UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q


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

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
Commission file number 000-22085

                          ORION NETWORK SYSTEMS, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

            Delaware                                       52-2008654
------------------------------                         -------------------
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                         Identification No.)

2440 Research Boulevard, Suite 400, Rockville, Maryland            20850
-------------------------------------------------------         ----------
     (Address of  principal executive offices)                  (Zip Code)


                                 (301) 258-8101
--------------------------------------------------------------------------------
               (Registrant's telephone number including area code)


Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__


Indicate the number of shares  outstanding  of each of the  issuer's  classes of
Common Stock, as of the latest practicable date.

           Class                                 Outstanding at April 30, 1997
-----------------------------                    -----------------------------
 Common Stock, $.01 par value                          11,160,099 shares


<PAGE>


                                      INDEX

                  ORION NETWORK SYSTEMS, INC. AND SUBSIDIARIES


                                                                            Page

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

         Condensed Consolidated Balance Sheets---March 31, 1997 and
         December 31, 1996                                                     3

         Condensed  Consolidated  Statements of  Operations---three
         months   ended     March  31, 1997  and 1996                          5

         Condensed   Consolidated    Statements   of   Changes   in
         Stockholders' Equity                                                  6

         Condensed  Consolidated  Statements of Cash  Flows---three
         months ended March 31, 1997 and 1996                                  7

         Notes to Condensed Consolidated Financial Statements                  9

Item 2.  Management's   Discussion   and   Analysis  of   Financial
         Condition  an   Results  of  Operations                              14


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                    22

Item 2.  Changes in Securities                                                22

Item 3.  Defaults upon Senior Securities                                      22

Item 4.  Submission of Matters to a Vote of Security Holders                  22

Item 5.  Other Information                                                    23

Item 6.  Exhibits and Reports on Form 8-K                                     23



Signatures                                                                    24

                                       2

<PAGE>




PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                           ORION NETWORK SYSTEMS, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>


                                                        March 31,               December 31,
                                                           1997                    1996
                                                  -----------------------   ------------------
ASSETS                                                  (Unaudited)
<S>                                                        <C>              <C>
 Current assets:
     Cash and cash equivalents                    $          116,899,430    $      42,187,807
                                                             
     Restricted cash                                          45,890,625                   --
     Accounts receivable                                       9,743,794            6,473,316
     Prepaid expenses and other current assets                 5,110,500            3,583,403
                                                  -----------------------   ------------------
         Total current assets                                177,644,349           52,244,526

 Restricted and segregated cash                              328,490,939                   -- 
 Property and equipment at cost:
     Land                                                         73,911               73,911
     Telecommunications equipment                             34,583,184           25,342,528
     Furniture and computer equipment                          6,593,620            4,849,711
     Satellite and related equipment                         321,911,489          321,247,346
                                                  -----------------------   ------------------
                                                             363,162,204          351,513,496
              Less: accumulated depreciation                 (43,823,595)         (68,224,957)
     Satellite construction in progress                       47,655,627            4,560,844
                                                  -----------------------   ------------------
     Net property and equipment                              366,994,236          287,849,383
 Deferred financing costs, net                                23,713,008           12,918,233
 Goodwill and other assets, net                               29,555,587            5,252,302
 TOTAL ASSETS                                     $          926,398,119    $     358,264,444
                                                  =======================   ==================
</TABLE>


            See Notes to Condensed Consolidated Financial Statements.



<PAGE>


                           ORION NETWORK SYSTEMS, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (CONTINUED)
<TABLE>
<CAPTION>

                                                                          March 31,            December 31,
                                                                            1997                   1996
                                                                       -----------------   --------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT                                   (Unaudited)
<S>                                                                    <C>                      <C>
 Current liabilities:                 
         Accounts payable                                               $     7,009,566      $       6,411,028
         Accrued liabilities                                                  9,401,612              7,653,208
         Other current liabilities                                            6,173,220              5,406,072
         Interest payable                                                     8,590,997              8,583,882
         Current portion of long-term debt                                    3,462,122             34,975,060
                                                                        ---------------      -------------------
             Total current liabilities                                       34,637,517             63,029,250
Long term debt                                                              783,337,740            218,236,839
Other liabilities                                                            11,545,444             46,402,299

Limited Partners' interest in Orion Atlantic                                         --             10,130,058

Redeemable preferred stock

     Series A 8% Cumulative Redeemable Convertible Preferred
         Stock, $.01 par value, 15,000 shares authorized; 13,861 and
         13,871 shares issued and outstanding, plus accrued dividends        16,363,068             16,097,880
     Series B 8% Cumulative Redeemable Convertible Preferred
         Stock, $.01 par value, 5,000 shares authorized; 4,298
         shares issued and outstanding, plus accrued dividends                4,890,446              4,804,486
     Series C 6% Cumulative Redeemable Convertible Preferred
         Stock, $.01 par value, 150,000 shares authorized; 123,172 and
           0 shares issued and outstanding, plus accrued dividends           92,399,219                     --

Stockholders' deficit:

     Common stock, $.01 par value, 40,000,000 shares authorized;
         11,419,614 and 11,244,665 issued, 11,160,099 and 10,985,150
         outstanding and 259,515 held as treasury shares (at no cost)           114,196                112,447
     Capital in excess of par value                                          98,235,746             86,932,391
     Accumulated deficit                                                   (115,125,257)           (87,481,206)
                                                                           ---------------  -------------------
        Total stockholders' deficit                                         (16,775,315)              (436,368)
                                                                           ---------------  -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                             $   926,398,119     $      358,264,444
                                                                        ===============     ==================
                                                                                 
</TABLE>

            See Notes to Condensed Consolidated Financial Statements.

                                       4

<PAGE>


                           ORION NETWORK SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                      Three months ended
                                                                            March 31,
                                                             --------------------------------
                                                                     1997                1996
                                                             ------------        ------------
                                                              (Unaudited)         (Unaudited)

<S>                                                          <C>                 <C>         
REVENUE                                                      $ 20,233,069        $  7,646,407

OPERATING EXPENSES:
    Direct expenses                                             5,392,020           1,083,631
    Sales and marketing                                         4,126,377           2,182,843
    Engineering and technical services                          2,657,570           2,104,910
    General and administrative                                  4,807,904           3,509,744
    Depreciation and amortization                              11,566,579           8,920,612
                                                             ------------        ------------
        Total operating expenses                               28,550,450          17,801,740
                                                             ------------        ------------

LOSS FROM OPERATIONS                                           (8,317,381)        (10,155,333)

OTHER EXPENSE (INCOME):
    Interest income                                            (3,413,080)           (688,722)
    Interest expense                                           17,570,631           7,498,779
    Other expense                                                 414,017              19,808
                                                             ------------        ------------
        Total other expense (income)                           14,571,568           6,829,865
                                                             ------------        ------------
Loss before extraordinary loss on
extinguishment of debt, minority interest and
preacquisition loss of acquired subsidiary                    (22,888,949)        (16,985,198)

Extraordinary loss on extinguishment of debt                  (15,763,220)               --

Limited Partners' and minority interest in
    the net loss of Orion Atlantic and
    other consolidated entities                                12,042,239           9,733,861

Preacquisition loss of acquired subsidiary                        626,246                --
                                                             ------------        ------------
NET LOSS                                                      (25,983,684)         (7,251,337)

Preferred stock dividend and accretion, net of                    
forfeitures                                                     1,660,367             379,482
                                                             ------------        ------------
Net loss attributable to
    common stockholders                                      $(27,644,051)       $ (7,630,819)
                                                             ============        ============
Net loss per common share                                    $      (2.48)       $      (0.70)
                                                             ============        ============
Weighted average common
    shares outstanding                                         11,159,557          10,913,132
                                                             ============        ============
</TABLE>

