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 SEPTEMBER 30, 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 No. )                   Identification)



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 September 30, 1997
                -----                          ---------------------------------
    Common Stock, $.01 par value                       11,406,162 shares

<PAGE>
                                                  INDEX

                                      ORION NETWORK SYSTEMS, INC.
<TABLE>
<S>                                                                                                      <C>

                                                                                                         PAGE
                                                                                                         ----
PART I. FINANCIAL INFORMATION

Item 1.   Financial Statements (Unaudited)

          Condensed Consolidated Balance Sheets---September 30, 1997 and  December 31, 1996.............   3


          Condensed Consolidated Statements of Operations --- three and nine months ended
          September 30, 1997 and 1996...................................................................   5

          Condensed Consolidated Statements of Changes in Stockholders' Deficit --- Year ended
          December 31, 1996 and nine months ended September 30, 1997....................................   6

          Condensed Consolidated Statements of Cash Flows --- nine months ended
          September 30, 1997 and 1996...................................................................   7

          Notes to Condensed Consolidated Financial Statements..........................................   9


Item 2.   Management's Discussion and Analysis of Financial Condition and Results
          of Operations.................................................................................  15


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.............................................................................  22

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


Signatures..............................................................................................  24
</TABLE>


                                       2
<PAGE>
PART I.   FINANCIAL INFORMATION

ITEM I.   FINANCIAL STATEMENTS


                           ORION NETWORK SYSTEMS, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                      SEPTEMBER 30,         DECEMBER 31,
                                                                           1997                 1996
                                                                      ------------          -----------
                                                                      (Unaudited)
ASSETS

<S>                                                                <C>                   <C>             
Current assets:
   Cash and cash equivalents                                       $      82,811,224     $     42,187,807

   Restricted assets                                                      50,064,014                   --

   Accounts receivable                                                    10,616,434            6,473,316

   Prepaid expenses and other current assets                               8,075,496            3,583,403
                                                                           ---------            ---------
Total current assets                                                     151,567,168           52,244,526

Restricted and segregated assets, including accrued interest
   of approximately $2.6 million                                         309,733,601                   --
   

Property and equipment at cost:
   Land                                                                       73,911               73,911

   Telecommunications equipment                                           39,640,596           25,342,528

   Furniture and computer equipment                                        7,662,047            4,849,711

   Satellite and related equipment                                       322,316,778          321,247,346
                                                                         -----------          -----------
                                                                         369,693,332          351,513,496

     Less: accumulated depreciation                                      (66,041,278)         (68,224,957)

   Satellite construction in progress, including capitalized
     interest of $4.5 million                                             85,161,019            4,560,844
                                                                          ----------            ---------

   Net property and equipment                                            388,813,073          287,849,383

Deferred financing costs, net                                             22,958,747           12,918,233

Goodwill and other assets, net                                            28,370,849            5,252,302
                                                                          ----------            ---------

TOTAL ASSETS                                                            $901,443,438         $358,264,444
                                                                        ============         ============
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

                                       3
<PAGE>
                           ORION NETWORK SYSTEMS, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (CONTINUED)
<TABLE>
<CAPTION>


                                                                                       SEPTEMBER 30,         DECEMBER 31,
                                                                                           1997                   1996
                                                                                       -------------         -------------
                                                                                       (Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT

<S>                                                                                  <C>                   <C>             
Current liabilities:
   Accounts payable                                                                  $       3,014,835     $      6,411,028
   Accrued liabilities                                                                      11,029,550            7,653,208
   Other current liabilities                                                                 7,889,160            5,406,072
   Interest payable                                                                         11,314,851            8,583,882
   Current portion of long-term debt                                                         9,161,559           34,975,060
                                                                                             ---------           ----------
     Total current liabilities                                                              42,409,955           63,029,250

Long-term debt                                                                             790,561,141          218,236,839
Other liabilities                                                                           21,849,605           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; 13,845 and
     13,871 shares issued and outstanding, plus accrued dividends                           16,897,297           16,097,880
   Series B 8%  Cumulative  Redeemable  Convertible  Preferred  Stock,  $.01 par
     value, 5,000 shares authorized; 4,295 and 4,298
     shares issued and outstanding, plus accrued dividends                                   5,058,832            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 and accretion                    95,911,432                   --

