), direct
or indirect subsidiaries of Loral, entered into a definitive
agreement (the Asset Purchase Agreement) to sell to
Intelsat, Ltd. and Intelsat (Bermuda), Ltd. (together, the
Purchasers), all of the Sellers domestic fixed
satellite services satellites, comprised of five satellites
currently in-orbit (one of which has just been launched and is
undergoing in-orbit testing) and one under construction, as well
as certain other net assets for up to $1.1 billion in cash,
subject to certain price adjustments related to Sellers
ability to achieve specified operating parameters prior to the
closing. The net book value of the satellites to be sold was
approximately $940 million and the other net liabilities of
the disposal group was approximately $25 million as of
June 30, 2003. Consummation of the transaction is
conditioned on the conduct of an auction by the bankruptcy court
in Sellers Chapter 11 cases (as defined below), that
certain operating parameters continue to be met with respect to
the assets being sold, receipt of

39



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##### 



the approval of the Federal Communications
Commission and certain other closing conditions typical for
transactions of this type. Loral expects to use most of the
proceeds from the sale of the assets to repay its outstanding
secured bank debt. The Chapter 11 Cases will enable the
Sellers to sell the six North American satellites to the
Purchasers free and clear of any encumbrances. There can be no
assurance, however, that the transaction contemplated by the
Asset Purchase Agreement will be consummated.


Also on July 15, 2003, Loral and certain of
its subsidiaries (the Debtor Subsidiaries),
including the Sellers, SS/ L and Loral Orion, filed voluntary
petitions for reorganization under Chapter 11 of
Title 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).
Loral and its Debtor Subsidiaries, including the Sellers,
continue to manage their properties and operate their 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 filed parallel insolvency proceedings in
the Supreme Court of Bermuda (the Bermuda Court). On
such date, the Bermuda Court granted an order appointing Philip
Wallace, Chris Laverty and Michael Morrison, partners of KPMG,
as Joint Provisional Liquidators (JPLs) in respect
of the Company and the Bermuda subsidiary. 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 Lorals and the Debtor
Subsidiaries voluntary petitions for reorganization,
Lorals prepetition debt obligations (aggregating
approximately $2.1 billion at June 30, 2003) have been
accelerated and are immediately due and payable and Lorals
other prepetition debt obligations are subject to acceleration
(see Note 10 to the condensed consolidated financial
statements and Liquidity and Capital Resources). A
creditors committee has been appointed in the
Chapter 11 Cases to represent all unsecured creditors,
including all holders of Lorals and Loral Orions
senior unsecured notes, and, in accordance with the provisions
of the Bankruptcy Code, will have the right to be heard on all
matters that come before the Bankruptcy Court. At this point, it
is not possible to predict with certainty when a plan of
reorganization will be confirmed by the Bankruptcy Court in the
Chapter 11 Cases or how any such plan will treat the claims
of prepetition creditors.

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

As a result of the commencement of the
Chapter 11 Cases, the pursuit of all pending claims and
litigation against Loral and its Debtor Subsidiaries 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, no
party may take any action to recover any prepetition claims,
enforce any lien against or obtain possession of any property
from Loral or its Debtor Subsidiaries. In addition, pursuant to
Section 365 of the Bankruptcy Code, Loral and its Debtor
Subsidiaries 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.

On July 15, 2003, the New York Stock
Exchange suspended trading of Lorals common stock and has
informed the Company that it intends to initiate proceedings to
delist Lorals securities. Lorals common stock is
being quoted under the ticker symbol LRLSQ on the Pink Sheets
Electronic Quotation Service and on the Over-The-Counter
Bulletin Board service. The Company anticipates that, in any
plan of reorganization ultimately confirmed by the Bankruptcy
Court, the common and preferred stock of the Company will, at
best,

40



---



##### 



be severely diluted and may be eliminated
entirely, with the result that common and preferred stockholders
would receive no distribution.


The condensed consolidated financial statements
have been prepared assuming the Company in its current structure
will continue as a going concern. The factors mentioned above,
however, among other things, raise substantial doubt about
Lorals ability to continue as a going concern. The
condensed financial statements do not include any adjustments
that might result from the outcome of this uncertainty. The
ability of the Company to continue as a going concern is
dependent on a number of factors including, but not limited to,
the Companys development of a plan of reorganization,
confirmation of the plan by the Bankruptcy Court, customer and
employee retention and the Companys ability to continue to
provide high quality services. If a plan of reorganization is
not confirmed and implemented, the Company may be forced to
liquidate under applicable provisions of the Bankruptcy Code.
There can be no assurance of the level of recovery that the
Companys creditors would receive in such liquidation. The
condensed consolidated 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 the Company is forced to
liquidate.

Consolidated Operating Results

In evaluating financial performance, management
uses revenues and operating income (loss) before depreciation
and amortization including amortization of unearned stock
compensation (EBITDA) as a measure of a
segments profit or loss. The following discussion of
revenues and EBITDA reflects the results of Lorals
operating businesses for the three and six months ended
June 30, 2003 and 2002, respectively. See Note 14 to
the condensed consolidated financial statements for additional
information on segment results. The remainder of the discussion
relates to the consolidated results of Loral, unless otherwise
noted.

On June 4, 2003, the Companys Board of
Directors approved a reverse stock split of the Companys
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.



Prior to the first quarter of 2003, management
evaluated the financial performance of the satellite
manufacturing and technology segment in accordance with
accounting principles applicable to government contracts,
whereby all costs incurred, including general and administrative
costs, were allocated to programs. The required adjustment to
conform to U.S. generally accepted accounting principles
for commercial contracts and self constructed assets was
previously reflected in consolidation eliminations. Subsequent
to the filing of the Companys September 30, 2002
Form 10-Q, the Company determined that it had miscalculated
this adjustment in its eliminations and has restated its
reported results for the second quarter of 2002 to reflect the
correct amounts. See Note 4 to the condensed consolidated
financial statements.

Revenues (in millions):

|                                       |  |                    |       |                  |  |      |       |             |  |   |       |   |  |   |       |  
|-------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ----------- |  | - | ----- | - |  | - | ----- | -
|                                       |  |                    |       |                 
|                                       |  | Three Months Ended |       | Six Months Ended
|                                       |  | June 30,           |       | June 30,        
|                                       |  |                    |       |                 
|                                       |  | 2003               |       | 2002             |  | 2003 |       | 2002       
|                                       |  |                    |       |                  |  |      |       |            
|                                       |  |                    |       | As Restated      |  |      |       | As Restated
|Fixed satellite services               |  | $                  | 73.1  |                  |  | $    | 102.9 |             |  | $ | 158.1 |   |  | $ | 213.5 |  
|Satellite manufacturing and technology |  |                    | 81.1  |                  |  |      | 250.0 |             |  |   | 212.6 |   |  |   | 492.6 |  
|                                       |  |                    |       |                  |  |      |       |             |  |   |       |   |  |   |       |  
|Segment revenues                       |  |                    | 154.2 |                  |  |      | 352.9 |             |  |   | 370.7 |   |  |   | 706.1 |  
|Eliminations(1)                        |  |                    | (11.6 | )                |  |      | (36.5 | )           |  |   | (29.8 | ) |  |   | (81.6 | )
|                                       |  |                    |       |                  |  |      |       |             |  |   |       |   |  |   |       |  
|Revenues as reported(2)                |  | $                  | 142.6 |                  |  | $    | 316.4 |             |  | $ | 340.9 |   |  | $ | 624.5 |  
|                                       |  |                    |       |                  |  |      |       |             |  |   |       |   |  |   |       |  

41



---



##### 



EBITDA(3)(in millions):

|                                              |  |                    |        |                  |  |      |       |             |  |   |        |   |  |   |       |  
|--------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ----- | ----------- |  | - | ------ | - |  | - | ----- | -
|                                              |  |                    |        |                 
|                                              |  | Three Months Ended |        | Six Months Ended
|                                              |  | June 30,           |        | June 30,        
|                                              |  |                    |        |                 
|                                              |  | 2003               |        | 2002             |  | 2003 |       | 2002       
|                                              |  |                    |        |                  |  |      |       |            
|                                              |  |                    |        | As Restated      |  |      |       | As Restated
|Fixed satellite services                      |  | $                  | 44.2   |                  |  | $    | 60.4  |             |  | $ | 86.7   |   |  | $ | 126.4 |  
|Satellite manufacturing and
    technology(4) |  |                    | (88.5  | )                |  |      | 9.7   |             |  |   | (101.0 | ) |  |   | 21.2  |  
|Corporate expenses(5)                         |  |                    | (9.9   | )                |  |      | (8.8  | )           |  |   | (19.0  | ) |  |   | (17.5 | )
|                                              |  |                    |        |                  |  |      |       |             |  |   |        |   |  |   |       |  
|Segment EBITDA before eliminations            |  |                    | (54.2  | )                |  |      | 61.3  |             |  |   | (33.3  | ) |  |   | 130.1 |  
|Eliminations(1)                               |  |                    | (2.3   | )                |  |      | (4.5  | )           |  |   | (7.4   | ) |  |   | (11.5 | )
|                                              |  |                    |        |                  |  |      |       |             |  |   |        |   |  |   |       |  
|EBITDA                                        |  |                    | (56.5  | )                |  |      | 56.8  |             |  |   | (40.7  | ) |  |   | 118.6 |  
|Depreciation and amortization                 |  |                    | (44.4  | )                |  |      | (48.1 | )           |  |   | (89.2  | ) |  |   | (95.2 | )
|                                              |  |                    |        |                  |  |      |       |             |  |   |        |   |  |   |       |  
|Operating (loss) income                       |  | $                  | (100.9 | )                |  | $    | 8.7   |             |  | $ | (129.9 | ) |  | $ | 23.4  |  
|                                              |  |                    |        |                  |  |      |       |             |  |   |        |   |  |   |       |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the elimination of intercompany sales
    and EBITDA, primarily for satellites under construction by SS/ L
    for wholly owned subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(2) | Includes revenues from affiliates of
    $8.2 million and $27.9 million for the three months
    ended June 30, 2003 and 2002, respectively and
    $23.9 million and $50.6 million for the six months
    ended June 30, 2003 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(3) | EBITDA (which is equivalent to operating
    income/(loss) before depreciation and amortization, including
    amortization of unearned stock compensation) is provided because
    it is a measure commonly used in the communications industry to
    analyze companies on the basis of operating performance,
    leverage and liquidity and is presented to enhance the
    understanding of Lorals operating results. EBITDA is not
    an alternative to net income as an indicator of a companys
    operating performance, or cash flow from operations as a measure
    of a companys liquidity. EBITDA may be calculated
    differently and, therefore, may not be comparable to similarly
    titled measures reported by other companies.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(4) | Satellite manufacturing and technology 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 due to the absence of
    new satellite awards; (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. In addition, for the six months ended June 30,
    2003, satellite manufacturing and technology EBITDA includes a
    charge of $10 million on SS/ L-provided vendor financing
    receivables to Sirius in exchange for Sirius common stock.
    During the three and six months ended June 30, 2003, Loral
    realized gains of $17 million and $18 million on the
    sale of 41 million and 59 million shares of such
    stock, respectively. The gains on the sale of stock are not
    recognized in EBITDA. As of June 30, 2003, Loral had sold
    all of its shares of Sirius common stock.



| |                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Satellite manufacturing and technology EBITDA for
    the three and six months ended June 30, 2002 includes
    $13 million of income from a recovery of a claim from a
    vendor and provisions for inventory obsolescence of
    $9 million and $12 million, respectively, due to the
    absence of new satellite awards.



|    |                                                                                   
|--- | ----------------------------------------------------------------------------------
|(5) | Represents corporate expenses incurred in support
    of the Companys operations.



| |                            
| | ---------------------------
| | Critical accounting matters

See the Companys latest Annual Report on
Form 10-K filed with the SEC and Other Matters 
Accounting Pronouncements below.

