**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe quarterly period ended September 30, 2006**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                      to                      **

**CommissionFile Number 000-52006**

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**ICO GLOBAL COMMUNICATIONS(HOLDINGS) LIMITED**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     |   | **98-0221142**                     |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (IRS Employer  Identification No.) |

 

**Plaza America Tower I,11700 Plaza America Drive, Suite 1010, Reston, Virginia 20190**

(Address of principalexecutive offices including zip code)

**(703) 964-1400**

(Registrant’s telephonenumber, including area code)

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x  No o.

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

| Large accelerated filer o | Accelerated  filer o | Non-accelerated filer x |
|--------------------------------|---------------------------|-----------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o  Nox.

As of November 1,2006, the registrant had 143,315,460 shares of Class A common stock and 54,840,000shares of Class B common stock outstanding.

 

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**ICO GLOBALCOMMUNICATIONS (HOLDINGS) LIMITEDFORM 10-QFor the three and nine months ended September 30, 2006**

**INDEX**

|                                                              | ** **                                                                                  | ** ** | **Page** | ** ** |
|--------------------------------------------------------------|---------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART I.****   FINANCIAL  INFORMATION** |                                                                                        |       |     |       |   |
| Item 1.                                                      | Financial Statements  (unaudited):                                                          |       |     |       |   |   |
|                                                         | Condensed Consolidated Balance Sheets                                                       |       |     | 3          |   |   |
|                                                         | Condensed Consolidated Statements of Operations                                             |       |     | 4          |   |   |
|                                                         | Condensed Consolidated Statements of Comprehensive  Income (Loss)                           |       |     | 5          |   |   |
|                                                         | Condensed  Consolidated Statements of Cash Flows                                            |       |     | 6          |   |   |
|                                                         | Notes to Condensed Consolidated Financial Statements                                        |       |     | 8          |   |   |
| Item 2.                                                      | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |       |     | 21         |   |   |
| Item 3.                                                      | Quantitative and Qualitative Disclosures About Market  Risk                                 |       |     | 33         |   |   |
| Item 4.                                                      | Controls and Procedures                                                                     |       |     | 33         |   |   |
| **PART II.   OTHER  INFORMATION**             |                                                                                        |       |     |       |   |
| Item  1.                                                     | Legal  Proceedings                                                                          |       |     | 35         |   |   |
| Item 1A.                                                | Risk  Factors                                                                               |       |     | 35         |   |   |
| Item 2.                                                      | Unregistered Sales of Equity Securities and Use of  Proceeds                                |       |     | 36         |   |   |
| Item 3.                                                      | Defaults Upon Senior Securities                                                             |       |     | 36         |   |   |
| Item 4.                                                      | Submission of Matters to a Vote of Security Holders                                         |       |     | 36         |   |   |
| Item  5.                                                     | Other  Information                                                                          |       |     | 36         |   |   |
| Item 6.                                                      | Exhibits                                                                                    |       |     | 36         |   |   |
| Signatures                                                   |                                                                                        |       | 37       |       |   |
| Certifications                                               |                                                                                        |       |     |       |   |

 

2

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**ICO Global Communications (Holdings) Limited(A Development Stage Enterprise)**

**Condensed Consolidated Balance Sheets**(in thousands, exceptshare data, unaudited)

| ** **                                                                                                                                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                            | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                            | ** ** |                   | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current assets:                                                                                                                                       |       |                   |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                             |       |                   | $          | 174,414               |       |   |   | $ | 175,510 |   |   |
| Restricted cash                                                                                                                                       |       |                   | 825        |                  |       |   | 1,650 |   |   |
| Available-for-sale  investments                                                                                                                       |       |                   | 107,770    |                  |       |   | 296,163 |   |   |
| Restricted investments                                                                                                                                |       |                   | 48,261     |                  |       |   | 48,707 |   |   |
| Prepaid expenses and  other current assets                                                                                                            |       |                   | 1,324      |                  |       |   | 2,002 |   |   |
| Total current assets                                                                                                                                  |       |                   | 332,594    |                  |       |   | 524,032 |   |   |
| Property in service―net of accumulated depreciation of $143  and $32                                                                            |       |                   | 396        |                  |       |   | 323 |   |   |
| Satellite system under  construction                                                                                                                  |       |                   | 287,507    |                  |       |   | 117,068 |   |   |
| Restricted investments                                                                                                                                |       |                   | —     |                  |       |   | 46,226 |   |   |
| Debt issuance costs―net  of accumulated amortization of $7,373 and $2,432                                                                       |       |                   | 22,185     |                  |       |   | 27,126 |   |   |
| Other assets                                                                                                                                          |       |                   | 14,000     |                  |       |   | — |   |   |
| Total                                                                                                                                                 |       |                   | $          | 656,682               |       |   |   | $ | 714,775 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY  IN ASSETS)**                                                                                 | ** ** |                   | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current liabilities:                                                                                                                                  |       |                   |       |                  |       |   |   |   |   |
| Accounts payable                                                                                                                                      |       |                   | $          | 455                   |       |   |   | $ | 1,084 |   |   |
| Accrued payroll                                                                                                                                       |       |                   | 763        |                  |       |   | 1,055 |   |   |
| Accrued satellite system  construction payable                                                                                                        |       |                   | 12,374     |                  |       |   | 27,595 |   |   |
| Accrued expenses                                                                                                                                      |       |                   | 18,494     |                  |       |   | 17,808 |   |   |
| Accrued interest                                                                                                                                      |       |                   | 16,033     |                  |       |   | 25,950 |   |   |
| Income tax payable                                                                                                                                    |       |                   | 1,313      |                  |       |   | 1,240 |   |   |
| Current portion of  capital lease obligations                                                                                                         |       |                   | 12,754     |                  |       |   | 9,623 |   |   |
| Total current liabilities                                                                                                                             |       |                   | 62,186     |                  |       |   | 84,355 |   |   |
| Capital lease  obligations, less current portion                                                                                                      |       |                   | 4,595      |                  |       |   | 7,568 |   |   |
| Convertible  long-term debt                                                                                                                           |       |                   | 650,000    |                  |       |   | 650,000 |   |   |
| Total liabilities                                                                                                                                     |       |                   | 716,781    |                  |       |   | 741,923 |   |   |
| Commitments and contingencies (Note 7)                                                                                                                |       |                   |       |                  |       |   |   |   |   |
| Stockholders’ equity (deficiency in assets):                                                                                                     |       |                   |       |                  |       |   |   |   |   |
| Preferred stock,  $.01 par value, 75,000,000 shares authorized, no shares issued or outstanding                                                  |       |                   | —     |                  |       |   | — |   |   |
| Class A  common stock, $.01 par value, 900,000,000 shares authorized, 201,284,352 and  200,203,884 shares issued and outstanding                 |       |                   | 2,013      |                  |       |   | 2,002 |   |   |
| Class B  convertible common stock, $.01 par value, 150,000,000 shares authorized, 85,843,382,  and 86,849,882 shares issued and outstanding |       |                   | 858        |                  |       |   | 868 |   |   |
| Additional paid-in  capital                                                                                                                           |       |                   | 2,713,431  |                  |       |   | 2,699,856 |   |   |
| Treasury stock,  57,968,892 shares of Class A common stock and 31,003,382 shares of Class B  convertible common stock                       |       |                   | (877,489   | )                     |       |   | (877,489 | ) |   |
| Deferred  stock-based compensation                                                                                                                    |       |                   | —     |                  |       |   | (2,063 | ) |   |
| Accumulated other  comprehensive income                                                                                                               |       |                   | 12,702     |                  |       |   | 9,127 |   |   |
| Deficit  accumulated during the development stage                                                                                                     |       |                   | (1,911,614 | )                     |       |   | (1,859,449 | ) |   |
| Total stockholders’  equity (deficiency in assets)                                                                                               |       |                   | (60,099    | )                     |       |   | (27,148 | ) |   |
| Total                                                                                                                                                 |       |                   | $          | 656,682               |       |   |   | $ | 714,775 |   |   |

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

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**ICO Global Communications (Holdings) Limited**

**(A Development StageEnterprise)**

**Condensed Consolidated Statements of Operations**(in thousands, exceptshare and per share data, unaudited)

| ** **                                                                                           | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **  | ** ** | **February 9, 2000** | ** **  |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------|------------|-------------|------------|--------------------------------|-------------|
| ** **                                                                                           | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **  | ** ** | **(inception) to**        | ** **  |
| ** **                                                                                           | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **  | ** ** | **September 30,**         | ** **  |
| ** **                                                                                           | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** | **2006**         | ** ** |
| ** **                                                                                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** | **(development** | ** ** |
| ** **                                                                                           | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006**         | ** ** | **2005**    | ** ** | **stage period)**         | ** **  |
| Operating expenses:                                                                                  |       |                             |       |                            |       |             |       |        |       |                           |        |   |   |
| General and  administrative                                                                          |       | $                                | 8,811      |                            | $          | 7,708            |       | $           | 27,296     |                           | $           | 19,484 |   |   | $ | 566,804 |   |   |
| Research and  development                                                                            |       | 2,831                            |       | 105                             |       | 3,702            |       | 570         |       |                           | 66,429      |   |   |
| Contract  settlements                                                                                |       | —                           |       | —                          |       | —           |       | (74,955     | )          |                           | (74,955     | ) |   |
| Impairment of  property under construction                                                           |       | —                           |       | —                          |       | —           |       | —      |       |                           | 1,438,304   |   |   |
| (Gain) loss on  disposal of assets                                                                   |       | (8                               | )          | —                          |       | (8               | )          | (2,030      | )          |                           | 11,100      |   |   |
| Operating income  (loss)                                                                             |       | (11,634                          | )          | (7,813                          | )          | (30,990          | )          | 56,931      |       |                           | (2,007,682  | ) |   |
| Interest income                                                                                      |       | 4,735                            |       | 2,980                           |       | 15,366           |       | 3,568       |       |                           | 117,440     |   |   |
| Interest expense                                                                                     |       | (9,788                           | )          | (7,396                          | )          | (32,780          | )          | (10,645     | )          |                           | (139,367    | ) |   |
| Other expense                                                                                        |       | (515                             | )          | (96                             | )          | (3,745           | )          | (438        | )          |                           | (873        | ) |   |
| Income (loss)  before income taxes                                                                   |       | (17,202                          | )          | (12,325                         | )          | (52,149          | )          | 49,416      |       |                           | (2,030,482  | ) |   |
| Income tax benefit  (expense)                                                                        |       | 20                               |       | 283                             |       | (16              | )          | (1,138      | )          |                           | 120,812     |   |   |
| Net income (loss)  before cumulative effect of a change in accounting principle                      |       | (17,182                          | )          | (12,042                         | )          | (52,165          | )          | 48,278      |       |                           | (1,909,670  | ) |   |
| Cumulative effect  of a change in accounting principle                                          |       | —                           |       | —                          |       | —           |       | —      |       |                           | (1,944      | ) |   |
| Net income (loss)                                                                                    |       | $                                | (17,182    | )                               | $          | (12,042          | )          | $           | (52,165    | )                              | $           | 48,278 |   |   | $ | (1,911,614 | ) |   |
| Basic income (loss) per share:                                                                       |       |                             |       |                            |       |             |       |        |       |                           |        |   |   |
| Income (loss)  before cumulative effect of change  in accounting principle                      |       | $                                | (0.09      | )                               | $          | (0.06            | )          | $           | (0.26      | )                              | $           | 0.25 |   |   | $ | (9.93 | ) |   |
| Cumulative effect  of a change in accounting principle                                               |       | —                           |       | —                          |       | —           |       | —      |       |                           | (0.01       | ) |   |
| Basic income  (loss) per share                                                                       |       | $                                | (0.09      | )                               | $          | (0.06            | )          | $           | (0.26      | )                              | $           | 0.25 |   |   | $ | (9.94 | ) |   |
| Diluted income (loss) per  share:                                                                    |       |                             |       |                            |       |             |       |        |       |                           |        |   |   |
| Income (loss)  before cumulative effect of change in accounting principle                       |       | $                                | (0.09      | )                               | $          | (0.06            | )          | $           | (0.26      | )                              | $           | 0.24 |   |   | $ | (9.93 | ) |   |
| Cumulative effect  of a change in accounting principle                                               |       | —                           |       | —                          |       | —           |       | —      |       |                           | (0.01       | ) |   |
| Diluted income  (loss) per share                                                                     |       | $                                | (0.09      | )                               | $          | (0.06            | )          | $           | (0.26      | )                              | $           | 0.24 |   |   | $ | (9.94 | ) |   |
| Weighted average  shares outstanding used to compute basic income (loss) per share         |       | 197,528,617                      |       | 194,653,602                     |       | 197,499,719      |       | 194,653,602 |       |                           | 192,352,275 |   |   |
| Weighted average  shares outstanding used to compute diluted income (loss)  per share |       | 197,528,617                      |       | 194,653,602                     |       | 197,499,719      |       | 199,778,871 |       |                           | 192,352,275 |   |   |

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

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**ICO GlobalCommunications (Holdings) Limited**(A Development StageEnterprise)

**Condensed ConsolidatedStatements of Comprehensive Income (Loss)**(in thousands, unaudited)

| ** **                            | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** **       | ** ** | ** ** | ** ** | **February 9, 2000** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------|------------|------------|------------|--------------------------------|------------|
| ** **                            | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** **       | ** ** | ** ** | ** ** | **(inception) to**        | ** ** |
| ** **                            | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** **       | ** ** | ** ** | ** ** | **September 30,**         | ** ** |
| ** **                            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** | **2006**         | ** ** |
| ** **                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** | **(development** | ** ** |
| ** **                            | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006**         | ** ** | **2005**   | ** ** | **stage period)**         | ** ** |
| Net income (loss)                     |       | $                                | (17,182    | )                               | $          | (12,042          | )          | $          | (52,165    | )                              | $          | 48,278 |   |   | $ | (1,911,614 | ) |   |
| Other  comprehensive income (loss):   |       |                             |       |                            |       |             |       |       |       |                           |       |   |   |
| Unrealized gain (loss) on investments |       | 27                               |       | (52                             | )          | 54               |       | (82        | )          |                           | (21        | ) |   |
| Cumulative translation adjustments    |       | 226                              |       | 134                             |       | 3,521            |       | 727        |       |                           | 12,723     |   |   |
| Comprehensive  income (loss)          |       | $                                | (16,929    | )                               | $          | (11,960          | )          | $          | (48,590    | )                              | $          | 48,923 |   |   | $ | (1,898,912 | ) |   |

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

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**ICO Global Communications (Holdings) Limited**