Stockholders' deficit:
   Common stock, $.01 par value, 40,000,000 shares authorized;
      11,406,162 and 10,985,150 shares outstanding                                             116,755              112,447
   Capital in excess of par value                                                          101,473,379           86,932,391
   Treasury stock, 269,274 and 259,515 shares                                                  (91,490)                  --
   Foreign currency translation                                                               (742,614)                  --
   Accumulated deficit                                                                    (172,000,854)         (87,481,206)
                                                                                          ------------          ----------- 
     Total stockholders' deficit                                                           (71,244,824)            (436,368)
                                                                                           -----------             -------- 

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                          $     901,443,438    $     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                  NINE MONTHS ENDED
                                                                        SEPTEMBER 30,                        SEPTEMBER 30,
                                                             ---------------------------------    ---------------------------------
                                                                   1997              1996              1997              1996
                                                                   ----              ----              ----              ----
                                                                (Unaudited)       (Unaudited)       (Unaudited)       (Unaudited)
<S>                                                          <C>                 <C>             <C>               <C>            
REVENUE                                                      $    17,618,704     $  12,246,599   $  54,538,878     $    30,015,517

OPERATING EXPENSES:
   Direct                                                          4,259,824         1,800,065      12,991,843           4,285,834
   Sales and marketing                                             4,819,732         2,753,409      13,381,240           7,792,666
   Engineering and technical services                              2,691,888         2,143,303       8,094,979           6,333,525
   General and administrative                                      4,990,995         3,871,365      14,750,878          11,469,235
   Depreciation and amortization                                  12,126,705         8,829,170      35,823,029          26,402,947
                                                                  ----------         ---------      ----------          ----------
     Total operating expenses                                     28,889,144        19,397,312      85,041,969          56,284,207
                                                                  ----------        ----------      ----------          ----------

LOSS FROM OPERATIONS                                             (11,270,440)       (7,150,713)    (30,503,091)        (26,268,690)

OTHER EXPENSE (INCOME):
   Interest income                                                (6,123,441)         (530,651)    (18,253,925)         (1,841,868)
   Interest expense                                               22,330,637         6,398,747      62,290,316          20,228,519
   Other                                                              32,064           (33,868)        605,295             (48,356)
                                                                  ----------        ----------       ----------         ----------
     Total other expense (income)                                 16,239,260         5,834,228      44,641,686          18,338,295
                                                                  ----------        ----------       ----------         ----------
Loss before extraordinary loss on extinguishment of debt,
   minority interest and preacquisition loss of acquired 
   subsidiary                                                    (27,509,700)      (12,984,941)    (75,144,777)        (44,606,985)

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                         --         7,188,636      12,042,978         24,799,698

Preacquisition loss of acquired subsidiary                                --              --           626,246                --
                                                                   ----------        ----------       ----------        ---------- 
NET LOSS                                                         (27,509,700)       (5,796,305)    (78,238,773)        (19,807,287)

Preferred stock dividend and accretion, net of forfeitures         2,308,501           265,873       6,280,875           1,006,285
                                                                  ----------        ----------       ----------         ----------
Net loss attributable to common stockholders                   $ (29,818,201)    $  (6,062,178)  $ (84,519,648)      $ (20,813,572)
                                                               =============     =============     =============      =============

Net loss per common share                                      $       (2.63)    $       (0.55)  $       (7.53)      $       (1.90)
                                                               =============     =============    =============       =============

Weighted average common shares outstanding                        11,335,347        10,964,945      11,221,618          10,943,287
                                                               =============     =============    =============       =============
See Notes to Condensed Consolidated Financial Statements.
</TABLE>

