**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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**(MarkOne)**

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

**For the quarterly period ended June 30,2006**

**or**

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

**For the transition period from *                *to *                ***

**Commission File Number 000-52006**

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**ICO GLOBAL COMMUNICATIONS(HOLDINGS) LIMITED**

**(Exact name of registrant asspecified 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 o  No x.

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 acceleratedfiler o            Acceleratedfiler 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 No x.

As of August 1, 2006, the registrant had143,269,343 shares of Class A common stock and  54,840,000 shares of Class B common stock outstanding.

 

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**ICO GLOBAL COMMUNICATIONS (HOLDINGS) LIMITEDFORM 10-QFor the three and six months ended June 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 |                                                              |       | 19 |   |   |
| Item 3.                                             | Quantitative  and Qualitative Disclosures About Market Risk                                 |                                                              |       | 29 |   |   |
| Item 4.                                             | Controls  and Procedures                                                                    |                                                              |       | 29 |   |   |
| **PART II.   OTHER  INFORMATION**    |                                                                                        |                                                              |       |   |   |
| Item 1.                                             | Legal  Proceedings                                                                          |                                                              |       | 31 |   |   |
| Item 1A.                                       | Risk Factors                                                                                |                                                              |       | 31 |   |   |
| Item 2.                                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                |                                                              |       | 31 |   |   |
| Item 3.                                             | Defaults  Upon Senior Securities                                                            |                                                              |       | 31 |   |   |
| Item 4.                                             | Submission  of Matters to a Vote of Security Holders                                        |                                                              |       | 31 |   |   |
| Item 5.                                             | Other  Information                                                                          |                                                              |       | 32 |   |   |
| Item 6.                                             | Exhibits                                                                                    |                                                              |       | 32 |   |   |
| Signatures                                          |                                                                                        |                                                              | 33         |   |   |
| Certifications                                      |                                                                                        |                                                              |       |   |   |

 

2

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**PART I—FINANCIALINFORMATION**

***Item 1.****                          FinancialStatements*

**ICOGlobal Communications (Holdings) Limited**(A Development Stage Enterprise)

**Condensed Consolidated Balance Sheets**

**(in thousands, except share data, unaudited)**

| ** **                                                                                                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                      | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                      |       |              |       |                  |       |   |   |
| Current assets:                                                                                                                                 |       |              |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                      |       | $                 | 196,260    |                  |       | $ | 175,510 |   |   |
| Restricted cash                                                                                                                                 |       | 825               |       |                  | 1,650      |   |   |
| Available-for-sale  investments                                                                                                                 |       | 146,144           |       |                  | 296,163    |   |   |
| Restricted  investments                                                                                                                         |       | 48,721            |       |                  | 48,707     |   |   |
| Prepaid expenses  and other current assets                                                                                                      |       | 1,520             |       |                  | 2,002      |   |   |
| Total current  assets                                                                                                                           |       | 393,470           |       |                  | 524,032    |   |   |
| Property in  service—net of accumulated depreciation of $103 and $32                                                                       |       | 395               |       |                  | 323        |   |   |
| Satellite under  construction                                                                                                                   |       | 227,142           |       |                  | 117,068    |   |   |
| Restricted  investments                                                                                                                         |       | 23,332            |       |                  | 46,226     |   |   |
| Debt issuance  costs—net of accumulated amortization of $5,685 and $2,432                                                                  |       | 23,873            |       |                  | 27,126     |   |   |
| Other assets                                                                                                                                    |       | 14,000            |       |                  | —     |   |   |
| Total                                                                                                                                           |       | $                 | 682,212    |                  |       | $ | 714,775 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIENCY IN ASSETS)**                                                                           | ** ** | ** **        | ** ** |                  |       |   |   |
| Current liabilities:                                                                                                                            |       |              |       |                  |       |   |   |
| Accounts payable                                                                                                                                |       | $                 | 131        |                  |       | $ | 1,084 |   |   |
| Accrued payroll                                                                                                                                 |       | 1,055             |       |                  | 1,055      |   |   |
| Accrued satellite  construction payable                                                                                                         |       | 10,534            |       |                  | 27,595     |   |   |
| Accrued expenses                                                                                                                                |       | 19,923            |       |                  | 17,808     |   |   |
| Accrued interest                                                                                                                                |       | 27,348            |       |                  | 25,950     |   |   |
| Income tax payable                                                                                                                              |       | 1,287             |       |                  | 1,240      |   |   |
| Current portion of  capital lease obligations                                                                                                   |       | 11,378            |       |                  | 9,623      |   |   |
| Total current  liabilities                                                                                                                      |       | 71,656            |       |                  | 84,355     |   |   |
| Capital lease  obligations, less current portion                                                                                                |       | 5,828             |       |                  | 7,568      |   |   |
| Convertible  long-term debt                                                                                                                     |       | 650,000           |       |                  | 650,000    |   |   |
| Total liabilities                                                                                                                               |       | 727,484           |       |                  | 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, 201,238,235 and  200,203,884 shares issued and outstanding           |       | 2,012             |       |                  | 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                                                                                                                     |       | 2,711,330         |       |                  | 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                                                                                                         |       | 12,449            |       |                  | 9,127      |   |   |
| Deficit  accumulated during the development stage                                                                                               |       | (1,894,432        | )          |                  | (1,859,449 | ) |   |
| Total  stockholders’ equity (deficiency in assets)                                                                                         |       | (45,272           | )          |                  | (27,148    | ) |   |
| Total                                                                                                                                           |       | $                 | 682,212    |                  |       | $ | 714,775 |   |   |

 

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

3

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**ICO GlobalCommunications (Holdings) Limited(A Development Stage Enterprise)**

**Condensed Consolidated Statements of Operations**

**(in thousands, except share and per share data,unaudited)**

| ** **                                                                           | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **  | ** ** | **February 9, 2000** | ** **  |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|------------------|------------|-------------|------------|--------------------------------|-------------|
| ** **                                                                           | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **  | ** ** | **(inception) to**        | ** **  |
| ** **                                                                           | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **  | ** ** | **June 30,**              | ** **  |
| ** **                                                                           | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** | **2006**         | ** ** |
| ** **                                                                           | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** | **(development** | ** ** |
| ** **                                                                           | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006**         | ** ** | **2005**    | ** ** | **stage period)**         | ** **  |
| Operating expenses:                                                                  |       |                             |       |                           |       |             |       |        |       |                           |        |   |   |
| General and administrative                                                           |       | $                                | 9,476      |                           | $          | 6,423            |       | $           | 18,485     |                           | $           | 11,776 |   |   | $ | 557,993 |   |   |
| Research and development                                                             |       | 843                              |       | 465                            |       | 871              |       | 465         |       |                           | 63,598      |   |   |
| Contract settlements                                                                 |       | —                           |       | (66,423                        | )          | —           |       | (74,955     | )          |                           | (74,955     | ) |   |
| Impairment of property under construction                                            |       | —                           |       | —                         |       | —           |       | —      |       |                           | 1,438,304   |   |   |
| (Gain) loss on disposal of assets                                                    |       | —                           |       | (2,030                         | )          | —           |       | (2,030      | )          |                           | 11,108      |   |   |
| Operating income (loss)                                                              |       | (10,319                          | )          | 61,565                         |       | (19,356          | )          | 64,744      |       |                           | (1,996,048  | ) |   |
| Interest income                                                                      |       | 5,050                            |       | 273                            |       | 10,631           |       | 588         |       |                           | 112,705     |   |   |
| Interest expense                                                                     |       | (10,673                          | )          | (718                           | )          | (22,992          | )          | (3,249      | )          |                           | (129,579    | ) |   |
| Other income (expense)                                                               |       | 362                              |       | (274                           | )          | (3,230           | )          | (342        | )          |                           | (358        | ) |   |
| Income (loss) before income taxes                                                    |       | (15,580                          | )          | 60,846                         |       | (34,947          | )          | 61,741      |       |                           | (2,013,280  | ) |   |
| Income tax benefit (expense)                                                         |       | 4                                |       | (1,400                         | )          | (36              | )          | (1,421      | )          |                           | 120,792     |   |   |
| Net income (loss) before cumulative effect of a change  in accounting principle      |       | (15,576                          | )          | 59,446                         |       | (34,983          | )          | 60,320      |       |                           | (1,892,488  | ) |   |
| Cumulative effect of a change in  accounting principle                               |       | —                           |       | —                         |       | —           |       | —      |       |                           | (1,944      | ) |   |
| Net income (loss)                                                                    |       | $                                | (15,576    | )                              | $          | 59,446           |       | $           | (34,983    | )                              | $           | 60,320 |   |   | $ | (1,894,432 | ) |   |
| Basic income  (loss) per share:                                                      |       |                             |       |                           |       |             |       |        |       |                           |        |   |   |
| Income (loss) before cumulative effect of change  in accounting principle       |       | $                                | (0.08      | )                              | $          | 0.31             |       | $           | (0.18      | )                              | $           | 0.31 |   |   | $ | (9.85 | ) |   |
| Cumulative effect of a change in accounting principle                                |       | —                           |       | —                         |       | —           |       | —      |       |                           | (0.01       | ) |   |
| Basic income (loss) per share                                                        |       | $                                | (0.08      | )                              | $          | 0.31             |       | $           | (0.18      | )                              | $           | 0.31 |   |   | $ | (9.86 | ) |   |
| Diluted income  (loss) per share:                                                    |       |                             |       |                           |       |             |       |        |       |                           |        |   |   |
| Income (loss) before cumulative effect of change  in accounting principle       |       | $                                | (0.08      | )                              | $          | 0.30             |       | $           | (0.18      | )                              | $           | 0.30 |   |   | $ | (9.85 | ) |   |
| Cumulative effect of a change in accounting principle                                |       | —                           |       | —                         |       | —           |       | —      |       |                           | (0.01       | ) |   |
| Diluted income (loss) per share                                                      |       | $                                | (0.08      | )                              | $          | 0.30             |       | $           | (0.18      | )                              | $           | 0.30 |   |   | $ | (9.86 | ) |   |
| Weighted average shares outstanding used to compute  basic income (loss) per  share  |       | 197,488,531                      |       | 194,653,602                    |       | 197,485,031      |       | 194,653,602 |       |                           | 192,148,150 |   |   |
| Weighted average shares outstanding used to compute  diluted income (loss) per share |       | 197,488,531                      |       | 199,771,453                    |       | 197,485,031      |       | 199,757,244 |       |                           | 192,148,150 |   |   |