**(A Development Stage Enterprise)**

**Condensed Consolidated Statements of Cash Flows (in thousands, unaudited)**

| ** **                                                                            | ** ** | ** **                      | ** ** | ** **       | ** ** | **February 9, 2000** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------------|------------|--------------------------------|------------|
| ** **                                                                            | ** ** | ** **                      | ** ** | ** **       | ** ** | **(inception) to**        | ** ** |
| ** **                                                                            | ** ** | ** **                      | ** ** | ** **       | ** ** | **September 30,**         | ** ** |
| ** **                                                                            | ** ** | **Nine months ended** | ** ** | **2006**         | ** ** |
| ** **                                                                            | ** ** | **September 30,**          | ** ** | **(development** | ** ** |
| ** **                                                                            | ** ** | **2006**                        | ** ** | **2005**         | ** ** | **stage period)**         | ** ** |
| Operating activities:                                                                 |       |                            |       |             |       |                           |       |   |   |
| Net income (loss)                                                                     |       | $                               | (52,165    | )                | $          | 48,278                         |       |   | $ | (1,911,614 | ) |   |
| Adjustments to reconcile net income (loss) to net  cash used in operating activities: |       |                            |       |             |       |                           |       |   |   |
| Stock-based compensation                                                              |       | 5,273                           |       | —           |       |                           | 24,908     |   |   |
| Depreciation                                                                          |       | 111                             |       | —           |       |                           | 3,422      |   |   |
| Amortization of debt  issuance costs                                                  |       | 4,941                           |       | 892              |       |                           | 7,373      |   |   |
| Unrealized foreign exchange  (gain) loss                                              |       | (554                            | )          | 444              |       |                           | (4,941     | ) |   |
| (Gain) loss on disposal  of assets                                                    |       | (8                              | )          | (2,030           | )          |                           | 11,100     |   |   |
| Impairment of property  under construction                                            |       | —                          |       | —           |       |                           | 1,438,304  |   |   |
| Gain on contract  settlements                                                         |       | —                          |       | (74,955          | )          |                           | (74,955    | ) |   |
| Gain on Nextel  share-pledge derivative                                               |       | —                          |       | —           |       |                           | (9,168     | ) |   |
| Deferred tax credit                                                                   |       | —                          |       | —           |       |                           | (121,928   | ) |   |
| Other than temporary loss  on available-for-sale securities                           |       | —                          |       | —           |       |                           | 689        |   |   |
| Amortization of  capitalized SAN operator incentive                                   |       | —                          |       | —           |       |                           | 2,593      |   |   |
| Cost of issuance of  shares to distribution partners                                  |       | —                          |       | —           |       |                           | 37,440     |   |   |
| Other                                                                                 |       | —                          |       | —           |       |                           | 30,573     |   |   |
| Other changes in certain assets and liabilities:                                      |       |                            |       |             |       |                           |       |   |   |
| Prepaid expenses and  other current assets                                            |       | 732                             |       | 571              |       |                           | 48,945     |   |   |
| Accrued interest income                                                               |       | 1,401                           |       | (1,137           | )          |                           | (2,918     | ) |   |
| Accounts payable                                                                      |       | (643                            | )          | 201              |       |                           | (501       | ) |   |
| Accrued interest payable                                                              |       | (21,077                         | )          | 9,923            |       |                           | 56,554     |   |   |
| Accrued payroll and other  accrued expenses                                           |       | 726                             |       | 2,730            |       |                           | 58,615     |   |   |
| Net cash used in  operating activities                                                |       | (61,263                         | )          | (15,083          | )          |                           | (405,509   | ) |   |
| Investing activities:                                                                 |       |                            |       |             |       |                           |       |   |   |
| Proceeds from launch  insurance                                                       |       | —                          |       | —           |       |                           | 225,000    |   |   |
| Debtor in possession  advance in relation to Old ICO                                  |       | —                          |       | —           |       |                           | (275,000   | ) |   |
| Acquisition of net assets  of Old ICO                                                 |       | —                          |       | —           |       |                           | (117,590   | ) |   |
| Cash received from Old  ICO at acquisition                                            |       | —                          |       | —           |       |                           | 107,436    |   |   |
| Restricted cash                                                                       |       | 825                             |       | (1,650           | )          |                           | (5,899     | ) |   |
| Purchases of satellite  system under construction                                     |       | (174,753                        | )          | (43,445          | )          |                           | (262,998   | ) |   |
| Purchases of property  under construction                                             |       | —                          |       | —           |       |                           | (497,890   | ) |   |
| Purchases of property in  service                                                     |       | (171                            | )          | (169             | )          |                           | (2,001     | ) |   |
| Investment in unconsolidated  subsidiaries                                            |       | —                          |       | —           |       |                           | (2,373     | ) |   |
| Purchases of other assets                                                             |       | (14,000                         | )          | —           |       |                           | (14,000    | ) |   |
| Purchases of available-for-sale investments                                           |       | (372,462                        | )          | (314,767         | )          |                           | (3,567,083 | ) |   |
| Maturities and sales of available-for-sale  investments                               |       | 558,795                         |       | 14,727           |       |                           | 3,460,595  |   |   |
| Purchases of restricted investments                                                   |       | (650                            | )          | (93,583          | )          |                           | (94,233    | ) |   |
| Maturities of restricted investments                                                  |       | 48,035                          |       | —           |       |                           | 48,035     |   |   |
| Proceeds from contract amendments                                                     |       | —                          |       | —           |       |                           | 44,434     |   |   |
| Proceeds from sale of assets                                                          |       | 8                               |       | 30               |       |                           | 12,106     |   |   |
| Net cash provided by  (used in) investing activities                                  |       | 45,627                          |       | (438,857         | )          |                           | (941,461   | ) |   |
| Financing  activities:                                                                |       |                            |       |             |       |                           |       |   |   |
| Net proceeds from issuance of common stock                                            |       | 43                              |       | —           |       |                           | 597,918    |   |   |
| Proceeds from issuance of convertible notes                                           |       | —                          |       | 650,000          |       |                           | 650,000    |   |   |
| Debt issuance costs                                                                   |       | —                          |       | (27,853          | )          |                           | (29,558    | ) |   |
| Proceeds from sales of  subsidiary stock and stock options                            |       | 9,920                           |       | —           |       |                           | 9,920      |   |   |
| Advances from affiliates                                                              |       | —                          |       | —           |       |                           | 324,395    |   |   |
| Repayment of advances  from affiliates                                                |       | —                          |       | —           |       |                           | (324,395   | ) |   |
| Repayment of note payable  to Eagle River                                             |       | —                          |       | —           |       |                           | (37,500    | ) |   |
| Repayment of operator  financing                                                      |       | —                          |       | —           |       |                           | (5,727     | ) |   |
| Proceeds from pledge of  Nextel shares                                                |       | —                          |       | —           |       |                           | 351,600    |   |   |
| Proceeds from loan from  Teledesic LLC                                                |       | —                          |       | —           |       |                           | 20,000     |   |   |
| Acquisition of ICO shares  from minority interest stockholder                         |       | —                          |       | —           |       |                           | (30,868    | ) |   |
| Net cash provided by  financing activities                                            |       | 9,963                           |       | 622,147          |       |                           | 1,525,785  |   |   |
| Effect of foreign  exchange rate changes on cash and cash equivalents                 |       | 4,577                           |       | (534             | )          |                           | (4,401     | ) |   |
| Net increase  (decrease) in cash and cash equivalents                                 |       | (1,096                          | )          | 167,673          |       |                           | 174,414    |   |   |
| Cash and cash  equivalents—beginning of period                                   |       | 175,510                         |       | 52,551           |       |                           | —     |   |   |
| Cash and cash  equivalents—end of period                                         |       | $                               | 174,414    |             | $          | 220,224                        |       |   | $ | 174,414 |   |   |

 

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**ICO Global Communications (Holdings) Limited (A Development Stage Enterprise)**

**Condensed Consolidated Statements of Cash Flows (Continued) (in thousands, unaudited)**

 

| ** **                                                                                                           | ** ** | ** **                      | ** ** | ** **       | ** ** | **February 9, 2000** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------------|------------|--------------------------------|------------|
| ** **                                                                                                           | ** ** | ** **                      | ** ** | ** **       | ** ** | **(inception) to**        | ** ** |
| ** **                                                                                                           | ** ** | ** **                      | ** ** | ** **       | ** ** | **September 30,**         | ** ** |
| ** **                                                                                                           | ** ** | **Nine months ended** | ** ** | **2006**         | ** ** |
| ** **                                                                                                           | ** ** | **September 30,**          | ** ** | **(development** | ** ** |
| ** **                                                                                                           | ** ** | **2006**                        | ** ** | **2005**         | ** ** | **stage period)**         | ** ** |
| Supplemental disclosure:                                                                                             |       |                            |       |             |       |                           |       |   |   |
| Income taxes paid                                                                                                    |       | $                               | —     |             | $          | 43                             |       |   | $ | 7,288 |   |   |
| Interest paid                                                                                                        |       | 48,750                          |       | —           |       |                           | 101,652    |   |   |
| Capitalized interest                                                                                                 |       | 10,907                          |       | 151              |       |                           | 12,135     |   |   |
| Supplemental disclosure of non-cash activities:                                                                      |       |                            |       |             |       |                           |       |   |   |
| Issuance of Class A common shares in respect of  investment in Ellipso, Inc.                               |       | —                          |       | —           |       |                           | 6,863      |   |   |
| Issuance of Class B common shares in respect of  investment in Ellipso, Inc.                               |       | —                          |       | —           |       |                           | 74         |   |   |
| Issuance of Class A common shares in respect of  investment in Constellation Communications Holdings, Inc. |       | —                          |       | —           |       |                           | 904        |   |   |
| Increase (decrease) in accrued satellite system  construction payable                                                |       | (15,221                         | )          | —           |       |                           | 12,374     |   |   |
| Equipment acquired in capital lease agreements                                                                       |       | —                          |       | —           |       |                           | 42,096     |   |   |
| Issuance of warrants for the repayment of debt                                                                       |       | —                          |       | —           |       |                           | 4,950      |   |   |
| Issuance of shares for advisory services                                                                             |       | 402                             |       | —           |       |                           | 402        |   |   |
| The following securities of ICO arose from the  acquisition of Old ICO’s net assets:                            |       |                            |       |             |       |                           |       |   |   |
| 93,700,041 Class A common shares and options to  acquire Class A common shares issued                      |       | —                          |       | —           |       |                           | 679,873    |   |   |
| 31,003,382 Class B common shares issued                                                                         |       | —                          |       | —           |       |                           | 275,000    |   |   |
| 1,600,000 Class A common shares issued to  distribution partners                                                |       | —                          |       | —           |       |                           | 16,720     |   |   |
| 200,000 Class A common shares committed to  distribution partners                                               |       | —                          |       | —           |       |                           | 2,090      |   |   |
| 50,000,000 warrants issued to acquire Class A  common shares                                                    |       | —                          |       | —           |       |                           | 180,000    |   |   |
|                                                                                                                      |            |                                 |            |                  |            |                                |            |  |  |  |  |  |

 

The accompanying notes are an intergral part of these condensed consolidated financial statements.

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**ICO Global Communications (Holdings) Limited(A Development Stage Enterprise)**

**Notes to CondensedConsolidated Financial Statements(unaudited)**

**1.   Organizationand Business**

ICO Global Communications (Holdings) Limited (“ICO”),along with its subsidiaries (collectively referred to as the “Company”), is anext-generation mobile satellite service operator authorized to operate amedium earth orbit (“MEO”) satellite system globally outside theUnited States (with the exception of two Middle Eastern countries) pursuantto regulations promulgated by the United Kingdom and, through its majorityowned subsidiary, ICO North America, Inc. (“ICO North America”),authorized by the FederalCommunications Commission (“FCC”) to offer ubiquitous mobile satelliteservices (“MSS”) throughout the United States using a geostationary earth orbit(“GEO”) satellite.

ICO was incorporated in the State of Delaware in 2000to purchase the assets and assume certain liabilities of ICO GlobalCommunications (Holdings) Limited (“Old ICO”), a Bermuda corporation, on itsemergence from Chapter 11 bankruptcy. Following the purchase of assets andassumption of certain liabilities of Old ICO, the Company established a newmanagement team who oversaw the construction of the MEO satellites and groundsystems and developed the technical plan for the MEO system. Following onelaunch failure in March 2000, as well as disagreements with themanufacturer and launch manager of its MEO satellites, which disagreements arethe subject of litigation commenced in 2004, the Company significantlycurtailed construction activity on its MEO system.

Through its subsidiary ICONorth America, the Company is developing an advanced hybrid mobile satelliteservice/ancillary terrestrial component system (“the MSS/ATC System”), using aGEO satellite, designed to provide voice, data and Internet service throughoutthe United States to handsets similar to existing cellular phones.

**2.   DevelopmentStage Enterprise**

The Company is a development stage enterprise asdefined in Statement of Financial Accounting Standards (“SFAS”) No. 7, *Accounting and Reporting by Development Stage Enterprises,*and will continue to be so until it commences commercial operations.

As the Company is notcurrently generating revenue from operations, there is no assurance that theCompany will be able to obtain the funding necessary to complete theconstruction of the MSS/ATC System, fund its future working capitalrequirements, or achieve positive cash flow from operations. In addition, theCompany operates in a heavily regulated industry, and its rights to offer itsplanned services are tied to meeting significant milestones or otherwisesatisfying its regulators. In November 2006, the Company requested anextension from the FCC of the remaining milestone dates in itsauthorization for construction and launch of its satellite. If theCompany fails to meet a milestone and it is unable to obtain a waiver orextension, the Company could lose its MSS authorization, and a loss of its MSSauthorization would be an event of default under the indenture governing theCompany’s $650 million aggregate principal amount of convertible notes due inAugust 2009 (the “Notes”) (see Note 6). In the event that the Company isnot able to realize its assets in the ordinary course of business, and isforced to realize the assets by divestment, there is no assurance that thecarrying value of the assets could be recovered.

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**3.   Summary ofSignificant Accounting Policies**

***Interim FinancialStatements******—The*** financialinformation as of September 30, 2006 and for the three and nine monthsended September 30, 2006 and 2005 that is included in the accompanyingcondensed consolidated financial statements is unaudited and includes alladjustments, consisting of normal recurring adjustments and accruals,considered necessary for a fair presentation. Certain information and footnotedisclosures have been condensed or omitted. The financial information as of December 31,2005, is derived from the Company’s audited consolidated financial statementsand notes for the year ended December 31, 2005, included in Item 13 in theCompany’s Form 10/A for the year ended December 31, 2005. Thesefinancial statements should be read in conjunction with the financialstatements and notes for the year ended December 31, 2005 included in theCompany’s Form 10/A filed with the Securities and Exchange Commission.Operating results for the interim period presented are not necessarilyindicative of the results that may be expected for the year ending December 31,2006 or any other interim period.