                                       5
<PAGE>

                           ORION NETWORK SYSTEMS, INC.
      CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
                                               COMMON STOCK            
                                          ----------------------         CAPITAL IN 
                                            NUMBER                      EXCESS OF PAR 
                                          OF SHARES         AMOUNT         VALUE 
                                          ---------         ------      ---------------
<S>                                       <C>              <C>           <C>           
Balance at December 31, 1995              11,115,965       $ 111,160     $ 85,485,613  
   Conversion of preferred stock                                                       
      to common stock                         91,071             911          804,034  
   Issuance of stock warrants                     --              --          300,000  
   Exercise of stock options and
     warrants                                 37,629             376          342,744  
   Preferred stock dividend, net of
     forfeitures                                  --              --               --  
   Net loss for 1996                              --              --               --  
                                          ----------         -------       ----------
Balance at December 31, 1996              11,244,665         112,447       86,932,391  
   Issuance of common stock                   11,286             113          142,317  
   Conversion of preferred stock
      to common stock                          3,350              34           28,966  
   Issuance of common stock for
      the purchase of APSC                    85,715             857        1,199,143  
   Issuance of common stock for
     interest payments                       205,229           2,052        2,622,947  
   Issuance of warrants relating to
     Senior Notes and Senior                     
     Discount Notes, net                          --              --        9,223,674  
   Exercise of stock options and
     warrants                                105,746           1,057        1,167,117  
   Employee Stock Purchase Plan               19,445             195          156,824  
   Preferred stock dividend and                                   --              --
     accretion, net of forfeitures                --                                   
    Foreign currency translation                  --              --               --  
    Purchase of treasury stock                    --              --               --  
    Net loss for the nine months                  
     ended September 30, 1997                     --              --               -- 
                                           ----------         -------       ---------- 
Balance at September 30, 1997 
    (unaudited)                            11,675,436 (1)   $ 116,755    $ 101,473,379  
                                           =============    =========    =============  
</TABLE>
<TABLE>
<CAPTION>
                                                                         FOREIGN            TOTAL
                                              ACCUMULATED     TREASURY    CURRENCY       STOCKHOLDERS'
                                                DEFICIT         STOCK    TRANSLATION    EQUITY(DEFICIT)
                                              -----------     ---------  -----------    ---------------
<S>                                        <C>               <C>         <C>             <C>          
Balance at December 31, 1995               $ (58,916,131)          $0         $   0      $  26,680,642
   Conversion of preferred stock
      to common stock                                 --           --            --            804,945
   Issuance of stock warrants                         --           --            --            300,000
   Exercise of stock options and
     warrants                                         --           --            --            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                 (87,481,206)           0             0           (436,368)
   Issuance of common stock                           --           --            --            142,430
   Conversion of preferred stock
      to common stock                                 --           --            --             29,000
   Issuance of common stock for
      the purchase of APSC                            --           --            --          1,200,000
   Issuance of common stock for
     interest payments                                --           --            --          2,624,999
   Issuance of warrants relating to
     Senior Notes and Senior             
     Discount Notes, net                              --           --            --          9,223,674
   Exercise of stock options and
     warrants                                         --           --            --          1,168,174
   Employee Stock Purchase Plan                       --           --            --            157,019
   Preferred stock dividend and          
     accretion, net of forfeitures            (6,280,875)          --            --         (6,280,875)
    Foreign currency translation                      --           --      (742,614)          (742,614)
    Purchase of treasury stock                        --      (91,490)           --            (91,490)
    Net loss for the nine months         
     ended September 30, 1997                (78,238,773)          --            --        (78,238,773)
                                             -----------     ---------    ---------        ----------- 
Balance at September 30, 1997 
     (unaudited)                           $(172,000,854)    $(91,490)   $ (742,614)    $  (71,244,824)
                                           =============     ========    ==========     ============== 
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

----------------
(1) Includes 269,274 treasury shares of which 259,515 are carried at no cost.


                                       6
<PAGE>
                           ORION NETWORK SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                NINE MONTHS ENDED
                                                                                                   SEPTEMBER 30,
                                                                                -------------------------------------------------
                                                                                          1997                   1996
                                                                                          ----                   ----
OPERATING ACTIVITIES                                                                  (Unaudited)            (Unaudited)
<S>                                                                                <C>                    <C>            
Net loss                                                                           $  (78,238,773)        $ (19,807,287)
Adjustments to reconcile net loss to net cash used in operating activities:
   Extraordinary loss on extinguishment of debt                                        15,763,220                    --
   Amortization and depreciation                                                       35,823,029            26,402,947
   Amortization of deferred financing costs                                             2,381,556             1,597,941
   Provision for bad debts                                                                796,618               524,999
   Satellite incentives and accrued interest                                            2,008,286             1,747,334
   Accretion of interest on Senior Discount Notes                                      22,116,416                    --
   Accrued interest on restricted funds                                                (2,615,846)                   --
   Accrued interest on Debentures                                                       3,500,000                    --
   Limited Partners' and minority interest in Orion Atlantic and other
     consolidated entities                                                            (12,042,978)          (24,799,698)  
   Gain on sale of assets                                                                      --               (41,054)
Changes in operating assets and liabilities:
   Accounts receivable                                                                 (1,532,969)           (1,143,969)
   Prepaid expenses and other current assets                                           (3,506,075)           (2,443,453)
   Other assets                                                                        (2,742,643)              427,741
   Accounts payable and accrued liabilities                                            (3,224,095)           (5,818,070)
   Other current liabilities                                                            1,888,731             3,279,274
   Interest payable                                                                     1,848,615            (4,876,714)
                                                                                        ---------            ---------- 
Net cash used in operating activities                                                 (17,776,908)          (24,950,009)