 

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

4

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**ICO GlobalCommunications (Holdings) Limited(A Development Stage Enterprise)**

**CondensedConsolidated Statements of Comprehensive Income (Loss)(in thousands, except share and per share data, unaudited)**

| ** **                            | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** **       | ** ** | ** ** | ** ** | **February 9, 2000** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|------------------|------------|------------|------------|--------------------------------|------------|
| ** **                            | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** **       | ** ** | ** ** | ** ** | **(inception) to**        | ** ** |
| ** **                            | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** **       | ** ** | ** ** | ** ** | **June 30,**              | ** ** |
| ** **                            | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** | **2006**         | ** ** |
| ** **                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** | **(development** | ** ** |
| ** **                            | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006**         | ** ** | **2005**   | ** ** | **stage period)**         | ** ** |
| Net income (loss)                     |       | $                                | (15,576    | )                              | $          | 59,446           |       | $          | (34,983    | )                              | $          | 60,320 |   |   | $ | (1,894,432 | ) |   |
| Other comprehensive  income (loss):   |       |                             |       |                           |       |             |       |       |       |                           |       |   |   |
| Unrealized gain (loss) on investments |       | (9                               | )          | 31                             |       | 27               |       | (30        | )          |                           | (48        | ) |   |
| Cumulative translation adjustments    |       | (515                             | )          | 452                            |       | 3,295            |       | 593        |       |                           | 12,497     |   |   |
| Comprehensive income  (loss)          |       | $                                | (16,100    | )                              | $          | 59,929           |       | $          | (31,661    | )                              | $          | 60,883 |   |   | $ | (1,881,983 | ) |   |

 

 

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**                        | ** ** |
| ** **                                                                            | ** ** | ** **                     | ** ** | ** **       | ** ** | **June 30,**                              | ** ** |
| ** **                                                                            | ** ** | **Six months ended** | ** ** | **2006**         | ** ** |
| ** **                                                                            | ** ** | **June 30,**              | ** ** | **(development** | ** ** |
| ** **                                                                            | ** ** | **2006**                       | ** ** | **2005**         | ** ** | **  stage period)  ** | ** ** |
| Operating activities:                                                                 |       |                           |       |             |       |                                           |       |   |   |
| Net income (loss)                                                                     |       | $                              | (34,983    | )                | $          | 60,320                                         |       |   | $ | (1,894,432 | ) |   |
| Adjustments to reconcile  net income (loss) to net cash used in operating activities: |       |                           |       |             |       |                                           |       |   |   |
| Stock-based  compensation                                                             |       | 3,464                          |       | —           |       |                                           | 23,099     |   |   |
| Depreciation                                                                          |       | 69                             |       | —           |       |                                           | 3,380      |   |   |
| Amortization of  debt issuance costs                                                  |       | 3,253                          |       | —           |       |                                           | 5,685      |   |   |
| Unrealized foreign  exchange (gain) loss                                              |       | (999                           | )          | 375              |       |                                           | (5,386     | ) |   |
| (Gain) loss on  disposal of assets                                                    |       | —                         |       | (2,030           | )          |                                           | 11,108     |   |   |
| 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                                            |       | 521                            |       | 294              |       |                                           | 48,734     |   |   |
| Accrued interest  income                                                              |       | 179                            |       | (285             | )          |                                           | (4,140     | ) |   |
| Accounts payable                                                                      |       | (958                           | )          | 64               |       |                                           | (816       | ) |   |
| Accrued interest  payable                                                             |       | (4,853                         | )          | 3,227            |       |                                           | 72,778     |   |   |
| Accrued payroll  and other accrued expenses                                           |       | 2,258                          |       | 388              |       |                                           | 60,147     |   |   |
| Net cash used in  operating activities                                                |       | (32,049                        | )          | (12,602          | )          |                                           | (376,295   | ) |   |
| 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 under construction                                            |       | (121,099                       | )          | (8,750           | )          |                                           | (209,344   | ) |   |
| Purchases of  property under construction                                             |       | —                         |       | —           |       |                                           | (497,890   | ) |   |
| Purchases of  property in service                                                     |       | (141                           | )          | —           |       |                                           | (1,971     | ) |   |
| Investment in  unconsolidated subsidiaries                                            |       | —                         |       | —           |       |                                           | (2,373     | ) |   |
| Purchases of other  assets                                                            |       | (14,000                        | )          | —           |       |                                           | (14,000    | ) |   |
| Purchases of  available-for-sale investments                                          |       | (177,874                       | )          | (34,314          | )          |                                           | (3,372,495 | ) |   |
| Maturities and  sales of available-for-sale investments                               |       | 326,688                        |       | 9,794            |       |                                           | 3,228,488  |   |   |
| Purchases of  restricted investments                                                  |       | (626                           | )          | —           |       |                                           | (94,209    | ) |   |
| Maturities of  restricted investments                                                 |       | 24,559                         |       | —           |       |                                           | 24,559     |   |   |
| Proceeds from  contract amendments                                                    |       | —                         |       | —           |       |                                           | 44,434     |   |   |
| Proceeds from sale  of assets                                                         |       | —                         |       | 30               |       |                                           | 12,098     |   |   |
| Net cash provided  by (used in) investing activities                                  |       | 38,332                         |       | (34,890          | )          |                                           | (948,756   | ) |   |
| Financing activities:                                                                 |       |                           |       |             |       |                                           |       |   |   |
| Net proceeds from  issuance of common stock                                           |       | —                         |       | —           |       |                                           | 597,875    |   |   |
| Proceeds from  issuance of convertible notes                                          |       | —                         |       | —           |       |                                           | 650,000    |   |   |
| Debt issuance  costs                                                                  |       | —                         |       | —           |       |                                           | (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                                            |       | 9,920                          |       | —           |       |                                           | 1,525,742  |   |   |
| Effect of foreign  exchange rate changes on cash and cash equivalents                 |       | 4,547                          |       | (102             | )          |                                           | (4,431     | ) |   |
| Net increase  (decrease) in cash and cash equivalents                                 |       | 20,750                         |       | (47,594          | )          |                                           | 196,260    |   |   |
| Cash and cash  equivalents—beginning of period                                   |       | 175,510                        |       | 52,551           |       |                                           | —     |   |   |
| Cash and cash  equivalents—end of period                                         |       | $                              | 196,260    |             | $          | 4,957                                          |       |   | $ | 196,260 |   |   |

 

6

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

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

 

| ** **                                                                                                           | ** ** | ** **                     | ** ** | ** **       | ** ** | **February 9, 2000**                 | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                           | ** ** | ** **                     | ** ** | ** **       | ** ** | **(inception) to**                        | ** ** |
| ** **                                                                                                           | ** ** | ** **                     | ** ** | ** **       | ** ** | **June 30,**                              | ** ** |
| ** **                                                                                                           | ** ** | **Six months ended** | ** ** | **2006**         | ** ** |
| ** **                                                                                                           | ** ** | **June 30,**              | ** ** | **(development** | ** ** |
| ** **                                                                                                           | ** ** | **2006**                       | ** ** | **2005**         | ** ** | **  stage period)  ** | ** ** |
| Supplemental disclosure:                                                                                             |       |                           |       |             |       |                                           |       |   |   |   |   |
| Income taxes paid                                                                                                    |       | $                              | —     |             |       | $                                              | —     |   |   |   | $ | 7,288 |   |   |
| Interest paid                                                                                                        |       | 24,374                         |       |             | —     |                                           |       |   | 77,276 |   |   |
| Capitalized interest                                                                                                 |       | 6,037                          |       |             | —     |                                           |       |   | 7,265 |   |   |
| 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 amounts due under satellite  construction payable                                             |       | (17,061                        | )          |             | —     |                                           |       |   | 10,534 |   |   |
| Equipment acquired in capital lease agreements                                                                       |       | —                         |       |             | —     |                                           |       |   | 42,096 |   |   |
| Issuance of warrants for the repayment of debt                                                                       |       | —                         |       |             | —     |                                           |       |   | 4,950 |   |   |
| Issuance of Class A common shares for advisory services                                                              |       | 153                            |       |             | —     |                                           |       |   | 153 |   |   |
| 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 Condensed Consolidated 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)pursuant to regulations promulgated by the United Kingdom and, through itsmajority owned 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 the event thatthe Company is not able to realize its assets in the ordinary course ofbusiness, and is forced to realize the assets by divestment, there is noassurance that the carrying value of the assets could be recovered. The Company’slosses to date have been primarily funded by proceeds from the issuance ofvarious forms of capital and the sale of $650 million aggregate principalamount of convertible notes due in August 2009 (the “Notes”) (see Note 6).