***Use of Estimates******—The preparation of financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Significantestimates are used when accounting for depreciation, taxes, contingencies,asset useful lives and valuation of stock compensation awards, among others.Actual results could differ from those estimates. Estimates are evaluated on anongoing basis.***

***Cash and Cash Equivalents******—Cash***andcash equivalents is defined as short-term highly liquid investments withoriginal maturities from the date of purchase of 90 days or less. Cash andcash equivalents is comprised of the following (in thousands):

| ** **          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------|------------|------------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Cash                |       |                   | $          | 20,517                |       |   |   | $ | 20,821 |   |   |
| Money market  funds |       |                   | 11,738     |                  |       |   | 7,877 |   |   |
| Commercial paper    |       |                   | 142,159    |                  |       |   | 146,812 |   |   |
|                |       |                   | $          | 174,414               |       |   |   | $ | 175,510 |   |   |

 

***Restricted Cash******—As***of September 30,2006 and December 31, 2005, the Company has restricted cash of $825,000and $1.7 million, respectively, related to a bond which is held pursuant toconditions of the Company’s FCC authorization to operate in theMSS spectrum.

***RestrictedInvestments******—The***Company’srestricted investments consist of U.S. Treasury securities held as collateralfor future interest payments related to the Company’s Notes. The maturity datesof these investments correspond with interest payment dates as specified in theNotes. These investments are classified as held-to-maturity and are reported atamortized cost. As of September 30, 2006, restricted investments withmaturity dates in February and August 2007 are classified as current.As of December 31, 2005, restricted investments with maturity dates during2006 are classified as current and restricted investments with maturity datesin 2007 are classified as non-current. Gross unrealized losses were $263,000and $304,000 as of September 30, 2006 and December 31, 2005,respectively.

***Satellite SystemUnder Construction******—Satellite***systemunder construction represents payments made and accrued for third-partyconstruction and engineering costs incurred in the design, manufacture, testand launch of the MSS/ATC System. Satellite system under construction will beclassified as property in service when placed into service and will bedepreciated using the straight-line method based on an anticipated useful lifeof ten to fifteen years. Only the costs of constructing successfully deployedsatellites will be transferred to property in service. Losses resulting fromany unsuccessful launches or satellite 

9

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failures will berecognized as those events occur, and insurance proceeds, if any, related tosuch losses will be recorded when their realization becomes determinable.

***CapitalizedInterest******—The***Companycapitalizes interest costs associated with the construction of the MSS/ATCSystem. Interest capitalized to satellite system under construction for thethree and nine months ended September 30, 2006 was $4.9 million and $10.9million, respectively and $151,000 for both the three and nine months ended September 30,2005.

***Debt Issuance Costs******—Costs***incurredin connection with the issuance of the Company’s Notes have been capitalizedand are included in debt issuance costs on the condensed consolidated balancesheets. These costs are amortized using the effective interest method fromissuance in August 2005 through maturity in August 2009. Amortizationof debt issuance costs is included in interest expense on the condensedconsolidated statements of operations and totaled $1.7 million and $5.0 millionfor the three and nine months ended September 30, 2006, respectively, and$892,000 for both the three and nine months ended September 30, 2005.

***Other Assets******—Other assets represents paymentsmade to acquire first-priority rights to use a desired orbital slot. TheCompany currently intends to utilize such slot when it deploys the satellite tobe used in the MSS/ATC System. The Company expects to amortize such costs overthe estimated useful life of its satellite system under construction, currentlyanticipated to be ten to fifteen years.***

***Stock-basedCompensation******—On***January 1,2006, the Company adopted SFAS No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123(R)”), which requires themeasurement and recognition of all share-based payment awards made to employeesand directors including stock options and restricted stock grants based onestimated fair values. SFAS 123(R) supersedes the Company’s previousaccounting under Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB 25”),for periods beginning in fiscal year 2006. In March 2005, the Securities andExchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”)relating to SFAS 123(R). The Company has applied the provisions of SAB 107 inits adoption of SFAS 123(R). The Company adopted SFAS 123(R) using themodified prospective transition method, which requires the application of theaccounting standard as of January 1, 2006, the first day of the Company’s2006 fiscal year. The Company’s condensed consolidated financial statements forthe three and nine months ended September 30, 2006 reflect the impact ofSFAS 123(R). In accordance with the modified prospective transition method, theCompany’s condensed consolidated financial statements for prior periods havenot been restated to include the impact of SFAS 123(R).

The Company records stock-based compensation on stockoptions and restricted stock awards issued to employees and directors.Stock-based compensation expense recorded on outstanding options and restrictedstock recognized under SFAS 123(R) for the three and nine months ended September 30,2006 was $1.8 million and $5.3 million, respectively, net of income taxesof $0, and is included in general and administrative expenses on the condensedconsolidated statements of operations. There were no unvested stock options orrestricted stock outstanding for the three and nine months ended September 30,2005.

SFAS 123(R) requires companies to estimate thefair value of share-based payment awards on the date of grant using anoption-pricing model. The value of the portion of the award that is ultimatelyexpected to vest is recognized as expense over the requisite service period inthe Company’s statements of operations. Prior to the adoption of SFAS 123(R),the Company accounted for stock-based awards to employees and directors usingthe intrinsic value method in accordance with APB 25 as allowed under SFAS No. 123,*Accounting for Stock-Based Compensation*(“SFAS 123”). Under the intrinsic value method, no stock-based compensationexpense for stock option grants is recognized as the exercise price of theCompany’s stock options granted to employees and directors was equal to orgreater than the fair market value of the underlying stock at the date ofgrant.

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Stock-based compensation expense recognized in theCompany’s condensed consolidated statements of operations for the three andnine months ended September 30, 2006 includes compensation expense forshare-based payment awards granted prior to, but not yet vested as of, December 31,2005, based on the grant date fair value estimated in accordance with the proforma provisions of SFAS 123 and compensation expense for the share-basedpayment awards granted subsequent to December 31, 2005, based on the grantdate fair value estimated in accordance with the provisions of SFAS 123(R).Stock-based compensation expense recognized in the Company’s condensedconsolidated statements of operations for the three and nine months ended September 30,2006 is based on awards ultimately expected to vest. SFAS 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.

The Company used the Black-Scholes option-pricingmodel (“Black-Scholes”) as its method of valuation under SFAS 123(R) in2006 and a single option award approach. This fair value is then amortized on astraight-line basis over the requisite service periods of the awards, which isgenerally the vesting period. Black-Scholes was also previously used for theCompany’s pro forma information required under SFAS 123 for periods prior to2006. The fair value of share-based payment awards on the date of grant asdetermined by the Black-Scholes model is affected by the Company’s stock priceas well as other assumptions. These assumptions include, but are not limitedto, the expected stock price volatility over the term of the awards and actualand projected employee stock option exercise behaviors.

Theweighted-average estimated value of employee stock options granted during thenine months ended September 30, 2006 was estimated using the Black-Scholesmodel with the following assumptions:

| ** **                | ** ** | **Nine months ended  September 30, 2006** | ** ** |
|---------------------------|------------|---------------------------------------------------------------|------------|
| Expected  volatility      |       |                                                          | 37         | % |   |
| Risk-free  interest rate  |       |                                                          | 5          | % |   |
| Expected  dividends       |       |                                                          | 0          | % |   |
| Expected  forfeiture rate |       |                                                          | 0          | % |   |
| Expected term in years    |       |                                                          | 10         |   |   |

 

The expected volatility assumption was based upon theCompany’s historical stock price volatility during the limited amount of timesubstantial information about the Company has been available to the general public,as well as a review of the expected volatility of other entities similar to theCompany, which the Company believes is a reasonable indicator of expectedvolatility. The risk-free interest rate assumption is based upon U.S. Treasurybond interest rates appropriate for the term of the Company’s employee stockoptions. The dividend yield assumption is based on the Company’s history andexpectation of dividend payments. Forfeiture rate is based on the Company’shistorical rate of forfeitures due to voluntary terminations and the fact thatthe Company has a limited number of employees, many of whom are critical to theCompany, and expectations for forfeitures in the future. The estimated expectedterm is based on employee exercise behavior.

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The Company’s stockoption activity for the nine months ended September 30, 2006 is summarizedas follows:

| ** **                              | ** ** | ** **         | ** ** | ** **                | ** ** | ** **                | ** ** | ** **              | ** ** |
|-----------------------------------------|------------|--------------------|------------|---------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | ** **         | ** ** | ** **                | ** ** | **Weighted average** | ** ** | **Aggregate**           | ** ** |
| ** **                              | ** ** | **Number of** | ** ** | **Weighted average** | ** ** | **remaining life**   | ** ** | **intrinsic**           | ** ** |
| ** **                              | ** ** | **options**        | ** ** | **exercise price**   | ** ** | **in years**         | ** ** | **value**               | ** ** |
| ** **                              | ** ** | ** **         | ** ** | ** **                | ** ** | ** **                | ** ** | **(in thousands)** | ** ** |
| Balance-December 31,  2005         |       | 6,739,573          |       |                      | $          | 4.80                      |       |                    |       | — |   |   |   | — |   |   |
| Granted                                 |       | 250,000            |       |                      | 4.75       |                      |       |                    | —     |   |   |   | — |   |   |
| Balance-March 31,  2006            |       | 6,989,573          |       |                      | $          | 4.80                      |       |                    |       | 9.14 |   |   |   | — |   |   |
| Granted                                 |       | 1,090,000          |       |                      | 5.51       |                      |       |                    | —     |   |   |   | — |   |   |
| Balance-June 30,  2006             |       | 8,079,573          |       |                      | $          | 4.90                      |       |                    |       | 9.03 |   |   |   | — |   |   |
| Granted                                 |       | —             |       |                      | —     |                      |       |                    | —     |   |   |   | — |   |   |
| Balance-September 30,  2006        |       | 8,079,573          |       |                      | $          | 4.90                      |       |                    |       | 8.78 |   |   |   | $ | 10,981 |   |   |
| Exercisable at  September 30, 2006 |       | 874,573            |       |                      | $          | 8.52                      |       |                    |       | 5.12 |   |   |   | $ | 944 |   |   |

 

The aggregate intrinsic value in the table aboverepresents total pretax intrinsic value (i.e., the difference between theCompany’s closing stock price on the last trading day of its third quarter offiscal 2006 and the exercise price, times the number of shares) that would havebeen received by the option holders had all option holders exercised theiroptions on September 30, 2006.

The weighted average fair value per share for optionsto purchase common stock granted to employees of the Company during the ninemonths ended September 30, 2006 was $2.80, and the fair value of theseoptions is $3.8 million. The options to purchase common stock vest over fouryears.

At September 30,2006, the balance of stock-based compensation cost to be expensed in futureperiods related to unvested share-based awards, as adjusted for expectedforfeitures, is as follows (in millions):

| Remainder of 2006 |   | $   | 1.3    |   |
|-------------------|--------|-----|--------|--------|
| 2007              |   | 4.1 |   |
| 2008              |   | 4.0 |   |
| 2009              |   | 3.6 |   |
| 2010              |   | 0.3 |   |
|              |   | $   | 13.3   |   |

 

The period over which the unearned stock-basedcompensation is expected to be recognized is approximately 3.8 years.

***Research andDevelopment******—Research***anddevelopment costs, consisting of third-party engineering, consulting anddevelopment costs associated with technology being considered for use in theMSS/ATC System, are expensed as incurred. The Company reviews each of itsresearch and development projects to determine if technological feasibility hasbeen achieved, at which point, future development costs associated with thatproject are capitalized.

***Accumulated OtherComprehensive Income******—The***Company’saccumulated other comprehensive income consists of unrealized gains and losseson available-for-sale investments, net of tax, and cumulative translationadjustments. Accumulated other comprehensive income as of September 30,2006 consisted of cumulative translation adjustments of $12.8 million, lessunrealized losses on available-for-sale investments of $21,000. Accumulatedother comprehensive income as of December 31, 2005 consisted of cumulativetranslation adjustments of $9.2 million, less unrealized losses onavailable-for-sale investments of $75,000.

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***Earnings Per Share******—Basic***earningsper share is calculated based on the weighted average number of shares thatwere outstanding during the period. Diluted earnings per share is calculated bydividing income or loss allocable to common shareholders by the weightedaverage common shares outstanding plus dilutive potential common stock.Potential common stock includes unvested restricted stock, stock options andwarrants, the dilutive effect of which is calculated using the treasury stockmethod. Prior to satisfaction of all conditions of vesting, unvested restrictedstock is considered contingently issuable consistent with SFAS No. 128, *Earnings per Share*, and is excluded fromweighted average common shares outstanding.

Thefollowing table sets forth the computation of basic and diluted earnings pershare (in thousands, except share and per share data):

| ** **                                                           | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** **       | ** ** | ** **  | ** ** | **February 9, 2000** | ** **  |
|----------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|------------------|------------|-------------|------------|--------------------------------|-------------|
| ** **                                                           | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** **       | ** ** | ** **  | ** ** | **(inception) to**        | ** **  |
| ** **                                                           | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** **       | ** ** | ** **  | ** ** | **September 30,**         | ** **  |
| ** **                                                           | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** **       | ** ** | ** **  | ** ** | **2006**                       | ** **  |
| ** **                                                           | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** | **(development** | ** ** |
| ** **                                                           | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006**         | ** ** | **2005**    | ** ** | **stage period)**         | ** **  |
| Net income (loss)                                                    |       | $                                                        | (17,182    | )                                                       | $          | (12,042          | )          | $           | (52,165    | )                              | $           | 48,278 |   |   | $ | (1,911,614 | ) |   |
| Weighted average  common shares outstanding                          |       | 198,128,617                                              |       | 194,653,602                                             |       | 198,099,719      |       | 194,653,602 |       |                           | 192,431,203 |   |   |
| Less: unvested  restricted stock                                |       | (600,000                                                 | )          | —                                                  |       | (600,000         | )          | —      |       |                           | (78,928     | ) |   |
| Shares used for  computation of basic earnings per share             |       | 197,528,617                                              |       | 194,653,602                                             |       | 197,499,719      |       | 194,653,602 |       |                           | 192,352,275 |   |   |
| Add: dilutive  unvested restricted stock, stock options and warrants |       | —                                                   |       | —                                                  |       | —           |       | 5,125,269   |       |                           | —      |   |   |
| Shares used for  computation of diluted earnings per share(1)   |       | 197,528,617                                              |       | 194,653,602                                             |       | 197,499,719      |       | 199,778,871 |       |                           | 192,352,275 |   |   |
| Basic earnings (loss) per share                                 |       | $                                                        | (0.09      | )                                                       | $          | (0.06            | )          | $           | (0.26      | )                              | $           | 0.25 |   |   | $ | (9.94 | ) |   |
| Diluted earnings  (loss) per share                                   |       | $                                                        | (0.09      | )                                                       | $          | (0.06            | )          | $           | (0.26      | )                              | $           | 0.24 |   |   | $ | (9.94 | ) |   |

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(1)          The effect of certainstock options and warrants was anti-dilutive, and they were not included in thecalculation of diluted earnings per share. Anti-dilutive options and warrantstotaled 11,251,683 and 54,655,965 as of September 30, 2006 and 2005,respectively.