INVESTING ACTIVITIES
Capital expenditures                                                                  (11,924,223)          (10,266,012)
Restricted assets                                                                    (357,181,769)                   --
Satellite construction costs, including capitalized interest                          (80,600,175)                   --
Purchase of Teleport Europe, net of cash acquired                                      (8,374,845)                   --
Deferred revenue                                                                       12,250,000                    --
FCC license costs                                                                        (182,708)             (117,600)
                                                                                         --------              -------- 
Net cash used in investing activities                                                (446,013,720)          (10,383,612)

FINANCING ACTIVITIES
Limited Partners' capital contributions                                                        --            30,135,000
Debt and equity financing costs                                                       (25,959,140)                   --
Proceeds from issuance of common stock and subscriptions,
   net of issuance costs                                                                1,325,160               219,380
Treasury stock purchase                                                                   (91,490)                   --
Proceeds from issuance of debt                                                        770,397,000                    --
Repayment of senior note payable to banks and notes payable                          (215,580,900)          (25,096,436)
Termination of interest cap agreements                                                 (5,287,827)                   --
Payment of satellite incentive obligations                                            (16,866,717)                   --
Other                                                                                  (3,522,041)           11,620,711
                                                                                       ----------            ----------
Net cash provided by financing activities                                             504,414,045            16,878,655

Net increase (decrease) in cash and cash equivalents                                   40,623,417           (18,454,966)
Cash and cash equivalents at beginning of period                                       42,187,807            55,111,585
                                                                                       ----------            ----------
Cash and cash equivalents at end of period                                         $   82,811,224       $    36,656,619
                                                                                   ==============       ===============
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                       7
<PAGE>
                           ORION NETWORK SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (CONTINUED)


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
                                                                                               NINE MONTHS ENDED
                                                                                   ------------------------------------------
                                                                                                 SEPTEMBER 30,
                                                                                           1997                  1996
                                                                                           ----                  ----
                                                                                       (Unaudited)           (Unaudited)

<S>                                                                                  <C>                   <C>          
Transactions not providing or requiring cash:

   Property and equipment financed by capital leases                                 $      18,600         $          --
                                                                                     =============         =============  

   Accrued preferred stock dividend and accretion, net of forfeitures                $   6,280,875         $   1,108,232
                                                                                     =============         =============

   Conversion of preferred stock to common stock                                     $      29,000         $     804,945
                                                                                     =============         =============

   Issuance of common stock for employees retirement (401-K)                         $     142,430         $          --
                                                                                     =============         =============
                                                                                           
   Issuance of common stock and warrants                                             $  13,048,673         $          --
                                                                                     =============         =============

   Issuance of preferred stock                                                       $  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)                  --
 
     Other, net                                                                            288,172                   --
 
   Net cash used to acquire Teleport Europe                                          $  (8,374,845)       $          --
                                                                                     =============        =============

Interest paid during the period, net of amounts capitalized                          $  33,709,344        $  11,436,501
                                                                                     =============        =============
</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 fair presentation have
been included.  Operating  results for the three and nine months ended September
30, 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  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 (and amendment thereto on Form 10-K/A).

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:

<TABLE>
<CAPTION>
                                                        Jurisdiction of organization or
                    Name                                         Incorporation
                    ----                                         -------------
                   
<S>                                                   <C>
Asia Pacific Space and Communications, Ltd.                        Delaware

International Private Satellite Partners, L.P.                     Delaware

Orion Network Systems-Asia Pacific, Inc.
(formerly known as Orion Asia Pacific Corporation)                 Delaware

Orion Network Systems-Europe, Inc.
(formerly known as Orion Atlantic                                  Delaware
Europe, Inc.)