        See Notes to Condensed Consolidated Financial Statements

                                        5

<PAGE>


                           ORION NETWORK SYSTEMS, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                         Common Stock
                                                  ----------------------------
                                                                                     Capital in                   Total
                                                    Number of                        Excess of     Accumulated    Stockholders'
                                                    Shares           Amount          Par Value         Deficit    Equity (Deficit)
                                                  ------------    ------------    ------------    ------------    ------------
<S>                                                 <C>                <C>          <C>            <C>              <C>       
Balance at December 31, 1995                        11,115,965         111,160      85,485,613     (58,916,131)     26,680,642
         Conversion of preferred stock to   
            common stock                                91,071             911         804,034            --           804,945
         Issuance of stock warrants                       --              --           300,000            --           300,000
         Exercise of stock options and       
            warrants                                    37,629             376         342,744            --           343,120
         Preferred stock dividend, net of   
            forfeitures                                   --              --              --        (1,369,665)     (1,369,665)
         Net loss for 1996                                --              --              --       (27,195,410)    (27,195,410)
                                                  ------------    ------------    ------------    ------------    ------------
Balance at December 31, 1996                        11,244,665         112,447      86,932,391     (87,481,206)       (436,368)

         Conversion of preferred stock to   
            common stock                                 1,176              12           9,988            --            10,000
         Issuance of common stock for purchase      
            of APSC                                     85,715             857       1,199,143            --         1,200,000
         Issuance of warrants relating to Senior
            Notes and Senior Discount Notes, Net            --              --       9,082,262            --         9,082,262
         Exercise of stock options and      
            warrants                                    88,058             880       1,011,962            --         1,012,842
         Preferred stock dividend and       
            accretion, net of forfeitures                 --              --              --        (1,660,367)     (1,660,367)
         Net loss for the three months ended
            March 31, 1997                                --              --              --       (25,983,684)    (25,983,684)
                                                  ------------    ------------    ------------    ------------    ------------
Balance at March 31, 1997                           11,419,614    $    114,196    $ 98,235,746   $(115,125,257)   $(16,775,315)
                                                  ============    ============    ============    ============    ============
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       6

<PAGE>


                          ORION NETWORK SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                            Three months ended
                                                                                                March 31,
                                                                                     ---------------------------
                                                                                        1997            1996
                                                                                     ------------    ------------
                                                                                      (Unaudited)     (Unaudited)
OPERATING ACTIVITIES
<S>                                                                                  <C>              <C>         
Net loss                                                                             $(25,983,684)    $(7,251,337)
Adjustments to reconcile net loss to net cash used in operating activities:
      Extraordinary loss on extingishment of debt                                      15,763,220            --
      Amortization and depreciation                                                    10,680,765       8,920,612
      Amortization of deferred financing costs                                            577,549         532,647
      Provision for bad debts                                                             200,000          24,900
      Satellite incentives and accrued interest                                           646,274         562,299
      Capitalized interest                                                             (1,050,335)           --
      Accretion interest on Senior Discount Notes                                       5,529,104            --
      Accrue interest on Debentures                                                       875,000            --
      Limited Partners' and minority interest in Orion
      Atlantic and other consolidated entities                                        (12,042,239)     (9,733,860)
Changes in operating assets and liabilities:
      Accounts receivable                                                                 (63,711)        642,507
      Prepaid expenses and other current assets                                          (541,079)        414,669
      Other assets                                                                     (3,016,738)         35,004
      Accounts payable and accrued liabilities                                         (1,003,594)     (3,071,450)
      Other current liabilities                                                           181,915       2,856,467
      Interest payable                                                                       (239)     (3,742,469)
                                                                                     ------------    ------------
Net cash used in operating activities                                                  (9,247,792)     (9,810,011)

INVESTING ACTIVITIES
Capital expenditures                                                                   (4,013,941)     (1,643,269)
Restricted cash                                                                      (374,381,564)           --
Satellite construction costs                                                          (42,044,448)           --
Purchase of Teleport Europe, net of cash acquired                                      (8,006,680)           --
FCC license costs                                                                         (50,214)        (12,286)
                                                                                     ------------    ------------
Net cash used in investing activities                                                (428,496,847)     (1,655,555)

FINANCING ACTIVITIES
Limited Partners' capital contributions                                                      --        18,044,446
Expenditures on debt and equity financing costs                                       (25,497,717)           --
Proceeds from issuance of common stock and subscriptions, 
 net of issuance costs                                                                  1,012,842          47,385
Proceeds from issuance of Debentures                                                   60,000,000            --
Proceeds from issuance of Senior Notes                                                445,000,000            --
Proceeds from issuance of Senior Discount Notes                                       265,397,000            --
Repayment of senior note payable to banks                                            (207,714,842)    (10,794,487)
Termination of interest cap agreement                                                  (5,287,827)           --
Payment of satellite incentive obligations                                            (13,358,379)           --
Repayment of notes payable                                                             (5,925,291)     (1,843,140)
Payments on capital lease obligations                                                    (219,256)       (167,224)
Capacity and other liabilities                                                           (950,268)      4,094,548
                                                                                     ------------    ------------
Net cash provided by financing activities                                             512,456,262       9,381,528
</TABLE>

                                       7

<PAGE>

                          ORION NETWORK SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
                                  (CONTINUED)
<TABLE>
<CAPTION>
                                                                           Three months ended
                                                                               March 31,
                                                                    -----------------------------
                                                                         1997             1996
                                                                    ---------------    ------------
                                                                     (Unaudited)        (Unaudited)

<S>                                                                 <C>                <C>
Net increase (decrease) in cash and cash equivalents                     74,711,623    (2,084,038)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                         42,187,807    55,111,585
                                                                    ---------------    ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                              116,899,430    53,027,547
                                                                    ===============    ==========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
                                                                           Three months ended
                                                                               March 31,
                                                                    -----------------------------
                                                                         1997             1996
                                                                    ---------------    ------------
                                                                     (Unaudited)        (Unaudited)
Transactions not providing or requiring cash:

      Accrued preferred stock dividend and accretion, net of        
      forfeitures                                                   $     1,660,367    $  379,482
                                                                    ===============    ==========
      Conversion of preferred stock to common stock                 $        10,000    $  698,619
                                                                    ===============    ==========
      Issuance of stock options and warrants                        $    10,282,262    $     --
                                                                    ===============    ==========
      Issuance of preferred stock for acquisition of Orion 
      Atlantic limited partnership interests                        $    94,000,000    $     --
                                                                    ===============    ==========
      Acquisition of Teleport Europe, net of cash acquired:

               Working capital deficit, net of cash acquired        $       683,567    $     --

               Property and equipment                                    (9,346,584)         --

               Negative goodwill                                            267,653          --

               Other assets                                                 (88,928)         --

               Non-current liabilities                                      477,612          --
                                                                    ---------------    ----------
      Net cash used to acquire Teleport Europe                      $    (8,006,680)         --
                                                                    ===============    ==========
Interest paid during the period, net of amounts capitalized         $    10,661,415    $1,997,350
                                                                    ===============    ==========
</TABLE>

            See Notes to Condensed Consolidated Financial Statements.

                                       8

<PAGE>


                          ORION NETWORK SYSTEMS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A. BASIS OF PRESENTATION

GENERAL

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-Q and Article 10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring accruals)  considered necessary for a fair presentation have
been included.  Operating  results for the three months ended March 31, 1997 are
not  necessarily  indicative  of the results  that may be expected  for the year
ending  December  31,  1997.  The balance  sheet at  December  31, 1996 has been
derived from the audited financial  statements at that date but does not include
all of the information and footnotes required by generally  accepted  accounting
principles for complete financial statements. For further information,  refer to
the consolidated financial statements and footnotes thereto included in the 1996
Orion Network Systems, Inc. Annual Report on Form 10-K.


RECENT  DEVELOPMENTS

In January 1997, Orion  consummated a series of transactions  that are described
below.


ACQUISITION OF ORION ATLANTIC LIMITED  PARTNERSHIP  INTERESTS IN THE EXCHANGE 

On January  31,  1997,  the  Company  acquired  all of the  limited  partnership
interests  which it did not own in the  Company's  operating  subsidiary,  Orion
Atlantic,  that owns the Orion 1 satellite.  Specifically,  the Company acquired
the Orion  Atlantic  limited  partnership  interests  and other rights  relating
thereto  held by  British  Aerospace  Communications,  Inc.,  COM DEV  Satellite
Communications  Limited,   Kingston  ,  Communications   International  Limited,
Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate
of Matra Hachette,  and Trans-Atlantic  Satellite,  Inc., an affiliate of Nissho
Iwai Corp. (collectively, the "Exchanging Partners").