***New Accounting Pronouncements******—In***February 2006,the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 155, *Accountingfor Certain Hybrid Financial Instruments*(“SFAS 155”). Thisstatement amends SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities* and SFAS No. 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities* to simplify and make more consistentthe accounting for certain financial instruments. This statement permits fairvalue remeasurement for any hybrid financial instrument with an embeddedderivative that otherwise would require bifurcation, provided that the whole instrumentis accounted for on a fair value basis and establishes a requirement toevaluate interests in securitized financial assets to identify interests thatare freestanding derivatives or that are hybrid financial instruments thatcontain an embedded derivative 

13

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requiringbifurcation. This statement also allows a qualifying special purpose entity tohold a derivative financial instrument that pertains to a beneficial interest.SFAS 155 is effective for all financial instruments acquired or issuedafter December 31, 2006. Earlier adoption is permitted as of the beginningof an entity’s fiscal year, provided the entity has not yet issued financialstatements for any interim period for that fiscal year. The Company does notexpect the adoption of this statement to have an impact on its financialposition, results of operations or cash flows.

In July 2006, theFASB issued Interpretation No. 48 (“FIN 48”), *Accountingfor Uncertainty in Income Taxes*, which clarifies the accounting foruncertainty in income taxes recognized in the financial statements inaccordance with SFAS No. 109, *Accounting for IncomeTaxes*. FIN 48 provides guidance on the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting for interim periods, disclosures andtransition. FIN 48 is effective for fiscal years beginning after December 15,2006 and is required to be adopted by the Company in the first quarter offiscal year 2007. The Company is currently evaluating the impact that adoptionof FIN 48 will have on its financial position and results of operations.

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements*(“SFAS 157”). This statement clarifies thedefinition of fair value, establishes a framework for measuring fair value, andexpands the disclosures on fair value measurements. SFAS 157 is effective forfiscal years beginning after November 15, 2007. The Company has notdetermined the impact, if any, the adoption of this statement will have on itsconsolidated financial statements.

In September 2006,the Securities and Exchange Commission staff released Staff Accounting Bulletin No.108, *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*(“SAB 108”). SAB 108 provides guidance on quantifying and evaluating themateriality of unrecorded misstatements and is effective for annual financialstatements ending after November 15, 2006. The Company has not determined theimpact, if any, the adoption of this statement will have on its consolidatedfinancial statements.

**4.   Available-For-Sale Investments**

Available-for-sale investments are carried at fairvalue and generally mature or reset interest rates within six months from thepurchase date. The Company includes any unrealized gains and losses oninvestments, net of tax, in stockholders’ equity (deficiency in assets) as acomponent of accumulated other comprehensive income (loss).

Individual securities with a fair value below the costbasis at September 30, 2006 were evaluated to determine if they wereother-than-temporarily impaired. These securities were determined to be onlytemporarily impaired because the decline in value was related to changes inmarket interest rates and the Company has the ability and intent to hold thesesecurities until they recover. No securities have been in a continuous lossposition for 12 months or longer.

Theamortized cost (including accrued interest), gross unrealized gains and lossesand fair value of available-for-sale investments as of September 30, 2006by major security type are as follows (in thousands):

| ** **                            | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                            | ** ** | **Amortized** | ** ** | **unrealized** | ** ** | **unrealized** | ** ** | **Fair**   | ** ** |
| ** **                            | ** ** | **cost**      | ** ** | **gains**      | ** ** | **losses**     | ** ** | **value**  | ** ** |
| Commercial paper                      |       | $             | 96,602     |           |       | $              | —     |       |       |   | $ | (14 | ) |   | $ | 96,588 |   |
| U.S government  and agency securities |       | 11,189        |       |           | —     |           |       |       | (7         | ) |   | 11,182 |   |
|                                  |       | $             | 107,791    |           |       | $              | —     |       |       |   | $ | (21 | ) |   | $ | 107,770 |   |

 

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**5.   SatelliteAccess Node (“SAN”) Agreements and Contract Settlements**

As part of the ground infrastructure for its MEOsatellite network, the Company established SANs in eleven countries throughoutthe world. One SAN is owned and operated by the Company. Prior to 2000, theCompany entered into noncancellable agreements with ten vendors (“SAN Operators”)that own and operate the Company’s SAN sites in various locations around theworld. All of the agreements provide for varying levels of support required tooperate the SAN sites (“SAN Operating Agreements”). Additionally, certain ofthe agreements require the repayment of certain up-front infrastructure costsincurred on the Company’s behalf (“SAN Infrastructure Agreements”). Both theSAN Operating Agreements and the SAN Infrastructure Agreements initially expirein various years through 2010 and are payable in U.S. and non-U.S. currencies.The SAN Infrastructure Agreements represent capital leases payable with initialinterest rates ranging from 8.5% to 20.0%.

In 2002, due to a delay in the deployment of the MEOnetwork, the Company attempted to enter into negotiations with the SANOperators to defer certain of the payment obligations and reduce the servicelevels and associated expense of the SAN operational support. Thesenegotiations were unsuccessful and did not result in any significantmodifications to the agreements with the SAN Operators.

The Company continued to explore its strategicalternatives and, in 2003, determined that it only needed some, not all, of theSAN sites to economically deploy the MEO network. Additionally, the Company’sBoard of Directors decided that the Company would no longer provide funding toits subsidiaries to pay the non-U.S. SAN Operators unless the Company receivedadditional funding or the contracts with such operators were restructured toobtain a substantial cost savings. In December 2004, the Company’s Boardof Directors determined to significantly curtail further construction on itsMEO satellite network, which further increased the likelihood that the SANsites would not be utilized in a timely fashion in the contemplated MEOnetwork. As a result of the Company’s decisions, eight of the ten SAN Operatorsterminated their agreements with the Company from 2004 to 2006 and discontinuedproviding the requisite level of services. The Company accrues operatingexpenses until the related agreement is terminated and the SAN Operator hasceased providing services. Certain of the terminated agreements were settled inexchange for a nominal level of consideration, including cash and the transferof assets. Certain of the terminated agreements have not been settled andremain outstanding and potentially subject to litigation (see Note 7).

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Subsequentto the date of termination, the Company has continued to accrue estimated latepayment fees, if applicable, and the interest expense on the capital leases ineffect pursuant to the SAN Infrastructure Agreements. Upon reaching settlementwith the SAN Operator where the SAN Operator’s claims are legally released, theCompany has written off the liability, resulting in the recognition of a gainon contract settlement. The following represents a summary of transactionalactivity with the various SAN Operators (in thousands):

| ** **                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Total SAN  liability, beginning of period                  |       | $                                                    | 42,311     |                                                | $          | 37,897 |   | $ | 40,097 |   | $ | 111,372 |   |
| Expense  recognized under SAN Operating Agreements         |       | 439                                                  |       | 936                                                 |       | 1,511 |   | 2,978 |   |
| Interest expense  related to SAN Infrastructure Agreements |       | 732                                                  |       | 657                                                 |       | 2,108 |   | 3,906 |   |
| Payments made to  SAN Operators                            |       | (230                                                 | )          | (161                                                | )          | (494 | ) | (3,731 | ) |
| Gain recognized  on SAN contract settlement                |       | —                                               |       | —                                              |       | — |   | (74,955 | ) |
| Effect of changes  in foreign currency exchange rates      |       | 241                                                  |       | (24                                                 | )          | 271 |   | (265 | ) |
| Total SAN liability, end  of period                        |       | $                                                    | 43,493     |                                                | $          | 39,305 |   | $ | 43,493 |   | $ | 39,305 |   |

 

Thetotal SAN liability is comprised of the following amounts which are included inthe following line items of the condensed consolidated balance sheets (inthousands):

| ** **                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Accrued expenses                                 |       |                   | $          | 16,123                |       |   |   | $ | 15,107 |   |   |
| Accrued interest                                 |       |                   | 10,021     |                  |       |   | 7,799 |   |   |
| Current portion  of capital lease obligations    |       |                   | 12,754     |                  |       |   | 9,623 |   |   |
| Capital lease obligations,  less current portion |       |                   | 4,595      |                  |       |   | 7,568 |   |   |
|                                             |       |                   | $          | 43,493                |       |   |   | $ | 40,097 |   |   |

 

**6.   ConvertibleLong Term Debt**

In August 2005, ICO North America completed thesale of $650 million aggregate principal amount of convertible notes due in August 2009.The Notes were sold to Qualified Institutional Buyers pursuant to the exemptionfrom the registration requirements of the Securities Act of 1933, as amended,provided by Rule 144A thereunder. The net proceeds from the sale of theNotes are currently being used to develop the MSS/ATC System.

The Notes bear interest ata rate of 7.5% per year, payable semi-annually in arrears in cash on February 15and August 15 of each year, from February 15, 2006 until August 15,2009, the maturity date. Subject to certain exceptions, for the period fromAugust 16, 2007 through August  15, 2009, ICO North America has theoption of paying accrued interest due with additional notes in lieu of cash atan increased interest rate of 8.5% per annum. ICO North America’s MSS/ATCsystem must also be certified as operational by August 15, 2008 or thecoupon increases by 150 basis points for every 30 days, until certification isachieved, up to a maximum of 13.5% per annum.

The aggregate fair valueof the Notes is approximately $793 million as of September 30, 2006and approximately $903.5 million as of December 31, 2005.

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**7.   Commitmentsand Contingencies**

***PurchaseCommitments******—The***Company,through its majority owned subsidiary ICO North America, has an agreement withSpace Systems/Loral, Inc. (“Loral”) to design, develop, manufacture, testand deliver one GEO communications satellite and to develop, test and implementcertain ground based systems related to the operation of the satellite. Thesatellite is expected to be delivered to permit a launch by November 30,2007. The Company also retains an option to purchase one spare GEOcommunications satellite through December 31, 2008.

On March 10, 2006, the Company entered into anagreement with Lockheed Martin Commercial Launch Services, Inc. (“LMCLS”)for the provision of launch services for its GEO satellite. The launch periodestablished for launch of the satellite commences on August 23, 2007. TheCompany has purchased launch risk protection insurance from LMCLS, providingfor a payment to the Company in the event of a satellite failure after launchdue to the launch vehicle. The Company also retains an option to require LMCLSto provide a replacement launch in the event that the Company determines thatthe initial launch resulted in a satellite failure within the first six monthsafter launch.

The launch services contract may be terminated for anyreason by the Company for its convenience. In the case of termination, theCompany’s liabilities are stipulated in an agreed-upon termination liabilityschedule. The same stipulated termination liability schedule would beapplicable if LMCLS terminates the contract due to the Company’s default,including default due to the Company’s delay beyond an agreed upon maximumpostponement period for the launch service. At no time does Company obtaintitle to or ownership in the launch vehicle. The launch vehicle remains theproperty of LMCLS. With certain exceptions, LMCLS is responsible for securingall licenses, approvals and consents as may be required for performance of thelaunch services contract.

Upon a specified default by LMCLS, including LMCLS’sdelay beyond an agreed maximum postponement period for the launch service, theCompany may, subject to certain exceptions, terminate the contract. Under thetermination for default, LMCLS shall refund to the Company all payments made bythe Company. In addition, LMCLS shall be required to pay any liquidated damagesfor delays that have accrued up to the date of notice of termination for default.In the event of default by LMCLS, there can be no assurance that the Companywill be able to find a substitute launch services provider in a timely manneror on economically acceptable terms.

On May 10, 2006, the Company entered into anagreement with Hughes Network Systems, LLC (“HNS”) to provide gateway servicesincluding the design, manufacture, delivery, and test of the radio frequencysubsystem, the gateway system controller, the gateway control network and thegateway system inter-connections. The gateway will be located at the HNSfacility in North Las Vegas, Nevada and is scheduled to be delivered in June 2007.The Company retains an option to purchase a diverse site radio frequencyterminal along with an associated diverse site facility.

This agreement may be terminated for any reason by theCompany for its convenience. In the case of termination, the Company’sliabilities are stipulated in an agreed-upon termination liability schedulethat approximates the total amounts paid or payable by the Company at the timeof termination. The same stipulated termination liability schedule would beapplicable if HNS terminates the contract due to the Company’s default.

Upon a specified defaultby HNS, including HNS’s delay beyond the agreed delivery dates for completionof the gateway, the Company may, subject to certain exceptions, terminate thecontract. Under the termination for default, HNS is required to refund to theCompany all payments made by the Company. In addition, HNS is required to pay anyliquidated damages for delays that have accrued up to the date of notice oftermination for default.

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HNS is responsible for securing all licenses,approvals and consents as may be required for performance of the gatewaycontract. In general, title to and risk of loss of the gateway passes from HNSto the Company when such systems have been proven acceptable.

In the event of default by HNS, there can be noassurance that the Company will be able to find a substitute gateway providerin a timely manner or on economically acceptable terms.

As of September 30, 2006, the Company hadremaining payments of approximately $129.8 million that are payable based onthe achievement of certain construction, delivery and deployment milestonesrelated to the development of the MSS/ATC System, which are expected to occurin 2006 and 2007. These remaining payments relate to the agreements above aswell as other secondary agreements related to the development of the MSS/ATCsystem. Additional payments of $23.2 million related to in-orbit satelliteperformance incentives, including interest, related to the Company’s GEO satellite are payable over 15 yearsfrom 2007 through 2022. In addition to these remaining payments, the Companyhas purchase commitments of approximately $3.5 million related to its MEOsatellite system.

***Lease and OperatingCommitments******—The***Companyhas entered into agreements with ten SAN operators that own and operatesubstantially all of the Company’s SAN sites. Such agreements require therepayment of certain up-front capital asset costs incurred by each SAN operatorin establishing the initial infrastructure for the SAN, as well as payments forongoing operations and related expenses incurred at each SAN site. The Companycontinues to have lease and operating commitments under some of theseagreements (see Note 5).