OrionNet Finance Corporation                                       Delaware

OrionNet, Inc.                                                     Delaware

Orion Network Services, Inc.
(formerly known as Orion Satellite Corporation)                    Delaware

Orion Network Systems-Europe GmbH
(formerly known as Teleport Europe GmbH)             Federal Republic of Germany
</TABLE>


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

                                        9
<PAGE>
                           ORION NETWORK SYSTEMS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A. BASIS OF PRESENTATION (CONTINUED)

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.

RECENT DEVELOPMENTS

PENDING ACQUISITION OF THE COMPANY BY LORAL

On October 7, 1997, Orion, Loral Space & Communications Ltd. ("Loral") and Loral
Satellite  Corporation,  a  wholly-owned  subsidiary  of Loral  ("Merger  Sub"),
entered into an Agreement and Plan of Merger (the "Merger Agreement"),  pursuant
to which Merger Sub will merge with and into the Company, with the Company being
the surviving  corporation  and thereby  becoming a  wholly-owned  subsidiary of
Loral (the "Loral Merger").

The Merger  Agreement  provides that (i) each share of Common  Stock,  excluding
treasury shares and shares owned by Loral or its subsidiaries, will be converted
into and  exchanged  for the  right to  receive  the  number  of fully  paid and
nonassessable shares of common stock, par value $.01 per share, of Loral ("Loral
Common Stock") equal to the Exchange Ratio (as described below), (ii) each share
of the Company's Series A 8% Cumulative  Redeemable  Convertible Preferred Stock
(the "Series A Preferred Stock"),  Series B 8% Cumulative Redeemable Convertible
Preferred  Stock (the "Series B Preferred  Stock" and together with the Series A
Preferred Stock, the "Senior Preferred Stock") and Series C Preferred Stock (the
Series C Preferred Stock and Senior Preferred Stock are hereinafter  referred to
as the "Senior  Preferred  Stock") will be converted  into and exchanged for the
right to  receive  the number of fully  paid and  nonassessable  shares of Loral
Common Stock equal to the Exchange  Ratio  multiplied by the number of shares of
Common  Stock  into  which  such  share  of  Preferred   Stock  was  convertible
immediately  prior  to the  Effective  Time  of the  Loral  Merger,  (iii)  each
outstanding  stock  option to  purchase  shares of Orion  Common  Stock  will be
converted  into an option to acquire the number of shares of Loral  Common Stock
equal to the Exchange  Ratio  multiplied by the number of shares of Common Stock
for which such  option was  exercisable,  and (iv) each  outstanding  warrant to
purchase  shares of Orion  Common  Stock  will be  converted  into a warrant  to
acquire  the  number  of  shares of Common  Stock  equal to the  Exchange  Ratio
multiplied  by the  number of  shares of  Company  Common  Stock for which  such
warrant was exercisable.

Pursuant to the terms of the Merger Agreement,  the Exchange Ratio is determined
as follows:

(i)     if the average of the  volume-weighted  average  trading prices of Loral
        Common Stock for the twenty consecutive trading days on which trading of
        Loral Common Stock occurs ending the tenth trading day immediately prior
        to the closing date for the Loral Merger (the "Determination  Price") is
        less than $24.458 but greater than  $16.305,  the Exchange  Ratio is the
        quotient obtained by dividing $17.50 by the Determination Price,

(ii)    if the  Determination  Price is equal to or greater  than  $24.458,  the
        Exchange Ratio is 0.71553 and

(iii)   if the  Determination  Price  is  equal  to or less  than  $16.305,  the
        Exchange Ratio is 1.07329.

                                       10
<PAGE>
                           ORION NETWORK SYSTEMS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A. BASIS OF PRESENTATION (CONTINUED)

The Loral  Merger is subject to a number of  conditions,  including  approval by
Orion's  stockholders,  approval by the Federal  Communications  Commission  and
other regulatory approvals.  Although not a condition of the Loral Merger, Orion
intends to seek an  Internal  Revenue  Service  ruling as to  eligibility  for a
tax-free exchange.

In connection with the Merger Agreement, certain principal stockholders of Orion
and  members of  Orion's  management  have  agreed to vote in favor of the Loral
Merger and have granted to the Loral the right to purchase  their  securities in
Orion  for a  price  equal  to the  Loral  Merger  consideration  under  certain
circumstances.  The Company  expects the Loral Merger to be  consummated  by the
first quarter of 1998.

