LORAL SPACE & COMMUNICATIONS LTD - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

COMMISSION FILE NUMBER 1-14180

LORAL SPACE & COMMUNICATIONS LTD.
C/O LORAL SPACECOM CORPORATION
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
TELEPHONE: (212) 697-1105

JURISDICTION OF INCORPORATION: BERMUDA

IRS IDENTIFICATION NUMBER: 13-3867424

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

The registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
has been subject to such filing requirements for the past 90 days.

Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K will
be contained in the registrant's 2002 definitive proxy statement.

At February 28, 2002, 337,323,721 common shares were outstanding, and the
aggregate market value of such shares (based upon the closing price on the New
York Stock Exchange) held by non-affiliates of the registrant was approximately
$661 million.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's 2002 definitive proxy statement (to be filed
not later than 120 days after the end of the registrant's fiscal year) are
incorporated by reference into Part III.

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PART I

ITEM 1. BUSINESS

THE COMPANY

OVERVIEW

Loral Space & Communications Ltd. together with its subsidiaries ("we",
"us", "Loral" or the "Company") is one of the world's leading satellite
communications companies with substantial activities in satellite-based
communications services and satellite manufacturing. Loral is organized into
three operating businesses:

Fixed Satellite Services ("FSS"): Loral leases transponder capacity to
customers for various applications, including broadcasting, news gathering,
Internet access and transmission, private voice and data networks, business
television, distance learning and direct-to-home television ("DTH") and provides
telemetry, tracking and control services ("TT&C") and network services to
customers. Loral operates its business through wholly owned subsidiaries such as
Loral Skynet, Loral Orion, Inc. (formerly known as Loral CyberStar, Inc.)
("Loral Orion") and Loral Skynet do Brasil Ltda. ("Skynet do Brasil") and
affiliates such as Satelites Mexicanos, S.A. de C.V. ("Satmex") and Europe*Star
Limited ("Europe*Star").

Satellite Manufacturing and Technology: Loral designs and manufactures
satellites and space systems and develops satellite technology for a broad
variety of customers and applications through Space Systems/ Loral, Inc.
("SS/L").

Data Services: Loral provides managed communications networks and Internet
and intranet services through Loral CyberStar, Inc. ("Loral CyberStar") and
delivers high-speed broadband data communications, business television and
business media services through Loral CyberStar and CyberStar, L.P. ("CyberStar
LP," together with Loral CyberStar, the "Loral CyberStar Group").

Loral intends to capitalize on its innovative capabilities, market position
and advanced technologies to offer value-added, satellite-based services as part
of the evolving worldwide communications networks. Loral regularly engages in
discussions with telecommunications service providers, equipment manufacturers
and others regarding possible strategic transactions and alliances such as joint
ventures; strategic relationships involving our fixed satellite services
operations and satellite manufacturing operations, which could involve business
combinations; participation in the Loral Global Alliance; and dispositions of
non-core assets.

Loral was incorporated on January 12, 1996 as a Bermuda exempt company and
has its registered and principal executive offices at Cedar House, 41 Cedar
Avenue, Hamilton, HM 12, Bermuda.

FIXED SATELLITE SERVICES

Following its acquisition of the Loral Skynet business from AT&T in March
1997, Loral has rapidly established itself through internal growth and a series
of acquisitions and joint venture transactions as one of the world's leading
providers of fixed satellite services. These satellites, which are known as GEO
satellites, fly in geosynchronous earth orbit approximately 22,000 miles above
the equator. In this orbit, the satellites remain in a fixed position relative
to points on the earth's surface. GEO satellites provide reliable, high
bandwidth services anywhere in their coverage areas and therefore serve as the
backbone for many forms of telecommunications.

In the United States and other developed countries, customers lease
transponder capacity primarily for distribution of network and cable television
programming, for direct-to-home, or DTH, video transmission and for live video
feeds from breaking news and sporting events. In the developing world, a
substantial portion of such capacity is dedicated to long-distance telephone
service as well as television services. GEO satellites are increasingly used
throughout the world for international Internet communications, high-speed data
services for businesses through very small aperture terminal, or VSAT, networks,
and for distance learning and educational television.

1

About 200 commercial geosynchronous satellites currently offer fixed
satellite services. Loral Skynet competes primarily with large fleet operators,
including PanAmSat Corporation, SES Global, Intelsat and Eutelsat. Large fleets
offer customers global or near-global coverage and in-orbit backup in case of a
satellite failure. With seven wholly owned satellites, Loral Skynet currently
operates the fifth largest fleet in the world and plans to expand the fleet to
ten satellites by early 2003. The Skynet-led Loral Global Alliance, with ten
satellites currently and 15 expected by the end of 2003, further enhances the
geographic reach, market presence and offerings of Loral Skynet, Loral Orion,
Satmex and Europe*Star.

In providing fixed satellite services we face competition from fiber optic
cable and other terrestrial delivery systems. In some applications, such as
broadcast or point-to-multipoint transmission of video, satellites are usually
considerably more efficient. In other applications, fiber may cost less, so that
satellites compete on the basis of superior reliability, or as a back-up
service.

Loral Global Alliance

Through the Loral Global Alliance, Loral offers its customers an integrated
portfolio of satellite capacity that provides "one stop shopping" for local,
regional and global GEO satellite services. The alliance, which consists of
Loral Skynet, Loral Orion, Skynet do Brasil, Satmex, Europe*Star and Stellat
S.N.C., a (joint venture between Europe*Star and France Telecom S.A.), currently
has ten satellites operating in orbit with a total of 163 C-band and 284 Ku-band
36 MHz transponder-equivalents available for lease (all references to
transponders are in 36 MHz equivalents, unless otherwise noted) and a collective
footprint covering almost all of the world's population, excluding 28 36 MHz
transponders not available due to previous sales or other events. As of December
31, 2001, the Loral Global Alliance had backlog (including 100% of Satmex and
Europe*Star backlog) totaling $1.8 billion, utilizing approximately 303 36 MHz
transponder-equivalents, and had approximately 144 additional 36 MHz
transponder-equivalents available for lease.

The Loral Global Alliance provides for cross-selling arrangements among the
alliance members' respective sales forces and for cooperative marketing and
promotional activities. Loral believes that such arrangements enable the members
of the alliance to compete more effectively in sales of communications satellite
services worldwide. In addition, the alliance offers in-orbit backup
capabilities for its members in regions where members' fleets have overlapping
coverage.

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LORAL GLOBAL ALLIANCE

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(1) We have asked the FCC to modify our authorizations for this satellite to
relocate Telstar 4 to 77(degrees) W.L. and Telstar 8, expected to be
launched by the first quarter of 2003, to 89(degrees) W.L.

(2) On November 15, 1999, the following satellites were renamed: the satellite
formerly known as Orion 1 is now known as Telstar 11; the satellite formerly
known as Orion 2 is now known as Telstar 12.

(3) Operating in inclined orbit and is not currently generating revenues.
Estrela do Sul, the replacement satellite for this slot, is currently under
construction at SS/L and is expected to be launched in the fourth quarter of
2002.

(4) Solidaridad 1 lost in August, 2000. Customers moved to other satellites,
most of which are part of the Loral Global Alliance. A replacement
satellite, Satmex 6, is scheduled to be launched in the first quarter of
2003.

(5) Currently operating in inclined orbit beyond its designed life and
generating only modest revenues. Continued operations depend on obtaining
special regulatory approvals.

Loral Skynet

Loral Skynet's core business is providing satellite capacity to support
distribution of U.S. television network programming. The ABC, CBS and Fox
television networks are its major customers. All ABC, CBS and Fox stations and
network affiliates have their antennae pointed at Loral Skynet's satellites,
creating a configuration known as a "neighborhood" that is attractive to other
users requiring similar distribution channels. Other Loral Skynet customers
include HBO, Disney, Time Warner, Boeing, Starband and Hughes Network Services
and third-party resellers, such as sports syndicators and distance learning
providers. Loral Skynet currently has four high power GEO satellites in
operation.

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Broadcast Neighborhood

Telstar 4 was placed in service in November 1995 and has 24 C-band and 24
Ku-band transponders. Telstar 4 provides coverage over the continental United
States, Hawaii, Alaska, Puerto Rico, U.S. Virgin Islands and into Canada.

Telstar 5, with 24 C-band and 24 Ku-band transponders, was built by SS/L
and was placed into service on July 1, 1997. Telstar 5 provides coverage over
the continental United States, Hawaii, Puerto Rico, the Caribbean and into
Canada and portions of Latin America.

Telstar 6, built by SS/L, was launched in February 1999 and commenced
commercial operations in March 1999. Telstar 6 is a broadcast video and data
communications satellite with 24 C-band and 24 Ku-band transponders. It provides
coverage over the continental United States, Hawaii, Puerto Rico, the Caribbean
and into Canada and Latin America.

Cable Neighborhood

Telstar 7, built by SS/L, was launched in September 1999 and commenced
commercial operations in November 1999. Telstar 7 is a broadcast video and data
communications satellite with 24 C-band and 24 Ku-band transponders. It provides
coverage over the continental United States, Hawaii, Puerto Rico, the Caribbean,
and into Canada and Latin America.

In addition, as of March 2002, Loral plans to launch three satellites in
the next year:

- Estrela do Sul will fill Skynet do Brasil's orbital slot at
63(degrees)W.L. with 51 Ku-band transponders, covering Brazil and other
parts of Latin America, which will replace the Brazil 1T satellite.

- Telstar 8 will carry 28 C-band transponders and 36 Ku-band transponders,
as well as a Ka-band payload that will allow Loral Skynet to enhance its
data transport services, covering North America, South America, Puerto
Rico and Hawaii.

- Telstar 13 is a "condo" satellite in which Loral will own the 24 C-band
transponders, while a direct-to-home television company will own the
Ku-band transponders, covering North America, Central America, Puerto
Rico and Hawaii.

The addition of these three satellites will substantially increase Loral's
capacity within the United States and will further extend its coverage of Canada
and portions of Latin America, subject to obtaining landing rights from
regulatory authorities in those regions.

Other Services

In order to meet customers' evolving needs and to increase the usage of
Loral's satellites, Loral Skynet has created two new product lines, Skynet
Network Services and Skynet Professional Services, to enhance and expand the
services it provides well beyond transponder leasing.

Skynet Network Services provides content movement and platforms for
bandwidth-on-demand, broadband transport, broadcast transport and digital
transport teleport services. These services are currently provided at Loral
Skynet's San Francisco International Gateway, and Loral Skynet plans to add
strategically located gateways around the world as it expands Network Services.

Skynet Professional Services assists customers with the needs of satellite
ownership, such as TT&C and with the design, construction and integration of
satellite-based networks.

Loral Orion

On March 20, 1998, Loral acquired Orion Network Systems, Inc., a rapidly
growing provider of satellite-based communications services, which changed its
name to Loral CyberStar, Inc. and, more recently, in connection with the
transfer of its data services business to another Loral subsidiary, further
changed its name to Loral Orion, Inc. Loral completed its integration plan for
Loral Orion and transferred management of Loral Orion's satellite capacity
leasing and satellite operations to Loral Skynet, effective January 1, 1999.
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Loral Orion's leasing business currently provides satellite capacity for
video distribution, satellite news gathering and other satellite services
primarily to broadcasters, news organizations, telecommunications service
providers and Internet Service Providers, or ISPs. Loral Orion's customers
include HBO, Disney, Cable & Wireless and United Pan Europe Communications.

Telstar 11, a high power satellite with 48 Ku-band transponders, commenced
operations in January 1995, and provides coverage in North America as far west
as Phoenix, Arizona and in Europe as far east as Istanbul, Turkey.

Telstar 12, a high power satellite with 57 Ku-band transponders, commenced
operations in January 2000 and expands Loral Orion's European coverage and
extends coverage to portions of Russia, Latin America, the Middle East and South
Africa. Telstar 12 was launched in October 1999 into 15 degrees W.L.

Telstar 10/Apstar IIR, formerly known as Apstar IIR, a high power satellite
with 28 C-Band and 24 Ku-Band transponders, commenced operations in December
1997 at 76.5 degrees E.L. and covers portions of Asia, Europe, Africa and
Australia, accounting for more than 75% of the world's population. Loral Orion
purchased all of Telstar 10/Apstar IIR's transponder capacity (other than a
single, reserved C-Band transponder) from APT Satellite Company in September
1999 to replace its Orion 3 satellite, which was lost in a launch failure in May
1999. Insurance proceeds from the launch failure covered most of the $273
million purchase price. APT has also given Loral Orion the right to provide
replacement satellites at this orbital location at the end of the satellite's
useful life, for which Loral Orion will be required to pay a fee to APT for the
right to use the orbital slot.

Satmex

Satmex, our 49%-owned affiliate, is currently the leading satellite
communications company providing fixed satellite services in Mexico, and intends
to expand its services to become a leading provider of satellite services
throughout Latin America.

Satmex provides satellite transmission capacity to broadcasting customers
for network and cable television programming, DTH service and on-site
transmission of live news reports, sporting events and other video feeds. Satmex
also provides satellite transmission capacity to telecommunications service
providers for public telephone networks in Mexico and elsewhere and to corporate
customers for their private business networks for data, voice and video
applications. Satmex has landing rights to provide broadcasting and
telecommunications transmission capacity in Mexico, the United States, Canada
and 35 nations and territories in the Latin American region. Satmex's
broadcasting customers include Televisa, MVS Multivision and Television Azteca,
and its telecommunications services and data customers include Telmex, Bell
South, Hughes Network Systems, the Mexican government and the Mexican
subsidiaries of DaimlerChrysler.

Satmex's satellites, Solidaridad 2 and Satmex 5, have a total of 96 36-MHz
transponder-equivalents operating in the C and Ku-band, with an aggregate
footprint covering substantially all of the continental United States and the
Caribbean as well as all of Latin America, other than certain regions in Brazil.
In August 2000, Satmex's Solidaridad 1 satellite ceased operation and was
considered irretrievably lost. Satmex received net insurance proceeds of $235
million relating to this loss. Satmex has contracted with SS/L to build its
replacement satellite. This satellite, known as Satmex 6, is scheduled to be
launched in the first quarter of 2003 and is designed to provide broader
coverage and higher power levels than any other satellite currently in the
Satmex fleet, with 24 C-band and 24 Ku-band transponders. In the interim, most
of Solidaridad 1 customers were transferred to other Satmex satellites or other
satellites in the Loral Global Alliance.

Satmex holds 20-year concession titles to operate in its three orbital
locations, each of which will expire on October 22, 2017. The concession titles
are renewable thereafter, subject to certain conditions, for an additional
20-year term without additional payment.

In August 2001, the Mexican government granted market access rights for
satellites owned by non-Mexican satellite operators, including SES Global and
PanAmSat, resulting in increased competition for Satmex.