**3.**                 Summaryof Significant Accounting Policies

***Interim Financial Statements******—***Thefinancial information as of June 30, 2006 and for the three and six monthsended June 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, considerednecessary for a fair presentation. Certain information and footnote disclosureshave been condensed or omitted. The financial information as ofDecember 31, 2005, is derived from the 

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Company’s auditedconsolidated financial statements and notes for the year endedDecember 31, 2005, included in Item 13 in the Company’s Form 10/A forthe year ended December 31, 2005.These financial statements should be readin conjunction with the financial statements and notes for the year ended December 31,2005 included in the Company’s Form 10/A filed with the Securities andExchange Commission. Operating results for the interim period presented are notnecessarily indicative 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, andasset useful lives, among others. Actual results could differ from thoseestimates. Estimates are evaluated on an ongoing 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):

| ** **          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------|------------|-------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Cash                |       | $                 | 23,761     |                  |       | $ | 20,821 |   |   |
| Money market  funds |       | 20,427            |       |                  | 7,877      |   |   |
| Commercial paper    |       | 152,072           |       |                  | 146,812    |   |   |
|                |       | $                 | 196,260    |                  |       | $ | 175,510 |   |   |

*** ***

***Restricted Cash******—As***of June 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.

***Restricted Investments******—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 June 30, 2006, restricted investments with maturitydates in August 2006 and February 2007 are classified current andrestricted investments with maturity dates in August 2007 are classifiedas non-current. As of December 31, 2005, restricted investments withmaturity dates during 2006 are classified as current and restricted investmentswith maturity dates in 2007 are classified as non-current. Gross unrealizedlosses were $496,000 and $304,000 as of June 30, 2006 and December 31,2005, respectively.

***Satellite Under Construction******—***Satelliteunder 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 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 failures will be recognized as those eventsoccur, and insurance proceeds, if any, related to such losses will be recordedwhen their realization becomes determinable.

***Capitalized Interest******—The*** Companycapitalizes interest costs associated with the construction of the MSS/ATCSystem. Interest capitalized to satellite under construction for the three andsix months ended June 30, 2006 was $3.8 million and $6 million,respectively. There was no capitalized interest recorded during the six monthsended June 30, 2005.

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***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 condensed consolidatedstatements of operations and totaled $1.6 million and $3.3 million for thethree and six months ended June 30, 2006, respectively. There was noamortization of debt issuance costs during the six months ended June 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 under construction, currentlyanticipated to be ten to fifteen years.***

***Stock-based Compensation******—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 Securitiesand Exchange 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 six months ended June 30, 2006 reflect the impact of SFAS123(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 recordsstock-based compensation on stock options and restricted stock awards issued toemployees and directors. Stock-based compensation expense recorded onoutstanding options and restricted stock recognized under SFAS 123(R) forthe three and six months ended June 30, 2006 was $1.8 million and$3.5 million, respectively, net of income taxes of $0, and is included ingeneral and administrative expenses on the condensed consolidated statements ofoperations. There were no unvested stock options or restricted stockoutstanding for the three and six months ended June 30, 2005.

SFAS 123(R) requirescompanies to estimate the fair value of share-based payment awards on the dateof grant using an option-pricing model. The value of the portion of the awardthat is ultimately expected to vest is recognized as expense over the requisiteservice period in the Company’s statements of operations. Prior to the adoptionof SFAS 123(R), the Company accounted for stock-based awards to employees anddirectors using the intrinsic value method in accordance with APB 25 as allowedunder SFAS No. 123, *Accounting for Stock-BasedCompensation* (“SFAS 123”). Under the intrinsic value method, nostock-based compensation expense for stock option grants is recognized as theexercise price of the Company’s stock options granted to employees anddirectors was equal to or greater than the fair market value of the underlyingstock at the date of grant. 

Stock-based compensationexpense recognized in the Company’s condensed consolidated statements of operationsfor the three and six months ended June 30, 2006 includes compensationexpense for share-based payment awards granted prior to, but not yet vested asof, December 31, 2005, based on the grant date fair value estimated inaccordance with the pro forma provisions of SFAS 123 and compensation expensefor the share-based payment awards granted subsequent to December 31,2005, based on the grant date fair value estimated in accordance with theprovisions of SFAS 123(R). Stock-based compensation expense recognized in theCompany’s condensed consolidated statements of operations for the three and 

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sixmonths ended June 30, 2006 is based on awards ultimately expected to vest.SFAS 123(R) requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. 

The Company used theBlack-Scholes option-pricing model (“Black-Scholes”) as its method of valuationunder SFAS 123(R) in 2006 and a single option award approach. This fairvalue is then amortized on a straight-line basis over the requisite serviceperiods of the awards, which is generally the vesting period. Black-Scholes wasalso previously used for the Company’s pro forma information required underSFAS 123 for periods prior to 2006. The fair value of share-based paymentawards on the date of grant as determined by the Black-Scholes model isaffected by the Company’s stock price as well as other assumptions. Theseassumptions include, but are not limited to, the expected stock pricevolatility over the term of the awards and actual and projected employee stockoption exercise behaviors.

Theweighted-average estimated value of employee stock options granted during thesix months ended June 30, 2006 was estimated using the Black-Scholes modelwith the following assumptions:

| ** **                | ** ** | **Six months ended  June 30, 2006** | ** ** |
|---------------------------|------------|---------------------------------------------------------|------------|
| Expected  volatility      |       |                                                    | 37         | % |   |
| Risk-free  interest rate  |       |                                                    | 5.0        | % |   |
| Expected  dividends       |       |                                                    | 0          | % |   |
| Expected  forfeiture rate |       |                                                    | 0          | % |   |
| Expected term in years    |       |                                                    | 10         |   |   |

 

The expected volatilityassumption was based upon the Company’s historical stock price volatility,which the Company believes is a reasonable indicator of expected volatility.The risk-free interest rate assumption is based upon U.S. Treasury bondinterest 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.

During the six monthsended June 30, 2006, the Board of Directors’ granted 1,340,000 options topurchase common stock to employees of the Company. The options to purchasecommon stock vest over four years. The weighted average fair value per sharefor these options was $2.80, and the fair value of these options is $3.8million.

At June 30, 2006, thebalance of stock-based compensation cost to be expensed in future periodsrelated to unvested share-based awards, as adjusted for expected forfeitures,is approximately $15.1 million. The period over which the unearnedstock-based compensation is expected to be recognized is approximately fouryears.

***Accumulated Other Comprehensive 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 June 30, 2006consisted of cumulative translation adjustments of $12.5 million, lessunrealized losses on available-for-sale investments of $48,000. 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.

***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 

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dilutive potentialcommon stock. Potential common stock includes unvested restricted stock, stockoptions and warrants, the dilutive effect of which is calculated using thetreasury stock method. Prior to satisfaction of all conditions of vesting,unvested restricted stock is considered contingently issuable consistent withSFAS No. 128, *Earnings per Share*,and is excluded from weighted average common shares outstanding.

