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 JUNE 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 June 30, 1997
-------------------------------------      ----------------------------------
    Common Stock, $.01 par value                   11,175,076 shares



<PAGE>


                                     INDEX


                          ORION NETWORK SYSTEMS, INC.

<TABLE>
<CAPTION>
                                                                                                          Page
                                                                                                          ----

PART I. FINANCIAL INFORMATION

<S>                                                                                                        <C>
Item 1.  Financial Statements (Unaudited)

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

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

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

         Condensed Consolidated Statements of Cash Flows --- six months ended
         June 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..................................................................................  14


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings..............................................................................  20

Item 2.  Changes in Securities..........................................................................  20

Item 3.  Defaults upon Senior Securities................................................................  20

Item 4.  Submission of  Matters to a Vote of Security Holders...........................................  21

Item 5.  Other Information..............................................................................  22

Item 6.  Exhibits and Reports on Form 8-K...............................................................  22


Signatures..............................................................................................  23
</TABLE>

                                       2

<PAGE>
PART I.  FINANCIAL INFORMATION

ITEM I.  FINANCIAL STATEMENTS

                           ORION NETWORK SYSTEMS, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

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

<S>                                                                          <C>              <C>
Current assets:
         Cash and cash equivalents                                           $  74,949,499    $  42,187,807

         Restricted cash, including accrued interest of
          approximately $3.9 million                                            47,837,500               --

         Accounts receivable                                                    10,034,827        6,473,316

         Prepaid expenses and other current assets                               8,967,778        3,583,403
                                                                             -------------    --------------
Total current assets                                                           141,789,604       52,244,526

Restricted and segregated cash                                                 357,496,908               --

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

         Telecommunications equipment                                           37,392,719       25,342,528

         Furniture and computer equipment                                        7,141,554        4,849,711

         Satellite and related equipment                                       322,163,571      321,247,346
                                                                             -------------    --------------
                                                                               366,771,755      351,513,496

                  Less: accumulated depreciation                               (54,728,373)     (68,224,957)

         Satellite construction in progress                                     54,841,426        4,560,844
                                                                             -------------    --------------
         Net property and equipment                                            366,884,808      287,849,383

Deferred financing costs, net                                                   23,681,080       12,918,233

Goodwill and other assets, net                                                  29,065,170        5,252,302
                                                                             -------------    --------------
TOTAL ASSETS                                                                 $ 918,917,570    $ 358,264,444
                                                                             =============    ==============
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

                                       3

<PAGE>



                          ORION NETWORK SYSTEMS, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (CONTINUED)

<TABLE>
<CAPTION>
                                                                                   JUNE 30,        DECEMBER 31,
                                                                                     1997              1996
                                                                                 -------------    --------------
                                                                                  (Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S>                                                                              <C>              <C>          
Current liabilities:
         Accounts payable                                                        $   4,466,898    $   6,411,028
         Accrued liabilities                                                        10,502,103        7,653,208
         Other current liabilities                                                   7,121,326        5,406,072
         Interest payable                                                           20,862,822        8,583,882
         Current portion of long-term debt                                           9,132,048       34,975,060
                                                                                 -------------    --------------
                  Total current liabilities                                         52,085,197       63,029,250

Long-term debt                                                                     782,388,564      218,236,839
Other liabilities                                                                   12,644,704       46,348,291

Limited Partners' interest in Orion Atlantic                                                --       10,130,058
Minority interest in other consolidated entities                                        66,361           54,008

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      16,640,288       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              4,976,406        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             94,348,046               --