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Europe*Star

Europe*Star, a joint venture between Loral and Alcatel, launched
Europe*Star 1, with 30 high-powered Ku-band transponders, in October 2000.
Europe*Star 1, marketed as part of the Loral Global Alliance, commenced
commercial service in January 2001.

Loral currently owns 47% of Europe*Star, and pursuant to the terms of the
shareholders agreement has permitted its joint venture partner, Alcatel, to fund
additional expenditures to develop Europe*Star's business and infrastructure
through $181 million in loans to the venture, which Alcatel claims are payable
on demand.

XTAR, L.L.C.

XTAR, L.L.C. ("XTAR"), a newly formed joint venture between Loral and
Hisdesat Servicios Estrategicos, S.A. ("Hisdesat"), a consortium comprised of
leading Spanish telecommunications companies, including Hispasat, S.A., and
agencies of the Spanish government, plans to construct and launch an X-band
satellite by the end of 2003 to provide X-band services to government users in
the United States and Spain, as well as other friendly and allied nations. XTAR
is owned 56% by Loral (accounted for under the equity method since Loral does
not control certain significant operating decisions) and 44% by Hisdesat. In
addition, XTAR has agreed to lease certain transponders on the Spainsat
satellite, which is being constructed for Hisdesat. As of March 4, 2002, the
partners, in proportion to their respective ownership interests, have
contributed $20 million to XTAR and expect to fund an additional $35 million in
2002. XTAR expects to raise the remaining amount of the funds it needs to
construct and launch its satellite through vendor and other third-party
financings.

FSS Segment Results

Segment Revenues:

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(1) Includes approximately $28 million to Loral companies.

Total segment EBITDA was $347 million, $282 million and $193 million in
2001, 2000 and 1999, respectively. Total assets for the segment were $4.2
billion, $4.0 billion and $3.9 billion as of December 31, 2001, 2000 and 1999,
respectively.

As of December 31, 2001 and 2000, funded backlog for the segment was $1.8
billion and $2.4 billion, respectively, including intercompany backlog of $61
million in 2001 and $65 million in 2000 and affiliate backlog of $404 million
and $546 million for Satmex and Europe*Star in 2001 and 2000, respectively.
Approximately $398 million of the segment's 2001 funded backlog is expected to
be realized in 2002, including approximately $19 million of intercompany backlog
and approximately $85 million of affiliate backlog for Satmex and Europe*Star.

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SATELLITE MANUFACTURING AND TECHNOLOGY

SS/L is a worldwide leader in the design, manufacture and integration of
satellites and space systems. SS/L draws on its 40-year history, during which
satellites manufactured by SS/L have achieved more than 900 years of cumulative
on-orbit experience. SS/L also provides Loral with visibility into emerging and
new satellite-based technologies and applications. SS/L manufactures satellites
that provide telecommunications, weather forecasting and broadcast services.
SS/L is the leading supplier of satellites to Intelsat, currently one of the
world's largest operators of commercial communications satellites. Other
significant customers include EchoStar, DirecTV, Loral Skynet, Sirius Satellite
Radio, Cable & Wireless Optus of Australia and APT Satellite Company.

As one of the premier providers of satellites and other space systems, SS/L
competes principally on the basis of technical excellence, a long record of
reliable performance, competitive pricing and on-orbit delivery packages, with
several of the world's largest satellite manufacturers, such as The Boeing
Company, Lockheed Martin, Alcatel Space and Astrium. We believe that SS/L's
advanced manufacturing and testing facilities and long-term customer
relationships have enabled SS/L to compete effectively in the commercial space
systems marketplace. SS/L's continued success depends on its ability to perform
on a cost-effective and timely basis.

SS/L has a history of technical innovation that includes the first
three-axis stabilized satellites, bipropellant propulsion systems for commercial
satellites that permit significant increases in the satellites' payload and
extend the satellites' on-orbit lifetime, rechargeable nickel-hydrogen batteries
with a life span of 10 years or more, the use of advanced composites to
significantly enhance satellite performance at lighter weights and the first
communications satellite with more than ten kilowatts of power. SS/L was also
the first satellite manufacturer to employ heat pipes to control heat transfer
in commercial satellites, thereby providing a more benign temperature
environment and increased reliability. SS/L also created the first multi-mission
geostationary satellite and was one of the first U.S. companies to acquire space
technology from Russia's space industry, obtaining exclusive rights outside the
former Eastern bloc to an electric propulsion subsystem that is five times more
efficient than bipropellant propulsion systems.

SS/L's geostationary satellite product portfolio continues to evolve to
best meet the current and future needs of the market. SS/L now offers a line of
three products that provide customers with a great span of power and capability:
the space-proven 1300, the advanced 1300E, and the 20.20, one of the most
powerful commercial spacecraft offered today. The power offered on SS/L-designed
satellites reaches from five kilowatts to in excess of 30 kilowatts, and the
number of transponders from as few as one to as many as 150.

Total revenues for the satellite manufacturing and technology segment,
including intercompany sales, were $815 million in 2001, $1.0 billion in 2000
and $1.4 billion in 1999. The segment's intercompany sales were $201 million in
2001, $192 million in 2000 and $255 million in 1999. Segment EBITDA was $24
million in 2001, $36 million in 2000 and $102 million in 1999. Total assets for
the segment were $1.1 billion, $1.2 billion and $1.6 billion as of December 31,
2001, 2000 and 1999, respectively.

As of December 31, 2001 and 2000, funded backlog for the segment was $1.6
billion and $1.7 billion, respectively, including intercompany backlog of $265
million in 2001 and $477 million in 2000. Approximately $944 million of the 2001
funded backlog is expected to be realized in 2002, including approximately $176
million of intercompany backlog. Revenues recorded under contracts with
Globalstar were $18 million, $134 million and $360 million in 2001, 2000 and
1999, respectively. In addition, sales to one customer represented 14% of the
Company's consolidated revenues in 2001 and sales to two other customers
represented 13% and 12% of the Company's consolidated revenues in 2000 and 18%
and 13% of the Company's consolidated revenues in 1999. For 2001, 2000 and 1999,
the segment expended $31 million, $26 million and $35 million for research and
development projects, respectively.

DATA SERVICES

Using the 10-satellite GEO constellation of the Loral Global Alliance and
third party capacity, access to fiber networks and internet backbone entry
(peering) points, Loral can provide its customers with the ability

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to distribute large, complex digital video and data files to multiple locations
throughout the world rapidly and cost efficiently. The Loral CyberStar Group
currently:

- delivers U.S.-based Internet content via satellite to more than 129 ISPs
in more than 35 foreign countries, which reach approximately seven
million residential customers around the world;

- distributes high-speed data over private corporate VSAT (very small
aperture terminals) networks which currently reach 165 customers, 633
sites and approximately 11,000 desktops; and

- offers business television (BTV) and business media services by satellite
to corporations for the delivery of teleconferences, distance learning
and training, and special events and other corporate communications.

During 2001, Loral CyberStar continued the rollout of its ClearStream suite
of IP-based services to its customers, including the introduction of ClearStream
OverNet, Webcast and Live providing enhanced video and streaming media
applications to the desktop. Loral believes that with the technical advantages
inherent in satellite delivery, streaming media services are a valuable addition
to Loral CyberStar's service offering to its customers.

The data services business faces competition not only from other
satellite-based providers, but also from providers of land-based data
communications services, such as cable operators, digital subscriber line, or
DSL, providers, wireless local loop providers and traditional telephone service
providers. The data services business will face continued price pressures from
fiber companies competing for its Internet services.

In connection with the consummation of Loral Orion's debt exchange offer in
December 2001, Loral Orion transferred its data services business to a new Loral
subsidiary, which assumed the name Loral CyberStar, Inc.

Total revenues for the data services segment were $98 million, $130
million, and $85 million in 2001, 2000 and 1999, respectively. Segment EBITDA
loss was $13 million, $52 million (including $22 million of costs for broadband
investment) and $36 million in 2001, 2000 and 1999, respectively. Total assets
for the segment were $154 million, $226 million and $114 million as of December
31, 2001, 2000 and 1999, respectively.

As of December 31, 2001 and 2000, funded backlog for the segment was $98
million and $191 million, respectively, which was all from external sources.
Approximately $48 million of 2001 funded backlog is expected to be realized in
2002. For 2001, 2000 and 1999, the segment expended $1 million, $22 million and
$24 million, respectively, for research and development.

Investment in Globalstar

Globalstar, L.P. ("Globalstar") owns and operates a satellite constellation
that forms the backbone of a global telecommunications network designed to serve
virtually every populated area of the world. On February 15, 2002, Globalstar
and certain of its direct subsidiaries filed voluntary petitions under Chapter
11 of Title 11, United States Code in the United States Bankruptcy Court for the
District of Delaware (the "Court"). In connection therewith, Loral/Qualcomm
Satellite Services, L.P., the managing general partner of Globalstar, its
general partner, Loral/Qualcomm Partnership, L.P. ("LQP"), and certain of
Loral's subsidiaries that serve as general partners of LQP also filed voluntary
petitions with the Court. As of December 31, 2001, Loral's direct and indirect
investment in connection with Globalstar-related activities as set forth on its
balance sheet was approximately $32 million. This investment balance primarily
represents the fair value of Loral's investment in Globalstar's $500 million
credit facility, which was based on the trading values of Globalstar's public
debt at December 31, 2001 (see Notes 3 and 12 to the consolidated financial
statements). If Globalstar were unable to effectuate a successful restructuring,
the Company's remaining investment in Globalstar's $500 million credit facility
would be impaired, which would have no effect on the Company's results of
operations. In addition, the Company has contingent liabilities of approximately
$14 million in connection with Globalstar service provider partnerships.

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Globalstar has reached an agreement with Loral and an informal committee of
noteholders, representing approximately 17% principal amount of Globalstar's
outstanding notes, regarding the substantive terms of a financial and legal
restructuring of Globalstar's business. The proposed restructuring plan, which
will have to be submitted for and will be subject to Court approval, calls for
the establishment of a new Globalstar company which will, in addition to taking
ownership of all of Globalstar's existing assets, acquire certain service
provider operations, including Loral's investment in the Canadian service
provider company. Under the proposed restructuring plan, if approved, the new
company will initially be owned by Globalstar's existing noteholders and other
unsecured creditors, including Loral, which would result in Loral initially
holding about a 24% equity interest in the new company, prior to any dilution
that may result from any new investments. The proposed plan also calls for the
cancellation of all existing partnership interests in Globalstar, but
contemplates, subject to the satisfaction of certain conditions, a rights
offering to common and preferred shareholders in Globalstar Telecommunications
Limited and Globalstar's creditors which could give them the option to purchase
up to 15% of the common equity in the new company. The proposed plan, if
approved, will also provide for mutual releases of claims related to Globalstar
to be granted to and by various persons, including, among others, Globalstar,
Globalstar's officers and directors, Loral and its affiliates, Globalstar
partners, service providers acquired by Globalstar and the members of any
official and informal committees of creditors. On March 5, 2002, the Court
appointed an official committee of creditors. Although the majority of the
members of the official committee are the members of the informal committee,
there can be no assurance that the proposed restructuring plan, including
Loral's proposed equity ownership in the new company, will be approved by
Globalstar's remaining creditors or the Court.

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REGULATION

TELECOMMUNICATIONS REGULATION

As an operator of a privately owned global satellite system, Loral is
subject to: (i) the regulatory authority of the U.S. government; (ii) the
regulatory authority of other countries in which Loral operates; and (iii) the
frequency coordination process of the International Telecommunications Union
("ITU"). Loral's ability to provide satellite service in a particular country or
region is subject to the technical constraints of its satellites, international
coordination, local regulatory approval and any limitation as to the scope of
the approval so obtained.

U.S. REGULATION

The ownership and operation of Loral's satellite systems in the U.S. is
regulated by the Federal Communications Commission (the "FCC"). Loral is subject
to the FCC's jurisdiction primarily for: (i) the licensing of satellites and
earth stations; (ii) avoidance of interference with other radio stations; and
(iii) compliance with FCC rules governing U.S.-licensed satellite systems.
Violations of the FCC's rules can result in various sanctions including fines,
loss of authorizations, or the denial of new authorizations or renewal
authorizations. Loral is not regulated as a common carrier and, therefore, is
not subject to rate regulation or the obligation not to discriminate among
customers. Loral must pay FCC filing fees in connection with its space station
and earth station applications; must pay annual regulatory fees that are
intended to defray the FCC's regulatory expenses; must file annual status
reports with the FCC; and, to the extent Loral is deemed to be providing
interstate/international telecommunications, must contribute to funds used to
support universal service.

Authorization to Launch and Operate Satellites

The FCC grants authorizations to satellite operators that meet its legal,
technical and financial qualification requirements. The FCC often receives
applications from multiple operators to operate a satellite at a given orbital
slot. There can be no assurance that in the process of resolving such mutually
exclusive applications, Loral's application will be granted. Under the FCC's
financial qualification rules, an applicant must demonstrate that it has
sufficient funds to construct, launch, and operate each requested satellite for
one year. Most satellite authorizations also include specific construction and
launch milestones which must be met. Licenses are usually issued for an initial
ten-year term and FCC policy provides licensees with an "expectancy" with
respect to the replacement of their authorized satellites. At the end of a
ten-year license term, a satellite that has not been replaced, or that has been
relocated to another orbital location following its replacement, may be allowed
to continue operations for a limited period of time pursuant to a grant of
special temporary authority from the FCC. Such operations, however, are subject
to certain restrictions.

Loral has final FCC authorization for the following existing or planned
satellites which operate or will operate in the C-band, the Ku-band, or both
bands: Telstar 4 at 89(degrees) W.L., Telstar 5 at 97(degrees) W.L., Telstar 6
at 93(degrees) W.L., Telstar 7 at 129(degrees) W.L., Telstar 8 at 77(degrees)
W.L., Telstar 9 at 69(degrees) W.L., Telstar 11 at 37.5(degrees) W.L., Telstar
12 at 15(degrees) W.L. and Orion A at 47(degrees) W.L. Certain of these
authorizations are subject to pending petitions for reconsideration submitted by
third parties. The final FCC authorizations for certain of the satellites that
are not yet in-orbit also do not cover certain design changes or milestone
extension requests that are the subject of pending modification applications.
Certain of these modification applications have been opposed by other satellite
operators. There can be no assurance that such design changes or milestone
extensions will be granted by the FCC. The failure to obtain a milestone
extension could result in the loss of the related FCC authorization. If Loral is
unable to obtain FCC approval to implement its requested technical modifications
for any particular authorization, it will be obligated to operate the related
satellite in accordance with the original authorization.