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

| ** **                                                            | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income (loss)                                                     |       | $                                                   | (15,576    | )                                                 | $          | 59,446 |   | $ | (34,983 | ) | $ | 60,320 |   |
| Weighted average  common shares outstanding                           |       | 198,088,531                                         |       | 194,653,602                                       |       | 198,085,031 |   | 194,653,602 |   |
| Less: unvested  restricted stock                                      |       | (600,000                                            | )          | —                                            |       | (600,000 | ) | — |   |
| Shares used for  computation of basic earnings per share         |       | 197,488,531                                         |       | 194,653,602                                       |       | 197,485,031 |   | 194,653,602 |   |
| Add: dilutive  unvested restricted stock, stock options and  warrants |       | —                                              |       | 5,117,851                                         |       | — |   | 5,103,642 |   |
| Shares used for  computation of diluted earnings per share(1)         |       | 197,488,531                                         |       | 199,771,453                                       |       | 197,485,031 |   | 199,757,244 |   |
| Basic earnings (loss) per share                                       |       | $                                                   | (0.08      | )                                                 | $          | 0.31 |   | $ | (0.18 | ) | $ | 0.31 |   |
| Diluted earnings  (loss) per share                                    |       | $                                                   | (0.08      | )                                                 | $          | 0.30 |   | $ | (0.18 | ) | $ | 0.30 |   |

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       (1) The effect of certain stock options andwarrants was anti-dilutive, and they were not included in the calculation ofdiluted earnings per share. Anti-dilutive options and warrants totaled60,033,075 and 49,470,965 as of June 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*. This statement amends SFASNo. 133, *Accounting for Derivative Instruments andHedging Activities* and SFAS No. 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities* to simplify and make more consistent the accounting forcertain financial instruments. This statement permits fair value remeasurementfor any hybrid financial instrument with an embedded derivative that otherwisewould require bifurcation, provided that the whole instrument is accounted foron a fair value basis and establishes a requirement to evaluate interests insecuritized financial assets to identify interests that are freestandingderivatives or that are hybrid financial instruments that contain an embeddedderivative requiring bifurcation. This statement also allows a qualifyingspecial purpose entity to hold a derivative financial instrument that pertainsto a beneficial interest. SFAS No. 155 is effective for all financialinstruments acquired or issued after December 31, 2006. Earlier adoptionis permitted as of the beginning of an entity’s fiscal year, provided theentity has not yet issued financial statements for any interim period for thatfiscal year. The Company does not expect the adoption of this statement to havean impact on its 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 and transition.FIN 48 is effective for fiscal years beginning after December 15, 

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2006 andis required to be adopted by the Company in the first quarter of fiscal year 2007.The Company is currently evaluating the impact that adoption of FIN 48 willhave on its financial position and results of operations.

**4.**                 Available-For-SaleInvestments

Available-for-saleinvestments are carried at fair value and generally mature or reset interestrates within six months from the purchase date. The Company includes anyunrealized gains and losses on investments, net of tax, in stockholders’ equity(deficiency in assets) as a component of accumulated other comprehensive income(loss).

Individual securities witha fair value below the cost basis at June 30, 2006 were evaluated to determineif they were other-than-temporarily impaired. These securities were determinedto be only temporarily impaired because the decline in value was related tochanges in market interest rates and the Company has the ability and intent tohold these securities until they recover. No securities have been in acontinuous loss position for 12 months or longer.

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

| ** **       | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|------------------|------------|---------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **       | ** ** | **Amortized** | ** ** | **unrealized** | ** ** | **unrealized** | ** ** | **Fair**   | ** ** |
| ** **       | ** ** | **cost**      | ** ** | **gains**      | ** ** | **losses**     | ** ** | **value**  | ** ** |
| Commercial paper |       | $             | 146,192    |           |       | $              | —     |       |       |   | $ | (48 | ) |   | $ | 146,144 |   |
|                  |            |               |            |                |            |                |            |            |            |  |  |  |  |  |  |  |  |

 

**5.**                 Satellite AccessNode Agreements and Contract Settlements

As part of the groundinfrastructure for its MEO satellite network, the Company established SANs ineleven countries throughout the world. One SAN is owned and operated by theCompany. Prior to 2000, the Company entered into noncancellable agreements withten vendors (“SAN Operators”) that own and operate the Company’s SAN sites invarious locations around the world. All of the agreements provide for varyinglevels of support required to operate the SAN sites (“SAN Operating Agreements”).Additionally, certain of the agreements require the repayment of certainup-front infrastructure costs incurred on the Company’s behalf (“SANInfrastructure Agreements”). Both the SAN Operating Agreements and the SANInfrastructure Agreements initially expire in various years through 2010 andare payable in U.S. and non-U.S. currencies. The SAN Infrastructure Agreementsrepresent capital leases payable with initial interest rates ranging from 8.5%to 20.0%.

In 2002, due to a delay inthe deployment of the MEO network, the Company attempted to enter intonegotiations with the SAN Operators to defer certain of the payment obligationsand reduce the service levels and associated expense of the SAN operationalsupport. These negotiations were unsuccessful and did not result in anysignificant modifications 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 

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terminated and the SANOperator has ceased providing services. Certain of the terminated agreementswere settled in exchange for a nominal level of consideration, including cashand the transfer of assets. Certain of the terminated agreements have not beensettled and remain outstanding and potentially subject to litigation (see Note7).

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 June 30,**                                                      | ** ** | **Six Months Ended June 30,**                                                        | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** |
| Total SAN  liability, beginning of period                  |       |                                                                                                     | $          | 41,099                                                                                                   |       |   |   | $ | 103,718 |   |   |   | $ | 40,097 |   |   |   | $ | 111,372 |   |   |
| Expense  recognized under SAN Operating Agreements         |       |                                                                                                     | 448        |                                                                                                     |       |   | 965 |   |   |   | 1,072 |   |   |   | 2,042 |   |   |
| Interest expense  related to SAN Infrastructure Agreements |       |                                                                                                     | 703        |                                                                                                     |       |   | 718 |   |   |   | 1,376 |   |   |   | 3,249 |   |   |
| Payments made to  SAN Operators                            |       |                                                                                                     | (162       | )                                                                                                        |       |   | (950 | ) |   |   | (264 | ) |   |   | (3,570 | ) |   |
| Gain recognized  on SAN contract settlements               |       |                                                                                                     | —     |                                                                                                     |       |   | (66,423 | ) |   |   | — |   |   |   | (74,955 | ) |   |
| Effect of changes  in foreign currency exchange rates      |       |                                                                                                     | 223        |                                                                                                     |       |   | (131 | ) |   |   | 30 |   |   |   | (241 | ) |   |
| Total SAN liability, end  of period                        |       |                                                                                                     | $          | 42,311                                                                                                   |       |   |   | $ | 37,897 |   |   |   | $ | 42,311 |   |   |   | $ | 37,897 |   |   |

 

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

| ** **                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Accrued expenses                                 |       | $                 | 15,914     |                  |       | $ | 15,107 |   |   |
| Accrued interest                                 |       | 9,191             |       |                  | 7,799      |   |   |
| Current portion  of capital lease obligations    |       | 11,378            |       |                  | 9,623      |   |   |
| Capital lease  obligations, less current portion |       | 5,828             |       |                  | 7,568      |   |   |
|                                             |       | $                 | 42,311     |                  |       | $ | 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, commencing February 15,2008, ICO North America has the option of paying accrued interest due withadditional notes in lieu of cash at an increased interest rate of 8.5% per annum.ICO North America’s MSS/ATC system must also be certified as operational by August 15,2008 or the coupon increases by 150 basis points for every 30 days, untilcertification is achieved, up to a maximum of 13.5% per annum.

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The aggregate fair valueof the Notes is approximately $747.5 million as of June 30, 2006 andapproximately $903.5 million as of December 31, 2005.

**7.**                 Commitments andContingencies

***Purchase Commitments******—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 scheduled to be delivered in May 2007. The Company alsoretains an option to purchase one spare GEO communications satellite through December 31,2008.

On March 10, 2006,the Company entered into an agreement with Lockheed Martin Commercial LaunchServices, Inc. (“LMCLS”) for the provision of launch services for its GEOsatellite. The launch period established for launch of the satellite is May 31,2007 through September 30, 2007. The Company has purchased launch riskprotection insurance from LMCLS, providing for a potential refund in the caseof a satellite failure after launch due to the launch vehicle. The Company alsoretains an option to require LMCLS to provide a replacement launch in the eventthat the Company determines that the initial launch resulted in a satellitefailure within the first six months after launch.

The launch servicescontract may be terminated for any reason by the Company for its convenience.In the case of termination, the Company’s liabilities are stipulated in anagreed-upon termination liability schedule. The same stipulated terminationliability schedule would be applicable if LMCLS terminates the contract due tothe Company’s default, including default due to the Company’s delay beyond anagreed upon maximum postponement period for the launch service. At no time doesCompany obtain title to or ownership in the launch vehicle. The launch vehicleremains the property of LMCLS. With certain exceptions, LMCLS is responsiblefor securing 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, the Company may, subject to certain exceptions,terminate the contract. Under the termination for default, LMCLS shall refundto the Company all payments made by the Company. In addition, LMCLS shall berequired to pay any liquidated damages for delays that have accrued up to thedate of notice of termination for default. In the event of default by LMCLS,there can be no assurance that the Company will be able to find a substitutelaunch services provider in a timely manner or on economically acceptableterms.