The Company leases office space and office equipmentunder noncancellable rental agreements accounted for as operating leases. Thetotal rental expense under operating leases was approximately $149,000 and$372,000 for the three and nine months ended September 30, 2006, respectively,and $87,000 and $247,000 for the three and nine months ended September 30,2005, respectively, and is included in general and administrative expense inthe accompanying condensed consolidated statements of operations.

***Internal RevenueService Audit******—For***U.S.federal income tax purposes, the Company realized a gain of more than $300million on the disposition of certain securities in 2003. This gain was offsetby losses incurred in connection with the Company’s MEO network. The Company iscurrently being audited for tax year 2003 by the Internal Revenue Service.While the Company believes it properly treated and reported all items of gainand loss, it is possible that the Company could have a tax liability rangingfrom approximately $50 million to $103 million, not including any interestor penalties that might be imposed. Since the tax liability is not probable atthis time, no amount has been recorded in the Company’s condensed consolidatedfinancial statements.

***Boeing Litigation******—In***responseto the Company’s demand for arbitration, in August 2004, Boeing SatelliteSystems International, Inc. (“BSSI”) filed an action in the Superior Courtof the State of California, in and for the County of Los Angeles, seeking ajudicial declaration that the Company had terminated its contractual agreementswith BSSI, and thereby extinguished all of the Company’s rights and claimsagainst BSSI arising out of or relating to the development, construction andlaunch of the Company’s MEO satellite system. In response, the Company filed across-complaint seeking damages from BSSI for breach of the parties’agreements and for other wrongful, tortuous conduct. Subsequently, theCompany also filed a cross-complaint against The Boeing Company, BSSI’scorporate parent, alleging wrongful, tortuous conduct that also damagedthe Company. BSSI recently filed a cross complaint against the Company seekingunspecified monetary relief. On August 24, 2006, the court denied BSSI’smotions for summary judgement and summary adjudication. A trial date has beenset for September 4, 2007. The Company believes that its claims aremeritorious and is vigorously pursuing a prompt resolution. The ultimateresolution is uncertain and the Company anticipates that the expense ofpursuing this litigation will be material.

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***Deutsche TelekomArbitration******—In***December 2005,Deutsche Telekom initiated arbitration with the InternationalChamber of Commerce against an indirect subsidiary of the Company, ICO GlobalCommunications Holding BV, seeking in excess of $10 million under acontract for the development and operation of a SAN locatedin Usingen, Germany. The arbitration is in the early stages. The Companyis vigorously defending against the claims by Deutsche Telekom but is also consideringopportunities to resolve the matter on favorable economic terms.

***Other******—In***theopinion of management, except those matters described above and in Note 5,litigation, contingent liabilities and claims against the Company in the normalcourse of business are not expected to involve any judgments or settlementsthat would be material to the Company’s financial condition, results ofoperations or cash flows.

**8.   Stockholders’Equity (Deficiency in Assets)**

***Common Stock******—The***Company’srestated certificate of incorporation authorizes two classes of common stock, Class Aand Class B. The rights of the holders of shares of Class A commonstock and Class B common stock are identical, except with respect tovoting and conversion. Holders of shares of Class A common stock areentitled to one vote per share. Holders of shares of Class B common stockare entitled to ten votes per share. The Class B common stock isconvertible at any time at the option of its holder into shares of Class Acommon stock. Each share of Class B common stock is convertible into oneshare of Class A common stock. Additionally, subject to certainexceptions, shares of Class B common stock will automatically convert intoshares of Class A common stock if the shares of Class B common stockare sold or transferred. Class A common stock is not convertible.

***Stock IncentivePlan******—The***2000Stock Incentive Plan (the “Plan”) was adopted following stockholder approval onMay 10, 2000 and was subsequently amended and restated on August 9,2000 and November 17, 2005. The Plan authorizes the grant of incentivestock options, as well as stock awards. In addition, the Company has issued485,000 shares outside of the Plan but with similar terms and conditions as thePlan and has assumed 222,573 shares pursuant to its merger with ICO GlobalLimited in 2001. As of September 30, 2006, the Company has 8,079,573options to purchase the Company’s common stock outstanding to employees andboard members. In accordance with SFAS No. 123(R), the Company recognizedcompensation expense of $1.3 million and $3.5 million related to these optionsduring the three and nine months ended September 30, 2006, respectively(see Note 3).

***Restricted Stock Awards******—In***November 2005,the Company granted 1,600,000 shares of restricted Class A common stock toEagle River Investments, LLC and certain employees and board members.Restricted stock awards of 1,500,000 vested on October 12, 2006. Theremaining 100,000 restricted stock awards vest in two equal installments, on July 14,2007 and 2008. The total compensation cost associated with these awards was$2.4 million and is being charged to expense over the respective vestingperiod. Accordingly, for the three and nine months ended September 30,2006, the Company recognized $533,000 and $1.8 million of compensation expense,respectively.

**9.   RelatedParty Transactions**

***Eagle River******—Eagle River is the Company’s***controllingshareholder with an economic interest of approximately 34.5% and a votinginterest of approximately 69%. ***In***2002, theCompany entered into a month-to-month agreement with Eagle River to provideoffice space and administrative support to the Company in Kirkland, Washington.Total payments made to Eagle River under this agreement were $10,000 and$37,000 for the three and nine months ended September 30, 2006,respectively, and $28,000 and $86,000 for the three and nine months ended September 30,2005, respectively. In addition, in January 2004 the Company entered intoan agreement with an employee of Eagle River to provide the Company withinformation technology support. Total payments under this agreement for thethree and 

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nine months ended September 30,2005 were $33,000 and $57,000, respectively. No payments were made for the ninemonths ended September 30, 2006. In November 2005, the Companyentered into an agreement with Eagle River, Inc. to provide advisoryservices to the Company. This agreement has an annual fee of $500,000 and ispayable in quarterly installments in stock or cash, at the Company’s option.From November 11, 2005 through September 30, 2006, the Company has electedto make all payments in Class A common stock and has issued 72,551 sharesas consideration. As of September 30, 2006, the Company owes Eagle RiverInc. $42,000 pursuant the advisory services agreement which is included inaccrued liabilities in the accompanying condensed consolidated balance sheets.

In November 2005, the Company granted one millionshares of restricted Class A common stock to Eagle River which has beentreated as a stock dividend.

***Davis Wright Tremaine******—A***principalof Eagle River, who is also a board member of the Company, is the spouse of apartner at the law firm Davis Wright Tremaine which provides the Company withongoing legal services. Total payments made to Davis Wright Tremaine were$241,000 and $1.1 million for the three and nine months ended September 30,2006, respectively, and $821,000 and $1.1 million  for the three and nine months ended September 30,2005, respectively.

**10.   Subsequent Events**

On November 9, 2006, the Company filed a request with the FCC toextend the remaining four milestone dates in its authorization for theconstruction and launch of its satellite. The extension is needed to accommodatemanufacture and delivery issues encountered by subcontractors for its satellitemanufacturer, Loral. The Company has requested that the launch of its satellitebe extended until November 30, 2007 (rather than July 1, 2007, themilestone date currently specified by the FCC) and that certification that its MSSsystem is operational be extended until December 31, 2007 (rather than July 17,2007). The Company also asked that the two remaining milestones, whichare technical benchmarks leading to the satellite launch, be extended to April 30,2007 (rather than January 1, 2007) and June 15, 2007 (rather than March 1,2007), respectively.

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***Item 2.****                          Management’sDiscussion and Analysis of Financial Condition and Results of Operations*

The following discussionand analysis should be read in conjunction with the financial statements andaccompanying notes included elsewhere in this quarterly report and in our Form 10/Afiled with the Securities and Exchange Commission on July 12, 2006.

**Special Note Regarding Forward-Looking Statements**

With the exception ofhistorical facts, the statements contained in this management’s discussion andanalysis are “forward-looking” statements. All of these forward-lookingstatements are subject to risks and uncertainties that could cause our actualresults to differ materially from those contemplated by the relevantforward-looking statements. Factors that might cause or contribute to such adifference include, but are not limited to, those discussed under “—Risks andUncertainties” and elsewhere in this Form 10-Q. The forward-lookingstatements included in this document are made only as of the date of thisreport, and we undertake no obligation to publicly update these forward-lookingstatements to reflect subsequent events or circumstances.

The following presentationof management’s discussion and analysis of our financial condition and resultsof operations should be read together with our condensed consolidated financialstatements included in this document.

**Overview**

We are a next-generationMSS operator. We intend to capitalize on the rapid growth of the wirelesssector in the United States by building a hybrid MSS/ATC System to offerubiquitous satellite and terrestrial wireless service throughout the UnitedStates. We are authorized to offer MSS services in the United States using aGEO satellite. We have the opportunity in the future to seek authorization fromthe FCC to integrate ATC into the MSS system in order to provide integratedsatellite and terrestrial services and are developing an advanced hybridsatellite terrestrial system. Our MSS/ATC System is designed to provide voice,data and Internet service throughout the United States to handsets similar toexisting cellular phones.

We are not currentlygenerating revenue from operations. The net losses we have funded and capitalexpenditures we have made since December 31, 2004 primarily relate to thedevelopment of our MSS/ATC System. We expect that our current resources will besufficient to fund the development of this system through 2007. We are focusingour efforts on meeting our planned satellite design, construction and launchschedule, much of which is mandated by the FCC, while maintaining systemdevelopment expenses at our planned levels.

On November 9, 2006, we filed arequest with the FCC to extend the remaining four milestone dates in ourauthorization for the construction and launch of our satellite. The extensionis needed to accommodate manufacture and delivery issues encountered bysubcontractors for our satellite manufacturer, Loral. We have requested thatthe launch of our satellite, our most critical remaining milestone, be extendeduntil November 30, 2007 (rather than July 1, 2007, the milestone datecurrently specified by the FCC) and that the other remaining milestone dates beextended as well. While we believe that such requests to the FCC have beengranted in the past under similar circumstances, there can be no assurance thatthe FCC will grant our request, nor can there be any assurance that Loral orICO will achieve the new milestone dates.

We may offer our servicesto strategic service providers who could incorporate our capabilities to offerintegrated satellite and terrestrial services to their customers. We may alsocommence operations without a strategic partner, a business model that wouldrequire substantially more capital resources than we currently have in order todevelop the ATC portion of our MSS/ATC System. Accordingly, we are meeting withpotential strategic partners as well as exploring alternative sources ofcapital. To provide ATC service, 

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we mustseparately apply to the FCC for ATC authorization, which we expect to do in2007, and meet certain “gating criteria,” which include the provision ofcommercial MSS service, as a pre-condition to obtaining an ATC authorization.

We are also authorized tooperate a MEO satellite system globally pursuant to regulations promulgated bythe United Kingdom and the International Telecommunications Union (“ITU”). Someof these regulations date back to 1997, and these regulations are currentlyunder reconsideration in Europe. There is considerable uncertainty as to howlegacy systems, such as our MEO system, would be treated in any new regulatoryregime. Also, while we have constructed and launched one MEO satellite, wesignificantly curtailed construction activity on our MEO system following onelaunch failure in 2000, as well as disagreements with the manufacturer andlaunch manager of our MEO satellites. The disagreements led to litigation thatcommenced in 2004. As a result of these disagreements as well as the regulatoryuncertainties surrounding our MEO system, we significantly curtailed furtherconstruction of our MEO system.

As a result of thedecision to significantly curtail further construction, the MEO satellitesystem has been written down to its fair value of zero for accounting purposes.Despite the curtailment of construction of our MEO satellite system and theconsiderable uncertainty as to the cost and effectiveness of restarting the MEOsatellite program with our current manufacturer, we continue to explore thepotential development of a MEO business plan outside of North America.

We are considered adevelopment stage enterprise as defined in Statement of Financial AccountingStandards (“SFAS”) No. 7, *Accounting and Reportingby Development Stage Enterprises,* and are not currently generatingrevenue from operations. There is no assurance that we will be able to obtainthe funding necessary to complete the construction of our MSS/ATC System, fundour future working capital requirements, or achieve positive cash flow fromoperations. These and other uncertainties that could materially affect ourresults of operations or liquidity in the future are discussed in greaterdetail below in “—Risks and Uncertainties.” In the event that we are notable to realize our assets in the ordinary course of business and are forced torealize the assets by divestment, there is no assurance that the carrying valueof the assets could be recovered. Our losses to date have been primarily fundedby proceeds from the issuance of various forms of capital and by proceeds fromthe sale of ICO North America’s $650 million aggregate principal amount of7.5% convertible notes (the “Notes”). Management plans to sustain operationswith existing funds and through additional third-party equity or debt financingwhen necessary.

**Critical Accounting Policies**

The accounting policiesdescribed below are considered critical in preparing our condensed consolidatedfinancial statements. Critical accounting policies require difficult,subjective or complex judgments, often as a result of the need to makeestimates about the effect of matters that are inherently uncertain. Thejudgments and uncertainties affecting the application of these policies includesignificant estimates and assumptions made by us using information available atthe time the estimates are made. Actual results could differ materially fromthose estimates.

*Impairment of Long-LivedAssets.**  *Wehave adopted SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*(“SFAS 144”). Pursuant to SFAS 144,the carrying values of long-lived assets are reviewed whenever events orchanges in circumstances indicate that their carrying value may not berecoverable. Management considers whether specific events have occurred indetermining whether long-lived assets are impaired at each balance sheetdate or whenever events or changes in circumstances indicate that the carryingvalue of an asset may not be recoverable. The determination of whetherimpairment exists is based on any excess of the carrying value over theexpected future cash flows. Any resulting impairment charge is measured basedon the difference between the carrying value of the asset and its fair value,as estimated through expected future cash flows, discounted at a market rate ofreturn for a similar investment.

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*Contract Settlements.**  *Our policy with respect to acontract in dispute is to continue to record operating expenses and liabilitiesaccording to our contractual obligation until such contract is terminated. Upontermination, and prior to settlement, we continue to accrue estimated latepayment fees and interest expense, as applicable. Upon reaching settlement, wherebythe other party’s claims are legally released, we will extinguish our recordedliability, resulting in the recognition of a gain or loss on contractsettlement. We recorded substantial gains on contract settlements during 2005.