The foregoing  descriptions  of the Merger  Agreement and Principal  Stockholder
Agreement  with Loral do not purport to be complete.  The Merger  Agreement  and
Principal  Stockholder  Agreement  have  been  filed  as  exhibits  2.1 and 2.2,
respectively, to Company's Current Report on Form 8-K dated October 9, 1997, and
are incorporated herein by reference.

OTHER 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 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 Asia Pacific Space and Communications, Ltd.
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 an Orion  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

                                       11
<PAGE>
                           ORION NETWORK SYSTEMS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A. BASIS OF PRESENTATION (CONTINUED)

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 "Orion  Merger").  On January 31, 1997,  the effective  time of the
Orion 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 Orion Merger.  Following the Orion 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 Orion  Merger  are
describe in greater  detail  under the caption  "The  Merger,  the  Exchange and
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
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, with the
first payment made on July 15, 1997. The Senior Discount Notes will not pay cash
interest  prior to July 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.

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.

                                       12

<PAGE>
                           ORION NETWORK SYSTEMS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A. BASIS OF PRESENTATION (CONTINUED)

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 in 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, whose name
was subsequently changed to Orion Network  Systems-Europe GmbH ("Orion 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 Orion Europe for the nine months ended September 30, 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 pre-acquisition loss of Orion Europe
of $0.6 million has been deducted from the consolidated  statement of operations
for the nine months ended September 30, 1997.

NOTE B. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                        SEPTEMBER 30,          DECEMBER 31,
                                                            1997                  1996
                                                            ----                  ----
<S>                                                 <C>                     <C>           
Senior notes ($445.0 million, net of 
    unamortized discount of $5.0 million)           $     440,023,150       $           --
Senior discount notes ($265.4 million, plus
   interest accretion of approximately 
   $22.1 million, net of unamortized
   discount of $4.0 million)                              283,491,546                   --
Convertible debentures                                     60,000,000                   --
Senior notes payable - banks                                      --           207,714,842
Notes payable - TT&C Facility                               6,267,244            6,956,624
Satellite incentive obligations                             7,515,315           22,373,746
Notes payable - STET                                              --             5,550,000
Notes payable - limited partners                                  --             8,050,000
Other                                                       2,425,445            2,566,687
                                                            ---------            ---------
   Total long-term debt                                   799,722,700          253,211,899
Less: current portion                                       9,161,559           34,975,060
                                                            ---------           ----------
   Long-term debt less current portion              $     790,561,141      $   218,236,839
                                                    =================      ===============
  
</TABLE>

                                       13
<PAGE>
                           ORION NETWORK SYSTEMS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE C. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

During the nine months ended September 30, 1997, certain preferred  stockholders
exercised  their right to convert 29 shares of preferred stock into 3,350 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 on 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 Untied  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.  On August 12, 1997,
the  parties  entered  into  a  formal  settlement  agreement.  As  part  of the
settlement,  the parties  released all claims by either side relating in any way
to the patent  and/or the  pending  litigation  and  arbitration.  In  addition,
Skydata granted 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.

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.

                                       14
<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  (whose name has been
changed to Orion Network  Services,  Inc.) 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, 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 described in Note
A  to  the  Condensed  Consolidated   Financial  Statements).   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 Note A to the
Condensed   Consolidated   Financial  Statements  for  a  discussion  of  recent
developments.

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  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).

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 five 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.


                                       15
<PAGE>
                           ORION NETWORK SYSTEMS, INC.

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

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.

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
promotion 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 continue 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  as  well  as  the
amortization  of goodwill 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 have
increased  substantially  as a result of the  financings  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 and Nine Month Periods Ended  September 30, 1997 Compared to the Three and
Nine Month Periods Ended September 30, 1996.

Consolidation  of  Teleport  Europe  GmbH.  On March 26,  1997,  Orion  acquired
German-based  Teleport  Europe GmbH (a  communications  company  specializing in
private  satellite  networks  for  voice  and  data  services),  whose  name was
subsequently changed to Orion Network  Systems-Europe GmbH ("Orion Europe"). The
Company has  consolidated  the  operations  of Orion  Europe for the nine months
ended September 30, 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 Orion Europe of $0.6 million has been  deducted from the
consolidated  statement of  operations  for the nine months ended  September 30,
1997.