On May 10, 2006, theCompany entered into an agreement with Hughes Network Systems, LLC (“HNS”) toprovide gateway services including the design, manufacture, delivery, and testof the radio frequency subsystem, the gateway system controller, the gatewaycontrol network and the gateway system inter-connections. The gateway willbe located at the HNS facility in North Las Vegas, Nevada and is scheduled tobe delivered in June 2007. The Company retains an option to purchase adiverse site radio frequency terminal along with an option for the provision ofoperations and maintenance services at the North Las Vegas and diverse sites.

This agreement may beterminated for any reason by the Company for its convenience. In the case oftermination, the Company’s liabilities are stipulated in an agreed-upontermination liability schedule that approximates the total amounts paid orpayable by the Company at the time of termination. The same stipulatedtermination liability schedule would be applicable if HNS terminates thecontract 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 

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thetermination for default, HNS is required to refund to the Company all paymentsmade by the Company. In addition, HNS is required to pay any liquidated damagesfor delays that have accrued up to the date of notice of termination fordefault.

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 the Company when such systems have been provenacceptable.

In the event of default byHNS, there can be no assurance that the Company will be able to find asubstitute gateway provider in a timely manner or on economically acceptableterms.

As of June 30, 2006,the Company had remaining payments of approximately $153.6 million that arepayable 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. Additional payments of $23.2 million relatedto in-orbit satellite performance incentives are payable over 15 years from2007 through 2022.

***Lease and Operating Commitments******—The***Companyhas entered into agreements with ten satellite access node (“SAN”) operatorsthat own and operate substantially all of the Company’s SAN sites. Suchagreements require the repayment of certain up-front capital asset costsincurred by each SAN operator in establishing the initial infrastructure forthe SAN, as well as payments for ongoing operations and related expensesincurred at each SAN site. The Company continues to have lease and operatingcommitments under some of these agreements (see Note 5).

The Company leases officespace and office equipment under noncancellable rental agreements accounted foras operating leases. The total rental expense under operating leases wasapproximately $71,000 and $223,000 for the three and six months ended June 30,2006, respectively, and $83,000 and $160,000 for the three and six months endedJune 30, 2005, respectively, and is included in general and administrativeexpense in the accompanying condensed consolidated statements of operations.

***Internal Revenue Service 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 to $103 million, not including any interest orpenalties 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. 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 Telekom Arbitration******—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 alsoconsidering opportunities 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 Incentive Plan******—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 June 30, 2006, the Company has 8,079,573 options topurchase the Company’s common stock outstanding to employees and board members.In accordance with SFAS No. 123(R), the Company recognized compensationexpense of $1.1 million and $2.2 million related to these options during thethree and six months ended June 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.Approximately 1,450,000 of these restricted stock awards vest 90 days after theeffective date of the Company’s Form 10 that has been filed with theSecurities and Exchange Commission, and the remaining shares vest in threeequal installments beginning on the 90th day after the effective date of the Company’s Form 10.The Company currently expects such shares to vest commencing in the fourthquarter of 2006. The total compensation cost associated with these awards was$2.4 million and is being charged to expense over the expected vesting period.Accordingly, for the three and six months ended June 30, 2006, the Companyrecognized $614,000 and $1.2 million of compensation expense, respectively.

**9.**                 Related PartyTransactions

***Eagle River******—In***2002,the Company 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 $17,000 and$27,000 for the three and six months ended June 30, 2006, respectively,and $29,000 and $58,000 for the three and six months ended June 30, 2005,respectively. In addition, in January 2004 the Company entered into anagreement with an employee of Eagle River to provide the Company withinformation technology support. Total payments under this 

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agreement for thethree and six months ended June 30, 2005 were $12,000 and $24,000,respectively. No payments were made for the six months ended June 30,2006. In November 2005, the Company entered into an agreement with EagleRiver, Inc. to provide advisory services to the Company. This agreement has anannual fee of $500,000 and is payable in quarterly installments in stock orcash, at the Company’s option. From November 11, 2005 through June 30,2006, the Company has elected to make all payments in Class A common stockand has issued 27,851 shares as consideration. As of June 30, 2006, theCompany owes Eagle River Inc. $167,000 pursuant the advisory services agreementwhich is included in accrued liabilities in the accompanying condensedconsolidated balance sheets.

In November 2005, theCompany granted one million shares of restricted Class A common stock toEagle River which has been treated 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 $526,000and $899,000 for the three and six months ended June 30, 2006,respectively, and $171,000 and $290,000 for the three and six months ended June30, 2005, 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 NoteRegarding Forward-Looking Statements**

With the exception of historical facts, the statementscontained in this management’s discussion and analysis are “forward-looking”statements. All of these forward-looking statements are subject to risks anduncertainties that could cause our actual results to differ materially fromthose contemplated by the relevant forward-looking statements. Factors thatmight cause or contribute to such a difference include, but are not limited to,those discussed under “—Risks and Uncertainties” and elsewhere in this Form 10-Q.The forward-looking statements included in this document are made only as ofthe date of this report, and we undertake no obligation to publicly updatethese forward-looking statements to reflect subsequent events or circumstances.

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

**Overview**

We are a next-generation MSS operator. We intend tocapitalize on the rapid growth of the wireless sector in the United States bybuilding a hybrid MSS/ATC System to offer ubiquitous satellite and terrestrialwireless service throughout the United States. We are authorized to offer MSSservices in the United States using a GEO satellite. We have the opportunity inthe future to seek authorization from the FCC to integrate ATC into the MSSsystem in order to provide integrated satellite and terrestrial services andare developing an advanced hybrid satellite terrestrial system. Our MSS/ATCSystem is designed to provide voice, data and Internet service throughout theUnited States to handsets similar to existing cellular phones.

We are not currently generating revenue fromoperations. The net losses we have funded and capital expenditures we have madesince December 31, 2004 primarily relate to the development of our MSS/ATCSystem. We expect that our current resources will be sufficient to fund thedevelopment of this system through 2007. The MSS portion of the system isrequired to be certified as operational in July 2007. We are focusing ourefforts 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.

We may offer our services to strategic serviceproviders who could incorporate our capabilities to offer integrated satelliteand terrestrial services to their customers. We may also commence operationswithout a strategic partner, a business model that would require substantiallymore capital resources than we currently have in order to develop the ATCportion of our MSS/ATC System. Accordingly, we are meeting with potentialstrategic partners as well as exploring alternative sources of capital. Toprovide ATC service, we must separately apply to the FCC for ATC authorization,which we expect to do in 2007, and meet certain “gating criteria,” whichinclude the provision of commercial MSS service, as a pre-condition toobtaining an ATC authorization.

We are also authorized to operate a MEO satellitesystem globally pursuant to regulations promulgated by the United Kingdom andthe ITU. Some of these regulations date back to 1997, and these regulations arecurrently under reconsideration in Europe. There is considerable uncertainty asto how legacy systems, such as our MEO system, would be treated in any newregulatory regime. Also, while we have constructed and launched one MEOsatellite, we significantly curtailed construction activity on our 

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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 the decision to significantly curtailfurther construction, the MEO satellite system has been written down to itsfair value of zero for accounting purposes. Despite the curtailment ofconstruction of our MEO satellite system and the considerable uncertainty as tothe cost and effectiveness of restarting the MEO satellite program with ourcurrent manufacturer, we continue to explore the potential development of a MEObusiness 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 not ableto 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 AccountingPolicies**

The accounting policies described below are consideredcritical in preparing our condensed consolidated financial statements. Criticalaccounting policies require difficult, subjective or complex judgments, oftenas a result of the need to make estimates about the effect of matters that areinherently uncertain. The judgments and uncertainties affecting the applicationof these policies include significant estimates and assumptions made by ususing information available at the time the estimates are made. Actual resultscould differ materially from those estimates.

*Impairment of Long-Lived Assets.  *We have adoptedSFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*. Pursuant to SFAS No. 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 whether impairmentexists is based on any excess of the carrying value over the expected futurecash flows. Any resulting impairment charge is measured based on the differencebetween the carrying value of the asset and its fair value, as estimatedthrough expected future cash flows, discounted at a market rate of return for asimilar investment.

*Contract Settlements.  *Our policy with respect to a contract indispute is to continue to record operating expenses and liabilities accordingto 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,whereby the other party’s claims are legally released, we will extinguish ourrecorded liability, 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 firstquarter of 2006, we adopted SFAS No. 123(R) (revised 2004), *Share-Based Payment* (“SFAS No. 123(R)”).The statement is a revision of SFAS No. 123, 

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*Accountingfor Stock Based Compensation* (“SFAS No. 123”) andsupersedes Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*.The statement focuses primarily on accounting for transactions in which weobtain employee services in share-based payment transactions. This statementrequires us to measure the cost of employee services received in exchange foran award of equity instruments based on the grant-date fair value of the award.We adopted this statement using the modified prospective method and recordedcompensation expense for the three and six months ended June 30, 2006 of$1.8 million and $3.5 million, respectively, that is included ingeneral administrative expense on our condensed consolidated statements ofoperations. Determining the appropriate fair-value model and calculating thefair value of share-based awards at the date of grant requires judgment. We usethe Black-Scholes option pricing model to estimate the fair value of employeestock options, consistent with the provisions of SFAS No. 123(R). Optionpricing models, including the Black-Scholes model, also require the use ofinput assumptions, including expected risk-free rate of return, expected life,dividend yield, expected volatility, and expected forfeiture rate. Therisk-free interest rate assumption is based upon U.S. Treasury bond interestrates appropriate for the term of our employee stock options. The estimatedlife is based on historical employee exercise behavior. The dividend yieldassumption is based on our history and expectation of dividend payments. Theexpected volatility assumption is based upon our historical stock pricevolatility, which we believe is a reasonable indicator of expected volatility.Expected forfeiture rate is based on our historical rate of forfeitures due tovoluntary terminations and the fact that we have a limited number of employees,many of whom are critical to us. As of June 30, 2006, the balance ofstock-based compensation cost to be expensed in future periods related tounvested share-based awards, as adjusted for expected forfeitures, isapproximately $15.1 million. The period over which the unearned stock-basedcompensation is expected to be recognized is approximately four years.