Stockholders' deficit:
         Common stock, $.01 par value, 40,000,000 shares authorized;
            11,175,076 and 10,985,150 shares outstanding                               114,443          112,447
         Capital in excess of par value                                             98,490,809       86,932,391
         Treasury stock, 269,274 and 259,515 shares                                    (91,490)              --
         Foreign currency translation                                                 (563,105)              --
         Accumulated deficit                                                      (142,182,653)     (87,481,206)
                                                                                 -------------    --------------
                  Total stockholders' deficit                                      (44,231,996)        (436,368)
                                                                                 -------------    --------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                      $ 918,917,570    $ 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                  SIX MONTHS ENDED
                                                                       JUNE 30,                       JUNE 30,
                                                         ---------------------------------  ---------------------------------
                                                                1997            1996           1997              1996
                                                            ------------    ------------    ------------    ------------
                                                             (Unaudited)     (Unaudited)    (Unaudited)      (Unaudited)
<S>                                                         <C>             <C>             <C>             <C>         
Revenue                                                     $ 16,687,105    $ 10,122,511    $ 36,920,174    $ 17,768,918

Operating expenses:
         Direct                                                3,339,999       1,402,138       8,732,019       2,485,769
         Sales and marketing                                   4,435,131       2,856,414       8,561,508       5,039,257
         Engineering and technical services                    2,745,521       2,085,312       5,403,091       4,190,222
         General and administrative                            4,951,979       4,088,126       9,759,883       7,597,870
         Depreciation and amortization                        12,129,745       8,653,165      23,696,324      17,573,777
                                                            ------------    ------------    ------------    ------------
                  Total operating expenses                    27,602,375      19,085,155      56,152,825      36,886,895
                                                            ------------    ------------    ------------    ------------

Loss from operations                                         (10,915,270)     (8,962,644)    (19,232,651)    (19,117,977)

Other expense (income):
         Interest income                                      (8,717,404)       (622,495)    (12,130,484)     (1,311,217)
         Interest expense                                     22,389,048       6,330,993      39,959,679      13,829,772
         Other                                                   159,214         (34,296)        573,231         (14,488)
                                                            ------------    ------------    ------------    ------------
                  Total other expense (income)                13,830,858       5,674,202      28,402,426      12,504,067
                                                            ------------    ------------    ------------    ------------

Loss before  extraordinary loss on extinguishment of
 debt, minority interest and preacquisition loss of
 acquired subsidiary                                         (24,746,128)    (14,636,846)    (47,635,077)    (31,622,044)

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                    739       7,877,201      12,042,978      17,611,062

Preacquisition loss of acquired subsidiary                            --              --         626,246              --
                                                            ------------    ------------    ------------    ------------

Net loss                                                     (24,745,389)     (6,759,645)    (50,729,073)    (14,010,982)

Preferred stock dividend and accretion, net of
forfeitures                                                    2,312,007         360,930       3,972,374         740,412
                                                            ------------    ------------    ------------    ------------

Net loss attributable to common stockholders                $(27,057,396)   $ (7,120,575)   $(54,701,447)   $(14,751,394)
                                                            ============    ============    ============    ============

Net loss per common share                                   $      (2.42)   $      (0.65)   $      (4.90)   $      (1.35)
                                                            ============    ============    ============    ============

Weighted average common shares outstanding                    11,169,950      10,951,784      11,164,754      10,932,458
                                                            ============    ============    ============    ============

See Notes to Condensed Consolidated Financial Statements

</TABLE>

                                       5

<PAGE>




                           ORION NETWORK SYSTEMS, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT


<TABLE>
<CAPTION>

                                           COMMON STOCK
                                     ---------------------------
                                                             CAPITAL IN                                 FOREIGN          TOTAL
                                        NUMBER               EXCESS OF     ACCUMULATED   TREASURY      CURRENCY      STOCKHOLDERS'
                                       OF SHARES     AMOUNT  PAR VALUE      DEFICIT      STOCK       TRANSLATION    EQUITY(DEFICIT)
                                     ------------  --------- ----------- -------------- ----------- ------------ ------------------