Pursuant  to a  Section  351  Exchange  Agreement  and Plan of  Conversion  (the
"Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange"), their
Orion  Atlantic  limited  partnership  interests  for 123,172  shares of a newly
created class of the Company's  Series C 6%  Cumulative  Convertible  Redeemable
Preferred  Stock (the  "Series C Preferred  Stock").  In  addition,  the Company
acquired  certain rights held by certain of the Exchanging  Partners' to receive
repayment  of  various  advances  (aggregating  approximately  $41.4  million at
December 31, 1996). The 123,172 shares of Series C Preferred Stock issued in the
Exchange are  convertible  into  approximately 7 million shares of the Company's
Common Stock.  As a result of the Exchange,  certain of the Exchanging  Partners
became  principal  stockholders  of the  Company.  The  Exchange is described in
greater  detail under the caption "The  Merger,  the Exchange and the  Debenture
Investments" in the Company's  Registration  Statement on Form S-4 (Registration
No. 333-19795).

The Exchange and the acquisition by the Company of the only outstanding minority
interest in the Company's subsidiary Orion Asia Pacific Corporation from British
Aerospace  Satellite  Investments,  Inc.  on  January 8, 1997 (in  exchange  for
approximately  86,000  shares of the  Company's  Common  Stock)  results  in the
Company  owning 100% of Orion Atlantic and it's other  significant  subsidiaries
and, therefore, a greatly simplified corporate structure.

                                       9

<PAGE>


                          ORION NETWORK SYSTEMS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A. BASIS OF PRESENTATION  (CONTINUED)

THE  MERGER

The Exchange was  conducted  on a tax-free  basis by means of a Merger  (defined
below) that was  consummated  on January  31,  1997.  Pursuant  to the  Exchange
Agreement,  Orion Oldco Services, Inc., formerly known as Orion Network Systems,
Inc.  ("Old  Orion"),  formed the Company as a new Delaware  corporation  with a
certificate  of  incorporation,   bylaws  and  capital  structure  substantially
identical in all material respects with those of Old Orion. Also pursuant to the
Exchange Agreement,  the Company formed a wholly owned subsidiary,  Orion Merger
Company, Inc. ("Orion Merger Subsidiary").  Pursuant to an Agreement and Plan of
Merger,  Orion  Merger  Subsidiary  was merged with and into Old Orion,  and Old
Orion became a wholly owned subsidiary of the Company (the "Merger"). On January
31, 1997, the effective time of the Merger, all of the stockholders of Old Orion
received  stock in the Company with  substantially  identical  rights to the Old
Orion stock they held prior to the effective  time of the Merger.  Following the
Merger,  the Company changed its name from Orion Newco  Services,  Inc. to Orion
Network  Systems,  Inc. and the Company's  wholly owned subsidiary Orion Network
Systems,  Inc.  changed its name to Orion Oldco Services,  Inc. The Exchange and
Merger are  described  in greater  detail  under the caption  "The  Merger,  the
Exchange and the Debenture  Investments" in the Company's Registration Statement
on Form S-4 (Registration No. 333-19795).

The  Company  is the  successor  issuer to Old  Orion  and filed a  Registration
Statement on Form 8-B with the Securities and Exchange Commission on January 31,
1997,  to register  all the issued and  outstanding  shares of Common  Stock and
preferred  stock of the Company.  The Company is considered the successor to Old
Orion for purposes of the NASDAQ National Market and the Company's  Common Stock
is quoted on the NASDAQ National Market under the trading symbol "ONSI."


FINANCINGS

On January 31, 1997,  the Company  completed a $710 million bond  offering  (the
"Bond Offering")  comprised of approximately  $445 million of Senior Note Units,
each of which  consists of one 11.25% Senior Note due 2007 (a "Senior Note") and
one Warrant to purchase 0.8463 shares of Common Stock,  par value $.01 per share
("Common  Stock") of the Company (a "Senior Note  Warrant"),  and  approximately
$265.4  million of Senior  Discount  Note Units,  each of which  consists of one
12.5% Senior Discount Note due 2007 (a "Senior Discount Note," and together with
the Senior  Notes,  the  "Notes") and one Warrant to purchase  0.6628  shares of
Common Stock of the Company (a "Senior Discount Note Warrant,  and together with
the Senior Note Warrants, the "Warrants").  Interest on the Senior Notes will be
payable semi-annually in cash on January 15 and July 15 of each year, commencing
July 15, 1997.  The Senior  Discount  Notes will not pay cash interest  prior to
January 15, 2002.  Thereafter,  cash interest  will accrue until  maturity at an
annual  rate of 12.5%  payable  semi-annually  on January 15 and July 15 of each
year, commencing July 15, 2002. The exercise price for the Warrants will be $.01
per share of Common  Stock of the  Company.  The  shares of Common  Stock of the
Company initially issuable upon exercise of the Warrants represent approximately
2.62% of the outstanding Common Stock of the Company on a fully diluted basis as
of January 31, 1997. The Bond Offering was  underwritten by Morgan Stanley & Co.
Incorporated  and Merrill Lynch & Co. The foregoing  description of the Notes is
qualified in its entirety by the description of such Notes in the Indentures and
Notes  documents,  copies of which have been filed as exhibits to the  Company's
Annual Report on Form 10-K filed with the Securities and Exchange  Commission on
March 31, 1997.

                                       10

<PAGE>


                          ORION NETWORK SYSTEMS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A. BASIS OF PRESENTATION (CONTINUED)

FINANCINGS (CONTINUED)

In addition,  on January 31, 1997,  the Company also  completed  the sale of $60
million of its convertible junior subordinated  debentures (the "Debentures") to
two investors,  British Aerospace Holdings, Inc. ("British Aerospace") and Matra
Marconi Space UK Limited ("Matra Marconi Space").  British  Aerospace  purchased
$50 million of the Debentures  and Matra Marconi Space  purchased $10 million of
the Debentures  (collectively,  the "Debentures Offering," and together with the
Bond Offering,  the "Financings").  The Debentures will mature in 2012, and will
bear interest at a rate of 8.75% per annum to be paid  semi-annually  in arrears
solely in Common Stock of the Company.  The Debentures are  subordinated  to all
other indebtedness of the Company, including the Notes.

The net proceeds of the Bond Offering and  Debentures  Offering were used by the
Company to repay the Orion 1 credit facility,  pre-fund the first three years of
interest  payments on certain of the Notes, and will be used to build and launch
two additional satellites, Orion 2 and Orion 3.

The extraordinary  loss on extinguishment of debt of $15.8 million for the three
months  ended March 31,  1997 is the result of  expensing  unamortized  deferred
financing costs associated with the Orion 1 credit facility which was refinanced
with the proceeds from the Bond Offering and  termination of a interest rate cap
agreement.


ACQUISITION OF TELEPORT EUROPE GMBH

On March 26, 1997, Orion acquired  German-Based  Teleport Europe GmbH ("Teleport
Europe"),  a communications  company  specializing in private satellite networks
for voice and data services for $8.9 million.  The Company has  consolidated the
operations  of  Teleport  Europe  for the three  months  ended  March 31,  1997,
retroactively to January 1, 1997. The effect of this consolidation on operations
prior to acquisition was to increase consolidated revenues by approximately $4.1
million,  increase total operating  expenses by  approximately  $4.0 million and
other  expenses  by  approximately  $0.7  million.  The  preacquisition  loss of
Teleport  Europe  of $0.6  million  has  been  deducted  from  the  consolidated
statement of operations for the three months ended March 31, 1997.