In addition, Loral has final authorization to operate at the following
orbital slots: Ka-band at 15(degrees) W.L., 67(degrees) W.L., 81(degrees) W.L.,
89(degrees) W.L., 93(degrees) W.L., 115(degrees) W.L., 147(degrees) W.L.,
126.5(degrees) E.L., 105.5(degrees) E.L. and 78(degrees) E.L. and hybrid
Ka/Ku-band at 47(degrees) W.L. Loral has requests for technical modifications
and requests for milestone extensions pending before the FCC. There can be no
assurance that the FCC will grant such modifications or milestone extensions.

10

Loral also has conditional authorizations and applications pending before
the FCC for other orbital locations. Under the FCC's rules, an applicant may
commence satellite construction prior to receiving an authorization to launch
and operate, although it must notify the FCC that it intends to commence
construction. Any construction engaged in is at the applicant's own risk. While
Loral therefore may proceed with the construction of planned satellites without
prior FCC approval, it must accept the risk that the FCC may not grant the
application, may not assign the satellite to its proposed orbital location, or
otherwise may act in a manner that limits or eliminates some or all of the value
of the construction previously done on the satellite.

Scope of Services Authorized

In 1996, the FCC largely eliminated the regulatory distinction between U.S.
domestic satellites and U.S.-licensed international satellites. As a result,
each of Loral's satellites may be used, to the extent technically feasible, to
provide both U.S. domestic and international services.

Coordination Requirements

The FCC requires applicants to demonstrate that their proposed satellites
would be compatible with the operations of adjacent satellites. The FCC requires
adjacent satellite operators to coordinate with one another to minimize
frequency conflicts. The FCC reserves the right to require that an FCC-licensed
satellite be relocated to a different orbital location if it determines that
such a change is in the public interest. The FCC might exercise this authority
in instances where operators are unable to coordinate with each other.

REGULATION BY NON-U.S. NATIONAL TELECOMMUNICATIONS AUTHORITIES

Foreign laws and regulatory practices governing the provision of satellite
services to licensed entities and directly to end users vary substantially from
country to country. Some countries may require Loral to confirm that it has
successfully completed technical consultation with other satellite service
providers before providing services on a given satellite. In addition, Loral may
be subject to communications and/or broadcasting laws with respect to its
provision of international satellite services, which vary from country to
country.

Foreign laws and regulatory practices may be applied or changed in ways
that may adversely affect Loral's ability to operate or provide service. There
are no guarantees that other countries will grant Loral's applications to
construct, launch, operate or provide service via satellites, or extend
construction or launch milestones, or that Loral will be permitted to retain or
renew its authorizations. As in the U.S., violations of other countries' laws
and rules may result in sanctions, fines, loss of authorizations or denial of
applications for new or renewal authorizations. Application and other
administrative fees may be required in other countries. License terms for
non-U.S. authorizations held by Loral vary but generally authorize operation for
at least the life of the satellite and include rights to operate a replacement
satellite. Loral's failure to operate or maintain operation of a satellite
pursuant to a non-U.S. authorization may result in revocation.

Many countries have liberalized their regulations to permit entities to
seek licenses to provide voice, data or video services. This trend should
accelerate with the commitments by many World Trade Organization ("WTO")
members, in the context of the WTO Agreement on Basic Telecommunications
Services, to open their satellite markets to competition. Other countries,
however, have maintained strict monopoly regimes. In such markets, the provision
of service from Loral and other U.S.-licensed satellites may be more
complicated.

In addition to the orbital slots licensed by the FCC, Loral has been
assigned orbital slots by certain other countries. For example, Loral has been
authorized to use numerous Ku- and Ka-orbital slots by the Papua New Guinea
government. In March 1999, the Brazilian telecommunications authority announced
that Loral had won Brazil's auction for its 63(degrees) W.L. Ku-band orbital
slot. Loral operates capacity on the Telstar 10/ Apstar IIR C/Ku-band satellite
licensed by China and located at 76.5(degrees) E.L. Satmex, of which Loral owns
49%, is licensed by Mexico to operate the C/Ku-band satellites at 109.2(degrees)
W.L., 113.0(degrees) W.L., and 116.8(degrees) W.L. Europe*Star, of which Loral
owns 47%, is licensed by Germany to operate Ku-band satellites at 45(degrees)
E.L. and 47.5(degrees) E.L.

11

Loral has applications pending on its behalf at 77(degrees) W.L. for use of
the extended C/Ku-band frequencies, at 81(degrees) W.L. for use of the Ku-band
and extended Ku-band frequencies and at 58(degrees) W.L., 95(degrees) W.L.,
115(degrees) W.L. and 135(degrees) W.L. for use of the V-band frequency. Loral
has an application pending at 126(degrees) E.L. for use of the Ku/extended Ku/C
and extended C-band frequencies. Loral also has an application pending for
authorization to use C-band at 121(degrees) W.L. in the U.S. (Telstar 13) using
a non-U.S. ITU filing. There can be no assurance that the FCC will grant this or
any of the other pending Loral applications.

The ITU Frequency Coordination Process

All satellite systems are subject to ITU frequency coordination
requirements and must obtain appropriate authority to provide service in a given
territory. The result of the required international coordination process may
limit the extent to which all or some portion of a particular authorized orbital
slot may be used for commercial operations, with a corresponding impact on the
useable capacity of a satellite at that location. In addition, the result of the
process by which satellite systems must seek authorization to provide service in
a given territory may limit the extent to which such service may be provided
from a given orbital location.

All of the registrations for Loral's satellites are or will be subject to
the ITU coordination process. Only national governments file required
coordination documents at the ITU. These documents are used by Loral and other
satellite operators as a basis for coordination of satellite systems. There may
be more than one ITU filing submitted for any particular orbital slot, or an
orbital slot adjacent thereto, thus requiring coordination between or among the
affected operators. The results of this coordination process may impose
technical constraints on Loral's ability to operate its satellites at a given
orbital location, if at all. Loral cannot guarantee successful frequency
coordination for its satellites.

ADDITIONAL ITU FILINGS

In addition to the ITU filings associated with Loral's satellite
authorizations and applications noted above, Loral has ITU filings on its behalf
at 98(degrees) E.L., 122(degrees) E.L., 130(degrees) E.L., 167.45(degrees) E.L.,
175(degrees) W.L., 121(degrees) W.L. and 115(degrees) W.L. for use of the C- and
Ku-band frequencies. Loral also has ITU filings at 9.9(degrees) E.L.,
22.3(degrees) E.L., 115.5(degrees) E.L., 161(degrees) E.L., and 97(degrees) W.L.
for the use of C-, Ku-, and Ka-band frequencies and at 37.5(degrees) W.L. for
the use of C- and Ka-band frequencies. Loral also has ITU filings at 1(degrees)
E.L., 3.5(degrees) E.L., 8(degrees) E.L., 11(degrees) E.L., 30(degrees) E.L.,
81(degrees) E.L., 105.5(degrees) E.L., 135(degrees) E.L., 135(degrees) W.L.,
115(degrees) W.L., 95(degrees) W.L., 58(degrees) W.L. for use of the V-band
frequency.

EXPORT REGULATION

Commercial communication satellites, and certain related items, technical
data and services, are subject to United States export control laws and
regulations. These export control laws and regulations affect the export of
products and services to foreign launch providers, insurers, customers,
potential customers and business partners, as well as to foreign Loral
employees, foreign regulatory bodies, foreign national telecommunications
authorities and to foreign persons generally. Commercial communications
satellites and certain related items, technical data and services were added to
the United States Munitions List and export jurisdiction over these products and
services was transferred to the U.S. Department of State and made subject to the
Arms Export Control Act and the International Traffic in Arms Regulations. Other
items, technical data and services exported by Loral remain subject to the
export jurisdiction of the U.S. Department of Commerce, pursuant to the Export
Administration Act and the Export Administration Regulations.

U.S. Government licenses or other approvals generally must be obtained
before exports of satellites and related items, technical data and services are
made and may be required before such satellites, items, data and services are
re-exported or transferred from one foreign person to another foreign person.
There can be no assurance that such licenses or approvals will be granted. Also,
licenses or approvals may be granted with limitations, provisos or other
requirements imposed by the U.S. Government as a condition of approval, which
may affect the scope of permissible activity under the license or approval.

12

PATENTS AND PROPRIETARY RIGHTS

SS/L relies, in part, on patents, trade secrets and know-how to develop and
maintain its competitive position. It holds 221 patents in the United States and
335 patents abroad and has applications for 107 patents pending in the United
States and 342 patents pending abroad. SS/L patents include those relating to
communications, station keeping, power control systems, antennae, filters and
oscillators, phased arrays and thermal control as well as assembly and
inspections technology. The SS/L patents that are currently in force expire
between 2002 and 2020.

Loral CyberStar and CyberStar LP have four and five patents in the United
States, respectively. In addition, Loral CyberStar, Loral SpaceCom Corporation
and CyberStar LP have two, five and six patents pending in the United States,
respectively, and three, 11 and zero patents pending abroad, respectively. The
Loral CyberStar and CyberStar LP patents that are currently in force expire
between 2016 and 2019.

There can be no assurance that any of the pending patent applications by
the Company will be issued. Moreover, because the U.S. patent application
process is confidential, there can be no assurance that third parties, including
competitors, do not have patents pending that could result in issued patents
which the Company would infringe. In such an event, the Company could be
required to pay royalties to obtain a license, which could increase costs.

FOREIGN OPERATIONS

Sales to foreign customers, primarily in Europe and Asia, represented 35%,
23% and 14% of the Company's consolidated revenues for 2001, 2000 and 1999,
respectively. As of December 31, 2001, 2000 and 1999, the Company had
substantially all of its long-lived assets located in the United States with the
exception of the in-orbit satellites. See "Certain Factors that May Affect
Future Results -- We face risks in conducting business internationally" for a
discussion of the risks related to operating internationally.

EMPLOYEES

As of December 31, 2001, the Company had approximately 3,400 full-time
employees, approximately 3% of whom are subject to collective bargaining
agreements. We consider our employee relations to be good.

13

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

This annual report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
from time to time, we or our representatives have made or may make forward-
looking statements, orally or in writing. They can be identified by the use of
forward-looking words such as "believes", "expects", "plans", "may", "will",
"would", "could", "should", "anticipates", "estimates", "project", "intend", or
"outlook" or their negatives or other variations of these words or other
comparable words, or by discussions of strategy that involve risks and
uncertainties. Such forward-looking statements may be included in, but are not
limited to, various filings made by us with the Securities and Exchange
Commission, press releases or oral statements made by or with the approval of an
authorized executive officer. We warn you that forward-looking statements are
only predictions. Actual events or results may differ materially as a result of
risks that we face, including those presented below. We undertake no obligation
to update any forward-looking statements. The following are representative of
factors that could affect the outcome of the forward-looking statements.

FINANCIAL STRUCTURE

WE HAVE SUBSTANTIAL DEBT AND GUARANTY OBLIGATIONS.

We and our subsidiaries and operating affiliates have a significant amount
of outstanding debt and guaranty obligations. As of December 31, 2001, our
consolidated total debt was $2.4 billion.

The indentures and credit agreements relating to this indebtedness impose
restrictions on our and our subsidiaries' and affiliates' ability to take
various actions, which may limit our and their ability to plan for, or react to,
changes in their business and market conditions. These limitations include
restrictions on the ability to pay dividends, or to make loans, capital
expenditures or investments. Moreover, certain of these agreements require that
excess cashflow and insurance proceeds from certain launch or in-orbit failures
be used to prepay debt. As part of the bank amendments that were entered into in
December 2001 relating to the credit facilities for Loral SpaceCom and Loral
Satellite, our principal operating subsidiaries, substantially all of the assets
of Loral SpaceCom and Loral Satellite have been pledged in favor of the bank
lenders, which further reduces our flexibility to take certain actions.

We intend to use our cash and available credit ($229 million at December
31, 2001) to help fund the growth and operation of our businesses. If any of our
subsidiaries or affiliates finds itself faced with default, we may be faced with
a choice between providing additional support to that company or accepting the
loss of some or all of its investment. In certain cases we have also guaranteed
the debt of our subsidiaries. For example, the $613 million principal amount of
new senior notes issued by Loral Orion in December 2001 in connection with its
exchange offer, are guaranteed by us. None of Globalstar, L.P.'s debt is
guaranteed by us and we do not intend to provide any further funding to
Globalstar. We do, however, have contingent liabilities of approximately $14
million in connection with Globalstar service provider partnerships.

Satmex, our 49%-owned Mexico affiliate, had total debt of $556 million. In
addition, Servicios Corporativos Satelitales, S.A. de C.V. ("Servicios"), the
parent company of Satmex, in which we have a 65% interest, has an obligation to
the government of Mexico with an initial face amount of $125 million which
accretes at 6.03% over a seven-year period, expiring in December 2004. We have
agreed to maintain our stock ownership interests in the parent company of
Servicios in a trust to collateralize this obligation. This debt is non-recourse
to Loral.

Recent accounting guidance could impact the accounting treatment for our
preferred stock. This accounting guidance could cause us to reclassify a portion
or all of our preferred stock, which is currently treated as equity, to outside
of equity, depending on the price of our common stock and the number of shares
of our common stock available for issuance, as determined at the end of each
fiscal quarter.

We have the ability to make the mandatory redemption payments due on our
Series C and Series D Preferred Stock in cash, common stock, or a combination of
the two. However, to the extent that we fail to have sufficient authorized
shares of common stock on the mandatory redemption dates in 2006 and 2007 to
14

effect payment in full of the related preferred stock in common stock, we will
have to cover any such shortfall with cash.

IF OUR BUSINESS PLAN DOES NOT SUCCEED, OUR OPERATIONS MIGHT NOT GENERATE ENOUGH
CASH TO PAY OUR OBLIGATIONS.

For the year ended December 31, 2001, we had a deficiency of earnings to
cover fixed charges of approximately $264 million. In addition to our debt
service requirements, our businesses are capital intensive and need substantial
investment before returns can be realized. For example, we will incur
significant expenditures to construct and launch new satellites for our fixed
satellite services business. We are subject to substantial financial risks from
possible delays or reductions in revenue, unforeseen capital needs or unforeseen
expenses. If this were to occur, our ability to meet our obligations and execute
our business plan could depend upon our ability, and that of our operating
subsidiaries and affiliates, to raise cash in the capital markets. We are
uncertain whether this source of cash will be available in the future on
favorable terms if at all.

THE ABILITY OF OUR SUBSIDIARIES TO PAY DIVIDENDS TO US OR OTHERWISE SUPPORT OUR
OBLIGATIONS IS LIMITED BY THE TERMS OF THEIR DEBT INSTRUMENTS.

Loral SpaceCom's credit facility allows dividend payments to us if
cumulative dividend payments do not exceed 50% of its cumulative consolidated
net income and the ratio of its funded debt to EBITDA is less than 3.0 to 1.0.
For the year ended December 31, 2001, Loral SpaceCom had no capacity under this
covenant to pay us any dividends.