Prior to January 1, 2006, we elected to apply thedisclosure-only provisions of SFAS No. 123, and to delay full adoption ofSFAS No. 123 and its revision SFAS No. 123(R), until the firstquarter of 2006.

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

We must assess the likelihood that we will be able torecover our deferred tax assets. If recovery is not likely, we must record avaluation allowance against the deferred tax assets that we estimate will notultimately be recoverable. Since our utilization of our deferred tax assets isdependent upon future taxable income that is not assured, we have recorded avaluation allowance equal to the amount of the deferred tax assets recorded inour condensed consolidated financial statements. However, should there be achange in our ability to recover our deferred tax assets, our tax provisionwould decrease in the period in which we determined that the recovery waslikely.

In addition, the calculation of our tax liabilitiesinvolves dealing with uncertainties in the application of complex taxregulations. We assess potential liabilities for anticipated tax audit issuesin the U.S. and other tax jurisdictions as well as foreign tax obligationsbased on our estimate of whether, and the extent to which, additionalliabilities are probable. If we ultimately determine that payment of theseamounts is unnecessary, we reverse the liability and recognize a tax benefitduring the period in which we determine that the liability is no longernecessary. We record an additional charge in our provision for taxes in theperiod in which we determine that the recorded tax liability is less than weexpect the ultimate assessment to be.

*Contingencies.*   Theoutcomes of legal proceedings and claims brought against us are subject to significantuncertainty. 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 

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reasonablyestimated. Disclosure of a contingency is required if there is at least areasonable possibility that a loss has been incurred. In determining whether aloss should be accrued we evaluate, among other factors, the degree ofprobability of an unfavorable outcome and the ability to make a reasonableestimate of the amount of loss. Changes in these factors could materiallyimpact our financial position or our results of operations.

**Recent AccountingPronouncements**

In February 2006, the FASB issued SFAS No. 155,*Accounting for Certain Hybrid Financial Instruments*.This statement 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 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 No. 155 iseffective for all financial instruments acquired or issued after December 31,2006. Earlier adoption is permitted as of the beginning of an entity’s fiscalyear, provided the entity has not yet issued financial statements for anyinterim period for that fiscal year. We do not expect the adoption of thisstatement to have an impact on our financial position, results of operations orcash 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 statement recognitionand measurement of a tax position taken or expected to be taken in a tax return.FIN 48 also provides guidance on derecognition, classification, interest andpenalties, accounting for interim periods, disclosures, and transition. FIN 48is effective for fiscal years beginning after December 5, 2006 and isrequired to be adopted by us in the first quarter of fiscal year 2007. We arecurrently evaluating the impact that adoption of FIN 48 will have on ourfinancial position and results of operations.

**Results ofOperations**

Thefollowing table is provided to facilitate the discussion of our results ofoperations for the three and six months ended June 30, 2006 and 2005 (inthousands):

| ** **                           | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| General and  administrative expenses |       | $                                               | 9,476      |                                          | $          | 6,423 |   | $ | 18,485 |   | $ | 11,776 |   |
| Research and  development expenses   |       | 843                                             |       | 465                                           |       | 871 |   | 465 |   |
| Contract  settlements                |       | —                                          |       | (66,423                                       | )          | — |   | (74,955 | ) |
| (Gain) on  disposal of assets        |       | —                                          |       | (2,030                                        | )          | — |   | (2,030 | ) |
| Interest income                      |       | (5,050                                          | )          | (273                                          | )          | (10,631 | ) | (588 | ) |
| Interest expense                     |       | 10,673                                          |       | 718                                           |       | 22,992 |   | 3,249 |   |
| Other income  (expense)              |       | 362                                             |       | (274                                          | )          | (3,230 | ) | (342 | ) |
| Income tax benefit  (expense)        |       | 4                                               |       | (1,400                                        | )          | (36 | ) | (1,421 | ) |
|                                      |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 

*General andAdministrative Expenses*

General and administrativeexpense, which primarily comprises executive, finance and administrativepersonnel costs, office facilities and related costs and professional fees,increased to $9.5 million for the 

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threemonths ended June 30, 2006 from $6.4 million for the three months ended June 30,2005. For the six months ended June 30, 2006, general andadministrative expenses increased to $18.5 million from $11.8 million forthe six months ended June 30, 2005. The increases are due to increases inprofessional fees, compensation expense related to the hiring of additionalemployees and $1.8 million and $3.5 million in non-cash stock-basedcompensation recorded in accordance with the adoption of SFAS 123(R) forthe three and six months ended June 30, 2006, respectively. We expectgeneral and administrative expenses to increase in future periods due to thehiring of additional personnel necessary to support the development of ourMSS/ATC System. We anticipate the amount of increase will not be significantuntil the scheduled launch date of our satellite becomes nearer. To a lesserextent, we expect general and administrative expenses to increase as we becomea reporting company under the Exchange Act and become subject to the rules andregulations applicable to a public company.

*Research andDevelopment Expenses*

Research and developmentconsists of third-party engineering and consulting costs associated withtechnology being considered for use in the MSS/ATC System. Research anddevelopment expenses for the three and six months ended June 30, 2006 were$843,000 and $871,000, respectively, and $465,000 for the three and six monthsended June 30, 2005. The increases are due to additional research beingperformed related to the network and ground portion of our MSS/ATC system. Wedo not expect future research and development costs to be significant.

*ContractSettlements*

As explained more fully in Note 5 to our condensed consolidatedfinancial statements, in 2002, due to a delay in the deployment of the MEOsystem, we initiated negotiations with gateway operators to defer certain ofthe payment obligations and reduce the service levels and associated expenseunder non-cancelable agreements that initially expire in various years through2010. These negotiations were unsuccessful.

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. Wehave continued 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 accrue latepayment 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 June 30, 2006, we have an accruedliability of $42.3 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.

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*Gain on Disposal ofAssets*

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

*Interest Income*

Interest income of $5.1million and $10.6 million for the three months and six months ended June 30,2006, respectively, was attributable to interest earned on the investment ofthe proceeds of the Notes issued in August 2005. Interest income for thethree and six months ended June 30, 2005 was $273,000 and $588,000, respectively.We expect interest income to decrease in future periods as our cash, cashequivalents, and available-for-sale investments balances decrease as we developour MSS/ATC System.

*Interest Expense*

Interest expense for thethree months and six months ended June 30, 2006 was $10.7 million and$23 million, respectively. Interest expense for the three months ended June 30,2006 was comprised of interest on the Notes of $12.2 million, amortization ofdebt issuance costs of $1.6 million and interest expense related to the gatewayagreements recorded as capital lease obligations of $703,000, less interestcosts associated with the construction of our MSS/ATC System totaling $3.8million that were capitalized to satellite under construction. For the sixmonths ended June 30, 2006, interest expense was comprised of interest onthe Notes of $24.4 million, amortization of debt issuance costs of $3.3 millionand interest expense related to the gateway agreements recorded as capitallease obligations of $1.4 million, less interest costs associated with theconstruction of our MSS/ATC System totaling $6 million that were capitalized tosatellite under construction. Interest expense for the three and six monthsended June 30, 2005 consisted solely of interest on the gateway agreementsaccounted for as capital leases. We expect interest expense to be consistentwith prior periods.

*Other Income(Expense)*

Other income (expense) iscomprised primarily of gains and losses on foreign currency transactions and thewrite-off of cumulative translation adjustments related to the liquidation ofcertain foreign subsidiaries. Other income (expense) for the three and sixmonths ended June 30, 2006 was income of $362,000 and expense of $3.2 million,respectively. Other income (expense) for the three and six months endedJune 30, 2005 was insignificant.

*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 six months ended June 30,2005. Income tax expense for the three and six months ended June 30, 2006was insignificant.