                                       16
<PAGE>

                           ORION NETWORK SYSTEMS, INC.

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

Revenue  and  bookings.  Total  revenue  for the  three  and nine  months  ended
September  30,  1997 was $17.6 and $54.5  million,  compared  to $12.2 and $30.0
million for the same periods in 1996, an increase of 44% and 82%,  respectively.
Revenues  from  private  communications  network  services  were  $9.1 and $26.5
million for the third  quarter  and year to date and $4.5 and $11.4  million for
the  comparable  periods  in 1996,  as the number of  customer  sites in service
increased  approximately 109%. Revenues from video  communications  services and
transponder  capacity  leasing were $8.4 and $23.6 million for the third quarter
and year to date compared to $7.5 and $18.2 million for the  comparable  periods
in 1996.  Revenues for the nine months ended  September 30, 1997,  included $4.4
million  of  equipment  sales  of  which  $3.8  million  was  associated  with a
sales-type lease to an existing customer.

At  September  30, 1997,  Orion had a customer  contract  backlog  (representing
future  revenues under  contract) of  approximately  $254.1 million  compared to
$134.3 million at September 30, 1996, an increase of 89%.  Revenue from customer
contract backlog is typically earned over contract terms of three to five years.

OPERATING EXPENSES

Direct  expenses.  Direct expenses for the three and nine months ended September
30,  1997 were $4.3  million and $13.0  million as compared to $1.8  million and
$4.3 million for the same periods in 1996.  The increase of $2.5 million or 139%
for  the  three  months  ended  September  30,  1997  resulted   primarily  from
incremental  Internet  support costs and  additional  leased space segment costs
outside the Orion 1 footprint,  principally for the acquisition of Orion Europe.
The increase of $8.7 million,  or approximately  202%, for the nine months ended
September  30,  1997,  were  primarily  attributable  to the  cost of  equipment
associated  with a sales-type  equipment lease to an existing  customer,  leased
space segment,  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 $4.8 million and
$13.4 million  respectively,  for the three and nine months ended  September 30,
1997, as compared to $2.8 million and $7.8 million for the same periods in 1996.
The  increase of $2.0  million or 71% and $5.6  million or 72% for the three and
nine months ended September 30, 1997, are related to compensation  costs for the
Company's  significant expansion of its sales force, as well as additional costs
for  the  expanded  marketing  program  during  1997.  This  expansion  includes
additional commissions, consulting and advertising associated with the growth in
private  communications network services business. The Company expects sales and
marketing expenses to continue to rise through the remainder of 1997.

Engineering and technical services expenses.  Engineering and technical services
expenses  were $2.7 million and $8.1 million for the three and nine months ended
September  30,  1997,  as  compared  to $2.1  million  and $6.3  million for the
comparable periods in 1996. The increase of $0.6 million or 29% and $1.8 million
or 29%,  respectively  for the three and nine months ended September 30, 1997 is
related to additional  engineering and technical staff associated with the Orion
Europe acquisition.

General and administrative  expenses.  General and administrative  expenses were
$5.0 million and $14.8 million for the three and nine months ended September 30,
1997,  compared to $3.9 million and $11.5  million for the same periods in 1996.
The  increase  of $1.1 or 28% and $3.3  million  or 29% for the  three  and nine
months ended September 30, 1997, was primarily due to additional  administrative
staff associated with the Orion Europe  acquisition,  outside services and other
expenses.

                                       17
<PAGE>
                           ORION NETWORK SYSTEMS, INC.

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

Depreciation and  amortization.  Depreciation and amortization  expenses for the
three and nine months  ended  September  30,  1997 were $12.1  million and $35.8
million,  an  increase  of  $3.3  million  or  38%,  and  $9.4  million  or  36%
respectively,  over the same periods in 1996. The increase is primarily a result
of  depreciation  on  the  step  up in  basis  on the  Orion  1  satellite,  the
amortization  of excess  cost over fair  value of net assets  acquired  from the
acquisition of the Limited Partner's interest in Orion Atlantic and depreciation
of  ground   equipment  to  service  the   expansion  of  the  private   network
communication services business.