42



---



##### 



Three Months Ended June 30, 2003 Compared
With June 30, 2002

Revenues as reported for Lorals operating
businesses decreased to $143 million as compared to
$316 million, after eliminations of $12 million and
$37 million, for the three months ended June 30, 2003
and 2002, respectively. The decrease in revenues was due to
lower SS/ L revenues which primarily resulted from a lack of new
satellite orders at SS/ L since December 2001 and the timing of
work performed and costs incurred on satellite programs under
the percentage of completion method and lower FSS revenues which
was primarily due to a decrease in volume and prices in both
transponder leasing and network services. Both of the
Companys segments have been adversely affected by the
global economic downturn, which has caused a delay in demand for
new telecommunications applications and services. Eliminations
primarily consist of revenues from satellites under construction
by SS/ L for FSS.

EBITDA as reported for Lorals operating
businesses decreased to a loss of $57 million as compared
to income of $57 million, after eliminations of $2 million
and $5 million, for the three months ended June 30,
2003 and 2002, respectively. The decrease in the three months
ended June 30, 2003 arose primarily from lower SS/ L EBITDA
primarily resulting from lower sales volume and the following:
(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 due to the absence of
new satellite awards; (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. SS/ L EBITDA for the three months ended
June 30, 2002 includes $13 million of income from a
recovery of a claim from a vendor and provisions for inventory
obsolescence of $9 million due to the absence of new
satellite awards. FSS EBITDA decreased in 2003 primarily due to
lower revenues, offset by lower costs and an insurance claim
recovery on a satellite of $9 million.

Depreciation and amortization was
$44 million and $48 million for the three months ended
June 30, 2003 and 2002, respectively. The decrease was
primarily due to the timing of assets being placed in service
and assets that became fully depreciated during the current
period.

As a result of the above, the Company had an
operating loss of $101 million, as compared to operating
income of $9 million for the three months ended
June 30, 2003 and 2002, respectively.

Interest and investment income was
$4 million in both the three months ended June 30,
2003 and 2002, respectively.

Interest costs remained relatively constant as
interest expense was $19 million, net of capitalized
interest of $10 million, as compared to $18 million,
net of capitalized interest of $8 million for the three
months ended June 30, 2003 and 2002, respectively. As a
result of Lorals voluntary petitions for reorganization,
interest costs will decrease subsequent to July 14, 2003,
since the Company expects to only pay interest on its bank debt.

During the three months ended June 30, 2003
the Company realized $17 million of gains from the sale of
the remaining 41 million shares of its Sirius common stock,
which is reflected as gain on investment on the condensed
consolidated statements of operations. As of June 30, 2003,
SS/ L had sold all of its shares of Sirius common stock.

Loral, as a Bermuda company, is subject to U.S.
federal, state and local income taxation at regular corporate
rates plus an additional 30% branch profits tax on
any income that is effectively connected with the conduct of a
U.S. trade or business. Loral has, cumulatively from its
inception, received no tax benefit as a result of being
established in Bermuda because of substantial losses incurred
outside the U.S. Lorals U.S. subsidiaries are subject to
regular corporate tax on their worldwide income. The Company
recorded an income tax provision of $2 million on a pre-tax
loss of $99 million, as compared to an income tax provision
of $4 million on a pre-tax loss of $5 million for the
three months ended June 30, 2003 and 2002, respectively.
Loral continues to record a 100% valuation allowance against its
domestic net deferred tax assets under the criteria of
SFAS No. 109, Accounting for Income Taxes. Therefore,
no benefit was recorded on the domestic loss for the three
months ended June 30, 2003 while a provision was recorded
on the domestic income for the three months ended June 30,
2002.

43



---



##### 



Equity in net losses of affiliates was
$8 million as compared to $13 million for the three
months ended June 30, 2003 and 2002, respectively.
Lorals share of equity in net losses of Satmex was
$8 million as compared to $3 million for the three
months ended June 30, 2003 and 2002. Lorals share of
equity in net losses of XTAR, L.L.C (XTAR) was
$1 million in both the three months ended June 30,
2003 and 2002, respectively. Lorals share of equity in net
losses of Europe*Star Limited (Europe*Star), managed
by Alcatel, was zero as compared to $8 million for the
three months ended June 30, 2003 and 2002, respectively. In
the fourth quarter of 2002, Lorals investment in
Europe*Star was reduced to zero. Accordingly, there is no longer
any requirement for Loral to provide for its allocated share of
Europe*Stars net losses subsequent to December 31,
2002. Lorals share of equity income
(losses) attributable to Globalstar, L.P.
(Globalstar) related activities was
$0.4 million as compared to $(1) million for the three
months ended June 30, 2003 and 2002, respectively. The 2002
amount for Globalstar related activities includes the recovery
of a claim from a vendor on the Globalstar program of which
$14 million ($8 million after taxes) was recorded as a
benefit to equity in net losses of affiliates and reduced equity
in net losses of Globalstar service provider partnerships
recorded, offset by a $9 million charge relating to
liabilities the Company guaranteed in connection with a
Globalstar service provider partnership. See Note 8 to the
condensed consolidated financial statements.

As a result of receiving Alcatels minority
interest in CyberStar, L.P., Loral recognized an extraordinary
gain of $14 million, which represents the excess of the
fair value of acquired net assets over cost.

Preferred dividends were $3 million as
compared to $47 million for the three months ended
June 30, 2003 and 2002, respectively. The decrease in 2003
was primarily due to the non-cash dividend charges of
$38 million incurred in the second quarter of 2002 on the
conversion of 1.8 million shares of Lorals 6%
Series C convertible redeemable preferred stock (the
Series C Preferred Stock) and 2.7 million shares
of Lorals 6% Series D convertible redeemable
preferred stock (the Series D Preferred Stock)
into an aggregate 3.1 million shares of the Companys
common stock in connection with Lorals privately
negotiated exchange transactions and reductions in dividend
obligations resulting from the Companys October 2002
exchange offers of its Series C and Series D preferred
stock, which converted 6.1 million shares of the
Series C Preferred Stock and 5.4 million shares of the
Series D Preferred Stock into 4.6 million shares of
the Companys common stock and $13.4 million in cash
(see Liquidity and Capital Resources).

As a result of the above, net loss applicable to
common shareholders was $99 million or $2.26 per basic and
diluted share as compared to $69 million or $1.94 per basic
and diluted share for the three months ended June 30, 2003
and 2002, respectively. Basic and diluted weighted average
shares were 44 million and 36 million for the three
months ended June 30, 2003 and 2002, respectively. The
increase in weighted average shares was primarily due to the
conversions of the Companys preferred stock into common
stock as mentioned above.

Six Months Ended June 30, 2003 Compared
With June 30, 2002

Revenues as reported for Lorals operating
businesses decreased to $341 million as compared to
$625 million, after eliminations of $30 million and
$82 million, for the six months ended June 30, 2003
and 2002, respectively. The decrease in revenues was due to
lower SS/ L revenues which primarily resulted from a lack of new
satellite orders at SS/ L since December 2001 and the timing of
work performed and costs incurred on satellite programs under
the percentage of completion method and lower FSS revenues which
was primarily due to a decrease in volume and prices in both
transponder leasing and network services. Both of the
Companys segments have been adversely affected by the
global economic downturn, which has caused a delay in demand for
new telecommunications applications and services. Eliminations
primarily consist of revenues from satellites under construction
by SS/ L for FSS.

EBITDA as reported for Lorals operating
businesses decreased to a loss of $41 million as compared
to income of $119 million, after eliminations of
$7 million and $12 million, for the six months ended
June 30, 2003 and 2002, respectively. The decrease in the
six months ended June 30, 2003 arose primarily from lower
SS/ L EBITDA primarily resulting from lower sales volume and the
following: (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 due to the absence of new satellite awards;
(iii) a charge of $13 million on the settlement of all

44



---



##### 



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; (v) a charge of $10 million recorded 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s common stock
on March 7, 2003 of $28 million (see discussion below
for gains realized subsequent to receipt of the shares). SS/ L
EBITDA for the six months ended June 30, 2002 includes
$13 million of income from a recovery of a claim from a
vendor and provisions for inventory obsolescence of
$12 million due to the absence of new satellite awards. FSS
EBITDA decreased in 2003 primarily due to lower revenues, offset
by lower costs and an insurance claim recovery on a satellite of
$9 million.


Depreciation and amortization was
$89 million and $95 million for the six months ended
June 30, 2003 and 2002, respectively. The decrease was
primarily due to the timing of assets being placed in service
and assets that became fully depreciated during the current
period.

As a result of the above, the Company had an
operating loss of $130 million as compared to operating
income of $23 million for the six months ended
June 30, 2003 and 2002, respectively.

Interest and investment income was
$11 million as compared to $10 million for the six
months ended June 30, 2003 and 2002, respectively.

Interest costs remained relatively constant as
interest expense was $36 million, net of capitalized
interest of $19 million, as compared to $37 million,
net of capitalized interest of $16 million for the six
months ended June 30, 2003 and 2002, respectively. As a
result of Lorals voluntary petitions for reorganization,
interest costs will decrease subsequent to July 14, 2003,
since the Company expects to only pay interest on its bank debt.

During the six months ended June 30, 2003
the Company realized $18 million of gains from the sale of
all 59 million shares of its Sirius common stock, which is
reflected as gain on investment on the condensed consolidated
statement of operations. As of June 30, 2003, SS/ L had
sold all of its shares of Sirius common stock.

Loral, as a Bermuda company, is subject to U.S.
federal, state and local income taxation at regular corporate
rates plus an additional 30% branch profits tax on
any income that is effectively connected with the conduct of a
U.S. trade or business. Loral has, cumulatively from its
inception, received no tax benefit as a result of being
established in Bermuda because of substantial losses incurred
outside the U.S. Lorals U.S. subsidiaries are subject to
regular corporate tax on their worldwide income. The Company
recorded an income tax provision of $4 million on a pre-tax
loss of $137 million, as compared to an income tax
provision of $10 million on a pre-tax loss of
$4 million for the six months ended June 30, 2003 and
2002, respectively. Loral continues to record a 100% valuation
allowance against its domestic net deferred tax assets under the
criteria of SFAS No. 109, Accounting for Income Taxes.
Therefore, no benefit was recorded on the domestic loss for the
six months ended June 30, 2003 while a provision was
recorded on the domestic income for the six months ended
June 30, 2002.