*Stock Based Compensation.**  *In the first quarter of 2006, weadopted SFAS No. 123(R) (revised 2004), *Share-Based Payment* (“SFAS 123(R)”). Thestatement is a revision of SFAS No. 123, *Accountingfor Stock Based Compensation* (“SFAS 123”) and supersedes AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees*. The statement focuses primarily onaccounting for transactions in which we obtain employee services in share-basedpayment transactions. This statement requires us to measure the cost ofemployee services received in exchange for an award of equity instruments basedon the grant-date fair value of the award. We adopted this statement using themodified prospective method and recorded compensation expense for the three andnine months ended September 30, 2006 of $1.8 million and$5.3 million, respectively, that is included in general administrativeexpense on our condensed consolidated statements of operations. Determining theappropriate fair-value model and calculating the fair value of share-based awardsat the date of grant requires judgment. We use the Black-Scholes option pricingmodel to estimate the fair value of employee stock options, consistent with theprovisions of SFAS 123(R). Option pricing models, including the Black-Scholesmodel, also require the use of input assumptions, including expected risk-freerate of return, expected life, dividend yield, expected volatility, andexpected forfeiture rate. The risk-free interest rate assumption is based uponU.S. Treasury bond interest rates appropriate for the term of our employeestock options. The estimated life is based on historical employee exercisebehavior. The dividend yield assumption is based on our history and expectationof dividend payments. The expected volatility assumption is based upon ourhistorical stock price volatility, which we believe is a reasonable indicatorof expected volatility. Expected forfeiture rate is based on our historicalrate of forfeitures due to voluntary terminations and the fact that we have alimited number of employees, many of whom are critical to us. As of September 30,2006, the balance of stock-based compensation cost to be expensed in futureperiods related to unvested share-based awards, as adjusted for expectedforfeitures, is approximately $13.3 million. The period over which the unearnedstock-based compensation is expected to be recognized is approximately fouryears.

Prior to January 1,2006, we elected to apply the disclosure-only provisions of SFAS 123, and todelay full adoption of SFAS 123 and its revision SFAS 123(R), until the firstquarter of 2006.

*Income Taxes.**  *We must make certain estimates andjudgments in determining income tax expense for financial statement purposes.These estimates and judgments occur in the calculation of tax credits, taxbenefits and deductions. Significant changes to these estimates may result inan increase or decrease to our tax provision in a subsequent period.

We must assess thelikelihood that we will be able to recover our deferred tax assets. If recoveryis not likely, we must record a valuation allowance against the deferred tax assetsthat we estimate will not ultimately be recoverable. Since our utilization ofour deferred tax assets is dependent upon future taxable income that is notassured, we have recorded a valuation allowance equal to the amount of thedeferred tax assets recorded in our condensed consolidated financialstatements. However, should there be a change in our ability to recover ourdeferred tax assets, our tax provision would decrease in the period in which wedetermined that the recovery was likely.

In addition, thecalculation of our tax liabilities involves dealing with uncertainties in theapplication of complex tax regulations. We assess potential liabilities foranticipated tax audit issues in the U.S. and other tax jurisdictions as well asforeign tax obligations based on our estimate of whether, and the extent towhich, additional liabilities are probable. If we ultimately determine thatpayment of these amounts is unnecessary, we reverse the liability and recognizea tax benefit during the period in which we determine 

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that theliability is no longer necessary. We record an additional charge in ourprovision for taxes in the period in which we determine that the recorded taxliability is less than we expect the ultimate assessment to be.

*Contingencies.*   Theoutcomes of legal proceedings and claims brought against us are subject tosignificant uncertainty. SFAS No. 5, *Accounting forContingencies*, requires that an estimated loss from a losscontingency such as a legal proceeding or claim should be accrued by a chargeto income if it is probable that an asset has been impaired or a liability hasbeen incurred and the amount of the loss can be reasonably estimated.Disclosure of a contingency is required if there is at least a reasonablepossibility that a loss has been incurred. In determining whether a loss shouldbe accrued we evaluate, among other factors, the degree of probability of anunfavorable outcome and the ability to make a reasonable estimate of the amountof loss. Changes in these factors could materially impact our financialposition or our results of operations.

**Recent Accounting Pronouncements**

In February 2006, theFASB issued SFAS No. 155, *Accounting for CertainHybrid Financial Instruments*(“SFAS 155”). This statement amendsSFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities* and SFAS No. 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities* to simplify and make more consistentthe accounting for certain financial instruments. This statement permits fairvalue remeasurement for any hybrid financial instrument with an embeddedderivative that otherwise would require bifurcation, provided that the wholeinstrument is accounted for on a fair value basis and establishes a requirementto evaluate interests in securitized financial assets to identify intereststhat are freestanding derivatives or that are hybrid financial instruments thatcontain an embedded derivative requiring bifurcation. This statement alsoallows a qualifying special purpose entity to hold a derivative financialinstrument that pertains to a beneficial interest. SFAS 155 is effective forall financial instruments acquired or issued after December 31, 2006.Earlier adoption is permitted as of the beginning of an entity’s fiscal year,provided the entity has not yet issued financial statements for any interimperiod for that fiscal year. We do not expect the adoption of this statement tohave an impact on our financial position, results of operations or cash flows.

In July 2006, theFASB issued Interpretation No. 48 (“FIN 48”), *Accountingfor Uncertainty in Income Taxes*, which clarifies the accounting foruncertainty in income taxes recognized in the financial statements inaccordance with SFAS No. 109, *Accounting for IncomeTaxes*. FIN 48 provides guidance on the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting for interim periods, disclosures, andtransition. FIN 48 is effective for fiscal years beginning after December 5,2006 and is required to be adopted by us in the first quarter of fiscal year2007. We are currently evaluating the impact that adoption of FIN 48 will haveon our financial position and results of operations.

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements*(“SFAS 157”). This statement clarifies thedefinition of fair value, establishes a framework for measuring fair value, andexpands the disclosures on fair value measurements. SFAS 157 is effective forfiscal years beginning after November 15, 2007. We have not determined theimpact, if any, the adoption of this statement will have on our consolidatedfinancial statements.

In September 2006,the Securities and Exchange Commission staff released Staff Accounting BulletinNo. 108, *Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements*(“SAB 108”). SAB 108**providesguidance on quantifying and evaluating the materiality of unrecordedmisstatements and is effective for annual financial statements ending after November 15,2006. We have not determined the impact, if any, the adoption of this statementwill have on our consolidated financial statements.

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**Results ofOperations**

Thefollowing table is provided to facilitate the discussion of our results ofoperations for the three and nine months ended September 30, 2006 and 2005(in thousands):

| ** **                           | ** ** | **Three months ended September 30,**                                                                         | ** ** | **Nine months ended September 30,**                                                                          | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **          2006          ** | ** ** | **          2005          ** | ** ** | **          2006          ** | ** ** | **          2005          ** | ** ** |
| General and  administrative expenses |       |                                                                                                                             | $          | 8,811                                                                                                                            |       |   |   | $ | 7,708 |   |   |   | $ | 27,296 |   |   |   | $ | 19,484 |   |   |
| Research and development  expenses   |       |                                                                                                                             | 2,831      |                                                                                                                             |       |   | 105 |   |   |   | 3,702 |   |   |   | 570 |   |   |
| Contract settlements                 |       |                                                                                                                             | —     |                                                                                                                             |       |   | — |   |   |   | — |   |   |   | (74,955 | ) |   |
| Gain on disposal of  assets          |       |                                                                                                                             | (8         | )                                                                                                                                |       |   | — |   |   |   | (8 | ) |   |   | (2,030 | ) |   |
| Interest income                      |       |                                                                                                                             | (4,735     | )                                                                                                                                |       |   | (2,980 | ) |   |   | (15,366 | ) |   |   | (3,568 | ) |   |
| Interest expense                     |       |                                                                                                                             | 9,788      |                                                                                                                             |       |   | 7,396 |   |   |   | 32,780 |   |   |   | 10,645 |   |   |
| Other income (expense)               |       |                                                                                                                             | (515       | )                                                                                                                                |       |   | (96 | ) |   |   | (3,745 | ) |   |   | (438 | ) |   |
| Income tax benefit (expense)         |       |                                                                                                                             | 20         |                                                                                                                             |       |   | 283 |   |   |   | (16 | ) |   |   | (1,138 | ) |   |

 

*General andAdministrative Expenses*

General and administrativeexpense, which primarily comprises executive, finance and administrativepersonnel costs, office facilities and related costs and professional fees,increased to $8.8 million for the three months ended September 30, 2006from $7.7 million for the three months ended September 30, 2005. For thenine months ended September 30, 2006, general and administrativeexpenses increased to $27.3 million from $19.5 million for the nine monthsended September 30, 2005. For the nine months ended September 30,2006, the increase is due to an increase in professional fees, compensationexpense related to the hiring of additional employees and $5.3 million innon-cash stock-based compensation recorded in accordance with the adoption ofSFAS 123(R) offset by a decrease in SAN expenses due to the cancellationof certain SAN operating agreements (see “Contract Settlements” below). For thethree months ended September 30, 2006, the increase is due to an increasein compensation expense and  $1.8 millionin non-cash stock-based compensation offset by a decrease in professional feesand SAN operating expenses. We expect general and administrative expenses toincrease in future periods due to the hiring of additional personnel necessaryto support the development of our MSS/ATC System. We anticipate the amount ofincrease will not be significant until the scheduled launch date of oursatellite becomes nearer.

*Research andDevelopment Expenses*

Research and developmentconsists of third-party engineering, consulting and development costsassociated with technology being considered for use in the MSS/ATC System.Research and development expenses for the three and nine months ended September 30,2006 were $2.8 million and $3.7 million, respectively, and $105,000 and$570,000 for the three and nine months ended September 30, 2005,respectively. The increases are due to additional design and developmentactivities related to the network and ground portion of our MSS/ATC system. Weexpect future research and development costs to increase as the pace of thedesign and development of our ground network increases.

*ContractSettlements*

As explained more fully in Note 5 to our condensedconsolidated financial statements, in 2002, due to a delay in the deployment ofthe MEO system, we initiated negotiations with gateway operators to defercertain of the payment obligations and reduce the service levels and associatedexpense under non-cancelable agreements that initially expire in various yearsthrough 2010. These negotiations were unsuccessful.

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In 2003, we determined that we did not need all of ourgateways to economically deploy the MEO system. Additionally, our Board ofDirectors decided to no longer provide funding to certain of our subsidiariesto pay gateway operators unless we received additional funding or the contractswith such operators were restructured to obtain a substantial cost savings. In December 2004,our Board of Directors decided to significantly curtail further construction ofour global MEO satellite system, which further increased the likelihood thatthe gateways would not be utilized in a timely fashion in the contemplated MEOsystem.

As a result of ourdecisions, seven of ten gateway operators terminated their agreements during2004 and 2005 and discontinued providing the requisite level of services. We havecontinued to accrue operating expenses and liabilities according to oursubsidiaries’ contractual obligation until such obligations have been releasedand the operator has ceased providing services, although in most instances oursubsidiaries have suspended or significantly reduced actual payments to theoperators. Subsequent to the date of termination, we have continued to accruelate payment fees, if applicable, and interest expense. In 2005, upon reachingsettlement with four operators, whereby the operators’ claims were legallyreleased, we wrote off the related liabilities and recognized a gain oncontract settlements of $75 million. In 2006, one other gateway operator hasterminated its agreement. As of September 30, 2006, we have an accruedliability of $43.5 million related to unsettled agreements. We will pursuesettlement with regard to the agreements that have been terminated but forwhich our subsidiaries’ obligations have not been released; however, thefinancial impact of settling the remaining agreements cannot be determined atthis time.

*Gain on Disposal ofAssets*

In May 2005, wesettled an outstanding $2 million obligation to a vendor in exchange forcertain specialized communications equipment from two of our MEO gateways,which had a net book value of $0.

*Interest Income*

Interest income of $4.7million and $15.4 million for the three months and nine months endedSeptember 30, 2006, respectively, was attributable to interest earned onthe investment of the proceeds of the Notes issued in August 2005.Interest income for the three and nine months ended September 30, 2005 was$3.0 million and $3.6 million, respectively. We expect interest income todecrease in future periods as our cash, cash equivalents, and available-for-saleinvestments balances decrease as we develop our MSS/ATC System.

*Interest Expense*

Interest expense for the three months and nine monthsended September 30, 2006 was $9.8 million and $32.8 million,respectively. Interest expense for the three months ended September 30,2006 was comprised of interest on the Notes of $12.2 million, amortization ofdebt issuance costs of $1.7 million and interest expense related to the gatewayagreements recorded as capital lease obligations of $732,000, less interestcosts associated with the construction of our MSS/ATC System totaling $4.9million that were capitalized to satellite system under construction. For thenine months ended September 30, 2006, interest expense was comprised ofinterest on the Notes of $36.6 million, amortization of debt issuance costs of$4.9 million and interest expense related to the gateway agreementsrecorded as capital lease obligations of $2.1 million, less interest costsassociated with the construction of our MSS/ATC System totaling $10.9 millionthat were capitalized to satellite system under construction. Interest expensefor the three and nine months ended September 30, 2005 consisted of $6million of interest on the Notes, $892,000 of amortization of debt issuancecosts and interest on the gateway agreements accounted for as capital leases.We expect interest expense to remain consistent with prior periods.

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*Other Income(Expense)*

Other income (expense) iscomprised primarily of gains and losses on foreign currency transactions andthe recognition in the consolidated statement of operations of cumulativetranslation adjustments related to the liquidation of certain foreignsubsidiaries. Other income (expense) for the three and nine months ended September 30,2006 was income of $515,000 and expense of $3.7 million, respectively.Other expense for the three and nine months ended September 30, 2005 was$96,000 and $438,000.

*Income Tax Benefit(Expense)*

Income tax expenserepresents the tax on income of certain of our U.K. entities that generatedtaxable income on a stand-alone basis for the three and nine months endedSeptember 30, 2005. Income tax expense for the three and nine months endedSeptember 30, 2006 was insignificant.

**Liquidity andCapital Resources**

Thefollowing table is provided to facilitate the discussion of our liquidity andcapital resources for the nine months ended September 30, 2006 and 2005(in thousands):

| ** **                                            | ** ** | **Nine months ended September 30,**                                                              | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** |
| Net cash provided  by (used in):                      |       |                                                                                                                 |       |   |   |   |   |   |   |
| Operating activities                                  |       |                                                                                                                 | $          | (61,263 | ) |   |   | $ | (15,083 | ) |   |
| Investing activities                                  |       |                                                                                                                 | 45,627     |   |   |   | (438,857 | ) |   |
| Financing activities                                  |       |                                                                                                                 | 9,963      |   |   |   | 622,147 |   |   |
| Effect of foreign  exchange rate changes              |       |                                                                                                                 | 4,577      |   |   |   | (534 | ) |   |
| Net increase  (decrease) in cash and cash equivalents |       |                                                                                                                 | (1,096     | ) |   |   | 167,673 |   |   |
| Cash and cash  equvalents―beginning of period   |       |                                                                                                                 | 175,510    |   |   |   | 52,551 |   |   |
| Cash and cash equvalents―end of period          |       |                                                                                                                 | $          | 174,414 |   |   |   | $ | 220,224 |   |   |

 

Cash, cash equivalents and available-for-saleinvestments were $282.2 million at September 30, 2006 compared to$471.7 million at December 31, 2005. As explained more fully in thefollowing discussion and analysis of cash flows, the decrease in our liquidityis due primarily to capital expenditures of $174.8 million related to thesatellite system under construction and $14 million for the purchase offirst-priority rights to use a desired orbital slot for our GEO satellite. Webelieve that our cash, cash equivalents and available-for-sale securities willbe sufficient to fund our operational and capital requirements until at leastthe end of 2007.