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**Liquidity andCapital Resources**

Thefollowing table is provided to facilitate the discussion of our liquidity andcapital resources for six months ended June 30, 2006 and 2005 (inthousands):

| ** **                                            | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| Net cash provided  by (used in):                      |       |                                          |       |   |   |
| Operating activities                                  |       | $                                             | (32,049    | ) | $ | (12,602 | ) |
| Investing activities                                  |       | 38,332                                        |       | (34,890 | ) |
| Financing activities                                  |       | 9,920                                         |       | — |   |
| Effect of foreign  exchange rate changes              |       | 4,547                                         |       | (102 | ) |
| Net increase  (decrease) in cash and cash equivalents |       | 20,750                                        |       | (47,594 | ) |
| Cash and cash  equvalents—beginning of period    |       | 175,510                                       |       | 52,551 |   |
| Cash and cash equvalents—end  of period          |       | $                                             | 196,260    |   | $ | 4,957 |   |

 

Cash, cash equivalents and available-for-saleinvestments were $342.4 million at June 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 $121.1 million related to thesatellite under construction and $14 million for the purchase of first-priorityrights to use a desired orbital slot for our GEO satellite. We believe that ourcash, cash equivalents and available-for-sale securities will be sufficient tofund our operational and capital requirements until at least the end of 2007.

Cash used in operating activities was $32 million forthe six months ended June 30, 2006 compared to $12.6 million for the sixmonths ended June 30, 2005. For the six months ended June 30, 2006,cash used in operations consisted primarily of our net loss of $35 million,partially offset by various non-cash items included in our net loss. Cash usedin operating activities for the six months ended June 30, 2005 consistedprimarily of net income of $60.3 million offset by contract settlements of $75million and other non-cash items included in net income.

Cash provided by investing activities was $38.3million for the six months ended June 30, 2006 compared to cash used ininvesting activities of $34.9 million for the six months ended June 30,2005. For the six months ended June 30, 2006, the primary source of cashprovided by investing activities was the net sales of investment securities of$172.8 million, partially offset by capital expenditures of $121.1 millionrelated to the satellite under construction and $14 million for the purchase offirst-priority rights to use a desired orbital slot for our GEO satellite. Cashused in investing activities for the six months ended June 30, 2005consisted primarily of $24.5 million of net purchases of available-for-salesecurities and $8.8 million related to satellite under construction.

Cash provided by financingactivities was $9.9 million for the six months ended June 30, 2006. Cashprovided by financing activities for the six months ended June 30, 2006was attributable to the sale of ICO North America Class A common stock andoptions to purchase shares of ICO North America Class A common stock of$9.9 million to certain holders of our Notes. For the six months ended June 30,2005, there were no financing activities.

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**Risks andUncertainties**

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 seven FCC milestones and ourright to use our assigned MSS spectrum to provide service is conditioned on ourcompletion of five additional FCC milestones, the most critical of which aresuccessfully launching our MSS satellite by July 1, 2007 and, followingthe satellite launch, satisfying additional conditions with respect to theoperation and integration of our ground and satellite system components inorder to be able to certify by July 17, 2007, that our MSS system isoperational. The other milestones, which must be accomplished by various datesbefore July 1, 2007, are technical benchmarks leading to thesatellite launch. If we fail to meet a milestone and we are unable to obtain awaiver or extension, we could lose our MSS authorization, and a loss of our MSSauthorization would be an event of default under the indenture governing the Notes.Substantially all of the $525 million to $600 million we anticipateneeding to develop the MSS portion of our MSS/ATC System will be used tocomplete the tasks to permit us to meet the July 1 and July 17, 2007milestones.

·       Thereare many risks inherent to building, launching and maintaining a satellite. Weintend to obtain launch vehicle and satellite insurance and maintain in-orbitinsurance coverage. These costs through 2007 are included in our estimatedcosts for completing the MSS portion of our MSS/ATC System. We expect theinsurance policies to include customary satellite insurance exclusions and/ordeductibles and material change limitations. We anticipate that, as is commonin the industry, we will not insure against business interruption, lostrevenues or delay of revenues in the event of a total or partial loss of thecommunications capacity or life of the satellite. Accordingly, we will not be fullyinsured for all of the potential losses that may be incurred upon a satellitelaunch failure or other malfunction. In addition, our business plancontemplates operating one satellite, and a launch failure would result insignificant delays in the deployment of the satellite due to the need toconstruct a replacement, which can take 27 months or longer, and to obtaina launch opportunity for the replacement satellite. If we were unable to obtaina waiver or extension from the FCC, we could lose our MSS authorization, and aloss of our 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 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 interest payments on the Notes will be required to bepaid in cash.

·       Webelieve we have sufficient capital resources to complete the MSS portion of ourMSS/ATC System and certify to the FCC that the MSS portion is operational. Wemay seek potential strategic partners to assist us in developing the ATCportion of our MSS/ATC System. If we chose to complete our MSS/ATC Systemwithout partners, we would need to raise substantial additional funding throughequity and/or debt offerings. The category of business or consumer market wechoose to serve, the type and extent of ATC infrastructure necessary to servesuch market and the geographic scope of our service area will affect the amountof capital needed for the terrestrial ATC portion of our MSS/ATC System. Weexpect that the additional funding needed for the type and scope of ATC servicewe would pursue without strategic partners would range from approximately $200million to $400 million, depending on the business or consumer market wechoose to serve, the type and extent of ATC infrastructure necessary to servesuch market and the geographic scope of 

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our service area. If wewere to develop the ATC portion of our MSS/ATC System with a strategic partner,we expect that we and the partner would pursue the development of a morecapital intensive ATC infrastructure that would be more robust and would covera wider geographic service area. We do not currently have the funding requiredto develop the ATC infrastructure alone. To provide ATC service, 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 ATC authorization. Ifthe MSS/ATC System is not certified as operational by August 15, 2008, theannual interest rate on the Notes will increase by 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 payments on the Notes will berequired to be paid in cash.

·       ForU.S. federal income tax purposes, we realized a gain of more the $300 millionon the disposition of certain securities in 2003. This gain was offset bylosses incurred in connection with the abandonment of certain assets related toour MEO network in the same year. The Internal Revenue Service is currentlyauditing our 2003 tax year in which these transactions occurred. To the extentthe IRS disallows the deductions claimed, we could face a tax liability,although we believe this may be partially reduced by applying ourapproximately $124 million of net operating losses carried forward fromprevious tax years and our approximately $16 million of net operatinglosses carried back from subsequent years. Depending on the outcome of the taxaudit and whether we are able to offset a portion of any gain with ouroperating losses, we could have a tax liability ranging from approximately$50 million to $103 million (not including any interest or penalties thatmight be imposed).

·       Weare engaged in litigation with The Boeing Company and BSSI arising out ofagreements for the development and launch of MEO satellites. BSSI’s allegationsare unproven and it has not specified the amount of monetary relief is seeking.We have asserted cross-claims that we believe are meritorious. From August 2004through June 30, 2006, we have spent approximately $8.4 million inpursuing this litigation and expect that we will continue to incur costs at asimilar rate through the duration of the litigation. Due to the uncertainnature of litigation and the many factors beyond our control, we could incurgreater costs as the litigation proceeds.

·       OurMEO system has met seven of eight milestones specified for 2GHz MSS systems inEurope. The final milestone to enable us to maintain our MEO authorization wouldbe the provision of commercial services in Europe, the precise requirements andtiming of which have not been determined. A new regulatory framework with newmilestones is currently being contemplated. There is considerable uncertainty asto how legacy systems, such as our MEO system, would be treated in any newregulatory regime. Depending on the development of a MEO business plan and theassociated costs (including the costs to comply with the final milestone or anynew milestones imposed), as well as the success of discussions with potentialpartners who could provide the funding for the development of the MEO system,we may or may not proceed with the development of our physical and regulatoryMEO assets.

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.

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**Contractual Obligations**

In the table below, we setforth our contractual obligations, including long-term debt and other obligationsand commitments that are payable subsequent to June 30, 2006 (inmillions):

| ** **                         | ** ** | ** ** | ** ** | ** **       | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------|------------|------------|------------|------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | ** ** | ** ** | **Remainder**    | ** ** | ** **                                  | ** ** | ** ** | ** ** | **2011 and** | ** ** |
| ** **                         | ** ** | **Total**  | ** ** | **of 2006** | ** ** | **2007-2008**                               | ** ** | **2009-2010** | ** ** | **Thereafter** | ** ** |
| Long-term debt  obligations(1)     |       | $          | 820.6      |             |       | $                                           | 24.4       |   |   |   | $ | 97.5 |   |   |   | $ | 698.7 |   |   |   | $ | — |   |   |
| Capital lease  obligations         |       | 25.2       |       |             | 15.4       |                                        |       |   | 6.1 |   |   |   | 3.7 |   |   |   | — |   |   |
| SAN operating lease  obligations   |       | 13.1       |       |             | 1.7        |                                        |       |   | 6.8 |   |   |   | 4.6 |   |   |   | — |   |   |
| Other operating lease  obligations |       | 1.9        |       |             | 0.2        |                                        |       |   | 0.7 |   |   |   | 0.6 |   |   |   | 0.4 |   |   |
| Purchase obligations(2)            |       | 176.8      |       |             | 93.6       |                                        |       |   | 61.0 |   |   |   | 1.7 |   |   |   | 20.5 |   |   |
| Total                              |       | $          | 1,037.6    |             |       | $                                           | 135.3      |   |   |   | $ | 172.1 |   |   |   | $ | 709.3 |   |   |   | $ | 20.9 |   |   |

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       (1) Assumes all interest payments on our Notes aremade in cash and at an interest rate of 7.5%. Subject to the satisfaction ofcertain conditions and to certain exceptions, commencing February 15,2008, we have the option of paying interest with additional notes in lieu ofcash at an increased rate of 8.5% per annum. In the event that our MSS/ATCSystem is not certified as operational by August 15, 2008, the interestrate on the Notes increases by 1.5% initially and by an additional 1.5% every30 days until certification is achieved, up to a maximum annual interest rateof 13.5%, and all payments on the Notes are required to be paid in cash.