Loral Satellite, Inc.'s credit agreement also imposes restrictions on its
ability to pay dividends to its parent. Such restrictions specify, for instance,
that dividends can be paid only after Loral Satellite has made loans to us in an
aggregate principal outstanding amount of $100 million or more.

Under the terms of the indenture for Loral Orion's new senior notes, Loral
Orion will be prevented from paying dividends to us and is unlikely to pay any
dividends in the foreseeable future.

GLOBALSTAR MATTERS

WE HAVE BEEN SUED IN A NUMBER OF PURPORTED CLASS ACTIONS BROUGHT BY OUR
STOCKHOLDERS AND SECURITY HOLDERS OF GLOBALSTAR TELECOMMUNICATIONS LIMITED AND
GLOBALSTAR.

We have been named as a defendant in various lawsuits brought by
securityholders of Globalstar Telecommunications Limited and Globalstar alleging
controlling person liability in respect of certain statements made by GTL,
Globalstar and their representatives. Our shareholders have also initiated
various shareholder lawsuits alleging that material misstatements or omissions
were made about our business and prospects as they relate to Globalstar. We will
vigorously defend against any such claims or proceedings and may be responsible
for damages awarded against us resulting from these proceedings and claims. Even
if such claims are unsuccessful, such claims and proceedings could require us to
spend money on litigation, divert management's time, damage our reputation and
depress the value of our equity.

We may also find ourselves subject to other claims brought by Globalstar
creditors and securities holders, who may seek to impose liabilities on us as a
result of our relationship with Globalstar. For instance, Globalstar's creditors
may seek to pierce the corporate veil in an attempt to recover Globalstar
obligations owed to them that are recourse to our subsidiaries, which are
general partners in Globalstar and have filed for bankruptcy protection.
Globalstar's cumulative partners deficit at September 30, 2001, was $2.81
billion. Globalstar's proposed restructuring plan contemplates that mutual
releases of claims related to Globalstar would be granted to and by various
persons, including, among others, Loral and its affiliates, Globalstar,
Globalstar's officers and directors, Globalstar partners, service providers
acquired by Globalstar and the members of any official and informal committee of
creditors. There can be no assurance that these releases will be approved by the
bankruptcy court or, if approved, as to the scope of any releases finally
obtained.

15

GLOBALSTAR AND CERTAIN OF ITS GENERAL PARTNER ENTITIES, INCLUDING TWO OF OUR
SUBSIDIARIES, HAVE FILED FOR BANKRUPTCY PROTECTION.

On February 15, 2002, Globalstar and certain of its direct subsidiaries
filed voluntary petitions under Chapter 11 of Title 11, United States Code in
the United States Bankruptcy Court for the District of Delaware. In connection
with this filing, Loral/Qualcomm Satellite Services, L.P., the managing general
partner of Globalstar, its general partner, Loral/Qualcomm Partnership, L.P.,
and certain of our subsidiaries that serve as general partners of Loral/Qualcomm
Partnership, L.P. also filed voluntary petitions with the Delaware bankruptcy
court. Globalstar's proposed restructuring plan, which will be submitted to and
subject to bankruptcy court approval, calls for the cancellation of all existing
partnership interests in Globalstar. This proposed restructuring plan also
contemplates the creation of a new Globalstar company, which will initially be
owned by Globalstar's existing noteholders and other unsecured creditors,
including us. In other situations in the past, challenges have been initiated
seeking subordination or recharacterization of debt held by an affiliate of an
issuer. While we know of no reason why such a claim would prevail with respect
to the debt we hold in Globalstar, there can be no assurance that such claims
will not be made in Globalstar's bankruptcy proceeding. If such claims were to
prove successful, it will jeopardize the amount of equity interest we will
ultimately receive in the new Globalstar company. Moreover, actions may be
initiated in Globalstar's bankruptcy proceeding seeking to characterize payments
made by Globalstar to us prior to the filing date as preferential payments
subject to repayment.

LITIGATION AND DISPUTES

WE AND SS/L ARE CURRENTLY INVOLVED IN AN ARBITRATION PROCEEDING WITH ALCATEL,
WHICH MAY RESULT IN THE PAYMENT OF DAMAGES TO ALCATEL.

SS/L was a party to an Operational Agreement with Alcatel Space Industries,
pursuant to which the parties had agreed to cooperate on certain satellite
programs, and an Alliance Agreement with Alcatel Space together with Alcatel
Space Industries, Alcatel, pursuant to which Alcatel had certain rights with
respect to SS/L, including the right to appoint two representatives to SS/L's
seven-member board of directors, rights to approve certain extraordinary actions
and certain rights to purchase SS/L shares at fair market value in the event of
a change of control (as defined) of either Loral or SS/L. The agreements between
Alcatel and SS/L were terminable on one year's notice, and, on February 22,
2001, Loral gave notice to Alcatel that they would expire on February 22, 2002.
In April 2001, Alcatel commenced an arbitration proceeding challenging the
effectiveness of Loral's notice of termination and asserting various alleged
breaches of the agreements by SS/L relating to the exchange of information and
other procedural or administrative matters. In February 2002, the arbitral
tribunal upheld the validity of Loral's termination effective February 22, 2002
and Alcatel's claims as to certain breaches. The arbitral tribunal has provided
both parties with an opportunity to file any additional claims or counterclaims
they may have. In March 2002, Alcatel submitted additional claims against Loral
and SS/L and is seeking at least $330 million in damages in respect of all of
its claims. We believe that Alcatel's claims for damages are without merit and
have been asserted for competitive reasons to disadvantage SS/L and that this
matter will not have a material adverse effect on our consolidated financial
position or results of operations. Loral and SS/L will have the opportunity and
intend to assert counterclaims against Alcatel in April 2002. The arbitral
tribunal will decide at a later date whether any of Alcatel's claims or Loral's
or SS/L's counterclaims give rise to damages.

SS/L IS CURRENTLY INVOLVED IN DISPUTES WITH CERTAIN CUSTOMERS REGARDING
SATELLITES BUILT OR UNDER CONSTRUCTION BY SS/L, WHICH MAY RESULT IN THE PAYMENT
OF DAMAGES OR REFUNDS.

In September 2001, the PAS 7 satellite built by SS/L for PanAmSat
experienced an electrical power failure on its solar arrays that resulted in the
loss of use of certain transponders on the satellite. As a result, PanAmSat has
claimed that under its contract with SS/L it is entitled to be paid $16 million.
SS/L disputes this claim. SS/L believes that this failure is an isolated event
and does not reflect a systemic problem in either the satellite design or
manufacturing process. In addition, the PAS 8 satellite has experienced minor
losses of power from its solar arrays, the cause of which is unrelated to the
loss of power on the PAS 7 satellite. PanAmSat has claimed that under its
contract with SS/L it is entitled to be paid $7.5 million as a result of
16

these minor power losses. SS/L disputes this claim. SS/L and PanAmSat are in
discussions to resolve these matters.

SS/L has contracted to build a spot beam, Ka-band satellite for a customer
planning to offer broadband data services directly to the consumer. The customer
has failed to make certain payments due to SS/L under the contract and has
asserted that SS/L is not able to meet the contractual delivery date for the
satellite. As of December 31, 2001, SS/L had billed and unbilled accounts
receivable and vendor financing arrangements of $47 million with this customer.
SS/L and the customer have entered into an agreement that provides that, until
May 1, 2002, neither party will assert that the other party is in default under
the contract, and the parties are currently engaged in discussions to resolve
their outstanding issues. In addition, SS/L and the customer have agreed to
suspend work on the satellite during these discussions, pending the outcome of
the discussions. If the parties do not resolve their issues, it is likely that
each party would assert that the other is in default. The contract provides that
SS/L may terminate the contract for a customer default 90 days after serving a
notice of default if the default is not cured by the customer; upon such a
default, SS/L would be entitled to recover the contractually agreed price of
items delivered and accepted prior to termination and 115% of its actual costs
incurred for items not delivered prior to termination. The contract also
provides that the customer may terminate the contract for an SS/L default 133
days after serving a notice of default if the default is not cured by SS/L; upon
such a default, SS/L would be obligated to refund all amounts previously paid by
the customer, $78 million as of December 31, 2001, plus interest. Based on the
discussions currently in progress with the customer and other parties who may be
interested in the satellite, management's assessment of the market opportunities
for the satellite and consideration of the satellite's estimated value,
management does not believe that this matter will have a material adverse effect
on our consolidated financial position or results of operations. No assurance
can be provided, however, that this matter will be resolved by the parties, will
not result in SS/L's being involved in protracted litigation, or will not result
in substantial liability on the part of SS/L to the customer.

OPERATIONAL MATTERS

SS/L IS STILL AWAITING APPROVAL FROM THE STATE DEPARTMENT FOR THE LAUNCH OF
CHINASAT-8.

The launch of ChinaSat-8 has been delayed pending SS/L's obtaining the
approvals required for the launch. On December 23, 1998, the Office of Defense
Trade Controls, or ODTC, of the U.S. Department of State temporarily suspended a
previously approved technical assistance agreement under which SS/L had been
preparing for the launch of the ChinaSat-8 satellite. In addition, SS/L was
required to re-apply for new export licenses from the State Department to permit
the launch of ChinaSat-8 on a Long March launch vehicle when the old export
licenses issued by the Commerce Department, the agency that previously had
jurisdiction over satellite licensing, expired in March 2000. On January 4,
2001, the ODTC, while not rejecting these license applications, notified SS/L
that they were being returned without action. On January 9, 2002, we, SS/L and
the United States Department of State entered into a consent agreement settling
and disposing of all civil charges, penalties and sanctions associated with
alleged violations by SS/L of the export control laws arising out of the
participation of certain SS/L's employees in a committee formed to review the
findings of the Chinese regarding the 1996 crash of a Long March rocket in
China. The consent agreement provides that the State Department agrees, assuming
our and SS/L's faithful adherence to the terms of the consent agreement, and the
Arms Export Control Act and its implementing regulations, that decisions
concerning export licenses for the ChinaSat-8 spacecraft will be made on the
basis of the security and foreign policy interests of the United States,
including matters relating to U.S. relations with the People's Republic of
China, without reference to the State Department's previously expressed concerns
regarding SS/L's reliability, which concerns are considered to be appropriately
mitigated through the operation of various provisions of the consent agreement.
Discussions between SS/L and the State Department regarding SS/L's obtaining the
approvals required for the launch of ChinaSat-8 are continuing.

In December 1999, SS/L reached an agreement with ChinaSat to extend the
date for delivery of the ChinaSat-8 satellite to July 31, 2000. In return for
this extension and other modifications to the contract, SS/L provided to
ChinaSat three transponders on Telstar 10/Apstar IIR for ChinaSat's use for the
life of those transponders. As a result, we recorded a charge to earnings of $35
million in 1999. If ChinaSat were to
17

terminate its contract with SS/L as a result of these delays, SS/L may have to
refund $134 million in advances received from ChinaSat and may incur penalties
of up to $11 million and believes it would incur costs of approximately $38
million to refurbish and retrofit the satellite so that it can be sold to
another customer, which resale cannot be guaranteed. To the extent that SS/L is
able to recover some or all of its $52 million deposit payment on the Chinese
launch vehicle, this recovery would offset a portion of such payments. There can
be no assurance, however, that SS/L will be able to either obtain a refund from
the launch provider or find a replacement customer for the Chinese launch
vehicle.

LAUNCH FAILURES HAVE DELAYED SOME OF OUR OPERATIONS IN THE PAST AND MAY DO SO
AGAIN IN THE FUTURE.

We depend on third parties, in the United States and abroad, to launch our
satellites. Satellite launches are risky, and some launch attempts have ended in
failure. We ordinarily insure against launch failures, but at considerable cost.
The cost and the availability of insurance vary depending on market conditions
and the launch vehicle used. Our insurance typically does not cover business
interruption, and launch failures may therefore result in uninsured economic
losses. Replacement of a lost satellite typically requires at least 24 months
from the time a contract is executed until the launch date of the replacement
satellite.

AFTER LAUNCH, OUR SATELLITES REMAIN VULNERABLE TO IN-ORBIT FAILURES, WHICH MAY
RESULT IN UNINSURED LOSSES.

Failure of satellite components in space may result in damage to or loss of
a satellite before the end of its expected life. In-orbit failure may result
from various causes, some random, including component failure, loss of power or
fuel, inability to maintain positioning of the satellite, solar and other
astronomical events, and space debris. Satellites are carefully built and tested
and have some redundant components to save the satellite in case of a component
failure. Due to the failure of primary components, certain of our satellites are
currently operating using back-up components. If these back-up components fail
and the primary components cannot be restored, these satellites could lose a
significant amount of capacity or be total losses which, until replacement
satellites are placed in-orbit, would result in lost revenues and lost profits
to the Company.

Repair of satellites in space is not feasible. Many factors affect the
useful life of our satellites including fuel consumption, the quality of
construction, degradation of solar panels and the durability of components.

Although some failures may be covered in part by insurance, they may result
in uninsured losses as well. For example, when Loral Skynet experienced the
total loss of two satellites in 1994 and 1997 while under AT&T's ownership, it
suffered a substantial drop in its profits due to the loss of revenues.

A loss of transponders on a satellite may have an adverse effect on us.
Loral Skynet has in the past entered into prepaid leases and sales contracts
relating to transponders on its satellites. Under the terms of these agreements,
Loral Skynet continues to operate the satellites which carry the transponders
and originally provided a warranty for a period of 10 to 14 years, in the case
of sales contracts (twelve transponders), and the lease term, in the case of the
prepaid leases (nine transponders). Depending on the contract, Loral Skynet may
be required under its prepaid leases and sales contracts to replace transponders
which do not meet operating specifications. All customers are entitled to a
refund equal to the reimbursement value if there is no replacement, which is
normally covered by insurance. In the case of the sales contracts, the
reimbursement value is based on the original purchase price plus an interest
factor from the time the payment was received to acceptance of the transponder
by the customer, reduced on a straight-line basis over the warranty period. In
the case of prepaid leases, the reimbursement value is equal to the unamortized
portion of the lease prepayment made by the customer.

SOME OF THE SATELLITES BUILT BY SS/L, INCLUDING FIVE SATELLITES OPERATED BY
SUBSIDIARIES OR AFFILIATES OF LORAL, HAVE EXPERIENCED OPERATIONAL PROBLEMS WITH
THEIR SOLAR ARRAYS.