Cash used in operating activities was $61.3 millionfor the nine months ended September 30, 2006 compared to $15.1 million forthe nine months ended September 30, 2005. For the nine months ended September 30,2006, cash used in operations consisted primarily of our net loss of $52.2million and a decrease in accrued interest payable of $21.1 million partiallyoffset by various non-cash items included in our net loss. Cash used inoperating activities for the nine months ended September 30, 2005consisted primarily of net income of $48.3 million offset by contractsettlements of $75 million and other non-cash items included in net income.

Cash provided by investing activities was $45.6million for the nine months ended September 30, 2006 compared to cash usedin investing activities of $438.9 million for the nine months ended September 30,2005. For the nine months ended September 30, 2006, the primary source ofcash provided by investing activities was the net sales of investmentsecurities of $233.7 million, partially offset by capital expenditures of$174.8 million related to the satellite system under construction and $14million for the purchase of first-priority rights to use a desired orbital slotfor our GEO satellite. Cash used in investing activities for the 

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nine months ended September 30,2005 consisted primarily of $393.6 million of net purchases ofavailable-for-sale securities and $43.4 million related to satellite systemunder construction.

Cash provided by financingactivities was $10 million for the nine months ended September 30, 2006.Cash provided by financing activities for the nine months ended September 30,2006 was primarily attributable to the sale of ICO North America Class Acommon stock and options to purchase shares of ICO North America Class Acommon stock of $9.9 million to certain holders of our Notes. For the ninemonths ended September 30, 2005, cash provided by financing activitiesconsisted of $622.1 million of net proceeds from the issuance of the Notes.

**Risks and Uncertainties**

Certain risks anduncertainties that could materially affect our future results of operations orliquidity are discussed under “Part II—Other Information, Item 1A.Risk Factors” in this Form 10-Q and in our Form 10/A. Inparticular, these risks and uncertainties include, but are not limited to, thefollowing matters:

·       Weoperate in a heavily regulated industry, and our rights to offer our plannedservices are tied to meeting significant milestones or otherwise satisfying ourregulators. In the United States, we have met eight FCC milestones and ourright to use our assigned MSS spectrum to provide service is conditioned on ourcompletion of four additional FCC milestones. However, we have requested for anextension from the FCC of the remaining milestone dates in our authorization for theconstruction and launch of our satellite to accommodate manufacture anddelivery issues encountered by subcontractors for our satellite manufacturer,Loral. We have asked to extend the most critical of the currentremaining milestones—successfully launching our MSS satellite—from July 1,2007 to November 30, 2007. We have also asked to be able to certify thatour MSS system is operational by December 31, 2007, instead of July 17,2007. In addition, our FCC application requests that the other two milestones,which are technical benchmarks leading to the satellite launch, be extendeduntil April 30, 2007 and June 15, 2007, respectively. While webelieve that such requests to the FCC have been granted in the past undersimilar circumstances, there can be no assurance that the FCC will grant ourrequest, nor can there be any assurance that Loral or ICO will achieve the newmilestone dates. If we fail to meet a milestone and we are unable toobtain a waiver or extension, we could lose our MSS authorization, and a lossof our MSS authorization would be an event of default under the indenturegoverning the Notes. Substantially all of the $525 million to $600 millionwe anticipate needing to develop the MSS portion of our MSS/ATC System will beused to complete the tasks to permit us to meet the 2007 milestones.

·       There are many risksinherent to building, launching and maintaining a satellite. We intend toobtain launch vehicle and satellite insurance and maintain in-orbit insurancecoverage. These costs through 2007 are included in our estimated costs forcompleting the MSS portion of our MSS/ATC System. We expect the insurancepolicies to include customary satellite insurance exclusions and/or deductiblesand material change limitations. We anticipate that, as is common in theindustry, we will not insure against business interruption, lost revenues ordelay of revenues in the event of a total or partial loss of the communicationscapacity or life of the satellite. Accordingly, we will not be fully insuredfor all of the potential losses that may be incurred upon a satellite launchfailure or other malfunction. In addition, our business plan contemplatesoperating one satellite, and a launch failure would result in significantdelays in the deployment of the satellite due to the need to construct areplacement, which can take 27 months or longer, and to obtain a launchopportunity for the replacement satellite. If we were unable to obtain a waiveror extension from the FCC, we could lose our MSS authorization, and a loss ofour MSS authorization would be an event of default under the indenturegoverning the Notes. In addition, in the event that the MSS/ATC System is notcertified as operational by August 15, 2008, the annual interest rate onthe Notes will increase by 

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1.5% initially and by anadditional 1.5% every 30 days until certification is achieved, up to amaximum annual interest rate of 13.5%, and all interest payments on the Noteswill be required to be paid in cash.

·       We believe we havesufficient capital resources to complete the MSS portion of our MSS/ATC Systemand certify to the FCC that the MSS portion is operational. We may seekpotential strategic partners to assist us in developing the ATC portion of ourMSS/ATC System. If we chose to complete our MSS/ATC System without partners, wewould need to raise substantial additional funding through equity and/or debtofferings. The category of business or consumer market we choose to serve, thetype and extent of ATC infrastructure necessary to serve such market and thegeographic scope of our service area will affect the amount of capital neededfor the terrestrial ATC portion of our MSS/ATC System. We expect that theadditional funding needed for the type and scope of ATC service we would pursuewithout strategic partners would range from approximately $200 million to$400 million, depending on the business or consumer market we choose toserve, the type and extent of ATC infrastructure necessary to serve such marketand the geographic scope of our service area. If we were to develop the ATCportion of our MSS/ATC System with a strategic partner, we expect that we andthe partner would pursue the development of a more capital intensive ATCinfrastructure that would be more robust and would cover a wider geographicservice area. We do not currently have the funding required to develop the ATCinfrastructure alone. To provide ATC service, we must separately apply to theFCC for ATC authorization, which we expect to do in 2007, and meet certain “gatingcriteria,” which include the provision of commercial MSS service, as apre-condition to obtaining ATC authorization. If the MSS/ATC System is notcertified as operational by August 15, 2008, the annual interest rate onthe Notes will increase by 1.5% initially and by an additional 1.5% every30 days until certification is achieved, up to a maximum annual interestrate of 13.5% and all payments on the Notes will be required to be paid incash.

·       For U.S. federal income taxpurposes, we realized a gain of more the $300 million on the disposition ofcertain securities in 2003. This gain was offset by losses incurred inconnection with the abandonment of certain assets related to our MEO network inthe same year. The Internal Revenue Service is currently auditing our 2003 taxyear in which these transactions occurred. To the extent the IRS disallows thedeductions claimed, we could face a tax liability, although we believe thismay be partially reduced by applying our approximately $124 millionof net operating losses carried forward from previous tax years and ourapproximately $16 million of net operating losses carried back fromsubsequent years. Depending on the outcome of the tax audit and whether we areable to offset a portion of any gain with our operating losses, we could have atax liability ranging from approximately $50 million to $103 million (notincluding any interest or penalties that might be imposed).

·       We are engaged inlitigation with The Boeing Company and BSSI arising out of agreements for thedevelopment and launch of MEO satellites. BSSI’s allegations are unproven andit has not specified the amount of monetary relief is seeking. We have assertedcross-claims that we believe are meritorious. From August 2004 through September 30,2006, we have incurred approximately $9.4 million in pursuing thislitigation and expect that we will continue to incur substantial costs throughthe duration of the litigation. Due to the uncertain nature of litigation andthe many factors beyond our control, we could incur greater costs as thelitigation proceeds.

·       Our MEO system has metseven of eight milestones specified for 2GHz MSS systems in Europe. The finalmilestone to enable us to maintain our MEO authorization would be the provisionof commercial services in Europe. A new regulatory framework with new milestonesis currently being contemplated. There is considerable uncertainty as to howlegacy systems, such as our MEO system, would be treated in any new regulatoryregime. Depending on the development of a MEO business plan and the associatedcosts (including the costs to comply with the final milestone or any new 

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milestones imposed), aswell as the success of discussions with potential partners who could providethe funding for the development of the MEO system, we may or may not proceedwith the development of our physical and regulatory MEO assets.

·       In connection with theiraudit of our financial statements for the years ended December 31, 2003,2004 and 2005, our independent auditors identified material weaknesses in ourinternal controls. Certain of these were matters that could, in our auditor’sjudgment, adversely affect our ability to record, process, summarize and reportfinancial data. The comments and recommendations provided by our auditorsincluded, but were not limited to: the need to employ additional financialreporting staff with adequate technical training and experience in connectionwith the preparation of consolidated financial statements on a timely basis andthe need to improve control procedures with respect to recording journal entries.

As of September 30, 2006, we had not remedied thematerial weaknesses identified by our auditors. If these material weaknessesare not remedied, they could materially adversely affect our business andresults of operations. For example, if we do not have sufficient adequatelytrained and experienced accounting personnel, we may be unable to prepare ourfinancial statements on time and may not accurately reflect our performance orcondition, which may adversely affect our business and compliance with SEC reportingobligations.

We are subject toadditional risks and uncertainties discussed under “Part II—OtherInformation, Item 1A. Risk Factors” included in our Form 10 /A filedwith the Securities and Exchange Commission on July 12, 2006, that couldadversely affect the planned development, operation or commercialization of ourMSS/ATC System and our costs, competitive position, financial condition andability to realize earnings.

**ContractualObligations**

Ourprimary contractual obligations include our long term debt as well as paymentsand other obligations under our primary agreements for the design, manufactureand launch of our GEO satellite and procurement of equipment and other servicesfor our gateway system. In the table below, we set forth our contractualobligations that are payable subsequent to September 30, 2006 (inmillions):

| ** **                         | ** ** | ** ** | ** ** | ** **       | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------|------------|------------|------------|------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | ** ** | ** ** | **Remainder**    | ** ** | ** **                                  | ** ** | ** ** | ** ** | **2011 and** | ** ** |
| ** **                         | ** ** | **Total**  | ** ** | **of 2006** | ** ** | **2007-2008**                               | ** ** | **2009-2010** | ** ** | **Thereafter** | ** ** |
| Long-term debt  obligations(1)     |       | $          | 796.3      |             |       | $                                           | —     |   |   |   | $ | 97.5 |   |   |   | $ | 698.8 |   |   |   | $ | — |   |   |
| Capital lease  obligations         |       | 25.4       |       |             | 15.6       |                                        |       |   | 6.1 |   |   |   | 3.7 |   |   |   | — |   |   |
| SAN operating  lease obligations   |       | 7.0        |       |             | 0.3        |                                        |       |   | 4.6 |   |   |   | 2.1 |   |   |   | — |   |   |
| Other operating  lease obligations |       | 1.8        |       |             | 0.1        |                                        |       |   | 0.7 |   |   |   | 0.6 |   |   |   | 0.4 |   |   |
| Purchase  obligations(2)           |       | 156.5      |       |             | 45.5       |                                        |       |   | 73.4 |   |   |   | 3.9 |   |   |   | 33.7 |   |   |
| Total                              |       | $          | 987.0      |             |       | $                                           | 61.5       |   |   |   | $ | 182.3 |   |   |   | $ | 709.1 |   |   |   | $ | 34.1 |   |   |

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(1)          Assumes all interestpayments on our Notes are made in cash and at an interest rate of 7.5%. Subjectto the satisfaction of certain conditions and to certain exceptions, for theperiod from August 16, 2007 through August 15, 2009, we have theoption of paying interest with additional notes in lieu of cash at an increasedrate of 8.5% per annum. In the event that our MSS/ATC System is not certifiedas operational by August 15, 2008, the interest rate on the Notesincreases by 1.5% initially and by an additional 1.5% every 30 days untilcertification is achieved, up to a maximum annual interest rate of 13.5%, andall payments on the Notes are required to be paid in cash.

(2)          As of September 30,2006, the Company had remaining payments of approximately $129.8 million thatare payable based on the achievement of certain construction, delivery anddeployment milestones related to the development of the MSS/ATC System, whichare expected to occur in 2006 and 2007. 

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These remaining paymentsrelate to the agreements described below as well as other secondary agreementsrelated to the development of the MSS/ATC system. Additional payments of$23.2 million related to in-orbit satellite performance incentives,including interest, related to our GEO satellite are payable over 15 years from2007 through 2022. In addition to these remaining payments, we have purchasecommitments of approximately $3.5 million related to our MEO satellite system.

***Through our***majority ownedsubsidiary ICO North America, we have an agreement with Loral, to design,develop, manufacture, test and deliver one GEO communications satellite and todevelop, test and implement certain ground based systems related to theoperation of the satellite. The satellite is expected to be delivered to permita launch by November 30, 2007. We also retain an option to purchase onespare GEO communications satellite through December 31, 2008.

We may terminate the satellite contract for ourconvenience in whole (meaning as to the whole of the then remaining work) or inpart. In the case of termination in whole, our liabilities are stipulated in anagreed-upon termination liability schedule that approximates the total amountspaid or payable by us at the time of termination. If the satellite portion ofthe contract is terminated, we are required to terminate the contract in whole.The same stipulated termination liability schedule would be applicable if Loralterminates the contract due to our default.

In general, title to and risk of loss of the satellitepasses from Loral to us at the time of intentional ignition of the launchvehicle. Title to the ground based systems passes to us when such systems havebeen proven operable at the gateway. Loral is responsible for maintainingproperty insurance against the risk of loss or damage to the satellite up tothe moment risk of loss passes to us. With certain exceptions, Loral isresponsible for securing all licenses, approvals and consents as may berequired for performance of the satellite contract. Subject to certainexceptions, we bear the risk (including additional costs, if any) resultingfrom excusable delays under the satellite contract, as well as risk of loss forthe satellite from the time of intentional ignition of the launch vehicle.There can be no assurance that events constituting excusable delays will notarise or, if any event constituting excusable delay does arise, that it will beresolved on terms that are not materially adverse to us.