       (2) We have an agreement with Space Systems/Loral, Inc.to design, develop, manufacture, test and deliver one GEO satellite anddevelop, test and implement certain ground based systems related to theoperation of the satellite. The satellite is to be delivered in May 2007.We also retain an option to purchase one spare GEO satellite exercisablethrough December 31, 2008. The satellite contract may be terminated by usfor our convenience in whole (meaning as to the whole of the then remainingwork) or in part. In the case of termination in whole by us or termination bySpace Systems/Loral due to our default, our liabilities are stipulated in anagreed upon liability termination schedule that approximates the total amountspaid or payable by us at the time of termination.

Under our agreement withLockheed Martin Commercial Launch Services, Inc. (“LMCLS”) for theprovision of launch services for our GEO satellite, our launch period commenceson May 31, 2007. We have purchased launch risk protection insurance fromLMCLS and retain and option to require LMCLS to provide a replacement launch inthe event that we determine that the initial launch resulted in a satellitefailure. The launch services contract may be terminated for any reason by usfor our convenience. In the case of termination, our liabilities are stipulatedin an agreed-upon termination liability schedule. The same stipulatedtermination liability schedule would be applicable if LMCLS terminates thecontract due to our default, including a default due to our delay beyond anagreed upon maximum postponement period for the launch service.

We have an agreement withHughes Network Systems, LLC (“HNS”) to provide gateway services including thedesign, manufacture, delivery, and test of the radio frequency subsystem, thegateway system controller, the gateway control network and the gateway systeminter-connections. The gateway will be located at the HNS facility inNorth Las Vegas, Nevada and is scheduled to be delivered in June 2007. Weretain an option to purchase a diverse site radio frequency terminal along withan option for the provision of operations and maintenance services at the NorthLas Vegas and diverse sites. This agreement may be terminated for any reason byus for its convenience. In the case of termination, our liabilities arestipulated in an agreed-upon termination liability schedule that approximatesthe total amounts paid or payable by us at the time of termination. The samestipulated termination liability schedule would be applicable if HNS terminatesthe contract due to our default.

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Remaining paymentspursuant to these agreements of approximately $153.6 million are payable basedon the achievement of certain construction, delivery and deployment milestones,which are expected to occur during the remainder of 2006 and 2007. Additionalpayments of $23.2 million related to in-orbit satellite performanceincentives are payable over 15 years from 2007 through 2022.

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 Sheet Arrangements**

We do not have anyoff-balance sheet arrangements as defined under SEC rules.

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

We have assessed ourvulnerability to certain market risks, including interest rate risk associatedwith available-for-sale securities, long-term debt, accounts payable, capitallease obligations, and cash and cash equivalents and foreign currency riskassociated with capital lease obligations and cash held in foreign currencies.

Our investment portfolio consistsof fixed income debt securities, including money market funds, commercialpaper, government obligations and corporate bonds, with a fair value ofapproximately $415.7 million as of June 30, 2006 and$537.6 million as of December 31, 2005. The primary objective of ourinvestments in fixed income securities is to preserve principal, whilemaximizing returns and minimizing risk, and our policies require that we makethese investments in short-term, highly-rated securities. For available-for-salesecurities, unrealized gains and losses are recorded in other comprehensiveincome. Losses will not be realized in the condensed consolidated statement ofoperations unless the individual securities are sold prior to recovery ordetermined to be other-than-temporarily impaired. We manage our interest raterisk by purchasing securities with maturities that correspond to our liquidityneeds for operations, capital expenditures and debt service. Due to theshort-term nature of these investments (less than 180 days) and our investmentpolicies and procedures, we have determined that the risk associated withinterest rate fluctuations related to these financial instruments is notmaterial to us.

Our convertible long-termdebt bears interest at a fixed rate of 7.5%, matures on August 15, 2009and has a fair value of approximately $747.5 million as of June 30, 2006and 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 of Disclosure Controls and Procedures*

Our management, with the participation of our chiefexecutive officer and chief financial officer, evaluated the effectiveness ofour “disclosure controls and procedures” as that term is defined inRules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended, (“Exchange Act”) as of June 30, 2006.These disclosure controls and procedures ensure that information required to bedisclosed 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. 

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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 June 30, 2006, based on the evaluation of our disclosure controlsand procedures, our chief executive officer and chief financial officerconcluded that, as of such date, our disclosure controls and procedures werenot effective because of the material weaknesses described below.

*Material Weaknesses*

In connection with its audit of our financialstatements for the years ended December 31, 2003, 2004 and 2005, ourindependent registered public accounting firm reported two material weaknessesin the internal controls over our ability to produce financial statements freefrom material misstatements. A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. Our independent registered publicaccounting firm reported a lack of sufficient qualified technical accountingpersonnel and deficiencies in our financial closing and report processincluding but not limited to adequate controls regarding the initialization andsupport of journal entries.

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 the participation of our chiefexecutive officer and chief financial officer, has developed a plan to address thesematerial weaknesses that includes the hiring of additional qualified technicalaccounting personnel, as well as the performance of an assessment of ourcurrent accounting and reporting policies and procedures. In addition to thisplan, we are in the beginning stages of a Section 404 compliance projectthat is described below. We believe that these steps will correct the materialweaknesses 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 404 complianceproject under which management plans to engage outside consultants and adopt adetailed project work plan to assess the adequacy of our internal control overfinancial reporting, remediate any control deficiencies that may be identified,validate through testing that controls are functioning as documented andimplement a continuous reporting and improvement process for internal controlover financial reporting.

Duringthe fiscal quarter ended June 30, 2006, there have been no changes in ourinternal control over financial reporting that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

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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 Securities andExchange Commission on July 12, 2006 has not materially changed.

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

Managementbelieves that the security transaction that is described in the table below wasexempt from the registration 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) |
|                   |            |                            |            |           |            |            |            |                   |            |               |            |  |  |  |  |

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

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

None.

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

(a)          The annual meeting ofstockholders of ICO Global Communications (Holdings) Limited was held on July 13,2006.

(b)         All director nomineeswere elected.

(c)          Certainmatters voted upon at the meeting and the votes cast with respect to suchmatters are as follows:

**Proposals and VoteTabulations**

**Election of Directors**

| **Director**      | ** ** | ** ** | ** **  | **Votes Received** | ** ** | **Votes Withheld** | ** ** |
|-------------------|------------|------------|-------------|-------------------------|------------|-------------------------|------------|
| Craig O. McCaw    |       |       | 490,073,000 |                    |       |                    | —     |   |   |
| J. Timothy Bryan  |       |       | 490,073,000 |                    |       |                    | —     |   |   |
| Donna P. Alderman |       |       | 490,073,000 |                    |       |                    | —     |   |   |
| Samuel L. Ginn    |       |       | 490,073,000 |                    |       |                    | —     |   |   |
| Barry Rowan       |       |       | 490,073,000 |                    |       |                    | —     |   |   |
| R. Gerard Salemme |       |       | 490,073,000 |                    |       |                    | —     |   |   |
| David Wasserman   |       |       | 490,073,000 |                    |       |                    | —     |   |   |
| Benjamin G. Wolff |       |       | 490,073,000 |                    |       |                    | —     |   |   |

 

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| ** **                                                                | ** ** | **Votes Cast** | ** ** | ** **  | ** ** | **Broker**  | ** ** |
|---------------------------------------------------------------------------|------------|---------------------|------------|-------------|------------|-------------|------------|
| ** **                                                                | ** ** | **For**             | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-votes** | ** ** |
| Ratification of  selection of independent auditors for 2006               |       | 490,073,000         |       |        | —     |        |       |   | — |   |   |   | — |   |   |
| 1 for 3 reverse  stock split at the discretion of Board of Directors |       | 490,073,000         |       |        | —     |        |       |   | — |   |   |   | — |   |   |

 

***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: August 14,  2006 | By:                                              | /s/ J. Timothy Bryan |
|                    |                                             | J. Timothy Bryan |
|                    |                                             | Chief Executive Officer |

 

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