<S>                                  <C>           <C>       <C>         <C>            <C>          <C>          <C>           
Balance at December 31, 1995         11,115,965    $ 111,160 $85,485,613 $ (58,916,131) $        0   $        0   $   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)          0            0         (436,368)
 Issuance of common stock                11,286          113     142,317            --          --           --          142,430
 Conversion of preferred stock       
  to common stock                         1,176           12       9,988            --          --           --           10,000
 Issuance of common stock for        
  the 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                              101,508        1,014   1,124,708            --          --           --        1,125,722
 Preferred stock dividend and        
  accretion, net of forfeitures              --           --          --    (3,972,374)         --           --       (3,972,374)
 Foreign currency translation                --           --          --            --          --     (563,105)        (563,105)
 Purchase of treasury stock                  --           --          --            --     (91,490)          --          (91,490)
 Net loss for the six months         
  ended June 30, 1997                        --           --          --   (50,729,073)         --           --      (50,729,073)
                                     ------------  --------- ----------- -------------- ----------- ------------ ------------------
Balance at June 30, 1997 (unaudited) 11,444,350(1) $ 114,443 $98,490,809 $(142,182,653) $  (91,490)  $ (563,105)  $  (44,231,996)
                                     ============  ========= =========== ============== =========== ============ ==================
</TABLE>

See Notes to 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>
                                                                                                          SIX MONTHS ENDED
                                                                                                               JUNE 30,
                                                                                             ---------------------------------------
                                                                                                    1997                   1996
                                                                                               -------------          -------------
<S>                                                                                            <C>                    <C>
OPERATING ACTIVITIES                                                                             (Unaudited)          (Unaudited)
Net loss                                                                                       $ (50,729,073)         $ (14,010,982)
Adjustments to reconcile net loss to net cash used in operating
  activities:
         Extraordinary loss on extinguishment of debt                                             15,763,220                     --
         Amortization and depreciation                                                            23,696,324             17,573,777
         Amortization of deferred financing costs                                                  1,177,549              1,065,294
         Provision for bad debts                                                                     500,000                449,999
         Satellite incentives and accrued interest                                                 1,315,433              1,144,508
         Capitalized interest                                                                     (2,454,183)                    --
         Accretion of interest on Senior Discount Notes                                           13,822,760                     --
         Accrued interest on restricted funds                                                     (3,956,969)                    --
         Accrued interest on Debentures                                                            2,187,500                     --
         Limited Partners' and minority interest in Orion Atlantic and
           other  consolidated entities                                                          (12,042,977)           (17,611,039)
         Gain on sale of assets                                                                           --                (27,369)
Changes in operating assets and liabilities:
         Accounts receivable                                                                        (654,744)              (389,227)
         Prepaid expenses and other current assets                                                (4,398,357)            (3,068,598)
         Other assets                                                                             (2,674,879)               158,903
         Accounts payable and accrued liabilities                                                 (2,299,481)            (4,929,754)
         Other current liabilities                                                                 1,120,897              3,309,244
         Interest payable                                                                         12,271,586             (1,176,745)
                                                                                               -------------          -------------
Net cash used in operating activities                                                             (7,355,394)           (17,511,989)

INVESTING ACTIVITIES
Capital expenditures                                                                              (8,954,510)            (7,625,166)
Restricted cash                                                                                 (401,377,439)                    --
Satellite construction costs                                                                     (47,826,399)                    --
Purchase of Teleport Europe, net of cash acquired                                                 (8,374,845)                    --
FCC license costs                                                                                   (179,129)               (26,325)
                                                                                               -------------          -------------
Net cash used in investing activities                                                           (466,712,322)            (7,651,491)

FINANCING ACTIVITIES
Limited Partners' capital contributions                                                                   --             18,044,446
Expenditures on debt and equity financing costs                                                  (26,065,789)                    --
Proceeds from issuance of common stock and subscriptions,
         net of issuance costs                                                                     1,125,722                148,886
Treasury stock                                                                                       (91,490)                    --
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 agreements                                                            (5,287,827)                    --
Payment of satellite incentive obligations                                                       (15,697,271)                    --
Repayment of notes payable                                                                        (7,624,384)            (2,081,754)
Other                                                                                             (2,211,711)             7,779,247
                                                                                               -------------          -------------
Net cash provided by financing activities                                                        506,829,408             13,096,338