Upon a specified default by Loral, including theinexcusable delay beyond an agreed upon period of delivery of the satellite, wemay, subject to certain exceptions, terminate the contract. Under thetermination for default, Loral shall refund to us all payments made plusinterest thereon from the date payment was received by Loral to the date therefund was received by us. In addition, Loral shall be required to pay anyliquidated damages for delays that have accrued up to the date of notice oftermination for default. Liquidated damages may be available from Loral forfailure to meet the FCC satellite construction implementation milestones andfor late delivery of the satellite. In the event of default by Loral, there canbe no assurance that we will be able to find a substitute provider in a timelymanner or on economically acceptable terms.

On March 10, 2006, we entered into an agreementwith Lockheed Martin Commercial Launch Services, Inc. (“LMCLS”) for theprovision of launch services for our GEO satellite. The launch periodestablished for launch of the satellite commences on August 23, 2007. Wehave purchased launch risk protection insurance from LMCLS, providing for apayment to us in the event of a satellite failure after launch due to thelaunch vehicle. We also retain an option to require LMCLS to provide areplacement launch in the event that we determine that the initial launchresulted in a satellite failure within the first six months after launch.

We may terminate thelaunch services contract for any reason for our convenience. In the case oftermination, our liabilities are stipulated in an agreed-upon terminationliability schedule. The same stipulated termination liability schedule would beapplicable if LMCLS terminates the contract due to our default, includingdefault due to our delay beyond an agreed upon maximum postponement period forthe launch service. At no time do we obtain title to or ownership in the launchvehicle. The launch vehicle 

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remainsthe property of LMCLS. With certain exceptions, LMCLS is responsible forsecuring all licenses, approvals and consents as may be required forperformance of the launch services contract.

Upon a specified defaultby LMCLS, including LMCLS’s delay beyond an agreed maximum postponement periodfor the launch service, we may, subject to certain exceptions, terminate thecontract. Under the termination for default, LMCLS shall refund to us allpayments made by us. In addition, LMCLS shall be required to pay any liquidateddamages for delays that have accrued up to the date of notice of terminationfor default. In the event of default by LMCLS, there can be no assurance thatwe will be able to find a substitute launch services provider in a timelymanner or on economically acceptable terms.

On May 10, 2006, weentered into an agreement with Hughes Network Systems, LLC (“HNS”) to providegateway services including the design, manufacture, delivery, and test of theradio frequency subsystem, the gateway system controller, the gateway controlnetwork and the gateway system inter-connections. The gateway will belocated at the HNS facility in North Las Vegas, Nevada and is scheduled to bedelivered in June 2007. We retain an option to purchase a diverse siteradio frequency terminal along with an associated diverse site facility.

We may terminate thisagreement for any reason for our convenience. In the case of termination, ourliabilities are stipulated in an agreed-upon termination liability schedulethat approximates the total amounts paid or payable by us at the time oftermination. The same stipulated termination liability schedule would beapplicable if HNS terminates the contract due to our default.

Upon a specified defaultby HNS, including HNS’s delay beyond the agreed delivery dates for completionof the gateway, we may, subject to certain exceptions, terminate the contract.Under the termination for default, HNS is required to refund to us all paymentsmade by us. In addition, HNS is required to pay any liquidated damages fordelays that have accrued up to the date of notice of termination for default.

HNS is responsible forsecuring all licenses, approvals and consents as may be required forperformance of the gateway contract. In general, title to and risk of loss ofthe gateway passes from HNS to us when such systems have been provenacceptable.

In the event of default byHNS, there can be no assurance that we will be able to find a substitutegateway provider in a timely manner or on economically acceptable terms.

In addition, we arerequired, under the terms of the indenture governing the Notes, to obtainlaunch insurance and maintain in-orbit insurance coverage, each in an amountequal to the full replacement cost of the GEO satellite. We have not yetdetermined what the cost of obtaining such insurance will be, but expect thelaunch insurance to range from approximately $40 million to$60 million.

**Inflation**

The impact of inflation onour consolidated financial condition and the results of operations was notsignificant during any of the periods presented.

**Off-Balance SheetArrangements**

We do not have any off-balance sheet arrangements.

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***Item 3.***           Quantitativeand Qualitative Disclosures About Market Risk

We have assessed our vulnerability to certain marketrisks, including interest rate risk associated with available-for-salesecurities, long-term debt, accounts payable, capital lease obligations, andcash and cash equivalents and foreign currency risk associated with capitallease obligations and cash held in foreign currencies.

Our investment portfolio consists of fixed income debtsecurities, including money market funds, commercial paper, governmentobligations and corporate bonds, with a fair value of approximately$330.4 million as of September 30, 2006 and $537.6 million as ofDecember 31, 2005. The primary objective of our investments in fixedincome securities is to preserve principal, while maximizing returns andminimizing risk, and our policies require that we make these investments inshort-term, highly-rated securities. For available-for-sale securities,unrealized gains and losses are recorded in other comprehensive income. Losseswill not be realized in the condensed consolidated statement of operationsunless the individual securities are sold prior to recovery or determined to beother-than-temporarily impaired. We manage our interest rate risk by purchasingsecurities with maturities that correspond to our liquidity needs foroperations, capital expenditures and debt service. Due to the short-term natureof these investments (less than 180 days) and our investment policies andprocedures, we have determined that the risk associated with interest ratefluctuations related to these financial instruments is not material to us.

Our convertible long-term debt bears interest at afixed rate of 7.5%, matures on August 15, 2009 and has a fair value ofapproximately $793 million as of September 30, 2006 and approximately$903.5 million as of December 31, 2005.

Our primary foreigncurrency exposure relates to cash balances in foreign currencies. Due to thesmall balances we hold, we have determined that the risk associated withforeign currency fluctuations is not material to us. We do not enter into anyhedging or derivative transactions to manage our exposure to foreign currencyrisk.

***Item 4.***           Controlsand Procedures

*Evaluation ofDisclosure Controls and Procedures*

Our management, with theparticipation of our chief executive officer and chief financial officer,evaluated the effectiveness of our “disclosure controls and procedures” as thatterm is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended, (“Exchange Act”) as of September 30,2006. These disclosure controls and procedures ensure that information requiredto be disclosed by a company in the reports that it files or submits under theExchange Act is recorded, processed, summarized and reported, within the timeperiods specified in the SEC’s rules and forms. Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by a company in the reportsthat it files or submits under the Exchange Act is accumulated and communicatedto the company’s management, including its principal executive and principalfinancial officers, as appropriate to allow timely decisions regarding requireddisclosure. Our management recognizes that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving their objectives and management necessarily applies its judgment inevaluating the cost-benefit relationship of possible controls and procedures.As of September 30, 2006, based on the evaluation of our disclosurecontrols and procedures, our chief executive officer and chief financialofficer concluded that, as of such date, our disclosure controls and procedureswere not effective because of the material weaknesses described below.

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*Material Weaknesses*

During the third quarter of 2005, in connection withits audit of our financial statements for the years ended December 31,2003, 2004 and 2005, our independent registered public accounting firm reportedtwo material weaknesses in the internal controls over our ability to producefinancial statements free from material misstatements. A material weakness is acontrol deficiency, or combination of control deficiencies, that results inmore than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected. For all periodspresented, our independent registered public accounting firm reported a lack ofsufficient qualified technical accounting personnel and deficiencies in ourfinancial closing and report process including but not limited to adequatecontrols regarding appropriate segregation of duties and proper levels ofreview related to the recording of journal entries. Many of the deficienciesnoted were due to the small size of our accounting and finance staff which ledto the concentration of duties in our individual staff members. We believethese deficiencies have existed since the fourth quarter of 2002 when wesignificantly reduced our accounting and finance staff.

In light of the deficiencies described above, we haveperformed additional analysis and reviews to provide reasonable assurance thatthe financial statements in this Form 10-Q have been prepared inaccordance with generally accepted accounting principles.

Our management, with theparticipation of our chief executive officer and chief financial officer, hasdeveloped a plan to address these material weaknesses that includes the hiringof additional qualified technical accounting personnel, performing additionalreviews of journal entries and the performance of an assessment of our currentaccounting and reporting policies and procedures. Since June 30, 2006 wehave hired two additional full-time employees, are in the process of hiring atleast one additional full-time employee, and have developed procedures toprovide for added review of journal entries. In addition to this plan, we haveengaged an outside consulting firm to assist us with our Section 404compliance project that is described below. We believe that these steps willcorrect the material weaknesses described above.

*Section 404Compliance Project*

Beginning with the year ending December 31, 2007,Section 404 of the Sarbanes-Oxley Act of 2002 will require us to includemanagement’s report on our internal control over financial reporting in ourAnnual Report on Form 10-K. The internal control report must contain:(1) a statement of management’s responsibility for establishing andmaintaining adequate internal control over our financial reporting, (2) astatement identifying the framework used by management to conduct the requiredevaluation of the effectiveness of our internal control over financialreporting, (3) management’s assessment of the effectiveness of ourinternal control over financial reporting as of the end of our most recentfiscal year, including a statement as to whether or not our internal controlover financial reporting is effective, and (4) a statement that ourregistered independent public accounting firm has issued an attestation reporton management’s assessment of our internal control over financial reporting.

In order to achieve compliance with Section 404within the prescribed period, management has commenced a Section 404compliance project under which management has engaged outside consultants andadopted a detailed project work plan to assess the adequacy of our internalcontrol over financial reporting, remediate any control deficiencies that maybe identified, validate through testing that controls are functioning asdocumented and implement a continuous reporting and improvement process forinternal control over financial reporting.

During the fiscal quarter ended September 30,2006, there have been no changes in our internal control over financialreporting that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

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**PART II—OTHERINFORMATION**

***Item 1.****                          LegalProceedings*

See Note 7 of ourcondensed consolidated financial statements, *“Commitmentsand Contingencies”* included in Part I, Item 1 of this quarterlyreport, for a discussion of the material legal proceedings to which we are aparty.

***Item 1A.****                  RiskFactors*

The risk factor disclosureincluded under Item 1A of our Form 10/A for the fiscal year ended December 31,2005 and quarter ended March 31, 2006 filed with the SEC on July 12,2006 has not materially changed, except as follows:

***Our 2 GHz MSS authorization is subject to significant implementationmilestones, and we have requested an extension of our remaining milestones dueto delays in the manufacture of our satellite.***

A significant component of our businessstrategy is to offer integrated MSS and ATC service. However, under FCCregulations, we are required to adhere to significant implementation milestonesto maintain authorization to use our assigned MSS spectrum in the United States.To date, we have certified to the FCC that we have met the first eight FCCmilestones. We are required to meet four additional FCC milestones, includingsatellite launch by July 1, 2007, and certification that the MSS system isoperational by July 17, 2007. On November 9, 2006, we filed a requestwith the FCC to extend the remaining milestone dates in our authorization forthe construction and launch of our satellite to accommodate manufacture anddelivery issues encountered by subcontractors for our satellite manufacturer,Loral. We have requested that the launch of our satellite be extended until November 30,2007 (rather than July 1, 2007), that certification that the MSS system isoperational be extended until December 31, 2007 (rather than July 17,2007). In addition, our FCC application requests that the other twomilestones, which are technical benchmarks leading to the satellite launch, beextended until April 30, 2007 and June 15, 2007, respectively. While webelieve that such requests to the FCC have been granted in the past undersimilar circumstances, there can be no assurance that the FCC will grant ourrequest, nor can there be any assurance that Loral or ICO will achieve the newmilestone dates. If we fail to meet a milestone, and we are unable to obtain awaiver or extension, we could lose our MSS authorizations. The loss of our MSSauthorization would have a material adverse effect on our business prospects,financial condition and results of operations, and would be an event of defaultunder the indenture governing the 7.5% notes.

***There are significant risks associated with building, launching andoperating the satellite contemplated under our business plan.***

As an update to the information includedunder this heading in the Risk Factor section of our Form-10/A, we havebeen informed by our satellite manufacturer that it projects a delay indelivery of the satellite. As a result, we have had to request an extensionfrom the FCC of our remaining milestones, and there can be no assurance thatthere will not be further delays in completion of our satellite. Any additionalfuture delays may require us to seek additional regulatory extensions.

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***Item 2.****                          UnregisteredSales of Equity Securities and Use of Proceeds.*

Management believes that thesecurities issuances described in the table below were exempt from theregistration requirements of the Securities Act pursuant to Section 4(2) asa transaction not involving any public offering. The number of investors waslimited, the investors were either accredited or otherwise qualified and hadaccess to material information about the registrant, and restrictions wereplaced on the resale of the securities sold.

| **Date**               | ** ** | ** **                | ** ** | **Title** | ** ** | **Amount** | ** ** | **Consideration** | ** ** | **Recipient** | ** ** |
|------------------------|------------|---------------------------|------------|-----------|------------|------------|------------|-------------------|------------|---------------|------------|
| June 7, 2006      |       | Class A common stock |       |      | 27,851     |       |       |              | —     |          |       | Eagle River, Inc. | (1) |
| August 10, 2006   |       | Class A common stock |       |      | 23,148     |       |       |              | —     |          |       | Eagle River, Inc. | (2) |
| September 5, 2006 |       | Class A common stock |       |      | 21,552     |       |       |              | —     |          |       | Eagle River, Inc. | (3) |

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(1)  Issued as compensation for advisory services performed from November 11,2005 through February 28, 2006.

(2)  Issued as compensation for advisory services performed from March 1,2006 through May 31, 2006.

(3)  Issued as compensation for advisory services performed from June 1,2006 through August 31, 2006.

***Item 3.****                          DefaultsUpon Senior Securities.*

None.

***Item 4.****                          Submissionof Matters to a Vote of Security Holders.*

None.

***Item 5.****                          OtherInformation.*

None.

***Item 6.****                          Exhibits*

| Ex. 31(a) |   | Certification of J. Timothy Bryan, Chief  Executive Officer.                                                                                                                         |
|-----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Ex. 31(b) |   | Certification of Dennis  Schmitt, Senior Vice President, Finance (principal financial officer).                                                                                           |
| Ex. 32    |   | Certification of  J. Timothy Bryan, Chief Executive Officer, and Dennis Schmitt, Senior  Vice President, Finance (principal financial officer), pursuant to 18 U.S.C.  section 1350. |

 

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**SIGNATURES**

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

|                                | **ICO gLOBAL COMMUNICATIONS (HOLDINGS) LIMITED** |
|--------------------------------|--------------------------------------------------|
|                           | (Registrant)                                     |
| Dated: November 14,  2006 | By:                                              | /s/ J. TIMOTHY BRYAN |
|                           |                                             | J. Timothy Bryan |
|                           |                                             | *Chief Executive Officer* |

 

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