Twelve of the satellites built by SS/L and launched since 1997, five of
which are owned and operated by our subsidiaries or affiliates, have experienced
minor losses of power from their solar arrays. Although, to date, neither we nor
any of the customers using the affected satellites have experienced any
degradation in performance, there can be no assurance that one or more of the
affected satellites will not experience additional power loss that could result
in performance degradation, including loss of transponder capacity. In
18

the event of additional power loss, the extent of the performance degradation,
if any, will depend on numerous factors, including the amount of the additional
power loss, the level of redundancy built into the affected satellite's design,
when in the life of the affected satellite the loss occurred and the number and
type of uses being made of transponders then in service. A complete or partial
loss of satellites could result in a loss of orbital incentive payments and, in
the case of satellites owned by our subsidiaries and affiliates, a loss of
revenues and profits. With respect to satellites under construction and
construction of new satellites, based on its investigation of the matter, SS/L
has identified and has implemented remedial measures that SS/L believes will
prevent newly launched satellites from experiencing similar anomalies. SS/L does
not expect that implementation of these measures will cause any significant
delay in the launch of satellites under construction or construction of new
satellites. Based upon information currently available, including design
redundancies to accommodate small power losses and the fact that no pattern has
been identified as to the timing or specific location within the solar arrays of
the failures, we believe that this matter will not have a material adverse
effect on our consolidated financial position or our results of operations.

IT MAY BE DIFFICULT TO OBTAIN FULL INSURANCE COVERAGE FOR SATELLITES THAT HAVE
EXPERIENCED PROBLEMS IN THE PAST.

While we have in the past, consistent with industry practice, typically
obtained in-orbit insurance for our satellites, we cannot guarantee that, upon a
policy's expiration, we will be able to renew the insurance on terms acceptable
to us, especially on satellites that have, or that are part of a family of
satellites that have, experienced problems in the past. For example, in
connection with the renewal of the insurance for the Telstar 10/Apstar IIR
satellite in October 2001, the insurance underwriters have excluded losses due
to solar array failures, since Telstar 10/Apstar IIR was manufactured by SS/L
and has the same solar array configuration as another 1300-class satellite
manufactured by SS/L that recently experienced a solar array failure. SS/L
believes that this failure is an isolated event and does not reflect a systemic
problem in either the satellite design or manufacturing process. Accordingly, we
do not believe that this anomaly will affect Telstar 10/ Apstar IIR. We are
currently in discussions with our insurers to remove this exclusion from the
Telstar 10/ Apstar IIR policy, in return for a deductible for losses arising
from electrical problems on the satellite's solar arrays. There can be no
assurance that these discussions will be successful. Three other satellites
operated by Loral Skynet have the same solar array configuration as Telstar
10/Apstar IIR. There can be no assurance that the insurers will not require
similar exclusions in connection with renewals of insurance for these satellites
in 2003 and 2004. Moreover, the existing insurance policy for Solidaridad 2
expires in November 2002 and a renewal policy may not insure against in-orbit
failure arising from the loss of the satellite's control processor, the same
component that failed on Solidaridad 1 and other Boeing satellites. An uninsured
loss of a satellite will have a material adverse effect on our consolidated
financial position and our results of operations.

WE ARE FACED WITH INCREASED COSTS DUE TO THE RECENT TREND IN THE INSURANCE
INDUSTRY TOWARDS HIGHER INSURANCE PREMIUMS AND SHORTER TERMS.

We, like others in the satellite industry, are faced with significantly
higher premiums on launch and in-orbit insurance and significantly shorter
coverage periods than those that have been available in the past, which was due
in part to the events of September 11, 2001. This development in the insurance
industry will increase the cost of doing business for both our satellite
manufacturing and fixed satellite services segments. We intend to pass on such
increased cost to our customers, although we cannot guarantee that we will be
able to do so. Insurance market conditions have historically been cyclical in
nature. While we anticipate that these conditions will improve in the future,
there can be no assurance that they will do so.

SPACE SYSTEMS/LORAL'S CONTRACTS ARE SUBJECT TO ADJUSTMENTS, COST OVERRUNS AND
TERMINATION.

SS/L's accounting for long-term contracts requires adjustments to profit
and loss based on revised estimates during the performance of the contract.
These adjustments may have a material effect on our consolidated financial
position and our results of operations in the period in which they are made. The
estimates giving rise to these risks, which are inherent in long-term,
fixed-price contracts, include the

19

forecasting of costs and schedules, contract revenues related to contract
performance, including revenues from orbital incentives, and the potential for
component obsolescence due to procurements long before assembly.

SS/L's major contracts are primarily firm fixed-price contracts. Under firm
fixed-price contracts, work performed and products shipped are paid for at a
fixed price without adjustment for actual costs incurred in connection with the
contract. While cost savings under these fixed-price contracts would result in
gains to SS/L, cost increases would result in losses borne solely by SS/L. Under
such contracts, SS/L may receive progress payments, or it may receive partial
payments upon the occurrence of certain program milestones.

Many of SS/L's contracts and subcontracts may be terminated at will by the
customer or the prime contractor. In the event of a termination at will, SS/L is
normally entitled to recover the purchase price for delivered items,
reimbursement for allowable costs for work in process and an allowance for
profit or an adjustment for loss, depending on whether completion of performance
would have resulted in a profit or loss. Such terminations may occur in the
future.

Some of SS/L's customers are start-up companies, and there can be no
assurance that these companies will be able to fulfill their payment obligations
under their contracts with SS/L.

SS/L MAY FORFEIT PAYMENTS FROM CUSTOMERS DUE TO SATELLITE FAILURES OR LOSSES
AFTER LAUNCH OR BE LIABLE FOR PENALTY PAYMENTS UNDER CERTAIN CIRCUMSTANCES, AND
THESE LOSSES MAY BE UNINSURED.

Some of SS/L's satellite manufacturing contracts provide that some of the
total price is payable as "incentive" payments earned over the life of the
satellite. SS/L has in the past generally not insured for these payments and in
fact may be prohibited from insuring these incentive payments under certain
circumstances.

SS/L records the present value of incentive payments as revenue during the
construction period of the related satellite. SS/L generally receives the
present value of these incentive payments if there is a launch failure or a
failure is caused by customer error. SS/L forfeits these payments, however, if
the loss is caused by satellite failure or as a result of its own error.

Some of SS/L's contracts call for in-orbit delivery, transferring the
launch risk to SS/L. SS/L generally insures against that exposure. In addition,
some of SS/L's contracts provide that SS/L may be liable to a customer for
penalty payments under certain circumstances, including upon late delivery.
These payments are not insured by SS/L.

SS/L COMPETES WITH LARGE SATELLITE MANUFACTURERS THAT HAVE SIGNIFICANT
RESOURCES.

In the manufacture of our satellites, we compete with very large
well-capitalized companies, including several of the world's largest satellite
manufacturers, such as The Boeing Company, Lockheed Martin, Alcatel Space and
Astrium. These companies have considerable financial resources which they may
use to gain advantages in marketing and in technological innovation. SS/L's
success depends on its ability to perform on a cost-effective and timely basis.

OUR SATELLITE SERVICES BUSINESSES COMPETE FOR MARKET SHARE AND CUSTOMERS;
TECHNOLOGICAL DEVELOPMENTS FROM COMPETITORS OR OTHERS MAY REDUCE DEMAND FOR OUR
SERVICES.

We face heavy competition in fixed satellite services from companies such
as PanAmSat Corporation, SES Global and newly privatized organizations such as
Intelsat and Eutelsat. Competition in this market may lower prices or result in
reduced satellite fleet utilization, which may have an adverse effect on our
consolidated financial position and our results of operations.

The data services business, provided through Loral CyberStar, Inc. and
CyberStar, L.P., faces competition not only from other satellite-based
providers, but also from providers of land-based data communications services,
such as cable operators, digital subscriber line, or DSL, providers, wireless
local loop providers and traditional telephone service providers. The data
services business will face continued price pressures from fiber companies
competing for its Internet services.

20

As land-based telecommunications services expand, demand for some
satellite-based services may be reduced. New technology could render
satellite-based services less competitive by satisfying consumer demand in other
ways or through the use of incompatible standards.

We also compete for local regulatory approval in places in which both we
and a competitor may want to operate. We also compete for scarce frequency
assignments and fixed orbital positions.

WE ARE SUBJECT TO EXPORT CONTROLS, WHICH MAY RESULT IN DELAYS AND ADDITIONAL
COSTS.

SS/L is required to obtain licenses and enter into technical assistance
agreements, presently under the jurisdiction of the State Department, in
connection with the export of satellites and related equipment, as well as
disclosure of technical data to foreign persons. Due to the relationship between
launch technology and missile technology, the U.S. government has limited, and
is likely in the future to limit, launches from China and other foreign
countries. Delays in obtaining the necessary licenses and technical assistance
agreements may result in the cancellation of, or delay SS/L's performance on,
existing contracts, and, as a result, SS/L may incur additional costs or
penalties or lose incentive payments under these contracts.

Some of our customers and potential customers, as well as insurance
underwriters and brokers have raised concerns that U.S. export control laws and
regulations excessively restrict their access to information about the satellite
during satellite construction and on-orbit satellite operation. To the extent
that our non-U.S. competitors are not subject to these export control laws and
regulations, they may enjoy a competitive advantage with foreign customers, and,
to the extent that our foreign competitors continue to gain market share, it
could become increasingly difficult for the U.S. satellite manufacturing
industry, including SS/L, to recapture this lost market share.

OUR BUSINESS IS REGULATED, CAUSING UNCERTAINTY AND ADDITIONAL COSTS.

Our business is regulated by authorities in multiple jurisdictions,
including the Federal Communications Commission, the International
Telecommunication Union, or ITU, and the European Union. The following are some
strategically important activities which are regulated and could be adversely
affected by regulatory policies:

- the expansion of Loral Skynet's operations in the U.S. and foreign
markets;

- the manufacture, export and launch of satellites;

- the expansion of Satmex's Latin American business;

- the operation of Europe*Star;

- the international service offered by our data services business
operations; and

- the implementation of the business plan of XTAR, our joint venture with
Hisdesat, which proposes to offer X-band services to government users.

Regulatory authorities in the various jurisdictions in which we operate can
modify, withdraw or impose charges or conditions upon, or deny or delay action
on applications for, the licenses which we need, and so increase our costs. For
example, the FCC may deny or fail to timely grant our pending application to use
C-band capacity in the U.S. (Telstar 13) via a non-U.S. ITU filing at 121
degrees W.L. The regulatory process also requires potentially costly
negotiations with third parties operating or intending to operate satellites at
or near orbital locations where we place our satellites so that the frequencies
of those other satellites do not interfere with our own. For example, as part of
our coordination effort on Telstar 12, we agreed to provide four 54 MHz
transponders on Telstar 12 to Eutelsat for the life of the satellite and have
retained risk of loss with respect to those transponders. We also granted
Eutelsat the right to acquire, at cost, four transponders on the next
replacement satellite for Telstar 12. Moreover, as part of this international
coordination process, we continue to conduct discussions with various
administrations regarding Telstar 12's operations at 15 degrees west longitude.
If these discussions are not successful, Telstar 12's useable capacity may be
reduced. We cannot guarantee successful frequency coordination for our
satellites.

21

Failure to successfully coordinate our satellites' frequencies or to
resolve other required regulatory approvals could have an adverse effect on our
consolidated financial position and our results of operations.

WE FACE RISKS IN CONDUCTING BUSINESS INTERNATIONALLY.

For the year ended December 31, 2001, approximately 35% of our revenue was
generated from customers located outside of the United States. We could be
harmed financially and operationally by changes in foreign regulations and
telecommunications standards, tariffs or taxes and other trade barriers. Almost
all of our contracts with foreign customers require payment in U.S. dollars, and
customers in developing countries could have difficulty obtaining U.S. dollars
to pay us due to currency exchange controls and other factors. Exchange rate
fluctuations may adversely affect the ability of our customers to pay us in U.S.
dollars. If we need to pursue legal remedies against our foreign business
partners or customers, we may have to sue them abroad where it could be
difficult for us to enforce our rights.

WE SHARE CONTROL OF OUR SUBSIDIARIES AND AFFILIATES WITH THIRD PARTIES.

Third parties have significant ownership, voting and other rights in many
of our subsidiaries and affiliates. As a result, we do not always have full
control over management of these entities. The rights of these third parties and
fiduciary duties under applicable law could result in others acting or omitting
to act in ways that are not in our best interest. To the extent that these
entities are or become customers of SS/L, these conflicts could become acute.
For example:

- Primary control of Satmex is vested in Mexican nationals, as required by
Mexican law, subject to certain approval rights which we retain.

- The Europe*Star joint venture is under the control of Alcatel, subject to
our right to approve certain matters, and any future joint ventures
between Alcatel and us within the Loral Global Alliance will be
controlled by the initiating party, subject to certain rights in favor of
the non-initiating party.

- Alcatel is an investor in CyberStar, LP and has certain minority
protection rights in it.

- Hisdesat enjoys certain approval rights in XTAR, our newly formed X-band
venture.

- Globalstar has filed for Chapter 11 bankruptcy protection, and is subject
to the supervision of the bankruptcy court.

WE RELY ON KEY PERSONNEL.

We need highly qualified personnel. Except for Mr. Bernard L. Schwartz, our
Chairman and Chief Executive Officer, none of our officers has an employment
contract nor do we maintain "key man" life insurance. The departure of any of
our key executives could have an adverse effect on our business.

OTHER MATTERS

THE RIGHTS OF SHAREHOLDERS UNDER BERMUDA LAW ARE DIFFERENT FROM RIGHTS OF
SHAREHOLDERS UNDER U.S. LAW.

Since we are a Bermuda company, the principles of law that govern
shareholder rights, the validity of corporate procedures and other matters are
different from those that would apply if we were a U.S. company. For example, it
is not certain whether a Bermuda court would enforce liabilities against us or
our officers and directors based upon United States securities laws either in an
original action in Bermuda or under a United States judgment. Bermuda law giving
shareholders the right to sue directors is less developed than in the United
States and may provide fewer rights.

PRICES OF OUR COMMON STOCK MAY EXPERIENCE SUDDEN CHANGES.

Many things that we cannot predict or control may cause sudden changes in
the price of our common stock. Risks associated with the deployment and
operation of satellite systems, in particular, may cause sudden changes in the
price.

22

THE MARKET FOR OUR STOCK COULD BE ADVERSELY AFFECTED BY FUTURE ISSUANCE OF
SIGNIFICANT AMOUNTS OF OUR COMMON STOCK.