Equity in net losses of affiliates was
$17 million as compared to $29 million for the six
months ended June 30, 2003 and 2002, respectively.
Lorals share of equity in net losses of Satmex was
$13 million as compared to $11 million for the six
months ended June 30, 2003 and 2002, respectively.
Lorals share of equity in net losses of XTAR was
$4 million as compared to $1 million for the six
months ended June 30, 2003 and 2002, respectively.
Lorals share of equity in net losses of Europe*Star,
managed by Alcatel, was zero as compared to $14 million for
the six months ended June 30, 2003 and 2002, respectively.
In the fourth quarter of 2002, Lorals investment in
Europe*Star was reduced to zero. Accordingly, there is no longer
any requirement for Loral to provide for its allocated share of
Europe*Stars net losses subsequent to December 31,
2002. Lorals share of equity income
(losses) attributable to Globalstar related activities was
$1 million as compared to $(3) million for the six months
ended June 30, 2003 and 2002, respectively. The 2002 amount
for Globalstar related activities includes the recovery of a
claim from a vendor on the Globalstar program of which
$14 million ($8 million after taxes) was recorded as a
benefit to equity in net losses of affiliates and reduced equity
in net losses of Globalstar service provider partnerships
recorded, offset by a $9 million charge

45



---



##### 



relating to liabilities the Company guaranteed in
connection with a Globalstar service provider partnership in
2002. See Note 8 to the condensed consolidated financial
statements.


On January 1, 2002 the Company adopted SFAS
No. 142, Goodwill and Other Intangible Assets, which
resulted in the Company recording a charge of $892 million
($877 million after taxes) to write-off all of its cost in
excess of net assets acquired (goodwill) for the
cumulative effect of change in accounting principle (see
Accounting Pronouncements).

As a result of receiving Alcatels minority
interest in CyberStar, L.P., Loral recognized an extraordinary
gain of $14 million, which represents the excess of the
fair value of acquired net assets over cost.

Preferred dividends were $7 million as
compared to $59 million for the six months ended
June 30, 2003 and 2002, respectively. The decrease in 2003
was primarily due to the non-cash dividend charges of
$38 million incurred in the second quarter of 2002 on the
conversion of 1.8 million shares of the Series C
Preferred Stock and 2.7 million shares of the Series D
Preferred Stock into an aggregate 3.1 million shares of the
Companys common stock in connection with Lorals
privately negotiated exchange transactions and reductions in
dividend obligations resulting from the Companys October
2002 exchange offers of its Series C and Series D
preferred stock, which converted 6.1 million shares of the
Series C Preferred Stock and 5.4 million shares of the
Series D Preferred Stock into 4.6 million shares of
the Companys common stock and $13.4 million in cash
(see Liquidity and Capital Resources).

As a result of the above, net loss applicable to
common shareholders was $151 million or $3.46 per basic and
diluted share as compared to net loss applicable to common
shareholders before the cumulative effect of the change in
accounting principle relating to goodwill of $101 million
or $2.91 per basic and diluted share for the six months ended
June 30, 2003 and 2002, respectively. Basic and diluted
weighted average shares were 44 million and 35 million
for the six months ended June 30, 2003 and 2002,
respectively. The increase in weighted average shares was
primarily due to the conversions of the Companys preferred
stock into common stock as mentioned above.

Results by Operating Segment for the Three and
Six Months Ended June 30, 2003 and 2002

The satellite industry continues to suffer from
the downturn in the global economy and the resultant decline in
demand for or postponement of new satellite-based applications
and services. The Companys businesses have also been
negatively effected by customers difficulty obtaining
funding for new projects in the capital markets, by competition
from fiber and other terrestrial alternatives and Lorals
financial condition.



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

FSS revenues were $73 million and
$103 million for the three months ended June 30, 2003
and 2002, respectively and $158 million and
$213 million for the six months ended June 30, 2003
and 2002, respectively. FSS revenues without network services
were $62 million and $86 million for the three months
ended June 30, 2003 and 2002, respectively and
$134 million and $176 million for the six months ended
June 30, 2003 and 2002, respectively. Network services
revenues were $11 million and $17 million for the
three months ended June 30, 2003 and 2002, respectively and
$24 million and $37 million for the six months ended
June 30, 2003 and 2002, respectively. These decreases were
primarily due to a decline in prices and volume for both
transponder leasing and network services due to the global
economic downturn and the delay in demand for new applications
and services. EBITDA was $44 million as compared to
$60 million for the three months ended June 30, 2003
and 2002, respectively and $87 million and
$126 million for the six months ended June 30, 2003
and 2002, respectively. The EBITDA decrease for the three and
six months ended June 30, 2003, were primarily due to lower
sales, partially offset by cost reductions and by an insurance
claim recovery on a satellite of $9 million. As of
June 30, 2003, FSS had seven operational satellites. Funded
backlog for the segment totaled $1.4 billion at
June 30, 2003 and December 31, 2002, including
intercompany backlog of $39 million and $41 million at
June 30, 2003 and December 31, 2002, respectively. Net
bookings for the segment were $192 million and $203 million
for the six months ended June 30, 2003 and 2002,
respectively.

46



---



##### 





| |                                           
| | ------------------------------------------
| | Satellite Manufacturing and
    Technology

Revenues at SS/ L, before eliminations, were
$81 million and $250 million for the three months
ended June 30, 2003 and 2002, respectively and
$213 million and $493 million for the six months ended
June 30, 2003 and 2002, respectively. The decrease in
revenues resulted from a lack of new satellite orders since
December 2001 and the timing of work performed and costs
incurred on satellite programs under the percentage of
completion method. EBITDA before eliminations was a loss of
$89 million, as compared to income of $10 million for
the three months ended June 30, 2003 and 2002, respectively
and a loss of $101 million, as compared to income of
$21 million for the six months ended June 30, 2003 and
2002, respectively. The decrease in EBITDA for the three months
ended June 30, 2003 was primarily due to lower sales volume
and the following: (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
due to the absence of new satellite awards; (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. The decrease in SS/ L EBITDA
for the six months ended June 30, 2003 was primarily due to
lower sales volume, the items mentioned above and a charge of
$10 million recorded 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s common stock on March 7, 2003 of
$28 million. SS/ L EBITDA for the three and six months
ended June 30, 2002 includes $13 million of income
from a recovery of a claim from a vendor and provisions for
inventory obsolescence of $9 million and $12 million,
respectively, due to the absence of new satellite awards. Funded
backlog for SS/ L as of June 30, 2003 and December 31,
2002 was $558 million and $763 million, respectively,
including intercompany backlog of $246 million as of
June 30, 2003 and $275 million as of December 31,
2002. Realization of the intercompany backlog is subject to the
limitations contained in the Companys credit agreements
and cash collateral order, and in certain cases may require the
consent of the lenders. The decline in backlog is due to a lack
of new satellite orders, due to sluggish economic conditions
that have had a negative impact industry-wide and Lorals
financial condition.

Transactions With Affiliates

Consolidated funded backlog was $1.7 billion
and $1.8 billion at June 30, 2003 and
December 31, 2002 which includes $90 million and
$142 million, respectively, as a result of transactions
entered into with affiliates and related parties (primarily with
Satmex, XTAR and Hisdesat) for the construction of satellites.

The Companys 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,        
|                                                                                                           |  |                    |        |                 
|                                                                                                           |  | 2003               |        | 2002             |  | 2003 |        | 2002       
|                                                                                                           |  |                    |        |                  |  |      |        |            
|                                                                                                           |  |                    |        | As Restated      |  |      |        | As Restated
|Revenues                                                                                                   |  | $                  | 8,244  |                  |  | $    | 27,947 |             |  | $ | 23,934 |   |  | $ | 50,589 |  
|Investment income                                                                                          |  |                    | 295    |                  |  |      | 294    |             |  |   | 589    |   |  |   | 588    |  
|Interest expense capitalized on development stage
    enterprise                                           |  |                    |       |                  |  |      | 270    |             |  |   | 428    |   |  |   | 397    |  
|Profits relating to affiliate transactions not
    eliminated, net of taxes                                |  |                    | 1,604  |                  |  |      | 1,452  |             |  |   | 2,288  |   |  |   | 2,608  |  
|Elimination of Lorals proportionate share
    of profits relating to affiliate transactions, net of taxes |  |                    | (1,695 | )                |  |      | (1,514 | )           |  |   | (2,814 | ) |  |   | (2,639 | )
|Amortization of deferred credit and profits
    relating to investments in affiliates                      |  |                    | 262    |                  |  |      | 326    |             |  |   | 523    |   |  |   | 254    |  

47



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##### 



Liquidity and Capital Resources

Lorals principal challenge has been to
overcome a confluence of events that have severely affected the
satellite industry in recent years. These include a downturn in
the global economy in general, the inability of Lorals
customers to access the capital markets which led to the
declining utilization of services by existing customers and a
lack of new customers, in particular telecommunications and
Internet access providers entering the market, and reduced
demand resulting in an overabundance of transponder capacity for
satellite services and a severe drought in satellite orders. In
addition, Lorals financial condition has been further
affected by the significant investments it made and wrote-off in
Globalstar. As a result of these and other factors, on
July 15, 2003, Loral and certain of its subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of
the Bankruptcy Code in the Bankruptcy Court. On July 15,
2003, Loral also filed parallel insolvency proceedings in
Bermuda, where it is incorporated.

Also on July 15 2003, Loral entered into a
definitive agreement to sell its six North American
telecommunications satellites (Telstars 4, 5, 6 and 7 which
are currently in orbit, Telstar 13 which has just been
launched and is undergoing in-orbit testing, and Telstar 8 which
is scheduled for launch in 2004), as well as certain other net
assets to the Purchasers for up to $1.1 billion in cash,
subject to certain price adjustments related to Lorals
ability to achieve specified operating parameters prior to the
closing. Consummation of the transaction is conditioned on the
conduct of an auction by the Bankruptcy Court in the
Sellers Chapter 11 Cases, that certain operating
parameters continue to be met with respect to the assets being
sold, receipt of the approval of the Federal Communications
Commission and certain other closing conditions typical for
transactions of this type. Loral expects to use most of the
proceeds from the sale of the assets to repay its outstanding
secured bank debt. The Chapter 11 Cases will enable the
Sellers to sell the six North American satellites to the
Purchasers free and clear of any encumbrances. There can be no
assurance, however, that the transaction contemplated will be
consummated. In addition, Intelsat has agreed to order a new
satellite from SS/ L and will make a $100 million down
payment on that order upon closing of the sale of the North
American satellites, subject to obtaining a security interest
from Loral on assets related to its Brazilian FSS business.