Net increase (decrease) in cash and cash equivalents                                              32,761,692            (12,067,142)
Cash and cash equivalents at beginning of period                                                  42,187,807             55,111,585
                                                                                               -------------          -------------
Cash and cash equivalents at end of period                                                      $ 74,949,499           $ 43,044,443
                                                                                               =============          =============
</TABLE>

                                       7

<PAGE>


                           ORION NETWORK SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (CONTINUED)


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>

                                                                                                SIX MONTHS ENDED
                                                                                                    JUNE 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                $  3,972,374           $   740,412
                                                                                  ====================    ====================
    Conversion of preferred stock to common stock                                     $     10,000           $   745,667
                                                                                  ====================    ====================
    Issuance of common stock for employees retirement (401K)                          $    142,430           $        --
                                                                                  ====================    ====================
    Issuance of common stock and warrants                                             $ 10,282,262           $        --
                                                                                  ====================    ====================
    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)                   --

         Goodwill                                                                         (100,512)                   --

         Other assets                                                                      (88,928)                   --

         Non-current liabilities                                                           477,612                    --
                                                                                  --------------------    --------------------
    Net cash used to acquire Teleport Europe                                          $(8,374,845)           $        --
                                                                                  ====================    ====================

Interest paid during the period, net of amounts capitalized                           $10,775,797            $ 2,479,835
                                                                                  ====================    ====================
</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 six months  ended June 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).

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  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.


                                       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  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 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 six
months  ended June 30,  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  six  months  ended  June  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
Teleport  Europe  of $0.6  million  has  been  deducted  from  the  consolidated
statement of operations for the six months ended June 30, 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:
<TABLE>
<S>                                                         <C>
                              Name                           Jurisdiction of organization or Incorporation
           -------------------------------------------      ----------------------------------------------
           Asia Pacific Space and
           Communications, Ltd.                                                 Delaware

           International Private
           Satellite Partners, L.P.                                             Delaware

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

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

</TABLE>

                                       11

<PAGE>



                          ORION NETWORK SYSTEMS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A. BASIS OF PRESENTATION (CONTINUED)

BUSINESS AND OWNERSHIP (CONTINUED)

<TABLE>
<CAPTION>
                        Name                               Jurisdiction of organization or Incorporation
          ---------------------------------             ---------------------------------------------------
<S>                                                    <C>
          OrionNet Finance Corporation                                       Delaware

          OrionNet, Inc.                                                     Delaware

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

          Teleport Europe GmbH                                      Federal Republic of Germany
</TABLE>

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:

                                                        JUNE 30,    DECEMBER 31,
                                                     -------------  -----------
                                                        1997           1996

Senior notes ($445.0 million, net of unamortized
 discount of $5.2 million)                           $ 439,825,447  $        --
Senior discount notes ($265.4 million, plus interest
 accretion of approximately $13.8 million, net of
 unamortized discount of $4.4 million)                 274,812,039            --
Convertible debentures                                  59,750,000            --
Senior notes payable - banks                                    --   207,714,842
Notes payable - TT&C Facility                            6,504,785     6,956,624
Satellite incentive obligations                          7,991,908    22,373,746
Notes payable - STET                                            --     5,550,000
Notes payable - limited partners                                --     8,050,000
Other                                                    2,636,433     2,566,687
                                                     -------------   -----------
         Total long-term debt                          791,520,612   253,211,899
Less: current portion                                    9,132,048    34,975,060
                                                     -------------   -----------
         Long-term debt less current portion         $ 782,388,564  $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 six months  ended  June 30,  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 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 of the pending  litigation  and  arbitration.  On August 12,
1997, the parties entered into a formal  settlement.  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.


                                       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 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
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.


                                       14

<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 form Orion's private and public financings.  Interest costs have
increased  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 Orion 1 satellite.

RESULTS OF OPERATIONS

Three and Six Month  Periods  Ended June 30, 1997  Compared to the Three and Six
Month Periods Ended June 30, 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 six months
ended June 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 Teleport  Europe of $0.6 million has been  deducted from
the consolidated statement of operations for the six months ended June 30, 1997.