As of December 31, 2001, 336,615,321 shares of our common stock were
outstanding. In addition, there were 47,660,663 stock options outstanding on
such date, of which 15,541,766 were immediately exercisable (none of which had a
strike price below the fair market value), warrants outstanding that were
exercisable for 6,237,404 shares of our common stock, 9,839,874 shares of our
Series C Preferred Stock convertible by its terms into 24,599,686 shares of our
common stock and 6,110,788 shares of our Series D Preferred Stock convertible by
its terms into 15,407,704 shares of our common stock. Moreover, we have the
ability to make the mandatory redemption payments due on our Series C and Series
D Preferred Stock in cash, common stock, or a combination of the two. The
mandatory redemption payments are due in 2006 for the Series C Preferred Stock
and in 2007 for the Series D Preferred Stock. The exact number of shares of our
common stock that may be issued on a mandatory redemption date cannot be
determined at this time, but may involve the issuance of a significant number of
shares of our common stock. That number will depend on a number of factors not
known today, such as the price of our common stock and the number of shares of
our preferred stock outstanding at that time. We have in the past from time to
time effected voluntary exchanges of our preferred stock for common stock. To
the extent that we make such additional exchanges in the future, we will reduce
the number of shares of our preferred stock subject to redemption in 2006 and
2007. However, there is no guarantee that theses exchanges will or can be made
in the future.

On March 31, 2000, Lockheed Martin converted 45,896,978 shares of our
Series A Preferred Stock into 45,896,978 shares of our common stock,
representing approximately 14% of our common stock. Because of the large number
of shares involved, sales by Lockheed Martin of all or a substantial part of its
position and any related hedging transactions could adversely affect the market
for, and the trading prices of, our common stock.

Sales of significant amounts of our common stock to the public, or the
perception that those sales could happen, could adversely affect the market for,
and the trading price of, our common stock.

ITEM 2. PROPERTIES

The Company leases approximately 47,000 square feet for its corporate
offices in New York. The Company also maintains office space, manufacturing and
telemetry, tracking and control facilities primarily in the United States.

Fixed Satellite Services -- Loral Skynet

Loral Skynet owns three telemetry, tracking and control stations covering
approximately 66,000 square feet on 212 acres in Hawley, Pennsylvania, Three
Peaks, California and Richmond, California. It also leases three telemetry,
tracking and control stations covering approximately 11,000 square feet on 3
acres in Richmond, California, Rio de Janeiro, Brazil and Utive, Panama. Loral
Skynet also leases approximately 68,000 square feet of office space in
Bedminster, New Jersey and Tinton Falls, New Jersey.

Satellite Manufacturing and Technology

SS/L's research, production and testing facilities are carried on in
SS/L-owned facilities covering approximately 562,000 square feet on 28 acres in
Palo Alto, California. In addition, SS/L leases approximately 887,000 square
feet of space on 44 acres from various third parties primarily in Palo Alto,
Menlo Park, and Mountain View, California.

Data Services

Loral CyberStar owns seven acres of land including 8,000 square feet of
office space in Mt. Jackson, Virginia and leases approximately 110,000 square
feet of office space and three acres of land worldwide.

Management believes that the facilities are sufficient for its current
operations.

ITEM 3. LEGAL PROCEEDINGS

Consent Agreement. On January 9, 2002, Loral, SS/L and the United States
Department of State entered into a consent agreement (the "Consent Agreement")
settling and disposing of all civil charges,

23

penalties and sanctions associated with alleged violations by SS/L of the Arms
Export Control Act and its implementing regulations. The conduct that gave rise
to the alleged violations occurred in connection with the participation of
certain SS/L employees on an independent review committee formed in the wake of
a 1996 crash of a Long March rocket in China, the purpose of which was to
consider whether studies of the crash made by the Chinese had correctly
identified the cause of the failure. Loral has been informed that the Justice
Department has terminated its investigation of SS/L relating to this matter and
has declined to pursue the matter further. The Consent Agreement provides that
SS/L will pay the State Department a civil penalty totaling $14 million over
seven years, without interest, the present value of which ($12 million) is
reflected as a charge to Loral's earnings in the fourth quarter of 2001. The
Consent Agreement also assesses an additional penalty of $6 million, which is
suspended on the condition that Loral and SS/L apply this amount over the next
seven years towards the implementation of export control compliance measures.
The Consent Agreement provides that the State Department agrees, assuming
Loral's and SS/L's faithful adherence to the terms of the Consent Agreement, and
the Arms Export Control Act and its implementing regulations, that decisions
concerning export licenses for the ChinaSat-8 spacecraft will be made on the
basis of the security and foreign policy interests of the United States,
including matters relating to U.S. relations with the People's Republic of
China, without reference to the State Department's previously expressed concerns
regarding SS/L's reliability, which concerns are considered to be appropriately
mitigated through the operation of various provisions of the consent agreement.
Discussions between SS/L and the State Department regarding SS/L's obtaining the
approvals required for the launch of ChinaSat-8 are continuing.

Alcatel Arbitration. SS/L was a party to an Operational Agreement with
Alcatel Space Industries, pursuant to which the parties had agreed to cooperate
on certain satellite programs, and an Alliance Agreement with Alcatel Space
together with Alcatel Space Industries, Alcatel, pursuant to which Alcatel had
certain rights with respect to SS/L, including the right to appoint two
representatives to SS/L's seven-member board of directors, rights to approve
certain extraordinary actions and certain rights to purchase SS/L shares at fair
market value in the event of a change of control (as defined) of either Loral or
SS/L. The agreements between Alcatel and SS/L were terminable on one year's
notice, and, on February 22, 2001, Loral gave notice to Alcatel that they would
expire on February 22, 2002. In April 2001, Alcatel commenced an arbitration
proceeding challenging the effectiveness of Loral's notice of termination and
asserting various alleged breaches of the agreements by SS/L relating to the
exchange of information and other procedural or administrative matters. In
February 2002, the arbitral tribunal upheld the validity of Loral's termination
effective February 22, 2002 and Alcatel's claims as to certain breaches. The
arbitral tribunal has provided both parties with an opportunity to file any
additional claims or counterclaims they may have. In March 2002, Alcatel
submitted additional claims against Loral and SS/L and is seeking at least $330
million in damages in respect of all of its claims. We believe that Alcatel's
claims for damages are without merit and have been asserted for competitive
reasons to disadvantage SS/L and that this matter will not have a material
adverse effect on our consolidated financial position or results of operations.
Loral and SS/L will have the opportunity and intend to assert counterclaims
against Alcatel in April 2002. The arbitral tribunal will decide at a later date
whether any of Alcatel's claims or Loral's or SS/L's counterclaims give rise to
damages.

Globalstar Related Matters. On September 26, 2001, the nineteen separate
purported class action lawsuits filed in the United States District Court for
the Southern District of New York by various holders of securities of Globalstar
Telecommunications Limited ("GTL") and Globalstar, L.P. ("Globalstar") against
GTL, Loral Space & Communications Ltd. ("Loral"), Bernard L. Schwartz and other
defendants were consolidated into one action titled In re: Globalstar Securities
Litigation. In November 2001, plaintiffs in the consolidated action filed a
consolidated amended class action complaint against Globalstar, GTL, Globalstar
Capital Corporation, Loral and Bernard L. Schwartz alleging (a) that all
defendants (except Loral) violated Section 10(b) of the Securities Exchange Act
of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, by making
material misstatements or failing to state material facts about Globalstar's
business and prospects, (b) that defendants Loral and Schwartz are secondarily
liable for these alleged misstatements and omissions under Section 20(a) of the
Exchange Act as alleged "controlling persons" of Globalstar, (c) that defendants
GTL and Schwartz are liable under Section 11 of the Securities Act of 1933 (the
"Securities Act") for untrue statements of material facts in or omissions of
material facts from a registration statement relating to the sale of shares of
GTL common stock in January 2000, (d) that defendant GTL is liable under
24

Section 12(2)(a) of the Securities Act for untrue statements of material facts
in or omissions of material facts from a prospectus and prospectus supplement
relating to the sale of shares of GTL common stock in January 2000, and (e) that
defendants Loral and Schwartz are secondarily liable under Section 15 of the
Securities Act for GTL's primary violations of Sections 11 and 12(2)(a) of the
Securities Act as alleged "controlling persons" of GTL. The class of plaintiffs
on whose behalf the lawsuit has been asserted consists of all buyers of
securities of Globalstar, Globalstar Capital and GTL during the period from
December 6, 1999 through October 27, 2000, excluding the defendants and certain
persons related or affiliated therewith. On February 25, 2002, Loral and Mr.
Schwartz filed a motion to dismiss the amended complaint in its entirety as to
Loral and Mr. Schwartz.

On March 2, 2001, the seven separate purported class action lawsuits filed
in the United States District Court for the Southern District of New York by
various holders of common stock of Loral against Loral, Bernard L. Schwartz and
Richard Townsend were consolidated into one action titled In re: Loral Space &
Communications Ltd. Securities Litigation. The lead plaintiff has been granted
until April 18, 2002 to serve a consolidated amended class action complaint. The
class of plaintiffs on whose behalf the lawsuit has been asserted consists of
all buyers of Loral common stock during the period from November 4, 1999 through
February 1, 2001, excluding the defendants and certain persons related or
affiliated therewith. The original complaints alleged (a) that the defendants
violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder, by making material misstatements or failing to state material facts
about Globalstar's and Loral's business and prospects, and (b) that Messrs.
Schwartz and Townsend are secondarily liable for these alleged misstatements and
omissions under Section 20(a) of the Exchange Act as alleged "controlling
persons" of Loral.

Loral believes that it has meritorious defenses to the above Globalstar
Related Matters and intends to pursue them vigorously.

CCD Lawsuits. On September 12, 1991, Loral Fairchild Corp. ("Loral
Fairchild"), a subsidiary of Loral Corporation, filed suit against a number of
companies claiming that such companies had infringed Loral Fairchild's patents
for a "charged coupled device" ("CCD"), commonly used as an optical sensor in
video cameras and fax machines. Although the CCD patents have expired, Loral
Fairchild is seeking reasonable royalties through the expiration date from a
number of defendants. Loral has the rights to any recovery that may be awarded
as a result of this suit. Although Loral Fairchild had previously either lost or
settled its claims against most of the defendants, in December 2001, a jury
trial was held with respect to its claims against the remaining defendants, and
the jury returned a verdict in favor of the defendants. Loral Fairchild has
filed motions with the trial court to overturn the jury verdict as contrary to
law. Those motions are pending.

Environmental Regulation. Operations at SS/L, Loral Skynet, Loral Orion,
Loral CyberStar and CyberStar LP are subject to regulation by various federal,
state and local agencies concerned with environmental control. The Company
believes that these facilities are in substantial compliance with all existing
federal, state and local environmental regulations. With regard to certain
sites, environmental remediation is being performed by prior owners who retained
liability for such remediation arising from occurrences during their period of
ownership. To date, these prior owners have been fulfilling such obligations and
the size and current financial condition of the prior owners make it probable
that they will be able to complete their remediation obligations without cost to
the Company.

The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, that arise in the ordinary course of business.
Although the outcome of these claims cannot be predicted with certainty, the
Company does not believe that any of these other existing legal matters will
have a material adverse effect on its consolidated financial position or results
of operations.

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

None.

25

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS

(a) MARKET PRICE AND DIVIDEND INFORMATION

The Company's common stock is traded on the New York Stock Exchange
("NYSE") under the symbol LOR. The following table presents, the reported high
and low sales prices of the Company's common stock as reported on the NYSE:

The Company does not currently anticipate paying any dividends or
distributions on its common stock. Loral is currently paying dividends on its 6%
Series C Convertible Redeemable Preferred Stock (the "Series C Preferred Stock")
and its 6% Series D Convertible Redeemable Preferred Stock (the "Series D
Preferred Stock"). Loral's indenture relating to its 9.5% senior notes imposes
limitations on Loral's ability to pay dividends to its shareholders. The credit
facilities maintained by the Company's two principal operating subsidiaries,
Loral SpaceCom Corporation and Loral Satellite, Inc., restrict the ability of
these companies to transfer cash or pay dividends to its parent (see Note 8 to
Loral's consolidated financial statements). Loral Orion's indenture relating to
its new senior notes also contains restrictions on Loral Orion's ability to make
dividend payments to its parent.

(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK

At February 28, 2002, there were 6,417 holders of record of the Company's
common stock.

ITEM 6. SELECTED FINANCIAL DATA

The following consolidated selected financial data has been derived from,
and should be read in conjunction with, the related consolidated financial
statements.

26

LORAL SPACE & COMMUNICATIONS LTD.
(in thousands, except per share and ratio data)

- ---------------

(1) On March 20, 1998, Loral acquired all of the outstanding stock of Loral
Orion, formerly Loral CyberStar in exchange for common stock of Loral. The
1998 financial information includes Loral Orion commencing from April 1,
1998. On March 14, 1997, Loral acquired Loral Skynet from AT&T; Loral's
financial information includes the results of Loral Skynet from that date.

(2) The Company's principal affiliates are Satmex since November 17, 1997 and
Europe*Star since December 1998. Loral also has investments in Globalstar
and other ventures, which are accounted for under the equity method. Loral
sold its interest in K&F Industries, Inc. in 1997.

(3) The results of operations for 2000 includes Loral's share of Globalstar's
related equity losses and after-tax impairment charges of approximately
$1.29 billion (approximately $1.6 billion on a pre-tax basis), which is
included in equity in net loss of affiliates and after-tax impairment
charges of $112 million ($125 million pre-tax) relating to Loral's
investments in and advances to Globalstar service provider partnerships.

(4) On December 21, 2001, Loral Orion completed exchange offers and consent
solicitations by issuing $613 million principal amount of new senior notes
guaranteed by Loral and 6.04 million five year warrants to purchase Loral
common stock in exchange for a total of $841 million principal amount of
Loral Orion senior notes due 2007 and senior discount notes due 2007.
27

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Results of
Operations and Financial Condition of Loral Space & Communications Ltd. and its
subsidiaries ("Loral" or the "Company") are not historical facts, but are
"forward-looking statements," as that term is defined in the Private Securities
Litigation Reform Act of 1995. In addition, the Company or its representatives
have made and may continue to make forward-looking statements, orally or in
writing, in other contexts, such as in reports filed with the SEC, press
releases or statements made with the approval of an authorized executive officer
of the Company. These forward-looking statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "plans," "may,"
"will," "would," "could," "should," "anticipates," "estimates," "project,"
"intend," or "outlook" or the negative of these words or other variations of
these words or other comparable words, or by discussion of strategy that
involves risks and uncertainties. These forward-looking statements are only
predictions, and actual events or results may differ materially as a result of a
wide variety of factors and conditions, many of which are beyond the Company's
control. Some of the factors and conditions that could affect the outcome of
forward-looking statements relate to (i) the Company's financial structure, (ii)
Globalstar matters, (iii) litigation and disputes, (iv) operational matters and
(v) other matters. For a detailed discussion of these factors and conditions,
please refer to the section of this Annual Report on Form 10-K titled "Certain
Factors that May Affect Future Results" beginning on page 14 and to the other
periodic reports filed with the SEC by Loral, our wholly owned subsidiary Loral
Orion, Inc. ("Loral Orion"), formerly known as Loral CyberStar, Inc., and the
Company's affiliate Satelites de Mexico, S.A. de C.V. ("Satmex"). In addition,
we caution you that the Company operates in an industry sector where securities
values may be volatile and may be influenced by economic and other factors
beyond the Company's control. The Company undertakes no obligation to update any
forward-looking statements.