Loral currently has approximately
$2.2 billion in debt (including future accrued interest of
$214 million associated with the deferred gain on the Loral
Orion debt exchanges), which mainly resulted from its
investments in Globalstar as well as the rapid build-up of its
FSS fleet, which has demonstrated its value over time through
its strong cash flow and EBITDA performance. This debt includes
$962 million of bank debt that is secured by liens on the
assets of Loral SpaceCom Corporation (Loral
SpaceCom) and Loral Satellite, Inc. (Loral
Satellite), consisting primarily of Lorals satellite
manufacturing and domestic FSS assets. As a result of filing
Chapter 11, Loral expects that it will continue to pay
interest only on its bank debt, which will significantly reduce
its cash interest payments. Loral expects to use most of the
proceeds from the sale of the North American satellites to the
Purchasers to repay its outstanding secured bank debt.

As a result of Lorals and the Debtor
Subsidiaries voluntary petitions for reorganization,
Lorals prepetition debt obligations (aggregating $2.1
billion at June 30, 2003) have been accelerated and are
immediately due and payable and Lorals other prepetition
debt obligations are subject to acceleration and have been
reclassified to current liabilities (see Note 10 to the
condensed consolidated financial statements). As of
July 15, 2003, Loral failed to make interest payments of
$16.6 million on its 9.50% Senior Notes due 2006, and Loral
Orion failed to make interest payments of $30.6 million on
its 10% Senior Notes due 2006, $2.1 million on its 11.25%
Senior Notes due 2007 and $3.1 million on its 12.50% Senior
Notes due 2007. A creditors committee has been appointed
to represent all unsecured creditors, including all holders of
Lorals and Loral Orions senior unsecured notes, and,
in accordance with the provisions of the Bankruptcy Code, will
have the right to be heard on all matters that come before the
Bankruptcy Court. At this point, it is not possible to predict
with certainty when a plan of reorganization will be confirmed
by the Bankruptcy Court in the Chapter 11 Cases or how any
such plan will treat claims of prepetition creditors.

Lorals intention is to reorganize around
its remaining fleet of five satellites and its satellite
manufacturing operations, allowing it to emerge as a viable
enterprise with opportunities for future growth There is no
assurance, however, that Loral will be able to formulate a
viable reorganization plan or to obtain confirmation of such a
plan pursuant to the provisions of the Bankruptcy Code.

48



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##### 



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

As a result of the commencement of the
Chapter 11 Cases, the pursuit of all pending claims and
litigation against Loral and its Debtor Subsidiaries 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, no
party may take any action to recover any prepetition claims,
enforce any lien against or obtain possession of any property
from Loral or its Debtor Subsidiaries. In addition, pursuant to
Section 365 of the Bankruptcy Code, Loral and its Debtor
Subsidiaries 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.

During 2002 and the first six months of 2003,
Loral took a number of steps to conserve cash on hand by
reducing its operating expenses, suspending payment of cash
dividends on its preferred stock and closely monitoring capital
expenditures. While Loral believes that it currently has
adequate cash on hand and cash flow from operations to continue
normal operations and customer support through October 2003, it
is reviewing the need to obtain third-party debtor-in-possession
(DIP) financing, as it continues to evaluate its liquidity needs
on an ongoing basis.



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

As a result of the Companys voluntary
petitions for reorganization, on July 15, 2003, the New
York Stock Exchange (NYSE) suspended trading of
Lorals common stock and has informed the Company that it
intends to initiate proceedings to delist Lorals
securities. Lorals common stock is being quoted under the
ticker symbol LRLSQ on the Pink Sheets Electronic Quotation
Service and on the Over-The-Counter Bulletin Board service. The
Company anticipates that, in any plan of reorganization
ultimately confirmed by the Bankruptcy Court, the common and
preferred stock of the Company will, at best, be severely
diluted and may be eliminated entirely, with the result that
common and preferred stockholders would receive no distribution.



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

In August 2002, the Company received notice from
the NYSE that its common stock price failed to meet the NYSE
listing requirement of maintaining a trading price over $1.00.
In response, the Company requested from its shareholders, and
received at its May 29, 2003 annual shareholders
meeting, authority to effect a reverse stock split of the
Companys common stock. On June 4, 2003, the
Companys Board of Directors approved a reverse stock split
of the Companys 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 approximately 440 million to
approximately 44 million.

At its annual shareholders meeting on
May 29, 2003, the Company obtained shareholder approval to
increase the authorized number of shares of its common stock
from 75,000,000 to 125,000,000 (as adjusted for the
above-mentioned reverse stock split).

Loral completed an exchange offer for certain of
its outstanding stock options on March 7, 2003. In
connection with this exchange offer, Loral accepted and
cancelled existing stock options to purchase an aggregate of
1,488,440 shares of common stock that were tendered in the
exchange offer and agreed to grant, in exchange, new stock
options to purchase an aggregate of 602,149 shares of
common stock. The new options were to have been granted, subject
to the terms and conditions of the exchange offer, on
September 8, 2003.

49



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As a result of Lorals Chapter 11
filing, however, Loral will not be able to grant the new stock
options. Any claims or rights that option holders whose options
were cancelled may have, will be addressed in the context of the
Chapter 11 Cases.




| |                
| | ---------------
| | Preferred Stock

The Companys 6% Series C Preferred
Stock and Series D Preferred Stock have mandatory
redemption dates in 2006 and 2007, respectively. The Company has
the right to make mandatory redemption payments to the holders
in either cash or common stock, or a combination of the two. As
a result of obtaining shareholder approval to increase the
authorized number of shares of the Companys common stock
to 125,000,000, the Company would be able to effect payment of
the total mandatory redemptions in common stock based on the
volume weighted average daily price of the Companys common
stock as defined at June 30, 2003. Accordingly, as of
June 30, 2003, all of the Companys outstanding
preferred stock was classified within the shareholders
deficit section of the condensed consolidated balance sheet (see
Accounting Pronouncements).

Based upon the price of the Companys common
stock at December 31, 2002, the Company did not have
available a sufficient number of authorized shares of its common
stock to effect payment of the total mandatory redemptions in
common stock in 2006 and 2007. Accordingly, as of
December 31, 2002, the Company classified an aggregate of
$125 million of its Series C Preferred Stock and
Series D Preferred Stock outside the shareholders
deficit section of the balance sheet, based on the average of
the volume weighted average daily price of the Companys
common stock as defined. As a consequence of the Chapter 11
Cases, it is not likely that a mandatory redemption will occur.

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,
Loral has deferred the payments of quarterly dividends due on
its Series C Preferred Stock and the payments of quarterly
dividends due on its Series D Preferred Stock. Dividends on
the two series continue to accrue. In the event accrued and
unpaid dividends accumulate to an amount equal to six quarterly
dividends on the Series C Preferred Stock, subject to the
applicable effects of the Chapter 11 Cases and Lorals
Bermuda insolvency proceedings, the terms of the Series C
Preferred Stock provide that holders of the majority of the
outstanding Series C Preferred Stock will be entitled to
elect two additional members to Lorals Board of Directors.
In the event accrued and unpaid dividends accumulate to an
amount equal to six consecutive quarterly dividends on the
Series D Preferred Stock, subject to the applicable effects
of the Chapter 11 Cases and Lorals Bermuda insolvency
proceedings, the terms of the Series D Preferred Stock
provide that holders of the majority of the outstanding
Series D Preferred will be entitled to elect two additional
members to Lorals Board of Directors. As of June 30,
2003, accrued and unpaid dividends of $12 million
represented three quarterly dividend payments outstanding.

During the second quarter of 2002, in privately
negotiated exchange transactions, Loral converted
1.8 million shares of its Series C Preferred Stock and
2.7 million shares of its Series D Preferred Stock
into 3.1 million shares of its common stock. In connection
with these transactions, Loral incurred non-cash dividend
charges of $38 million, which primarily relate to the
difference between the value of the common stock issued in the
exchanges and the value of the shares that were issuable under
the stated conversion terms of the preferred stock. The non-cash
dividend charges had no impact on Lorals total
shareholders deficit as the offset was an increase in
common stock and paid-in capital.

On October 8, 2002, Loral completed exchange
offers for its Series C and Series D preferred stock
and converted 4.3 million shares of its Series C
Preferred Stock and 2.7 million shares of its Series D
Preferred Stock for 4.6 million shares of its common stock
and $13.4 million in cash. In connection with the exchange
offers, Loral incurred $21.6 million of dividend charges,
comprised of the $13.4 million in cash and non-cash
dividend charges of $8.2 million. The non-cash dividend
charges relate to the difference between the value of the common
stock issued in the exchanges and the value of the shares that
were issuable under the stated conversion terms of the preferred
stock and had no impact on Lorals total shareholders
deficit as the offset was an increase in common stock and
paid-in capital.

50



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| |      
| | -----
| | Other

The Companys qualified pension plan, under
the Internal Revenue Code and regulations thereunder, is
considered fully funded (i.e. assets are greater than
liabilities) and there was no contribution required. However,
the significant declines experienced in the financial markets
have unfavorably impacted pension plan asset performance. This,
coupled with historically low interest rates (a key factor when
estimating pension plan liabilities), caused the Company to
recognize $65 million of non-cash charges to accumulated
other comprehensive loss at December 31, 2002. These
charges did not impact the Companys reported earnings, and
will be reversible in the future if either interest rates
increase or market performance and plan returns improve.



| |     
| | ----
| | Cash

As of June 30, 2003, Loral had
$128 million of cash and had no further available credit
from its credit facilities.

As stated above, substantially all of the assets
of Loral SpaceCom and Loral Satellite constitute collateral
security for the obligations that are owed to their bank
lenders. Under the provisions of the Bankruptcy Code, Loral
SpaceCom and Loral Satellite are not authorized to use the
existing cash or cash proceeds of this collateral (the
Cash Collateral) without either an order of the
Bankruptcy Court authorizing the use of the Cash Collateral or
the consent of their bank lenders.

On the date the Chapter 11 Cases were
commenced, the Bankruptcy Court entered an order authorizing the
debtors to use the Cash 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. The use of the Cash Collateral can be
terminated by the bank lenders upon the occurrence of certain
events specified in the order, including the failure of the
debtors and the bank lenders to agree on a budget for the
further use of the Cash Collateral for the period subsequent to
September 9, 2003, the failure of the debtors to comply
with certain obligations contained in the order, or the failure
of the debtors to achieve certain milestones with respect to the
proposed sale of certain of the debtors assets to the
Purchasers. In the event the debtors ability to use the
Cash Collateral were terminated, the debtors would still have
the right to seek the authority of the Bankruptcy Court to use
the Cash Collateral notwithstanding any objection by the bank
lenders. There can be no assurance that the Bankruptcy Court
would grant such request.