         Revenue and bookings.  Total revenue for the three and six months ended
June 30, 1997 was $16.7 and $36.9  million,  compared to $10.1 and $17.8 million
for the same  periods  in  1996,  an  increase  of 65% and  107%,  respectively.
Revenues  from  private  communications  network  services  were  $7.8 and $15.7
million for the second  quarter  and year to date and $4.0 and $6.9  million for
the  comparable  periods  in 1996,  as the number of  customer  sites in service
increased  approximately 148%. Revenues from video  communications  services and
transponder  capacity leasing were $8.7 and $16.9 million for the second quarter
and year to date compared to $6.1 and $10.6

                                       15

<PAGE>

                          ORION NETWORK SYSTEMS, INC.

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                   OPERATIONS

                                   (CONTINUED)

million for the  comparable  periods in 1996.  Revenues for the six months ended
June 30, 1997,  included  $4.3 million of equipment  sales of which $3.8 million
was associated with a sales type lease to an existing customer.

At June 30, 1997,  Orion had a customer  contract backlog  (representing  future
revenues under  contract) of  approximately  $253.8  million  compared to $132.1
million at June 30, 1996.  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 six months ended June 30,
1997 were $3.3  million and $8.7  million as  compared to $1.4  million and $2.5
million for the same  periods in 1996.  The increase of $1.9 million or 136% for
the three months ended June 30, 1997 is attributable to additional  leased space
segment  costs outside the Orion 1 footprint.  The increase of $6.2 million,  or
approximately  248%,  for the six months  ended June 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 $4.4 million and
$8.6 million respectively,  for the three and six months ended June 30, 1997, as
compared to $2.9  million and $5.0  million  for the same  periods in 1996.  The
increase  of $1.5  million or 52% and $3.6  million or 72% for the three and six
months  ended June 30,  1997,  are related to  additional  sales  personnel  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 and $5.4 million for the three and six months ended
June 30, 1997,  as compared to $2.1 million and $4.2 million for the  comparable
periods in 1996.  The  increase of $0.6  million or 29% and $1.2 million or 29%,
respectively  for the three and six  months  ended  June 30,  1997 is related to
additional  engineering and technical staff  associated with the Teleport Europe
acquisition.

General and administrative  expenses.  General and administrative  expenses were
$5.0  million and $9.8 million for the three and six months ended June 30, 1997,
compared to $4.1  million and $7.6  million  for the same  periods in 1996.  The
increase  of $0.9 or 22% and $2.2  million  or 29% for the three and six  months
ended June 30,  1997,  was  primarily  due to  additional  administrative  staff
associated  with the Teleport  Europe  acquisition,  outside  services and other
expenses.

Depreciation and  amortization.  Depreciation  and amortization  expense for the
three and six months ended June 30, 1997 was $12.1 million and $23.7 million, an
increase of $3.4 million or 39%, and $6.1 million or 35% respectively,  over the
same periods in 1996.  The increase is primarily a result from  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 $8.7 million and $12.1 million for the three and
six months ended June 30, 1997,  compared to $0.6 million and $1.3  million,  an
increase  of $8.1  million  or  1,350%  and $10.8  million  or 831% for the same
periods in 1996. The increase in interest  income during the first six 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, was $22.4 million and $40.0 million for the three and six months ended
June 30, 1997, and $6.3 million and $13.8 million for the comparable  periods in
1996. The increase in interest expense of $26.2 million in


                                       16

<PAGE>



                          ORION NETWORK SYSTEMS, INC.

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                   OPERATIONS

                                   (CONTINUED)

the first six months of 1997 is  attributable to additional  interest  resulting
from the  completion of the Company's  financings in January 1997 (See Note A to
the Condensed Consolidated Financial Statements).

Extraordinary  loss  on  extinguishment  of  debt.  The  extraordinary  loss  on
extinguishment  of debt of $15.8  million for the six months ended June 30, 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 an interest rate cap agreement.