BUSINESS AND OWNERSHIP

Orion Network  Systems,  Inc. is a holding  company with no assets or operations
other than its  investments in its  subsidiaries.  Through the operations of the
following  subsidiaries  ("Subsidiary  Guarantors"),   the  Company's  principal
business is the provision of satellite-based communications services:

                                             Jurisdiction of
                                             organization or
Name                                         Incorporation
----                                         ----------------
Asia Pacific Space and
Communications, Ltd.                         Delaware

International Private
Satellite Partners, L.P.                     Delaware

Orion Asia Pacific
Corporation                                  Delaware

Orion Atlantic Europe, Inc.                  Delaware

                                       11

<PAGE>



                          ORION NETWORK SYSTEMS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A. BASIS OF PRESENTATION (CONTINUED)

BUSINESS AND OWNERSHIP (CONTINUED)

OrionNet Finance
Corporation                                  Delaware

OrionNet, Inc.                               Delaware

Orion Satellite
Corporation                                  Delaware

Teleport Europe GmbH                         Federal Republic of Germany

Each of the  Subsidiary  Guarantors is a wholly  (100%) owned  subsidiary of the
Company.  The  Subsidiary  Guarantors  comprise  all of the direct and  indirect
subsidiaries of the Company (other than inconsequential subsidiaries).

Separate  financial  statements of the  Subsidiary  Guarantors are not presented
because (a) such Subsidiary Guarantors have jointly and severally guaranteed the
Notes on a full and unconditional basis, (b) the aggregate assets,  liabilities,
earnings and equity of the Subsidiary Guarantors are substantially equivalent to
the assets,  liabilities,  earnings and equity of the Company on a  consolidated
basis and (c) management has determined that such information is not material to
investors

NOTE B. LONG-TERM DEBT

Long-term debt consists of the following:

                                           March 31, 1997     December 31, 1996
                                           --------------    ------------------
  Senior notes ($445.0 million,   
    net of unamortized  discount 
    of $5.2 million)                       $  439,825,447    $          --
  Senior discount notes ($265.4
   million, net of unamortized
   discount of $4.4 million)                  266,518,381               --
   Convertible debentures                      59,750,000               --
  Senior notes payable--banks                          --      207,714,842
  Notes payable--TT&C Facility                  6,734,493        6,956,624
  Satellite incentive obligations               9,661,641       22,373,746
  Notes payable--STET                           1,373,949        5,550,000
  Notes payable--limited partners                      --        8,050,000
  Other                                         2,935,951        2,566,687
                                           --------------    ------------------
   Total long-term debt                       786,799,862      253,211,899
  Less: current portion                         3,462,122       34,975,060
                                           --------------    ------------------
   Long-term debt less current portion    $   783,337,740    $ 218,236,839
                                          ===============    ==================



                                       12

<PAGE>


                          ORION NETWORK SYSTEMS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE C. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

During the three  months ended March 31, 1997,  certain  preferred  stockholders
exercised  their right to convert 10 shares of preferred stock into 1,176 shares
of Common Stock at prices ranging from $8.50 to $10.20 per share.

NOTE D. COMMITMENTS AND CONTINGENCIES

In October 1995, Skydata  Corporation  ("Skydata"),  a former contractor,  filed
suit against Orion  Atlantic,  Orion  Satellite  Corporation  and Orion,  in the
United States District Court for the Middle  District of Florida,  claiming that
certain Orion Atlantic  operations using frame relay switches infringe a Skydata
patent.  Skydata's  suit sought  damages in excess of $10 million and asked that
any damages assessed be trebled. On December 11, 1995, the Orion parties filed a
motion to  dismiss  the  lawsuit  on the  grounds  of lack of  jurisdiction  and
violation of a mandatory  arbitration  agreement.  In addition,  on December 19,
1995, the Orion parties filed a Demand for Arbitration  against Skydata with the
American  Arbitration  Association in Atlanta,  Georgia,  requesting  damages in
excess of $100,000 for breach of contract and declarations,  among other things,
that Orion and Orion Atlantic own a royalty-free license to the patent, that the
patent is invalid and  unenforceable  and that Orion and Orion Atlantic have not
infringed  on the patent.  On March 5, 1996,  the court  granted  the  Company's
motion to dismiss the lawsuit on the basis that Skydata's  claims are subject to
arbitration.  Skydata  appealed  the  dismissal  to the United  States  Court of
Appeals  for the  Federal  Circuit.  Skydata  also filed a  counterclaim  in the
arbitration  proceedings asserting a claim for $2 million damages as a result of
the conduct of Orion and its affiliates. On May 15, 1996, the arbitrator granted
the Orion  parties'  request  for an initial  hearing on claims  relating to the
Orion parties' rights to the patent,  including the co-ownership claim and other
contractual claims.

On November 9, 1996,  Orion and  Skydata  executed a letter with  respect to the
settlement  in full  the  pending  litigation  and  arbitration.  As part of the
settlement, the parties are to release all claims by either side relating in any
way to the patent and/or the pending  litigation and  arbitration.  In addition,
Skydata  is to grant  Orion (and its  affiliates)  an  unrestricted,  world-wide
paid-up  license to make,  have made,  use or sell products or methods under the
patent and all other corresponding continuation and reissue patents. Orion is to
pay Skydata  $437,000 over a period of two years as part of the settlement.  The
parties are in the process of negotiating the final terms of a formal settlement
agreement.

While Orion is party to regulatory  proceedings incident to its business,  there
are no material  legal  proceedings  pending or, to the knowledge of management,
threatened against Orion or its subsidiaries.

                                       13

<PAGE>


                          ORION NETWORK SYSTEMS, INC.

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

GENERAL

Orion Network System,  Inc.'s ("Orion" or the "Company")  principal  business is
the provision of satellite  communications for private  communications  networks
and video  distribution  and other  satellite  transmission  services.  From its
inception in 1982 through  January 20, 1995,  when Orion 1 commenced  commercial
operations,  Orion was a development  stage  enterprise.  Prior to January 1995,
Orion's efforts were devoted  primarily to monitoring the  construction,  launch
and in-orbit  testing of Orion 1, product  development,  marketing  and sales of
interim private communications network services,  raising financing and planning
Orion 2 and Orion 3.

Through  January 31,  1997,  Orion  Satellite  Corporation  was the sole general
partner in Orion  Atlantic,  L.P.  ("Orion  Atlantic")  and had a 41 2/3% equity
interest in Orion  Atlantic.  As a result of Orion's  control of Orion  Atlantic
during 1996, Orion's  consolidated  financial statements include the accounts of
Orion Atlantic.  All of Orion  Atlantic's  revenues and expenses are included in
Orion's  consolidated  financial  statements,  with  appropriate  adjustment  to
reflect the interests of the Limited Partners in Orion  Atlantic's  losses prior
to the Exchange (as defined below).  The assets and liabilities  reported in the
consolidated  balance  sheet at  December  31, 1996  primarily  pertain to Orion
Atlantic. Orion's consolidated financial statements also include the accounts of
all other subsidiaries of Orion. See Recent Developments below.

All subsidiaries of Orion ("Subsidiary Guarantors"),  other than inconsequential
subsidiaries,  have unconditionally guaranteed the Notes (as defined below) on a
joint and several basis. No restrictions  exist on the ability of the Subsidiary
Guarantors to pay dividends or make other  distributions to Orion, except to the
extent provided by law generally (e.g.,  adequate capital to pay dividends under
state corporate laws).

RECENT DEVELOPMENTS

In January 1997, Orion  consummated a series of transactions  that are described
below.

ACQUISITION OF ORION ATLANTIC LIMITED PARTNERSHIP INTERESTS IN THE EXCHANGE

On January  31,  1997,  the  Company  acquired  all of the  limited  partnership
interests  which it did not already own in the Company's  operating  subsidiary,
Orion  Atlantic,  that owns the Orion 1  satellite.  Specifically,  the  Company
acquired  the Orion  Atlantic  limited  partnership  interests  and other rights
relating  thereto  held  by  British  Aerospace  Communications,  Inc.,  COM DEV
Satellite  Communications  Limited,  Kingston  ,  Communications   International
Limited,  Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an
affiliate of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of
Nissho Iwai Corp. (collectively, the "Exchanging Partners").