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

Net cash provided by operating activities for the
six months ended June 30, 2003 was $78 million. This was
primarily due to net income as adjusted for non-cash items of
$11 million and 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 from accelerated collections of
orbital receivables, offset by a decrease in customer advances
of $51 million primarily due to progress on satellite
programs.

Net cash provided by operating activities for the
six months ended June 30, 2002 was $113 million. This
was primarily due to net income as adjusted for non-cash items
of $117 million, a decrease in deposits of $50 million
resulting from the assignment of launch vehicles to satellite
programs, offset by a decrease in accounts payable of
$31 million primarily due to the timing of payments to
vendors.



| |                                          
| | -----------------------------------------
| | Net Cash Used in Investing
    Activities

Net cash used in investing activities was
$16 million for the six months ended June 30, 2003,
primarily as a result of capital expenditures of
$50 million mainly for the construction of satellites and
investments and advances to affiliates of $12 million,
offset by proceeds received from the sale of Sirius common stock
of $46 million.

Net cash used in investing activities was
$119 million for the six months ended June 30, 2002
primarily as a result of capital expenditures of
$97 million mainly for the construction of satellites and
investments in and advances to affiliates of $22 million.

51



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| |                                          
| | -----------------------------------------
| | Net Cash Used in Financing
    Activities

Net cash used in financing activities was
$0.5 million for the six months ended June 30, 2003,
primarily due to debt amortization payments of $65 million
(including $31 million of interest payments on the 10%
senior notes) and payment of bank amendment costs of
$5 million, offset by net borrowings under revolving credit
facilities of $66 million and net cash provided by equity
transactions of $4 million.

Net cash used in financing activities was
$46 million for the six months ended June 30, 2002,
primarily due to debt amortization payments of $35 million
and net cash used in equity transactions of $14 million,
offset by net borrowings (repayments) under revolving credit
facilities of $2 million.



| |                                   
| | ----------------------------------
| | Fixed Satellite Services Liquidity

Satellites are carefully built and tested and
have some redundant components to permit the continued operation
of a satellite in case of a component failure. Due to the
failure of primary components, certain of the Company and its
affiliates satellites are currently operating using back-up
components. If these back-up components fail and the primary
components cannot be restored, these satellites could lose a
significant amount of capacity or be total losses which, until
replacement satellites are placed in-orbit, would result in lost
revenues and lost profits.

On September 20, 2002, Loral entered into an
agreement with APT for the 50/50 joint acquisition of the
Apstar V satellite, a satellite under construction by SS/L
for APT. Lorals aggregate purchase price for its 50%
interest in the satellite will be 50% of the project cost of
constructing, launching and insuring the satellite. At launch,
Loral will obtain title to 25% of the satellite, in return for
payment by Loral of half of its purchase price, a portion of
which is being funded by existing launch vehicle deposits. At
June 30, 2003, the total purchase price for Lorals
50% interest in the satellite was estimated at
$113 million. Subject to certain acceleration rights on the
part of Loral, the remainder of the estimated purchase price
will be paid by Loral as follows: $7 million for
2.5 additional transponders on the second anniversary of
the satellites in-service date; $13 million for three
additional transponders on the third anniversary; and
$18 million for four additional transponders on each of the
fourth and fifth anniversary. Amounts incurred to date
attributable to the transponders to be acquired from APT in the
future of $25 million, are being treated for accounting
purposes as a repurchase obligation based on the present value
of such obligations and are included in satellites under
construction and long-term liabilities on Lorals condensed
consolidated balance sheet as of June 30, 2003.

In March 2003, as a result of finalizing launch
arrangements for the satellite, Loral agreed to take two fewer
transponders (resulting in a reduction in the satellite
percentage ownership allocation between APT and Loral from 50/50
to 54/46), without changing the 50/50 cost allocation in the
satellite as described above. More recently and in response to
concerns regarding the timely receipt of necessary export
licenses to transfer title of the satellite from SS/L to APT,
Loral and APT have been engaged in discussions to revise their
existing arrangement to provide for transfer at launch of a
prepaid leasehold interest, instead of title, to APT. Under this
arrangement, Loral would hold title to the satellite, with APT
leasing on a prepaid basis 77% of the transponders on the
satellite commencing at launch. APTs leasehold interest in
the satellite would be reduced over time (ultimately to 54%) as
Loral makes additional payments towards its share of the
satellite project cost. Other than the retention of title,
neither Lorals economic interest nor its payment
obligations with respect to the satellite would be changed as a
result of this arrangement. This new arrangement may be subject
to Bankruptcy Court approval.

Affiliate Matters



| |       
| | ------
| | Satmex

In connection with the privatization of Satmex by
the Mexican Government of its fixed satellite services business,
Loral and Principia formed a joint venture, Firmamento Mexicano,
S.A. de R.L. de C.V. (Holdings). In 1997, Holdings
acquired 75% of the outstanding capital stock of Satmex. As part
of the acquisition, Servicios Corporativos Satelitales, S.A. de
C.V. (Servicios), a wholly owned subsidiary of
Holdings, issued a seven-year Government Obligation
(Government Obligation) to the Mexican Govern-

52



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##### 



ment in consideration for the assumption by
Satmex of the debt incurred by Servicios in connection with the
acquisition. The Government Obligation had an initial face
amount of $125 million, which accretes at 6.03% and expires
in December 2004. The debt of Satmex and Holdings is
non-recourse to Loral and Principia. However, Loral and
Principia have agreed to maintain assets in a collateral trust
in an amount equal to the value of the Government Obligation
through December 30, 2000 and, thereafter, in an amount
equal to 1.2 times the value of the Government Obligation until
maturity. As of June 30, 2003, Loral and Principia have
pledged their respective shares in Holdings in such trust. Loral
has a 65% economic interest in Holdings and a 49% indirect
economic interest in Satmex. Loral accounts for Satmex using the
equity method. The covenants of Satmexs debt instruments
restrict the ability of Satmex to pay cash dividends to Loral.


In order to fund the construction, insurance and
launch of Satmex 6, Satmex has obtained preliminary
approvals for export credit agency financings and is working on
a proposed private placement of $70 million of secured
notes. These financings, however, are subject to, among other
things, the extension of Satmexs 2004 debt maturities. To
conserve cash, Satmex did not make the August 1, 2003
interest payment of $16.2 million on those notes and has
until August 30, 2003 to cure such default. If Satmex is
unable to complete its proposed financing transactions, it will
not have sufficient liquidity to complete the launch of
Satmex 6 or service its debt. In that case, Satmex would
default on its outstanding indebtedness and would seek to
reorganize under either Chapter 11 of the United States
Bankruptcy Code or Mexican reorganization law or both. In such
event, the Companys investment in Satmex of
$38 million at June 30, 2003 would be materially and
adversely affected. Moreover, while Satmex has previously
deposited the remaining milestone payments due under its
satellite construction contract with SS/L in a trust account for
the benefit of SS/L, SS/Ls ability to recover any other
amounts due under the contract, including orbital incentive
payments, would be materially and adversely affected.

At June 30, 2003, Solidaridad 2 had a
remaining estimated useful life of six years. Solidaridad 2
was manufactured by Boeing and is similar in design to
Solidaridad 1 and to other Boeing satellites which have
experienced in-orbit component failures. While Satmex was able
to obtain a renewal of the in-orbit insurance for
Solidaridad 2 in November 2002, this policy does not insure
against an in-orbit failure due to the loss of the
satellites control processor, the same component that
caused the loss of Solidaridad 1 and other Boeing
satellites. An uninsured loss of the satellite could have a
material adverse effect on Satmexs results of operations
and financial condition.

Revenues for Satmex were $19 million and
$20 million for the three months ended June 30, 2003
and 2002, respectively and $40 million and $43 million
for the six months ended June 30, 2003 and 2002,
respectively. Operating (loss) income was $(1.4) million
and $(0.7) million for the three months ended June 30,
2003 and 2002, respectively and $(2.1) million and
$0.5 million for the six months ended June 30, 2003
and 2002, respectively.



| |            
| | -----------
| | Europe*Star

In the fourth quarter of 2002, the Companys
investment in Europe*Star was reduced to zero. Accordingly,
there is no longer any requirement for Loral to provide for its
allocated share of Europe*Stars net losses subsequent to
December 31, 2002. In addition, pursuant to the master
settlement agreement with Alcatel, on June 30, 2003, Loral
transferred to Alcatel its minority interest in Europe*Star (see
Commitments and Contingencies).



| |     
| | ----
| | XTAR

XTAR, a joint venture between Loral 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, plans to construct and 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. XTAR is
owned 56% by Loral (accounted for under the equity method since
the Company does not control certain significant operating
decisions) and 44% by Hisdesat. 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, 2003,

53



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##### 



the partners in proportion to their respective
ownership interests have contributed $55 million to XTAR.
XTAR is seeking to raise the remaining amount of the funds it
needs to construct and launch its satellite through vendor and
other third-party financings. If XTAR is unable to raise the
remaining funds it needs to construct, launch and operate its
satellite, the Companys investment in XTAR of
$32 million at June 30, 2003 would be adversely
affected. Due to the uncertainty regarding XTARs ability
to raise the remaining funds, SS/L stopped recognizing revenues
and profits associated with the construction of the satellite as
of April 1, 2003, and has treated the unpaid costs incurred
during the second quarter of 2003 associated with such satellite
(aggregating $11 million) as an increase to Lorals
investment account balance.




| |                   
| | ------------------
| | Globalstar and GTL

The Company accounts for its investment in
Globalstar on the equity method due to its inability to control
significant operating decisions at Globalstar. In 2000,
Lorals allocated share of Globalstars losses and
Globalstars impairment charges reduced Lorals
investment in and advances to Globalstar to zero (see below).
Accordingly, there is no longer any requirement for Loral to
provide for its allocated share of Globalstars net losses
subsequent to December 31, 2000. The Company accounts for
its investment in Globalstars $500 million credit
facility at fair value, with changes in the value (net of tax)
recorded as a component of other comprehensive loss (see
Note 8 to the condensed consolidated financial statements).
The Company recorded unrealized net (losses) gains after taxes
as a component of other comprehensive (loss) income of zero and
$2 million for the six months ended June 30, 2003 and
2002, respectively, in connection with this security.

On February 15, 2002, Globalstar and certain
of its direct subsidiaries filed voluntary bankruptcy petitions
under Chapter 11 of Title 11, United States Code in
the United States Bankruptcy Court for the District of Delaware
(the Court). In connection therewith, Loral/Qualcomm
Satellite Services, L.P., the managing general partner of
Globalstar, its general partner, Loral/Qualcomm Partnership,
L.P. (LQP), and certain of Lorals subsidiaries
that serve as general partners of LQP also filed voluntary
bankruptcy petitions with the Court. As a result of
Globalstars bankruptcy petition, several of
Globalstars debt facilities and other debt obligations
have been accelerated and are immediately due and payable.
Subcontractors have assumed $70 million of vendor financing
that SS/L has provided to Globalstar at June 30, 2003,
which includes $47 million which is non-recourse to SS/L in
the event of non-payment by Globalstar due to bankruptcy and is
included in long-term liabilities in Lorals condensed
consolidated balance sheets.