Net loss.  The Company  incurred net losses of $24.7 million and $50.7  million,
$7.1 million and $14.8  million for the three and six months ended June 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 million,  $7.9
million and $17.6 million,  respectively,  and elimination of the preacquisition
loss of  Teleport  Europe of $.6  million  from the  consolidated  statement  of
operations for the six months ended June 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  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 June 30, 1997,  the Company had cash and cash
equivalents of $75 million and  restricted and segregated  cash of $405 million,
including  $267 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 plus $134 million plus accrued interest of $3.9 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.


                                       17

<PAGE>




                           ORION NETWORK SYSTEMS, INC.

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                   OPERATIONS

                                   (CONTINUED)

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  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.


                                       18

<PAGE>




                           ORION NETWORK SYSTEMS, INC.

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

OTHER  INDEBTEDNESS  AND OTHER  OBLIGATIONS.  At June 30, 1997,  the Company had
outstanding  indebtedness of approximately  $6.5 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 June 30, 1997 the
Company had  obligations of  approximately  $8.0 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 $500 million. In addition to the $48 million incurred
through  the  second  quarter  of 1997,  Orion  will  need to make  payments  of
approximately $50 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 $89.7  million at June 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.

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.


                                       19

<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  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 of the pending  litigation  and  arbitration.  On August 12,
1997, the parties entered into a formal  settlement.  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.


ITEM 2. CHANGES IN SECURITIES

         None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

         None.


                                       20

<PAGE>



                           ORION NETWORK SYSTEMS, INC.

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


     (a)  The 1997 Annual Meeting of Stockholders of the Company was held on May
          22, 1997.

     (b)  Not applicable.

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

          (1)Election of Directors:


          Nominee         Term Expires             For             Against
---------------------- -------------------- ------------------- --------------

Richard J. Brekka             2000             18,464,203          136,506
Warren B. French, Jr.         2000             18,464,203          136,506
W. Anthony Rice               2000             18,464,203          136,506

          (2)  Adoption of Employee Stock Purchase Plan:

              For:    15,280,148
              Against:    52,766
              Abstain:   941,464

          (3)  Adoption of 1997 Stock Option Plan:

              For:    14,705,441
              Against:   594,059
              Abstain:   950,875

          (4)  Approval of the Restated  Certification of Incorporation of Orion
               Oldco Services, Inc.

              For:    14,956,147
              Against:    25,878
              Abstain:   160,162

          (5)  Approval of Puente Stock Option Agreement:

              For:    14,956,147
              Against:   178,426
              Abstain: 1,008,602

          (6)  Approval of Hauser Stock Option Agreement:

              For:    14,895,202
              Against:   238,221
              Abstain: 1,009,952

          (7)  Ratification of Selection of Independent Auditors:

              For:    18,588,996
              Against:    11,301
              Abstain:   100,412


                                       21

<PAGE>




                           ORION NETWORK SYSTEMS, INC.

ITEM 5. OTHER INFORMATION

                  None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

          10.1 Amendment No. 1 to the Joint Investment  Agreement,  effective as
               of July __, 1997,  by and between  Orion Asia Pacific  Corp.  and
               Dacom Corp.

          11.1 Statement regarding: Computation of Net Loss Per Common Share

          27   Financial Data Schedule

     a.   Reports on Form S-K during the six months ended June 30, 1997.


           The Company filed a Current  Report on Form 8-K dated March 14, 1997.
           Reporting  cosummation  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.


                                       22
<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: August 13, 1997                 /s/ W. Neil Bauer
                                      --------------------------------------
                                      W. Neil Bauer, President
                                      Chief Executive Officer and Director
                                      (Principal Executive Officer)



Date: August 13, 1997                 /s/ David J. Frear
                                      --------------------------------------
                                      David J. Frear, Vice President
                                      Chief Financial Officer and Treasurer
                                      (Principal Financial Officer and
                                      Principal Accounting Officer)


                                       23