Pursuant  to a  Section  351  Exchange  Agreement  and Plan of  Conversion  (the
"Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange"), their
Orion  Atlantic  limited  partnership  interests  for 123,172  shares of a newly
created class of the Company's  Series C 6%  Cumulative  Convertible  Redeemable
Preferred  Stock (the  "Series C Preferred  Stock").  In  addition,  the Company
acquired  certain rights held by certain of the Exchanging  Partners' to receive
repayment  of  various  advances  (aggregating  approximately  $41.4  million at
December 31, 1996). The 123,172 shares of Series C Preferred Stock issued in the
Exchange are convertible  (as of January 31, 1997) into  approximately 7 million
shares of the Company's  Common Stock.  As a result of the Exchange,  certain of
the  Exchanging  Partners  became  principal  stockholders  of the Company.  The
Exchange is  described in greater  detail  under the caption  "The  Merger,  the
Exchange and the Debenture  Investments" in the Company's Registration Statement
on Form S-4 (Registration No. 333-19795).

                                       14

<PAGE>



                           ORION NETWORK SYSTEMS, INC.

        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
                                   (CONTINUED)

The Exchange and the acquisition by the Company of the only outstanding minority
interest in the Company's subsidiary Orion Asia Pacific Corporation from British
Aerospace  Satellite  Investments,  Inc.  on  January 8, 1997 (in  exchange  for
approximately  86,000  shares of the  Company's  Common  Stock)  results  in the
Company  owning 100% of Orion  Atlantic and its other  significant  subsidiaries
and, therefore, a greatly simplified corporate structure.

THE MERGER

The Exchange was  conducted  on a tax-free  basis by means of a Merger  (defined
below) that was  consummated  on January  31,  1997.  Pursuant  to the  Exchange
Agreement,  Orion Oldco Services, Inc., formerly known as Orion Network Systems,
Inc.  ("Old  Orion"),  formed the Company as a new Delaware  corporation  with a
certificate  of  incorporation,   bylaws  and  capital  structure  substantially
identical in all material respects with those of Old Orion. Also pursuant to the
Exchange Agreement,  the Company formed a wholly owned subsidiary,  Orion Merger
Company, Inc. ("Orion Merger Subsidiary").  Pursuant to an Agreement and Plan of
Merger,  Orion  Merger  Subsidiary  was merged with and into Old Orion,  and Old
Orion became a wholly owned subsidiary of the Company (the "Merger"). On January
31, 1997, the effective time of the Merger, all of the stockholders of Old Orion
received  stock in the Company with  substantially  identical  rights to the Old
Orion stock they held prior to the effective  time of the Merger.  Following the
Merger,  the Company changed its name from Orion Newco  Services,  Inc. to Orion
Network  Systems,  Inc. and the Company's  wholly owned subsidiary Orion Network
Systems,  Inc.  changed its name to Orion Oldco Services,  Inc. The Exchange and
Merger are  described  in greater  detail  under the caption  "The  Merger,  the
Exchange and the Debenture  Investments" in the Company's Registration Statement
on Form S-4 (Registration No. 333-19795).

The  Company  is the  successor  issuer to Old  Orion  and filed a  Registration
Statement on Form 8-B with the Securities and Exchange Commission on January 31,
1997,  to register  all the issued and  outstanding  shares of Common  Stock and
preferred  stock of the Company.  The Company is considered the successor to Old
Orion for purposes of the NASDAQ National Market and the Company's  Common Stock
is quoted on the NASDAQ National Market under the trading symbol "ONSI."

FINANCINGS

On January 31, 1997,  the Company  completed a $710 million bond  offering  (the
"Bond Offering")  comprised of approximately  $445 million of Senior Note Units,
each of which  consists of one 11.25% Senior Note due 2007 (a "Senior Note") and
one Warrant to purchase 0.8463 shares of Common Stock,  par value $.01 per share
of the Company (a "Senior Note Warrant"),  and  approximately  $265.4 million of
Senior Discount Note Units,  each of which consists of one 12.5% Senior Discount
Note due 2007 (a "Senior Discount Note," and together with the Senior Notes, the
"Notes")  and one  Warrant  to  purchase  0.6628  shares of Common  Stock of the
Company (a "Senior  Discount  Note  Warrant,  and together  with the Senior Note
Warrants,  the  "Warrants").  Interest  on the  Senior  Notes  will  be  payable
semi-annually  in cash on January 15 and July 15 of each year,  commencing  July
15, 1997. The Senior  Discount Notes will not pay cash interest prior to January
15, 2002. Thereafter, cash interest will accrue until maturity at an annual rate
of  12.5%  payable  semi-annually  on  January  15 and  July  15 of  each  year,
commencing  July 15, 2002.  The exercise price for the Warrants will be $.01 per
share of Common Stock of the Company.  The shares of Common Stock of the Company
initially issuable upon exercise of the Warrants represent  approximately  2.62%
of the  outstanding  Common Stock of the Company on a fully  diluted basis as of
January 31, 1997.  The Bond Offering was  underwritten  by Morgan  Stanley & Co.
Incorporated  and Merrill Lynch & Co. The foregoing  description of the Notes is
qualified in its entirety by the description of such Notes in the Indentures and
Notes  documents,  copies of which have been filed as exhibits to the  Company's
Annual Report on Form 10-K filed with the Securities and Exchange  Commission on
March 31, 1997.

                                       15

<PAGE>
                           ORION NETWORK SYSTEMS, INC.

        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
                                   (CONTINUED)

In addition,  on January 31, 1997,  the Company also  completed  the sale of $60
million of its convertible junior subordinated  debentures (the "Debentures") to
two investors,  British Aerospace Holdings, Inc. ("British Aerospace") and Matra
Marconi Space UK Limited ("Matra Marconi Space").  British  Aerospace  purchased
$50 million of the Debentures  and Matra Marconi Space  purchased $10 million of
the Debentures  (collectively,  the "Debentures Offering," and together with the
Bond Offering,  the "Financings").  The Debentures will mature in 2012, and will
bear interest at a rate of 8.75% per annum to be paid  semi-annually  in arrears
solely in Common Stock of the Company.  The Debentures are  subordinated  to all
other indebtedness of the Company, including the Notes.

The net proceeds of the Bond Offering and  Debentures  Offering were used by the
Company to repay the Orion 1 credit facility,  pre-fund the first three years of
interest  payments on certain of the Notes, and will be used to build and launch
two additional satellites,  Orion 2 and Orion 3. Orion intends to launch Orion 2
in the Atlantic Ocean region to bolster its European  capacity and to expand its
coverage area in the Commonwealth of Independent States, Latin America and parts
of Africa. Orion 3 will be launched into the Asia Pacific region and is expected
to cover all or portions of China, Japan, Korea, India, Hawaii,  Southeast Asia,
Australia, New Zeland and Eastern Russia.

ORION 2 AND ORION 3 COMMENCEMENT OF CONSTRUCTION

Orion 2 and Orion 3 Construction  Contracts.  Orion  commenced  construction  of
Orion 2 in  February  1997 under a  satellite  procurement  contract  with Matra
Marconi Space. Orion commenced  construction of Orion 3 in December 1996 under a
satellite   procurement   contract   with   Hughes   Space  and   Communications
International, Inc.

Pre-Construction  Lease on Orion 3. Orion has entered into a contract with DACOM
Corp.,  a Korean  communications  company  ("DACOM"),  under  which  DACOM will,
subject to certain conditions, lease eight dedicated transponders on Orion 3 for
13 years, in return for  approximately  $89 million,  payable over a period from
December 1996 through seven months following the lease commencement date for the
transponders (which is scheduled to occur by January 1999). Payments are subject
to refund unless Orion 3 commences commercial operation by June 30, 1999.

OVERVIEW

Orion's  revenues are  principally  generated under three to four year contracts
for delivery of communications  services.  Such revenues are derived principally
from recurring monthly fees from its customers,  although many contracts include
initial  non-recurring  installation  and other fees. These  non-recurring  fees
generally are structured to cover the Company's  actual costs of installation of
the  customer's  site-based  equipment.  The revenues from each  contract  vary,
depending upon the type of service, amount of capacity, data handling ability of
the  network,  the  number of very small  aperture  terminals  ("VSATs")  (which
generally are owned by Orion), value-added services and other factors. Depending
on the  complexity  of the  services to be  provided  to a customer,  the period
between  the date of  signature  of a contract  and the  commencement  of actual
services  (and  receipt of fees)  typically  ranges  from 30 days to six months.
Substantially all of Orion's contracts are denominated in U.S. dollars, although
some  contracts are  denominated  in pounds  sterling,  deutschemarks,  Austrian
shillings or French francs.  Orion begins to record revenues under its contracts
upon service commencement to the customer.