On April 8, 2003, Loral signed a settlement
and release agreement with Globalstar and Globalstars
official creditors committee to resolve certain issues related
to Globalstar and Globalstars restructuring (the
Settlement). The Settlement was approved on
April 14, 2003 by the Court and closed on July 10,
2003. Among other things, the Settlement provided that
Globalstar grants to Loral, subject to certain conditions, a
general release of all claims Globalstar might have against
Loral; approximately 50% of Lorals unsecured claims
against Globalstar are allowed, or approximately
$438 million; and the debt owed to Globalstar by three
foreign service providers in which Loral has a substantial
equity interest (Globalstar do Brasil, Globalstar de Mexico and
GlobalTel), of an aggregate of $5.5 million has been set
off against amounts otherwise due to Loral from the Globalstar
Canadian service providers. In consideration, Loral has
transferred to Globalstar eight spare satellites ordered by
Globalstar but not fully paid for; certain agreements relating
to a joint venture in which Loral is a participant and that
provided the joint venture with exclusivity in marketing certain
Globalstar services in the U.S. have been terminated, with a new
joint venture formed between Globalstar (75%) and Loral (25%),
which is under the management and control of Globalstar, to be
the exclusive reseller of Globalstar encrypted, end-to-end
services to certain governmental agencies in the U.S. and
non-exclusively to other customers in the U.S.; the FCC license
authorizing the Globalstar service, which in any event was being
held by a joint venture in which Loral is a participant for the
exclusive benefit of Globalstar, will be transferred to
Globalstar; Lorals equity interest in the Globalstar
Canadian service providers have been transferred to Globalstar;
a $11.5 million obligation of the Canadian service
providers owed to Loral has been reduced by $5.5 million
(described above) and the remaining debt obligation has been
converted from a demand note into two five-year term notes of
$4.4 million and $1.6 million, respectively;
Lorals unsecured claims against Globalstar will be reduced
by approximately 50% or approximately $438 million when

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Globalstar emerges from bankruptcy; the unused
prepayment ($2,260,000) on a Globalstar contract under which
there is a stop work order has been returned to Globalstar by
Loral; a $250,000 termination fee that may come due under that
contract has been waived; Loral will cooperate toward a
reorganization of Globalstar; and the Loral employees on
Globalstars management committee have resigned. Loral does
not expect any material impact on its results of operations or
financial position as a result of this Settlement.


One of Globalstars creditors filed with the
Court on April 24, 2003 a motion seeking reconsideration by the
Court of the Courts approval of the Settlement. The Court
denied this motion for reconsideration on May 30, 2003,
and, on June 9, 2003, the creditor filed a notice of appeal
of the Courts order approving the Settlement. Although the
Company believes 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.

On April 28, 2003, Globalstar and ICO Global
Communications (Holdings) Limited (ICO) received
Court approval for ICO to acquire a majority interest in a
reorganized Globalstar. The Court approved the sale of
Globalstars assets to a new company to be controlled by
ICO in exchange for an investment of $55 million for which
ICO will receive a 54% equity stake in the new operating
company. Closing of the transaction is subject to regulatory
approvals prior to any license transfers and to consent by
QUALCOMM Incorporated to several business issues and certain
conditions precedent. The Court-approved sale supersedes an
earlier proposal that had been made by Thermo Capital Partners.
In addition to ICOs 54% stake in the newly-formed company,
the remaining equity will be distributed to Globalstars
creditors, which include Loral (approximately 6%), QUALCOMM
Incorporated and holders of Globalstar bonds. Globalstar will
file a plan of reorganization with the Court, and has stated
that it expects to complete its Chapter 11 process later
this year.

As of June 30, 2003, the Companys
investment in Globalstar related activities was
$18 million, representing the fair value of its investment
in Globalstars $500 million credit facility, which
was based on the trading values of Globalstars public debt
at June 30, 2003. If Globalstar were unable to effectuate a
successful restructuring, the Companys remaining
investment in Globalstars $500 million credit
facility would be impaired, which, as discussed above, would
have no effect on the Companys results of operations.
Lorals investment in the operations of those Globalstar
service provider ventures in which it participates as an equity
owner was zero in the first six months of 2003. Globalstar
service providers own and operate gateways, are licensed to
provide services and, through their sales and marketing
organizations, are actively selling Globalstar service, in their
respective territories.



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

Contractual obligations as previously disclosed
in the Companys Latest Annual Report on Form 10-K
have not materially changed. However, as a result of the
Companys Chapter 11 filing, debt obligations of
approximately $2.2 billion have been accelerated or are
subject to acceleration.

Recently, counterparties have declined to renew
yen denominated forward contracts. 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, 2003,
SS/L had the following amounts denominated in Japanese Yen that
were substantially hedged (in millions):

|                     |  |              |        |       |  |   |      | 
|-------------------- |  | ------------ | ------ | ----- |  | - | ---- | 
|                     |  | Japanese Yen |        | U.S.$
|                     |  |              |        |      
|Future revenues      |  |              | ¥3,646 |       |  | $ | 30.5 | 
|Future expenditures  |  |              | 860    |       |  |   | 7.3  | 
|Contracts-in-process |  |              | 1,991  |       |  |   | 16.6 | 

Upon filing Chapter 11, SS/Ls hedges
were cancelled leaving SS/L vulnerable to foreign currency
fluctuations in the future.

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Commitments and Contingencies

SS/L has deferred revenue and established
warranty obligations relating to satellites sold to customers
which could be impacted by future performance. A reconciliation
of such deferred amounts for the three months ended
March 31, 2003 is as follows (in millions):

|                                                                                 |  |   |      | 
|-------------------------------------------------------------------------------- |  | - | ---- | 
|Balance of deferred amounts at January 1,
    2003                               |  | $ | 14.1 | 
|Accruals for deferred amounts issued during the
    period                       |  |   |     | 
|Accruals relating to pre-existing contracts
    (including changes in estimates) |  |   | 2.3  | 
|                                                                                 |  |   |      | 
|Balance of deferred amounts at June 30, 2003.                                    |  | $ | 16.4 | 
|                                                                                 |  |   |      | 

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, Loral Skynet continues to operate the satellites
which carry the transponders and originally provided for a
warranty for a period of 10 to 14 years, in the case of
sales contracts and other arrangements (19 transponders), and
the lease term, in the case of the prepaid leases (six
transponders). Depending on the contract, Loral Skynet may be
required to replace transponders which do not meet operating
specifications. 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 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. In the case of 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, seven of which are owned and operated by
Lorals subsidiaries or affiliates, have experienced minor
losses of power from their solar arrays. Although to date,
neither the Company nor any of the customers using the affected
satellites have experienced any degradation in performance,
there can be no assurance that one or more of the affected
satellites will not experience additional power loss that could
result in performance degradation, including loss of transponder
capacity 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 the number
and type of use being made of transponders then in service. 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 of the
remaining transponders. In the case of one satellite, Loral
Skynet has removed one transponder from service in order to
maintain proper power balance for the remaining transponders,
none of which have been degraded in performance as a result of
the power loss. A complete or partial loss of satellites could
result in a loss of orbital incentive payments and, in the case
of satellites owned by Loral subsidiaries and affiliates, a loss
of revenues and profits. 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, the Company believes that this
matter will not have a material adverse effect on the
consolidated financial position or results of operations of
Loral.

In 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. Also, the PAS 8 satellite
has experienced minor losses of power from its solar arrays, the
cause of which is unrelated to the loss of power on the
PAS 7 satellite. On June 30, 2003, PanAmSat commenced
an arbitration claiming

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that under its contract with SS/L it is entitled
to $23.7 million as a result of these losses. As a result
of SS/Ls Chapter 11 filing, this arbitration is
subject to the automatic stay and further proceedings in the
matter have been suspended. See Part II, Item 1, Legal
Proceedings. In addition, a Loral Skynet satellite has
experienced a minor loss of power from its solar arrays, the
cause of which may be similar to the cause of the PAS 7
anomaly. SS/L believes, however, 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.


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 since December 2001 while the customer and SS/L
were in discussions to resolve a dispute under the contract. 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, 2003, SS/L had billed and
unbilled accounts receivable and vendor financing arrangements
of $51 million including accrued interest with this
customer. Under the agreement, the customer will pay the
remainder of the purchase price under the contract of
$68.1 million (including $51 million owed to SS/L at
June 30, 2003) in installments over time, a portion of
which will be due subsequent to completion of the satellite.

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. The agreements
between Alcatel and SS/L were terminable on one years
notice, and, on February 22, 2001, Loral gave notice to
Alcatel that they would expire on February 22, 2002. In
April 2001, Alcatel commenced an arbitration proceeding
challenging the effectiveness of Lorals notice of
termination and asserting various alleged breaches of the
agreements by SS/L relating to the exchange of information and
other procedural or administrative matters. In February 2002,
the arbitral tribunal issued a partial decision, which upheld
the validity of Lorals termination effective
February 22, 2002 and Alcatels claims as to certain
breaches. The partial decision was confirmed by the District
Court for the Southern District of New York on June 25,
2002. The arbitral tribunal provided both parties with an
opportunity to file any additional claims or counterclaims they
had. In March 2002, Alcatel submitted additional claims against
Loral and SS/L and sought at least $350 million in damages
in respect of all of its claims. On January 27, 2003, Loral
and SS/L received from the arbitral tribunal a partial decision
on the additional claims and counterclaims. The arbitral
tribunal ruled in favor of Alcatel on most of its claims
alleging breaches of the Operational Agreement or Alliance
Agreement and ruled against Loral and SS/L on the counterclaims.
The arbitral tribunal deferred, pending additional submissions
and hearings, a determination whether any of the breaches caused
Alcatel to suffer injury and a determination of the amount of
damages, if any.

On June 30, 2003, Loral, SS/L and Alcatel
entered into a master settlement agreement in settlement of all
claims among the parties. 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, L.P.,
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, L.P., Loral recognized an
extraordinary gain of $14 million, which represents the
minority interest liability in excess of the fair value of the
acquired net assets. Under the terms of the agreement, the
arbitration and a related court proceeding to confirm the
arbitral tribunals January partial award were suspended,
with termination 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 agreement, 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

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as 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. On
December 23, 1998, the Office of Defense Trade Controls, or
ODTC, of the U.S. Department of State temporarily suspended
a previously approved technical assistance agreement under which
SS/L had been preparing for the launch of the ChinaSat-8
satellite. In addition, SS/L was required to re-apply for new
export licenses from the State Department to permit the launch
of ChinaSat-8 on a Long March launch vehicle when the old export
licenses issued by the Commerce Department, the agency that
previously had jurisdiction over satellite licensing, expired in
March 2000. On January 4, 2001, the ODTC, while not
rejecting these license applications, notified SS/L that they
were being returned without action. On January 9, 2002,
Loral, SS/L and the United States Department of State entered
into a consent agreement (the Consent Agreement)
settling and disposing of all civil charges, penalties and
sanctions associated with alleged violations by SS/L of the Arms
Export Control Act and its implementing regulations. The Company
recorded a $12 million charge in 2001 for the penalties
associated with the Consent Agreement. The Consent Agreement
provides that the State Department agrees, assuming the
Companys and SS/Ls faithful adherence to the terms
of the Consent Agreement, and the Arms Export Control Act and
its implementing regulations, that decisions concerning export
licenses for the ChinaSat-8 spacecraft will be made on the basis
of the security and foreign policy interests of the United
States, including matters relating to U.S. relations with the
Peoples Republic of China, without reference to the State
Departments previously expressed concerns regarding
SS/Ls reliability, which concerns are considered to be
appropriately mitigated through the operation of various
provisions of the Consent Agreement. Discussions between SS/L
and the State Department regarding SS/Ls obtaining the
approvals required for the launch of ChinaSat-8 are continuing.