Loral is one of the world's leading satellite communications companies,
with substantial activities in satellite-based communications services and
satellite manufacturing. Loral is organized into three operating businesses:

Fixed Satellite Services ("FSS"). Through the Loral Global Alliance,
which currently consists of Loral Skynet, Loral Orion, Loral Skynet do
Brasil Ltda. ("Skynet do Brasil"), its 49%-owned affiliate Satmex and its
47%-owned affiliate Europe*Star Limited ("Europe*Star"), Loral has become
one of the world's leading providers of satellite services using
geostationary communications satellites. The Company leases transponder
capacity on its satellites to its customers for various applications,
including broadcasting, news gathering, Internet access and transmission,
private voice and data networks, business television, distance learning and
direct-to-home television ("DTH") and provides telemetry, tracking and
control services ("TT&C") and network services to customers. The Loral
Global Alliance currently has ten operating high-powered geosynchronous
satellites in orbit: the seven satellite Telstar fleet, two Satmex
satellites and one Europe*Star satellite, with footprints covering almost
all of the world's population.

Satellite Manufacturing and Technology. The Company designs and
manufactures satellites and space systems and develops satellite technology
for a broad variety of customers and applications through Space
Systems/Loral, Inc. ("SS/L").

Data Services: The Company provides managed communications networks
and Internet and intranet services through Loral CyberStar, Inc. ("Loral
CyberStar") and delivers high-speed broadband data communications, business
television and business media services through CyberStar, L.P. ("CyberStar
LP").

CONSOLIDATED OPERATING RESULTS

In evaluating financial performance, management uses revenues and earnings
before interest, taxes, depreciation and amortization ("EBITDA") as a measure of
a segment's profit or loss. The following discussion of revenues and EBITDA
reflects the results of Loral's operating businesses for 2001, 2000 and

28

1999. See Note 16 to Loral's consolidated financial statements for additional
information on segment results. The remainder of the discussion relates to the
consolidated results of Loral, unless otherwise noted.

REVENUES:

EBITDA(6):

- ---------------

(1) Includes 100% of Europe*Star's and Satmex's revenues and EBITDA
(Europe*Star commenced revenue service in 2001) and 100% of Loral's
56%-owned affiliate XTAR, L.L.C. ("XTAR") EBITDA since July 2001. Also
includes Loral's subsidiary, Loral Skynet do Brasil since November 2000.
For the year ended December 31, 1999, Satmex's results include $25.5
million in revenues and $11.2 million in EBITDA, respectively, from the
sale by Satmex of transponders to Loral Skynet.

(2) Satellite manufacturing and technology consists of 100% of SS/L's results.
SS/L EBITDA includes charges of $12 million in 2001 for future payments to
the U.S. government to settle a case relating to export controls, $77
million in 2000 relating to increased costs for manufacturing delays and
customer contract issues and $44 million in 1999 relating to an agreement
with ChinaSat to extend the delivery date of a satellite and other
modifications to the contract in return for providing transponders on
another Loral satellite for their remaining lives.

(3) Data services consists of 100% of CyberStar LP (in which Loral owns an 82%
equity interest) and 100% of Loral Orion's data services business, which
business was transferred in December 2001 to a Loral subsidiary which
assumed the name Loral CyberStar. Equipment sales for data services were
$7.9 million, $16.9 million and $0.6 million in 2001, 2000 and 1999,
respectively. The year ended December 31, 2000 includes $22 million of
investment in broadband activities.

(4) Represents amounts related to unconsolidated affiliates (Satmex,
Europe*Star and XTAR), which are eliminated in order to arrive at Loral's
consolidated results. Loral's proportionate share of these affiliates is
included in equity in net loss of affiliates in Loral's consolidated
statements of operations.

(5) Represents the elimination of intercompany sales and EBITDA, primarily for
satellites under construction by SS/L for wholly owned subsidiaries; as
well as the elimination of revenues for the lease of transponder capacity
by satellite manufacturing and technology and data services from fixed
satellite services.

(6) EBITDA (which is equivalent to operating income/loss before depreciation
and amortization, including amortization of unearned stock compensation) is
provided because it is a measure commonly used in the communications
industry to analyze companies on the basis of operating performance,
leverage and liquidity and is presented to enhance the understanding of
Loral's operating results. EBITDA is not an alternative to net income as an
indicator of a company's operating performance, or cash flow from
operations as a measure of a company's liquidity. EBITDA may be calculated
differently and, therefore, may not be comparable to similarly titled
measures reported by other companies.

(7) Represents corporate expenses incurred in support of the Company's
operations.

Critical accounting matters

The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of

29

contingent assets and liabilities at the date of the financial statements and
the amounts of revenues and expenses reported for the period. Actual results
could differ from estimates.

The majority of Loral's satellite manufacturing and technology revenue is
associated with long-term fixed-price contracts and revenue and profit from
satellite sales under these long-term contracts are recognized using the
cost-to-cost percentage of completion method, which requires significant
estimates. Loral uses this method because reasonably dependable estimates can be
made based on historical experience and various other assumptions that are
believed to be reasonable under the circumstances. These estimates include
forecasts of costs and schedules, estimating contract revenue related to
contract performance (including estimated amounts for penalties, performance
incentives and orbital incentives that will be received as the satellite
performs on orbit) and the potential for component obsolescence in connection
with long-term procurements. These estimates are assessed continually during the
term of the contract and revisions in estimates are reflected in the period in
which the conditions that require the revision become known. Provisions for
losses on contracts are recorded when estimates determine that a loss will be
incurred on a contract at completion. Under firm fixed-price contracts, work
performed and products shipped are paid for at a fixed price without adjustment
for actual costs incurred in connection with the contract; accordingly,
favorable changes in estimates in a period will result in additional revenue and
profit and unfavorable changes in estimates will result in a reduction of
revenue and profit or the recording of a loss that will be borne solely by
Loral.

Depreciation is provided for on the straight-line method for satellites
over the estimated useful life of the satellite, which is determined by
engineering analyses performed at the in-service date and re-evaluated
periodically.

Realization of the net deferred tax assets is dependent on Loral's ability
to generate future taxable income and utilize tax planning strategies. A
valuation allowance has been recorded to reduce the deferred tax assets to the
amount that is more likely than not to be realized based on current estimates
and assumptions. Loral evaluates the valuation allowance on a quarterly basis.
Any resulting changes to the valuation allowance would result in an adjustment
to income in the period the determination is made.

Contingencies by their nature relate to uncertainties that require
management to exercise judgment both in assessing the likelihood that a
liability has been incurred as well as in estimating the amount of potential
loss, if any. The most important contingencies impacting our financial
statements are detailed below under Commitments and Contingencies.

2001 COMPARED WITH 2000

Revenues as reported for Loral's operating businesses were $1.1 billion in
2001 as compared to $1.2 billion in 2000, after intercompany and affiliate
eliminations of $374 million in 2001 and $369 million in 2000. The decrease in
revenues was due primarily to lower revenues in satellite manufacturing and
technology, primarily resulting from the slowdown in demand in the satellite
manufacturing industry, delays in production of certain programs, and the
substantial completion of the Globalstar satellite program at the end of 2000,
and lower volume in data services, offset by strong growth in FSS revenues due
to the increased number of transponders leased and higher revenue per
transponder in 2001 as compared to 2000.

EBITDA as reported increased to $223 million in 2001 as compared to $130
million in 2000, after intercompany and affiliate eliminations of $98 million in
2001 and $91 million in 2000. This increase arose primarily from strong revenue
growth in FSS without a proportionate growth in costs, and smaller losses from
data services resulting from cost savings realized from streamlining operations
and savings related to the exit from the direct-to-consumer broadband business
in 2001, offset by lower satellite manufacturing and technology EBITDA, which
was due to lower revenues and margins and start-up costs associated with the
introduction of several new technologies and a $12 million charge for future
payments to the U.S. government to settle a case relating to export controls.

30

Depreciation and amortization was $228 million in 2001 and $216 million in
2000. The increase primarily resulted from the timing of assets placed into
service. Depreciation and amortization associated with the FSS business
represents approximately 71% and 72% of the totals in 2001 and 2000,
respectively.

Interest and investment income was $29 million in 2001 as compared to $129
million in 2000. This decrease was principally due to non-cash interest income
in 2000 related to warrants received in connection with the guarantees provided
by Loral subsidiaries of Globalstar's $500 million credit facility, dividend
income in 2000 related to the Company's investment in Globalstar
Telecommunications Limited preferred stock, as well as lower average cash
balances for investment and lower investment rates in 2001.

Interest expense was $184 million in 2001, net of capitalized interest of
$23 million, as compared to $171 million in 2000, net of capitalized interest of
$17 million. The increase is due primarily to interest expense incurred in
connection with the Company's $500 million credit facility from November 2000,
offset by increased capitalized interest and lower interest rates in 2001. As a
result of the Loral Orion exchange offers, Loral will not recognize any interest
expense on the new senior notes and as a result, interest expense on its
statement of operations will be reduced significantly in future periods (see
Liquidity and Capital Resources).

The Company realized $71 million of gains in 2000, primarily from the sale
of substantially all of its investments in available-for-sale securities.

For 2001, income tax was a benefit of $10 million on a pre-tax loss of $160
million, as compared to an income tax provision of $9 million on a pre-tax loss
of $57 million for 2000. The decrease in tax expense for 2001 is primarily
attributable to a lower amount of income subject to U.S. tax during the current
period.

The equity in net loss of affiliates was $67 million in 2001 as compared to
$1.29 billion in 2000. Loral's share of equity in net losses of affiliates
attributable to Globalstar related activities (net of taxes of $4 million in
2001 and a tax benefit of $299 million in 2000), was $25 million in 2001 as
compared to $1.29 billion in 2000 (including equity in net losses of Globalstar
service provider partnerships of $30 million and $38 million, in 2001 and 2000,
respectively). This decrease is primarily due to the Company recognizing its
share of Globalstar's equity losses and impairment charges in the fourth quarter
of 2000, which reduced its investment in and advances in connection with
Globalstar to zero. Accordingly, there is no longer any requirement for Loral to
provide for any of Globalstar net losses subsequent to December 31, 2000 (see
Acquisitions and Investments). Loral's share of equity in net loss of Satmex was
$12 million in 2001, as compared to Loral's share of equity in net income of
Satmex of $19 million in 2000. Satmex had net income applicable to common
stockholders in 2000 of $54 million, which primarily resulted from a $67 million
after-tax gain it recorded on the net insurance recovery on the loss of a
satellite (see Other Liquidity Matters). Also included in equity in net loss of
affiliates is Loral's share of losses from Europe*Star, managed by Alcatel,
(which commenced service in 2001) and other affiliates (see Note 7 to Loral's
consolidated financial statements).

The minority interest benefit primarily reflects the reduction of CyberStar
LP's loss attributed to CyberStar LP's other investor, who owned 17.6% as of
December 31, 2001.

In the fourth quarter of 2000, the Company recorded after-tax impairment
charges of $112 million related to its investments in and advances to Globalstar
service provider partnerships (see Acquisitions and Investments).

During December 2001, the Company recorded an extraordinary gain of $22
million, net of taxes, related to Loral Orion's debt exchanges (see Liquidity
and Capital Resources).

On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which resulted in the Company
recording a charge for the cumulative effect of a change in accounting
principle, net of taxes, of $1.7 million (see Accounting Pronouncements).

Preferred distributions were $81 million in 2001 as compared to $68 million
for 2000. The increase was primarily due to non-cash dividend charges of
approximately $29 million incurred in the second quarter of 2001, on the
conversion of 3.7 million shares of Loral's 6% Series C Preferred Stock and 1.9
million shares of

31

Loral's 6% Series D Preferred Stock into the Company's common stock, in
connection with the Company's exchange offers, offset by lower dividends as a
result of the exchange offers (see Liquidity and Capital Resources).

As a result of the above, the net loss applicable to common stockholders
for 2001 was $277 million or $0.86 per basic and diluted share, compared to the
net loss of $1.54 billion or $5.20 per basic and diluted share for 2000. Basic
and diluted weighted average shares were 324 million in 2001 and 296 million in
2000. The increase in shares primarily relates to the 30.9 million shares of
common stock issued in connection with the Company's preferred stock exchange
offers.

2000 COMPARED WITH 1999

Revenues as reported for Loral's operating businesses were $1.2 billion for
2000 as compared to $1.5 billion in 1999, after intercompany and affiliate
eliminations of $369 million in 2000 and $402 million in 1999. The decrease in
revenues was due primarily to lower revenues in satellite manufacturing and
technology due to the timing of bookings and the nearing completion of the
Globalstar satellite program at the end of 2000, offset in part by strong growth
in FSS as a result of the increased number of transponders leased and higher
revenue per transponder in 2000 as compared to 1999 and from growth in data
services in 2000.

EBITDA as reported increased to $130 million in 2000 from $113 million in
1999, after intercompany and affiliate eliminations of $91 million in 2000 and
$108 million in 1999. This increase arose primarily from strong revenue growth
from fixed satellite services and lower pension cost in 2000 primarily as a
result of better than expected asset returns in 1999, offset by lower satellite
manufacturing and technology EBITDA, which was due to lower revenues and
increased costs relating to manufacturing delays and customer contract issues
and higher losses from data services which primarily related to investment in
broadband activities.

Depreciation and amortization rose to $216 million in 2000 from $175
million in 1999. This increase primarily resulted from the initiation of
depreciation on satellites placed in service in 1999. Depreciation and
amortization associated with the FSS business represents approximately 72% and
63% of the totals in 2000 and 1999, respectively.

Interest and investment income increased to $129 million in 2000 from $89
million in 1999, principally due to the non-cash interest income related to
warrants received in connection with the guarantees provided by Loral's
subsidiaries of Globalstar's $500 million credit facility and interest income
related to the Company's purchase of Globalstar loans in 2000.

Interest expense increased to $171 million in 2000, net of capitalized
interest of $17 million, from $89 million in 1999, net of capitalized interest
of $84 million. The increase was primarily due to capitalized interest
decreasing in 2000 as a result of the commencement of service of Globalstar in
2000 and of Telstar 6, Telstar 7 and Telstar 12 in 1999 and interest expense
incurred in 2000 in connection with the Company's $500 million credit facility.

The Company realized $71 million of gains in 2000, primarily from the sale
of substantially all of its investments in available-for-sale securities.