The  services  provided  by Orion have been  subject to  decreasing  prices over
recent  years  and this  pricing  pressure  is  expected  to  continue  (and may
accelerate) for the foreseeable future,  particularly if, as expected,  capacity
continues to increase.  Orion will need to increase its volume of sales in order
to compensate  for such price  reductions.  Orion  believes that  customers will
increase  the data  speeds  in their  communications  networks  to  support  new
applications,  and  that  such  upgrading  of  customer  networks  will  lead to
increased  revenues that will mitigate the effect of price reductions.  However,
there can be no  assurance  that this will occur.  Orion  expects to continue to
incur net losses and negative cash flow (after payments for capital expenditures
and interest) for the foreseeable future.

                                       16

<PAGE>



                           ORION NETWORK SYSTEMS, INC.

        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
                                   (CONTINUED)

Orion's direct cost of services  includes  principally (i) costs relating to the
installation, maintenance and licensing of VSAT earth stations at its customers'
premises;  (ii) satellite lease payments for transponder capacity (generally for
services outside of the Orion 1 footprint);  and (iii) associated  miscellaneous
expenses.  Sales and marketing  expenses consist of salaries,  sales commissions
(including  commissions  to  third  party  sales  representatives),  travel  and
promotional expenses. The Company has recently commenced a significant expansion
of its marketing  program and expects to continue this  expansion  through 1997.
Due to the complexity of the Company's services,  and the continued expansion of
sales   personnel,   sales  and  marketing   expense  is  expected  to  increase
significantly  during  1997.  Engineering  and  technical  expenses,  consisting
principally  of personnel  costs and travel,  relate to tracking,  telemetry and
command ("TT&C"), network monitoring, network design and similar activities. The
Company constructed its TT&C facilities to control two satellites.  As a result,
the  Company  anticipates  a slight  increase  in costs  with Orion 2 and a more
substantial  increase in costs with Orion 3, which will  require  separate  TT&C
facilities.  General and  administrative  expenses consist of in-orbit insurance
premiums,  personnel  costs  other than for sales,  marketing  and  engineering,
professional  services, and occupancy costs. These costs will increase generally
as the Company's operations expand. Specifically,  in-orbit insurance costs will
increase  significantly   following  the  launches  of  Orion  2  and  Orion  3.
Depreciation  and  amortization  expenses result mainly from the depreciation of
the Orion 1 satellite,  VSATs and the related equipment to service the expansion
of the  private  network  communication  services  business  and  will  increase
substantially  after  the  launch  of Orion 2 and  Orion 3.  Interest  income is
primarily the result of interest earned on the proceeds from Orion's private and
public financings. Interest costs will increase substantially as a result of the
bond  offering  completed  January 31,  1997.  Orion's  costs  (other than sales
commissions) generally do not vary substantially with the amount of revenue from
the Orion 1 satellite.

RESULTS OF OPERATIONS

Three Months  Ended March 31, 1997  Compared to the Three Months Ended March 31,
1996.

Consolidation  of  Teleport  Europe  GmbH.  On March 26,  1997,  Orion  acquired
German-based Teleport Europe GmbH ("Teleport Europe"), a communications  company
specializing  in private  satellite  networks for voice and data  services.  The
Company has  consolidated the operations of Teleport Europe for the three months
ended  March 31,  1997,  retroactively  to January  1, 1997.  The effect of this
consolidation  on operations  prior to acquisition was to increase  consolidated
revenues by  approximately  $4.1 million,  increase total operating  expenses by
approximately $4.0 million and other expenses by approximately $0.7 million. The
preacquisition  loss of Teleport  Europe of $0.6 million has been  deducted from
the  consolidated  statement of operations  for the three months ended March 31,
1997.

Revenue and  bookings.  Total  revenue for the three months ended March 31, 1997
was $20.2  million,  compared to $7.6  million  for the same period in 1996,  an
increase of 165 percent.  Revenues from private  communications network services
were  $7.9  million  for the  first  quarter  of 1997 and $2.9  million  for the
comparable  period in 1996, as the number of customer sites in service increased
approximately  200  percent.  Revenues  from video  communications  services and
transponder  capacity  leasing were $8.2  million for the first  quarter of 1997
compared to $4.5 million for the first  quarter of 1996.  Revenues for the three
months ended March 31, 1997,  included $4.1 million of equipment  sales of which
$3.8 million was  associated  with a sales-type  lease to an existing  customer,
compared to $0.2 million for the same period in 1996.

At March 31, 1997, Orion had a customer  contract backlog  (representing  future
revenues under contract) of approximately  $244 million compared to $135 million
at March 31, 1996.  Revenue from customer  contract  backlog is typically earned
over contract terms of three to five years.

                                       17

<PAGE>



                           ORION NETWORK SYSTEMS, INC.

        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
                                   (CONTINUED)

OPERATING EXPENSES

Direct expenses. Direct expenses for the three months ended March 31, 1997, were
$5.4 million  compared to $1.1 million for the same period in 1996. The increase
of $4.3 million, or approximately 391 percent,  for the three months ended March
31,1997, were primarily  attributable to the cost of equipment associated with a
sales-type  equipment lease to an existing customer,  site maintenance and other
operational costs associated with the increased sites in service for the period.

Sales and marketing expenses. Sales and marketing expenses were $4.1 million for
the three months ended March 31, 1997,  as compared to $2.2 million for the same
period in 1996,  an increase  of $1.9  million or 86  percent.  The  increase is
related to additional sales salaries and commissions, consulting and advertising
associated with the growth in private communications network service business.

Engineering and technical services expenses.  Engineering and technical services
expenses  were $2.7  million  for the three  months  ended  March 31,  1997,  as
compared to $2.1 million for the comparable period in 1996. The increase of $0.6
million or 29 percent is related to additional  engineering  and technical staff
associated with the Teleport Europe acquisition.

General and administrative  expenses.  General and administrative  expenses were
$4.8 million for the three months ended March 31, 1997, compared to $3.5 million
for the same period in 1996.  The increase of $1.3 million or 37 percent for the
three  months  ended March 31, 1997 was  primarily  due to outside  services and
other expenses.

Depreciation and  amortization.  Depreciation  and amortization  expense for the
three  months  ended March 31,  1997,  were $11.6  million,  an increase of $2.7
million or 30 percent, over the same period in 1996. The increase is primarily a
result from  depreciation  of ground  equipment to service the  expansion of the
private network communication services business.

Interest.  Interest income was $3.4 million for the three months ended March 31,
1997,  compared to $0.7 million,  an increase of $2.7 million or 386 percent for
the period.  The  increase in interest  income  during the first three months of
1997 is primarily a result of interest earned on the proceeds from the Company's
public bond  offering in January  1997.  Interest  expense,  net of  capitalized
interest of $1.1 million, was $17.6 million for the three months ended March 31,
1997 and $7.5  million  for the  comparable  period  in 1996.  The  increase  in
interest  expense  of  $10.1  million  in the  first  three  months  of  1997 is
attributable  to  expensing  interest   (including   commitment  fees,  interest
accretion  associated  with  the  Orion 1  satellite  incentive  obligation  and
amortization  of deferred  financing  costs) from the in-service date of Orion 1
and the impact of the interest rate cap agreement.  Prior to the in-service date
of Orion 1, substantially all interest expense was capitalized.

Extraordinary  loss  on  extinguishment  of  debt.  The  extraordinary  loss  on
extinguishment  of debt of $15.8  million for the three  months  ended March 31,
1997 is the result of  expensing  unamortized  deferred  financing  costs of the
Orion 1  credit  facility  which  was  refinanced  with  the  proceeds  from the
Company's recent Bond Offering and termination of a interest rate cap agreement.

Net loss. The Company  incurred net losses of $26.0 million and $7.3 million for
the three months ended March 31, 1997 and 1996, respectively, after deduction of
the limited  partners' and minority  interests' share in the Company's losses of
$12.0  million  and  $9.7  million,   respectively   and   elimination   of  the
preacquisition  loss of Teleport  Europe of $0.6 million  from the  consolidated
statement of operations for the three months ended March 31, 1997.