If ChinaSat were to terminate its contract with
SS/L for ChinaSat-8 as a result of these delays, ChinaSat may
seek a refund of $134 million for payments made to SS/L as
well as penalties of up to $11 million. The Company does
not believe that ChinaSat is entitled to such a refund or
penalties and would vigorously contest any such claims by
ChinaSat. A portion of the potential claim relates to amounts
that were paid to a launch vehicle provider. To the extent that
SS/L or ChinaSat is able to recover some or all of the
$52 million deposit payment on the Chinese launch vehicle,
this recovery would reduce the amount of any claim. SS/L
believes that ChinaSat bears the risk of loss in the event that
the deposit payments are not refunded by the launch vehicle
provider. SS/L has commenced discussions with the launch vehicle
provider to recover this deposit. There can be no assurance,
however, that SS/L will be able either to obtain a refund from
the launch provider or to find a replacement customer for the
Chinese launch vehicle. If ChinaSat were to terminate the
contract, SS/L estimates that it would incur costs of
approximately $38 million to refurbish and retrofit the
satellite so that it could be sold to another customer, which
resale cannot be guaranteed.

Sirius, a customer of SS/L, is currently in the
process of rolling out its business. On March 7, 2003,
Sirius completed its recapitalization plan and received
$200 million in cash from third party investors and
exchanged approximately $636 million of its debt and all of
its $525 million of preferred stock into common stock. As
part of this recapitalization, SS/L converted all of its vendor
financing receivables of approximately $76 million into
58,964,981 shares of common stock of Sirius. For the three and
six months ended June 30, 2003, SS/L realized net proceeds
of $36 million and $46 million, respectively, from the
sale of 41 million shares and 59 million shares,
respectively, of the Sirius common stock that it received in the
recapitalization, and realized gains on such sales of
$17 million and $18 million, respectively. As of
June 30, 2003, SS/L had sold all of its shares of Sirius
common stock. At December 31, 2002, the receivables from
Sirius were classified as short-term vendor financing
receivables. In the first quarter of 2003, SS/L recorded a
charge on the vendor financing receivables due from Sirius of
$10 million, 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s common stock on March 7,
2003 of $28 million. The increase in the

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value of Sirius common stock from
March 7, 2003 to March 31, 2003 of $10 million
was recorded as an adjustment to accumulated other comprehensive
income (loss) in the condensed consolidated balance sheet as of
March 31, 2003.


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. Through the assignment of satellites to launch
vehicles, refunds and cancellations (as a result of current
market conditions), SS/L has reduced its launch deposits by
$111 million from December 31, 2001 through
June 30, 2003. SS/L had launch services agreements with
International Launch Services (ILS) which covered
three launches. 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, purporting to terminate all three launches and
asserting a right to retain $42.5 million in deposits,
without prejudice to any other legal claims or remedies. Despite
ILSs termination of 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,
and 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 in the second
quarter of 2003 with respect to this launch. SS/L believes that
ILSs claims are without merit and intends to defend
against them vigorously and to seek recovery of its deposits and
termination liabilities. The Company does not believe that this
matter will have a material adverse effect on its consolidated
financial position and its results of operations, although no
assurances can be provided.

While the Company has in the past, consistent
with industry practice and the requirements in the
Companys debt agreements, typically obtained in-orbit
insurance for its satellites, the Company cannot guarantee that,
upon a policys expiration, the Company will 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. Five satellites
owned by Loral Skynet and Loral Orion have the same solar array
configuration as two other 1300 class satellites manufactured by
SS/L that have experienced solar array failures. 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, the Company does not believe that these
anomalies will affect these satellites. The insurance coverage
for Telstar 10/Apstar IIR, however, provides for coverage of
losses due to solar array failures only in the event of a
capacity loss of 75% or more. The Company believes, that the
insurers will require either exclusions of, or limitations on,
coverage due to solar array failures in connection with renewals
of insurance for the other four satellites in 2003 and 2004. An
uninsured loss of a satellite would have a material adverse
effect on the Companys consolidated financial position and
its results of operations. Moreover, the Company is required
under the terms of its bank facilities and cash collateral order
to use the insurance proceeds from any launch or in-orbit
failure of a satellite owned by Loral SpaceCom or Loral
Satellite to prepay the bank loans, and as a result, these
insurance proceeds would not be available to Loral to build a
replacement for the lost satellite, which would result in an
adverse effect on its future revenue.

In an order released on August 8, 2003, the FCC
added Telstar 13 to the Permitted Space Station
List in the C-Band frequency at 121 degrees W.L. As a
result of this action, earth stations located in the U.S. will
be able to communicate with the Telstar 13 satellite, which
was successfully launched on August 7, 2003, and
Telstar 13 will be permitted to operate in the U.S. using a
non-U.S. ITU filing. The order contains several conditions on
this authorization, including (1) a requirement that
Telstar 13 be in compliance with all applicable current and
future operational requirements as a result of coordination
agreements reached with other satellite systems; and
(2) that, in the absence of a coordination agreement with a
satellite network with higher ITU priority, Telstar 13 must
cease service to the U.S. market immediately upon launch and
operation of the higher ITU priority satellite, or be subject to
further conditions designed to address potential harmful
interference to a satellite with ITU date precedence. New Skies
Satellites has asserted that its non-U.S. ITU filing at 120.8
degrees W.L. has ITU priority over Telstar 13. Loral Skynet
is continuing its international coordination of the 121 degrees
W.L. slot. There can be no assurance, however, that coordination
discussions will be successful.

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On October 21, 2002, National Telecom of
India Ltd. (Natelco) filed suit against Loral and
Loral CyberStar 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.
Loral believes that the claims are without merit and intends to
vigorously defend against them. As a result of Lorals
Chapter 11 filing, this lawsuit is subject to the automatic
stay and further proceedings in the matter have been suspended.
See Part II, Item 1, Legal Proceedings.

The Company is subject to various other legal
proceedings and claims, either asserted or unasserted, that
arise in the ordinary course of business. Although the outcome
of these claims cannot be predicted with certainty, the Company
does not believe that any of these other existing legal matters
will have a material adverse effect on its consolidated
financial position or results of operations. These claims
against the Company are subject to the automatic stay as a
result of the commencement of the Chapter 11 Cases. See
Part II, Item 1, Legal Proceedings.

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 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 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 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 or
affiliated therewith. 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. Loral believes that it has meritorious defenses to this
class action lawsuit and intends to pursue them vigorously. As a
result of Lorals Chapter 11 filing, 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. See Part II, Item 1,
Legal Proceedings.

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 common stock of Loral Space & Communications Ltd.
(Loral) 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

60



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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 or
affiliated therewith. Loral and Messrs. Schwartz and
Townsend have filed a motion to dismiss the complaint in its
entirety. At oral argument on the motion on May 9, 2003,
the Court indicated its intent to dismiss the complaint but gave
the plaintiffs thirty days to amend their complaint to state a
cause of action. In the interim, the Court denied the motion
without prejudice to its renewal. On June 9, 2003, the
plaintiffs filed an amended complaint alleging essentially the
same claims as in the original amended complaint. As a result of
Lorals Chapter 11 filing, 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 who served a motion to dismiss the
amended complaint on July 31, 2003. See Part II,
Item 1, Legal Proceedings.


In addition, the primary insurer under
Lorals directors and officers liability insurance policy
has denied coverage for the 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 their coverage position. In May 2003, Loral
and the other defendants served their 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, Loral and
the other defendants also filed a third party complaint against
the excess insurers seeking a declaration that they are
obligated to provide coverage. Loral believes that the insurers
have wrongfully denied coverage and intends to defend against
the denial vigorously. As a result of Lorals
Chapter 11 filing, 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. See Part II, Item 1, Legal Proceedings.

Other Matters



| |                  
| | -----------------
| | Insurance Matters

The Company, like others in the satellite
industry, is faced with significantly higher premiums on launch
and in-orbit insurance, increasing thresholds in determining
total losses for satellites in orbit and significantly shorter
coverage periods than those that have been available in the
past, which is due in part to the events of September 11,
2001. This development in the insurance industry has increased
the cost of doing business. The Company intends to pass on some
of the increased cost to its customers. There can be no
assurance, however, that it will be able to do so. Insurance
market conditions have historically been cyclical in nature.
While the Company anticipates that these conditions will improve
in the future, there can be no assurance that they will. See
Commitments and Contingencies.



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



| |         
| | --------
| | SFAS 142

On January 1, 2002, the Company adopted SFAS
No. 142, Goodwill and Other Intangible Assets (SFAS
142) which addresses the initial recognition and
measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible
assets subsequent to their acquisition. SFAS 142 provides
that intangible assets with finite useful lives be amortized and
that goodwill and intangible assets with indefinite lives not be
amortized, but rather be tested at least annually for
impairment. SFAS 142 also changed the evaluation criteria
for testing goodwill for impairment from an undiscounted cash
flow approach, which was previously utilized under the guidance
in Accounting Principles Board Opinion No. 17, Intangible
Assets, to a test based on fair value. Fair value is determined
by the amount at which an asset or liability could be bought or
sold in a current transaction between willing parties, that is,
other than in a forced or liquidation sale. Quoted market prices
in active markets are the best evidence of fair value and must
be used as the basis for the measurement, if available. If
quoted market prices are not available, the estimate of fair
value must be based on the best information available, including
prices for similar assets and liabilities and the results of
using other valuation techniques, such as public company trading
multiples, future discounted cash flows and merger and
acquisition transaction multiples.