Interest.  Interest  income was $6.1 million and $18.3 million for the three and
nine months ended September 30, 1997, compared to $0.5 million and $1.8 million,
an increase of $5.6 million and $16.5 million for the same periods in 1996.  The
increase in interest  income during the first nine 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 $4.5
million in the nine months ended September 30, 1997, was $22.3 million and $62.3
million for the three and nine months ended September 30, 1997, and $6.4 million
and $20.2 million for the  comparable  periods in 1996. The increase in interest
expense of $42.1  million in the first nine  months of 1997 is  attributable  to
additional interest resulting from the completion of the Company's financings in
January 1997.

Extraordinary  loss  on  extinguishment  of  debt.  The  extraordinary  loss  on
extinguishment  of debt of $15.8  million  in 1997 is the  result  of  expensing
unamortized  deferred  financing  costs of the Orion 1 credit facility which was
repaid with the proceeds from the Company's recent Bond Offering and termination
of an interest rate cap agreement.

Net loss.  The Company  incurred net losses of $27.5 million and $78.2  million,
$5.8 million and $19.8 million for the three and nine months ended September 30,
1997 and 1996,  respectively,  after  deduction  of the  limited  partners'  and
minority  interests'  share in the  Company's  losses  of $0  million  and $12.0
million,  $7.2 million and $24.8 million,  respectively,  and elimination of the
preacquisition  loss of  Teleport  Europe of $.6 million  from the  consolidated
statement of operations for the nine months ended September 30, 1997.

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  repaid  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

                                       18
<PAGE>
                           ORION NETWORK SYSTEMS, INC.

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

owing to STET, a former limited partner of Orion  Atlantic.  As of September 30,
1997,  the Company had cash and cash  equivalents  of $83 million and restricted
and segregated assets $360 million,  including $244 million which was segregated
by the Company to be used to make payments for additional satellites and certain
related costs.  The  restricted  and segregated  cash included $113 million plus
accrued  interest of $2.6 million  placed in a pledged  account (to pre-fund the
first six interest payments on the senior notes). Additionally, included in cash
and cash  equivalents,  is $22.5  million  held in escrow and  subject to refund
pending the successful launch and commencement of commercial  operation of Orion
3 as required by the DACOM agreement.

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 in 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.

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  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 price of the Common

                                       19
<PAGE>
                           ORION NETWORK SYSTEMS, INC.

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

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 September 30, 1997, the Company had
outstanding  indebtedness of approximately  $6.3 million under a seven year term
loan  provided by General  Electric  Capital  Corporation  ("GECC") for the TT&C
facility and various assets  relating  thereto.  Additionally,  at September 30,
1997 the Company had  obligations of  approximately  $7.5 million payable to the
manufacturer of Orion 1 through 2007.

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, 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 $540 million. In addition to the $76 million incurred
through  the  third  quarter  of  1997,  Orion  will  need to make  payments  of
approximately $17 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 $109.2  million  at  September  30,  1997.  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.

                                       20
<PAGE>
                           ORION NETWORK SYSTEMS, INC.

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

The balance of the Company's funding  requirements are dependent upon its growth
and cash flow from  operations.  The Company cannot predict whether its existing
resources  and cash flows will be adequate  to cover its future  cash needs.  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, 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 on 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 Untied  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.  On August 12, 1997,
the  parties  entered  into  a  formal  settlement  agreement.  As  part  of the
settlement,  the parties  released all claims by either side relating in any way
to the patent  and/or the  pending  litigation  and  arbitration.  In  addition,
Skydata granted 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.

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

          None

ITEM 5. OTHER INFORMATION

          None.

                                       22
<PAGE>
                           ORION NETWORK SYSTEMS, INC.

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 nine months ended September 30, 1997.

Current Report on Form 8-K dated January 31, 1997, reporting consummation of the
Exchange.   Current  Report  on  Form  8-K  dated  March  26,  1997,   reporting
consummation of the acquisition of Teleport  Europe.  Current Report on Form 8-K
dated October 9, 1997, reporting execution of the Merger Agreement with Loral.



                                       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: November 12, 1997                /s/  W. Neil Bauer
                                       -----------------------------------------
                                       W. Neil Bauer, President
                                       Chief Executive Officer and Director
                                       (Principal Executive Officer)



Date: November 12, 1997                /s/ David J. Frear
                                       -----------------------------------------
                                       David J. Frear, Senior Vice President
                                       Chief Financial Officer and Treasurer
                                       (Principal Financial Officer and
                                       Principal Accounting Officer)






                                       24