                                       18

<PAGE>



                           ORION NETWORK SYSTEMS, INC.

        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
                                   (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES

Prior  Funding.  Orion  has  required  significant  capital  for  operating  and
investing  activities in the  development of its business,  and will continue to
need to expend significant additional capital in the future to develop fully its
global satellite communications system. The Company's funding for its operations
through  January  1997  had  been  provided  primarily  by the  sale  of  equity
securities,  including the completion of its initial  public  offering in August
1995 which generated  proceeds to the Company of approximately  $52 million (net
of underwriting discounts), bank loans, vendor financing, lease arrangements and
short-term loans from its investors.  Funding for the construction and launch of
the Orion 1 satellite and related  facilities  was fully  committed  through $90
million of equity from the limited  partners of Orion Atlantic,  an aggregate of
$251 million under a secured bank credit facility and  approximately $11 million
under other debt facilities, dedicated primarily to the construction of the TT&C
facility,  which is being used to control  Orion 1. The Orion 1 credit  facility
was  refinanced  in January  1997 with the proceeds  from the Bond  Offering and
concurrently  with  the  Bond  Offering,  Orion  acquired  all  of  the  limited
partnership  interests  (which  it did not  already  own) in Orion  Atlantic  in
exchange for 123,172 shares of Series C Convertible Preferred Stock representing
approximately 7 million underlying shares of Common Stock.

Existing Capital  Resources.  The net proceeds of the January 1997 Bond Offering
to the Company  were  approximately  $684  million,  and the net proceeds of the
Debentures  Offering  were  approximately  $59  million.  Of the  Bond  Offering
proceeds,  approximately  $223  million  was used for  repayment  of the Orion 1
credit  facility  (including  payment of  accrued  interest  and hedge  breakage
costs),  approximately $24 million was used to make certain initial payments for
the  Orion 2  satellite  contract,  approximately  $13  million  was used to pay
accrued  satellite  incentive  fees  under the Orion 1  satellite  contract  and
approximately $4 million was used to pay amounts owing to STET, a former limited
partner of Orion  Atlantic.  As of March 31,  1997 the Company had cash and cash
equivalents of $117 million and  restricted and segregated  cash of $374 million
including  $240 million  which was  segregated by the Company to be used to make
payments for  additional  satellites and certain  related costs.  The restricted
cash  consisted  of $134  million  placed in a pledged  account (to pre-fund the
first six interest payments on the senior notes).

Existing Indebtedness

Notes. In the Bond Offering,  Orion issued  approximately $445 million of 11.25%
Senior  Notes  due 2007 and  approximately  $484  million  principal  amount  at
maturity  ($265.4 million initial accreted value) of 12.5% Senior Discount Notes
due 2007.  Interest  on the  Senior  Notes is payable  semi-annually  in cash on
January  15 and July 15 of each  year,  commencing  July 15,  1997.  The  Senior
Discount  Notes  do  not  accrue  cash  interest  prior  to  January  15,  2002.
Thereafter,  cash interest will accrue until maturity at an annual rate of 12.5%
payable  semi-annually  on January 15 and July 15 of each year,  commencing July
15, 2002.

The  Notes  have  the  benefit  of  guarantees  issued  by each of the  material
subsidiaries  of the  Company.  The Senior  Notes  initially  are secured by the
securities  purchased with the $134 million held in a pledged  account until the
Company makes the first six scheduled  interest payments on the Senior Notes and
thereafter  the Senior Notes will be unsecured.  The Senior  Discount  Notes are
unsecured.  The Notes are redeemable,  at the Company's  option,  in whole or in
part, at any time on or after January 15, 2002 at specified  redemption  prices.
In the event of a change of control  (as defined in the  indentures  relating to
the  Notes),  the Company  will be  obligated  to make an offer to purchase  all
outstanding  Notes at a  purchase  price  equal to 101% of  their  principal  or
accreted value, plus accrued and unpaid interest thereon to the repurchase date.

                                       19

<PAGE>



                           ORION NETWORK SYSTEMS, INC.

        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
                                   (CONTINUED)

The  indebtedness  evidenced  by the Notes  ranks pari passu in right of payment
with all existing and future unsubordinated  indebtedness of the Company and the
guarantors,  respectively,  and senior in right of payment to all  existing  and
future  subordinated  indebtedness  of  the  Company  and  the  guarantors.  The
indentures  relating to the Notes (the  "Indentures")  contain certain covenants
which,  among  other  things,  restrict  distributions  to  stockholders  of the
Company,  the  repurchase  of equity  interests in the Company and the making of
certain other investments and restricted payments,  the incurrence of additional
indebtedness  by the Company and its  restricted  subsidiaries,  the creation of
certain liens,  certain asset sales,  transactions  with  affiliates and related
parties, and mergers and consolidations.  The foregoing description of the Notes
is  qualified  in its  entirety  by the  terms of such  Notes  contained  in the
Indentures and Notes documents.

Debentures.  In January 1997, the Company also completed the sale of $60 million
of its  Debentures  to British  Aerospace  ($50 million) and Matra Marconi Space
($10 million).  The Debentures  will mature in 2012, and will bear interest at a
rate of 8.75% per annum to be paid  semi-annually  in  arrears  solely in Common
Stock of the Company at prices of between $10.21 and $14.00 per share, depending
on the  average  trading  prices  of the  Common  Stock  during  the  applicable
measurement  period.  The  Debentures  (and accrued but unpaid  interest) may be
converted  in  whole or in part  into  Common  Stock  at any time at an  initial
conversion  rate of $14.00  per share,  as  adjusted  for stock  splits or other
recapitalizations,  certain dividends or issuances of stock to all stockholders,
issuances  of stock (or  certain  rights to acquire  stock) at a price per share
below $14.00, and other events.

Orion may at any time (except  during 90 days after a change in control)  redeem
all or part (but not less than 25% on any one  occasion) of the  Debentures  for
cash  consideration  determined  by  multiplying  the number of shares of Common
Stock  issuable  upon  conversion  of the  Debentures  by the greater of (i) the
average closing price of the Common Stock over the 20 trading days preceding the
redemption  or  (ii)  $17.50  per  share.  Alternatively,  Orion,  in  its  sole
discretion,  may effect the sale  through a public or private  offering,  of the
Common Stock  underlying  the Debentures or received as payment of dividends on,
the Debentures. In such event, the holders of the Debentures will be entitled to
receive  a price  per  share  equal to the  greater  of (a) at least  95% of the
average  closing price of the Common Stock over the preceding 20 trading days or
(b)  $17.50  per  share.  From and after the time when less than $50  million of
Notes remain outstanding,  in the event of a change of control of Orion (defined
as the acquisition by any stockholder of a majority of the voting  securities of
Orion),  either Orion or any holder of the Debentures  may, within 90 days after
such change of control,  require the sale of the  Debentures,  as converted into
Common  Stock,  to Orion for a purchase  price  equal to the  greater of (a) the
price payable in an optional  redemption (as described  above) and (b) the price
paid to  holders  of Common  Stock in the  change of  control  transaction.  The
Indentures  for the Notes  contain a covenant  which will  effectively  prohibit
Orion from honoring such right.

The  Debentures  are  subordinated  to all other  indebtedness  of the  Company,
including the Notes.  The  Debentures  contain  minimal  covenants and events of
default so long as $50 million or more of the Notes  remain  outstanding,  but a
more extensive set of covenants and events of default will apply after less than
$50 million of Notes are outstanding.

Other  Indebtedness  and Other  Obligations.  At March 31, 1997, the Company had
outstanding  indebtedness of approximately  $6.7 million under a seven year term
loan  provided by General  Electric  Capital  Corporation  ("GECC") for the TT&C
facility,  which is secured by the TT&C  facility  and various  assets  relating
thereto.  Additionally,  at  March  31,  1997 the  Company  had  obligations  of
approximately $9.7 payable to the manufacturer of Orion 1 through 2007, and $1.4
million payable to a former partner in Orion Atlantic through 1997.