61



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##### 



In accordance with SFAS 142, the
Companys previously recognized cost in excess of net
assets acquired (goodwill) of $892 million for
business acquisitions accounted for under the purchase method of
accounting completed prior to July 1, 2001, was reviewed
under the new transitional guidance as of January 1, 2002.
Goodwill had been previously assigned to the Companys
business segments as follows (based on the net book value at
December 31, 2001): FSS $606 million and satellite
manufacturing and technology $286 million. The Company
hired professionals in the valuation consulting business to
determine the fair value of each of the Companys reporting
units. Since there were no quoted market prices in active
markets for the Companys reporting units, the measurement
of fair value for each reporting unit was based on the best
information available for that reporting unit, including
reasonable and supportable assumptions and projections, as
follows: (1) FSS  public company trading
multiples merger and acquisition transaction multiples and
(2) satellite manufacturing and technology 
future discounted cash flows. Based on the fair values concluded
on by those professionals, management determined that the
goodwill for each of the Companys reporting units under
the new guidance in SFAS 142 was fully impaired. Accordingly, as
of January 1, 2002, the Company recorded a non-cash charge
for the cumulative effect of the change in accounting principle
of $892 million before taxes ($877 million after
taxes).

The charge is the result of a change in the
evaluation criteria for goodwill from an undiscounted cash flow
approach which was previously utilized under the guidance in
Accounting Principles Board Opinion No. 17, Intangible
Assets, to the fair value approach which is stipulated in
SFAS 142.



| |         
| | --------
| | SFAS 143

In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations
(SFAS 143). SFAS 143 addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result
from the acquisition, construction, development and the normal
operation of a long-lived asset, except for certain obligations
of lessees. The Company has determined that there was no effect
on its consolidated financial position or results of operations
upon the adoption of SFAS 143 on January 1, 2003.



| |       
| | ------
| | FIN 45

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Others (FIN 45).
FIN 45 elaborates on the disclosures to be made by the
guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. It
also requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this interpretation were applicable on
a prospective basis to guarantees issued or modified after
December 31, 2002; while the provisions of the disclosure
requirements were effective for financial statements of interim
or annual reports ending after December 15, 2002. The
Company adopted the disclosure provisions of FIN 45 during
the fourth quarter of 2002. The Company adopted the recognition
provisions of FIN 45 on January 1, 2003 and determined that
there was no effect on its consolidated financial position or
results of operations.



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

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin
No. 51 (FIN 46). FIN 46 requires
certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46
is effective for all new variable interest entities created or
acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company
is currently evaluating the provisions of FIN 46.

62



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##### 





| |         
| | --------
| | SFAS 149

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities (SFAS 149). SFAS 149
amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 149 is effective for contracts entered
into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003, except for
certain provisions that relate to SFAS 133 Implementation
Issues that have been effective for fiscal quarters prior to
June 15, 2003. The Company is currently evaluating the
provisions of SFAS 149.



| |         
| | --------
| | SFAS 150

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity
(SFAS 150). SFAS 150 establishes standards
for how an issuer classifies and measures in its statement of
financial position certain financial instruments with
characteristics of both liabilities and equity. SFAS 150
requires that an issuer classify a financial instrument that is
within the scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an
obligation of the issuer. SFAS 150 is effective for the
Company beginning on July 1, 2003. The Company is currently
evaluating the provisions of SFAS 150.

Item 3.      Quantitative
and Qualitative Disclosures About Market Risk

Recently, counterparties have declined to renew
yen denominated forward contracts. 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, 2003,
SS/L had the following amounts denominated in Japanese Yen that
were substantially hedged (in millions):

|                     |  |              |        |       |  |   |      | 
|-------------------- |  | ------------ | ------ | ----- |  | - | ---- | 
|                     |  | Japanese Yen |        | U.S.$
|                     |  |              |        |      
|Future revenues      |  |              | ¥3,646 |       |  | $ | 30.5 | 
|Future expenditures  |  |              | 860    |       |  |   | 7.3  | 
|Contracts-in-process |  |              | 1,991  |       |  |   | 16.6 | 

Upon filing Chapter 11, SS/Ls hedges
were cancelled leaving SS/L vulnerable to foreign currency
fluctuations in the future.

Item 4.      Disclosure
Controls and Procedures

(a) Disclosure controls and procedures.Lorals chief executive officer and its chief financial
officer, after evaluating the effectiveness of the
Companys 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, 2003 have
concluded that as of June 30, 2003, the Companys
disclosure controls and procedures were effective and designed
to ensure that material information relating to the Company and
its consolidated subsidiaries would be made known to them by
others within those entities.

(b) Internal control over financial
reporting.There were no changes in the Companys
internal control over financial reporting during the quarterly
period ended June 30, 2003, that have materially effected
or are reasonably likely to materially effect the Companys
control over financial reporting.

63



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##### 



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). Loral and its subsidiaries continue to manage
their properties and operate their 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 filed parallel insolvency proceedings in
the Supreme Court of Bermuda (the Bermuda Court). On
such date, the Bermuda Court granted an order appointing Philip
Wallace, Chris Laverty and Michael Morrison, partners of KPMG,
as Joint Provisional Liquidators (JPLs) in respect
of the Company and the Bermuda subsidiary. 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 the commencement of the
Chapter 11 Cases, the pursuit of all pending claims and
litigation against Loral and its Debtor Subsidiaries 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, no
party may take any action to recover any prepetition claims,
enforce any lien against or obtain possession of any property
from Loral or its Debtor Subsidiaries. In addition, pursuant to
Section 365 of the Bankruptcy Code, Loral and its Debtor
Subsidiaries 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 12 to the condensed consolidated
financial statements.



|        |                                              
|------- | ---------------------------------------------
|Item 2. | Changes in Securities and Use of
    Proceeds

Reverse
Stock Split

On June 4, 2003, the Companys Board of
Directors approved a reverse stock split of the Companys
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
approximately 440 million to approximately 44 million.

Increase
in the Number of Authorized Shares

At its annual shareholders meeting on
May 29, 2003, the Company obtained shareholder approval to
increase the authorized number of shares of its common stock
from 75,000,000 to 125,000,000 (as adjusted for the
above-mentioned reverse stock split).



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

(a) On July 15, 2003, Loral and the
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 Lorals and the Debtor
Subsidiaries voluntary petitions for reorganization,
Lorals prepetition debt obligations (aggregating
approximately $2.1 billion at June 30, 2003) have been
accelerated and are immediately due and payable and Lorals
other prepetition debt obligations are subject to acceleration
(see Note 10 to the condensed consolidated financial
statements). As of July 15, 2003, Loral failed to make
interest payments of $16.6 million on its 9.50% Senior
Notes due 2006, and Loral Orion

64



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##### 



failed to make interest payments of
$30.6 million on its 10% Senior Notes due 2006,
$2.1 million on its 11.25% Senior Notes due 2007 and
$3.1 million on its 12.50% Senior Notes due 2007.


(b) 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, Loral has deferred the payments of quarterly
dividends due on its Series C Preferred Stock and the
payments of quarterly dividends due on its Series D
Preferred Stock. Dividends on the two series continue to accrue.
In the event accrued and unpaid dividends accumulate to an
amount equal to six quarterly dividends on the Series C
Preferred Stock, holders of the majority of the outstanding
Series C Preferred Stock will be entitled to elect two
additional members to Lorals Board of Directors. In the
event accrued and unpaid dividends accumulate to an amount equal
to six consecutive quarterly dividends on the Series D
Preferred Stock, holders of the majority of the outstanding
Series D Preferred will be entitled to elect two additional
members to Lorals Board of Directors. As of June 30,
2003, accrued and unpaid dividends of $12.2 million
represented three quarterly dividend payments outstanding.

Loral does 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 4. | Submissions of Matters to a Vote of
    Security Holders

On May 29, 2003, at the Companys
Annual Meeting of Shareholders, the following proposals were
acted on (as adjusted for the above-mentioned reverse stock
split):



| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) In an uncontested election, four
    nominees for the Board of Directors were elected to three-year
    terms expiring in 2006. The votes were as follows:

|                |  |     |            |          |  |  |           | 
|--------------- |  | --- | ---------- | -------- |  |  | --------- | 
|                |  | For |            | Withheld
|                |  |     |            |         
|Howard Gittis   |  |     | 34,570,914 |          |  |  | 2,159,134 | 
|Gershon Kekst   |  |     | 34,554,913 |          |  |  | 2,175,135 | 
|Arthur L. Simon |  |     | 34,597,002 |          |  |  | 2,133,046 | 
|Eric J. Zahler  |  |     | 34,650,312 |          |  |  | 2,079,736 | 



| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) Amendment of the Companys bye-laws
    to allow for implementation of a reverse stock split of the
    Companys common stock. The votes were as follows:

|    |            |         |  |         |           |  |  |  |         | 
|--- | ---------- | ------- |  | ------- | --------- |  |  |  | ------- | 
|For |            | Against |  | Abstain
|    |            |         |  |        
|    | 33,700,497 |         |  |         | 2,882,654 |  |  |  | 146,897 | 



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | (3) Increasing the number of authorized
    shares of the Companys common stock. The votes were as
    follows:

|    |            |         |  |         |           |  |  |  |         | 
|--- | ---------- | ------- |  | ------- | --------- |  |  |  | ------- | 
|For |            | Against |  | Abstain
|    |            |         |  |        
|    | 32,101,384 |         |  |         | 4,386,659 |  |  |  | 242,005 | 



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (4) The selection of Deloitte & Touche
    LLP to serve as independent auditors for the fiscal year ending
    December 31, 2003, was approved. The votes were as follows:

|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 35,396,008 | 
|Against |  |  | 1,011,331  | 
|Abstain |  |  | 322,709    | 

65



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|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits

The following exhibits are filed as part of this
report:



| |                |                                                                                                                                                                                                             
| | -------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Exhibit 10.1  | Master Agreement dated June 30, 2003 among
    Loral Space & Communications Ltd., Loral
    Space & Communications Corporation, Loral SpaceCom
    Corporation, Space Systems/ Loral, Inc. and Alcatel Space
|
| | 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                                                                                       
|               |  |                                                                                                           |  |                                                                                                   
|June 5, 2003   |  | Item 5  Other Events
    Item 7  Financial Statements, Pro Forma
    Financial Information and Exhibits |  | 2002 Annual Meeting of Shareholders Amended
    Bye-law 4 (c) of Loral Space & Communications Ltd.
|June 6, 2003   |  | Item 7  Financial Statements, Pro
    Forma Financial Information and Exhibits                           |  | First Quarter 2003 earnings release                                                               
|               |  | Item 9  Regulation FD Disclosure                                                                         |  |                                                                                                   

66



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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.



| |  |                                  
| |  | ---------------------------------
| |  | LORAL SPACE & COMMUNICATIONS LTD.

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

Date: August 14, 2003

67



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##### 



EXHIBIT INDEX

|             |  |   |  |                                                                                                                                                                                                             
|------------ |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No.  |  |   |  | Description                                                                                                                                                                                                 
|             |  |   |  |                                                                                                                                                                                                             
|Exhibit 10.1 |  |  |  | Master Agreement dated June 30, 2003 among
    Loral Space & Communications Ltd., Loral Space &
    Communications Corporation, Loral SpaceCom Corporation, Space
    Systems/ Loral, Inc. and Alcatel Space
|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