                                       20

<PAGE>



                           ORION NETWORK SYSTEMS, INC.

        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
                                   (CONTINUED)


Current Funding  Requirements.  Based upon its current  expectations for growth,
the Company anticipates it will have substantial  funding  requirements over the
next  three  years to fund the  costs of Orion 2 and  Orion 3, the  purchase  of
VSATs, and other capital expenditures and other capital needs.  Interest charges
on the  Senior  Notes  over the next  three  years  are  fully  provided  for by
restricted cash.

The in-orbit  delivered costs of the Orion 2 and Orion 3 satellites are expected
to aggregate approximately $500 million. In addition to the $42 million incurred
through  the  first  quarter  of  1997,  Orion  will  need to make  payments  of
approximately $45 million,  $350 million and $50 million in 1997, 1998 and 1999,
respectively. These amounts include the Company's estimate regarding the cost of
launch  insurance,  although the Company has not had material  discussions  with
potential insurers and has not received any commitment to provide insurance. The
contracts for Orion 2 and Orion 3 provide firm fixed prices for the construction
and launch of those  satellites  and provides for penalties in the event of late
delivery by the  manufacturer,  however,  the Company's actual payments could be
substantially  higher due to any change  orders  for the  satellites,  insurance
rates, delays and other factors.

The Company  anticipates  that its existing cash balances and payments under the
DACOM  contract  will be  sufficient  to meet  substantially  all of its capital
requirements  for the  delivery  in orbit of Orion 2 and Orion 3. In  connection
with the Bond Offering,  the Company segregated $273 million of the net proceeds
to make payments for additional  satellites and certain related costs (or to pay
interest and principal on the Notes).  The Company also can use a portion of its
working  capital  for such costs if it chooses to do so. The Company had working
capital  of $105  million at March 31,  1997 The  Company  anticipates  that its
existing cash balances,  payments under the DACOM contract and future cash flows
are likely to be sufficient to meet its capital requirements. However, there can
be no  assurance  that cost  increases  for Orion 2 and/or Orion 3 due to change
orders,  insurance  rates or  construction  delays,  among other factors may not
increase the Company's  capital  requirements  or that the Company's  growth may
vary from its  expectations  resulting  in changes in its cash  requirements  or
expected cash.

The balance of the Company's funding  requirements are dependent upon its growth
and cash flow from  operations.  TThe  Company  cannot  predict  whether  itsthe
Company's existing resources and cash flows will be adequate to cover its future
cash needs.  and there can be no assurance  that such  resources  and cash flows
will be adequate.  If existing  resources  and cash flows are not  sufficient to
cover the Company's future cash needs, the Company will need to raise additional
financing. The Company does not have a revolving credit facility or other source
of readily available  capital.  Sources of additional capital may include public
or private debt, or equity  financings or strategic  investments.  To the extent
that the Company seeks to raise additional debt financing,  the Indentures limit
the amount of such additional  debt (under a variety of provisions  contained in
such Indentures) and prohibit the Company from using Orion 1, Orion 2 or Orion 3
as collateral  for  indebtedness  for money  borrowed.  If the Company  requires
additional financing and is unable to obtain such financing from outside sources
in the amounts and at the times needed, there would be a material adverse effect
on the Company.

EFFECTIVE OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

In February 1997, the Financial  Accounting Standards Board issued Statement No.
128,  Earnings per Share,  which is required to be adopted on December 31, 1997.
At that time,  the Company will be required to change the method  currently used
to compute  earnings per share and to restate all prior  periods.  Under the new
requirements for calculating  primary earnings per share, the dilutive effect of
stock  options  will  be  excluded.  The  impact  of  Statement  No.  128 on the
calculation of primary or fully diluted earnings per share for these quarters is
not expected to be material.

                                       21

<PAGE>



                           ORION NETWORK SYSTEMS, INC.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In October 1995, Skydata  Corporation  ("Skydata"),  a former contractor,  filed
suit against Orion  Atlantic,  Orion  Satellite  Corporation  and Orion,  in the
United States District Court for the Middle  District of Florida,  claiming that
certain Orion Atlantic  operations using frame relay switches infringe a Skydata
patent.  Skydata's  suit sought  damages in excess of $10 million and asked that
any damages assessed be trebled. On December 11, 1995, the Orion parties filed a
motion to  dismiss  the  lawsuit  on the  grounds  of lack of  jurisdiction  and
violation of a mandatory  arbitration  agreement.  In addition,  on December 19,
1995, the Orion parties filed a Demand for Arbitration  against Skydata with the
American  Arbitration  Association in Atlanta,  Georgia,  requesting  damages in
excess of $100,000 for breach of contract and declarations,  among other things,
that Orion and Orion Atlantic own a royalty-free license to the patent, that the
patent is invalid and  unenforceable  and that Orion and Orion Atlantic have not
infringed  on the patent.  On March 5, 1996,  the court  granted  the  Company's
motion to dismiss the lawsuit on the basis that Skydata's  claims are subject to
arbitration.  Skydata  appealed  the  dismissal  to the United  States  Court of
Appeals  for the  Federal  Circuit.  Skydata  also filed a  counterclaim  in the
arbitration  proceedings asserting a claim for $2 million damages as a result of
the conduct of Orion and its affiliates. On May 15, 1996, the arbitrator granted
the Orion  parties'  request  for an initial  hearing on claims  relating to the
Orion parties' rights to the patent,  including the co-ownership claim and other
contractual claims.

On November 9, 1996,  Orion and  Skydata  executed a letter with  respect to the
settlement  in full  the  pending  litigation  and  arbitration.  As part of the
settlement, the parties are to release all claims by either side relating in any
way to the patent and/or the pending  litigation and  arbitration.  In addition,
Skydata  is to grant  Orion (and its  affiliates)  an  unrestricted,  world-wide
paid-up  license to make,  have made,  use or sell products or methods under the
patent and all other corresponding continuation and reissue patents. Orion is to
pay Skydata  $437,000 over a period of two years as part of the settlement.  The
parties are in the process of negotiating the final terms of a formal settlement
agreement.

While Orion is party to regulatory  proceedings incident to its business,  there
are no material  legal  proceedings  pending or, to the knowledge of management,
threatened against Orion or its subsidiaries.

ITEM 2. CHANGES IN SECURITIES.

     None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   (a)  A Special Meeting of the Stockholders of the Company was held on January
        30, 1997.

   (b)  Not applicable.

   (c)  The results of the voting at the Special Meeting of the Stockholders
            was as follows:

        1. Ratification of the Merger Agreement:

              For:         7,865,750

              Against:         7,200

              Abstain:        47,984

                                       22

<PAGE>



                           ORION NETWORK SYSTEMS, INC.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
           (CONTINUED)

           (2) Approval and adoption of the Exchange Agreement:

               For:        7,865,000

               Against:        7,950

               Abstain:       47,984

           (3) Approval  of  the  transactions  contemplated  by  the  Debenture
               Purchase Agreement:

               For:        7,865,750

               Against:        7,200

               Abstain:       47,984

ITEM 5. OTHER INFORMATION

     None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits required by Item 601 of Regulation S-K:

         11.1  Statement regarding:  Computation of Net Loss Per Common Share

         27     Financial Data Schedule

     (b) Reports on Form 8-K during the three months ended March 31, 1997:

     The Company  filed a Current  Report on Form 8-K dated  January  31,  1997,
     reporting  consummation  of the Exchange.  The Company also filed a Current
     Report on Form 8-K dated  March 26,  1997,  reporting  consummation  of the
     acquisition of Teleport Europe.

                                       23

<PAGE>


                           ORION NETWORK SYSTEMS, INC.

SIGNATURES

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

                             ORION NETWORK SYSTEMS, INC.

                             (Registrant)




Date:  May  15, 1997            /s/ W. Neil Bauer
                                ---------------------------------------
                                W. Neil Bauer, President,
                                Chief Executive Officer and Director
                                (Principal Executive Officer)

Date:  May  15, 1997            /s/ David J. Frear
                                ---------------------------------------
                                David J. Frear, Vice President,
                                Chief Financial Officer and Treasurer
                                (Principal Financial Officer and
                                Principal Accounting Officer)



                                       24