For 2000, the Company's tax provision was $9 million as compared to a tax
provision of $1 million in 1999 after excluding the non-recurring tax benefit of
$34 million related to the reversal of a valuation allowance resulting from a
tax law change affecting the future utilization of Loral Orion's pre-acquisition
loss carryforwards. The increase in the 2000 tax provision was primarily due to
additional income subject to U.S. tax and state and local income tax expense
during 2000.

The minority interest benefit primarily reflects the reduction of CyberStar
LP's loss attributed to CyberStar LP's other investor who owned 17.6% as of
December 31, 2000.

The equity in net loss of affiliates was $1.29 billion in 2000 compared to
$178 million in 1999. Loral's share of equity in net loss of affiliates related
to Globalstar activities, net of the related tax benefit of $299 million in 2000
and $3 million in 1999, was $1.29 billion in 2000 compared to $110 million in
1999, including equity in net losses of Globalstar service provider partnerships
of $38 million and $11 million in 2000 and 1999, respectively. This increase was
primarily due to Loral recognizing its share of Globalstar's
32

impairment charges of approximately $2.9 billion, Globalstar moving from the
development stage into revenue operations, which initiated depreciation of the
Globalstar System, the expensing of interest and increased operations and
marketing, general and administrative costs (see Globalstar Results). Loral's
share of Satmex's net income was $19 million in 2000 as compared to Loral's
share of Satmex's losses of $33 million in 1999, after eliminating the profit
from the sale of three transponders to Loral Skynet. Satmex had net income
applicable to common stockholders in 2000 of $54 million, which primarily
resulted from a $67 million after-tax gain it recorded on the net insurance
recovery on the loss of the Solidaridad 1 satellite. Also included in net loss
from affiliates is Loral's share of losses from Europe*Star, managed by Alcatel,
and other affiliates (see Note 7 to the consolidated financial statements).

In 2000, the Company recorded after-tax impairment charges of $112 million
related to its investments in and advances to Globalstar service provider
partnerships (see Acquisitions and Investments).

Preferred distributions were $68 million in 2000 as compared to $45 million
for 1999. The increase was primarily due to the issuance of Loral's 6% Series D
convertible redeemable preferred stock (the "Series D Preferred Stock") in
February 2000 and the 332,777 shares of common stock issued as dividend
prepayments in connection with the conversion of 1.4 million shares of Loral's
6% Series C convertible redeemable preferred stock (the "Series C Preferred
Stock") into common stock during the first quarter of 2000 (see "Liquidity and
Capital Resources").

As a result of the above, the net loss applicable to common stockholders
for 2000 was $1.54 billion or $5.20 per basic and diluted share, compared to the
net loss of $247 million or $0.85 per basic and diluted share for 1999. Basic
and diluted weighted average shares were 296 million for 2000 and 290 million
for 1999. The increase in shares primarily relates to the conversion of 1.4
million shares of Series C Preferred Stock into 3.5 million shares of Loral
common stock and shares issued to the Company's employee savings plan.

RESULTS BY REPORTABLE SEGMENT

Fixed Satellite Services

FSS revenues (including 100% of Satmex and Europe*Star) increased to $531
million in 2001, from $461 million and $342 million in 2000 and 1999,
respectively, due to the increased number of transponders leased and higher
revenue per transponder in 2001 and 2000, as compared to the respective prior
year. EBITDA (including 100% of Satmex, Europe*Star and XTAR) increased to $347
million in 2001, from $282 million and $193 million in 2000 and 1999,
respectively. EBITDA margins increased to 65% in 2001 from 61% and 56% in 2000
and 1999, respectively, as a result of strong revenue growth in the respective
years without a proportionate growth in costs. As of December 31, 2001, FSS had
10 operational satellites (three of which are owned by Loral affiliates) which
were 68% utilized. Funded backlog for the segment totaled $1.8 billion at the
end of 2001, as compared to $2.4 billion at the end of 2000, including
intercompany backlog of $61 million and $65 million in 2001 and 2000,
respectively, and affiliate backlog of $404 million and $546 million for Satmex
and Europe*Star in 2001 and 2000, respectively. Gross bookings of $614 million
in 2001 were more than offset by de-bookings. The average contract length of
funded backlog has grown from approximately 5 years at December 31, 2000, to
approximately 5.3 years at December 31, 2001. Approximately $398 million of the
2001 funded backlog is expected to be realized in 2002, including approximately
$19 million of intercompany backlog and approximately $85 million of affiliate
backlog for Satmex and Europe*Star. Capital expenditures in 2001 were
approximately $344 million, which included approximately $136 million for Satmex
and Europe*Star. Capital expenditures for 2002 are expected to be lower than
2001, since the company is nearing completion of three of its satellites. The
FSS satellite fleet has five satellites under construction (including one each
for Satmex and XTAR). The reduction in total funded backlog resulted from
contract terminations in the third and fourth quarters of 2001 and de-bookings
arising largely from the restructuring of two customer contracts in the second
quarter of 2001. In one case, Loral reduced the length of a lease agreement and
allowed a reduction in the number of transponders leased under a multi-year
contract. In the other case, Loral reduced the length of a lease agreement from
13 years to eight. In both instances Loral received appropriate compensation in
exchange for meeting its customers' requirements and,

33

accordingly, these de-bookings did not have an adverse impact on results of
operations in 2001, nor are they expected to have an adverse impact on near-term
results of operations.

Satellite Manufacturing and Technology

Financial performance of the satellite manufacturing industry suffered in
2001 for numerous reasons. There is more capacity in the industry than needed at
a time when, because of economic conditions, customers' capital investment
programs have been stretched over longer time-frames and demand for new
satellites and satellite systems has slowed. In addition, the introduction of
new technologies required by customer applications has increased development
costs. To counter these factors, SS/L, the Company's satellite manufacturing and
technology subsidiary, has increased productivity, reducing its workforce by 11
percent over the last three quarters of 2001. The Company also is streamlining
certain internal processes and has instituted tighter controls to ensure that
subcontracted components are received on time and meet all customer
requirements, in turn bringing stability and predictability to Loral's
manufacturing performance. The benefits of these and other changes are expected
to positively effect SS/L's financial performance over the course of 2002.

Over the past three years, SS/L has developed a series of technical
advances in response to customers' expressed desire for expanded capabilities.
These advances include the development of spot beam technology, Ka-band
frequency usage, increased power levels, lithium-ion batteries and advanced
propulsion systems. In addition, SS/L has introduced a new family of satellite
buses, designated the 1300E and comprising a number of models of varying size,
power and capabilities based on the heritage 1300 bus. These improvements are
part of the evolutionary technology developments typical to the satellite
manufacturing industry and are essential to the maintenance of the company's
strong market share position. To counter the challenges that typically accompany
new product or technology introductions, SS/L has reinforced its design and
testing disciplines to provide maximum reliability and to control added costs
and potential delays.

Revenues at SS/L, before intercompany eliminations, decreased to $815
million in 2001, from $1.0 billion in 2000 and $1.4 billion in 1999, resulting
from the slowdown in demand in the satellite manufacturing industry, lower
volume and delays in production of certain programs. EBITDA before intercompany
eliminations was $24 million in 2001 as compared to $36 million in 2000 and $102
million in 1999. The EBITDA decline in 2001 was primarily due to lower revenues
and start-up costs associated with the introduction of several new technologies
and a $12 million charge for future payments to the U.S. government to settle a
case relating to export controls. The EBITDA decline in 2000 as compared to 1999
was primarily due to the $77 million of increased costs relating to
manufacturing delays and customer contract issues, and lower revenues. EBITDA in
1999 included a $44 million charge relating to an agreement reached with a
customer to extend the delivery date of a satellite and other modifications to
the contract in return for satellite capacity on another Company-owned
satellite. Funded backlog for SS/L as of December 31, 2001 and 2000 was $1.6
billion and $1.7 billion, respectively, including intercompany backlog of $265
million in 2001 and $477 million in 2000. During 2001, SS/L booked five
satellite awards, nearly one quarter of worldwide satellite requirements.
Approximately $944 million of the 2001 funded backlog is expected to be realized
in 2002, including approximately $176 million of intercompany backlog. Capital
expenditures in 2001 were approximately $26 million and are expected to increase
in 2002.

Data Services

Revenues are derived primarily from Loral CyberStar's corporate data
networking and Internet and intranet services businesses, which have been
impacted by the slowdown of worldwide prices and demand for telecommunications
and Internet services. Revenues for data services were $98 million in 2001, as
compared to $130 million and $85 million in 2000 and 1999, respectively. The
decrease in 2001 is primarily due to lower volume from the VSAT business,
Internet services and occasional use revenue from business television services.
The increase in 2000 was primarily due to increased global demand for access to
the Internet backbone, steadily growing corporate adoption of VSAT networks and
the acquisition of Global Access Services ("Global Access") in July 1999. EBITDA
in 2001 decreased to a loss of $13 million from a loss of $52 million in 2000,
and a loss of $36 million in 1999. The substantial improvement in EBITDA in 2001
34

resulted primarily from cost savings realized from streamlining operations,
savings related to the exit from the direct-to-customer broadband business at
the end of 2000, offset by charges for integration and rationalization of the
data business in 2000 and 1999. As of December 31, 2001 and 2000, funded backlog
for the segment was $98 million and $191 million, respectively, which was all
from external sources. The decrease in backlog resulted from de-bookings,
primarily due to the continued softness in the Internet business worldwide.
Approximately $48 million of 2001 funded backlog is expected to be realized in
2002. Capital expenditures in 2001 were approximately $4 million and are
expected to be fairly constant in 2002.

TRANSACTIONS WITH AFFILIATES

Funded backlog at December 31, 2001 and 2000 includes $341 million and $267
million, respectively, as a result of transactions entered into with affiliates
and related parties (primarily with Globalstar, Satmex, Europe*Star, XTAR and
Spainsat) for the construction of satellites.

The Company's consolidated statements of operations reflect the effects of
the following amounts related to transactions with or investments in affiliates
(in thousands).

ACQUISITIONS AND INVESTMENTS

The Company commenced operations in 1996 with equity holdings in
affiliates, including SS/L and Globalstar. From 1997 through 2001, Loral
accelerated its transformation from a company with extensive equity investments,
to a major satellite manufacturer and provider of satellite services by making a
number of acquisitions and investments that significantly affected its results
of operations and financial condition, including the following transactions
during the three years ended December 31, 2001:

Fixed Satellite Services

Satmex

On March 30, 1999, Loral acquired 577,554 shares of preferred stock of
Satmex at a purchase price of $30.3 million. The preferred stock has limited
voting rights, pays a dividend in limited voting common stock of Satmex and is
exchangeable, at Satmex's option, into limited voting common stock of Satmex
based upon a predetermined exchange ratio.

In May 2000, Satelites Enigma S.A. de C.V., a subsidiary of Principia, S.A.
de C.V. ("Principia"), exercised its option to purchase 104,105 shares of Satmex
preferred stock from Loral for $6.6 million in cash. Loral realized a gain of $1
million in connection with this transaction.

Europe*Star

In December 1998, Loral finalized its strategic partnership with a
subsidiary of Alcatel to jointly build and operate Europe*Star, a geostationary
satellite system that commenced service in 2001. Europe*Star is a member of the
Loral Global Alliance, which is led by Loral Skynet. Through December 31, 2001,
Loral has invested $76 million in Europe*Star. As of December 31, 2001, Loral
owned 47% of Europe*Star. Pursuant to the terms of the shareholders agreement,
Loral has permitted Alcatel to fund additional expenditures to develop
Europe*Star's business and infrastructure through $181 million in loans to the
venture, which Alcatel claims are payable on demand.

35

XTAR, L.L.C.

XTAR, L.L.C. ("XTAR"), a newly formed joint venture between Loral and
Hisdesat Servicios Estrategicos, S.A. ("Hisdesat"), a consortium comprised of
leading Spanish telecommunications companies, including Hispasat, S.A., and
agencies of the Spanish government, plans to construct and launch an X-band
satellite by the end of 2003 to provide X-band services to government users in
the United States and Spain, as well as other friendly and allied nations. XTAR
is owned 56% by Loral (accounted for under the equity method since the Company
does not control certain significant operating decisions) and 44% by Hisdesat.
In addition, XTAR has agreed to lease certain transponders on the Spainsat
satellite, which is being constructed for Hisdesat. As of March 4, 2002, the
partners in proportion to their respective ownership interests, have contributed
$20 million to XTAR and expect to fund an additional $35 million in 2002. XTAR
expects to raise the remaining amount of the funds it needs to construct and
launch its satellite through vendor and other third-party financings.

Data Services

Global Access

On July 31, 1999, Loral's subsidiary, CyberStar LP, acquired Global Access,
a business television unit of Williams Communications, Inc., for approximately
$11 million in cash. Global Access provided business television, video
conferencing and other communication services to companies in various parts of
the world through networks operated in Singapore, Dallas, London and
Johannesburg. Approximately $8 million of the purchase price was allocated to
cost in excess of net assets acquired, which is being amortized over 10 years
(see Accounting Pronouncements). Loral's consolidated financial statements
include Global Access's results of operations from August 1, 1999. This
acquisition was accounted for using the purchase method.

Globalstar and GTL

The Company accounts for its investment in Globalstar on the equity method
due to its inability to control significant operating decisions at Globalstar.
In 2000, Loral's allocated share of Globalstar's losses and Globalstar's
impairment charges reduced Loral's investment in and advances to Globalstar to
zero (see below). Accordingly, Loral has discontinued providing for its
allocated share of Globalstar's net losses beginning in 2001. The Company
accounts for its investment in Globalstar's $500 million credit facility at fair
value, with changes in the value (net of tax) recorded as a component of other
comprehensive loss (see Notes 3 and 12 to Loral's consolidated financial
statements). The Company recognized unrealized net gains (losses) after taxes as
a component of other comprehensive (loss) income of $(12) million and $33
million in 2001 and 2000, respectively, in connection with this security.

In January 2001, Globalstar suspended indefinitely principal and interest
payments on its debt and dividend payments on its redeemable preferred
partnership interests in order to conserve cash for operations.

On February 15, 2002, Globalstar and certain of its direct subsidiaries
filed voluntary petitions under Chapter 11 of Title 11, United States Code in
the United States Bankruptcy Court for the District of Delaware (the "Court").
In connection therewith, Loral/Qualcomm Satellite Services, L.P., the managing
general partner of Globalstar, its general partner, Loral/Qualcomm Partnership,
L.P. ("LQP"), and certain of Loral's subsidiaries that serve as general partners
of LQP also filed voluntary petitions with the Court. As a result of
Globalstar's bankruptcy petition, several of Globalstar's debt facilities and
other debt obligations have been accelerated and are immediately due and
payable. Subcontractors have assumed $91 million of financing related to
deferred billings SS/L has provided to Globalstar at December 31, 2001, which
includes $46 million which is non-recourse to SS/L in the event of non-payment
by Globalstar due to bankruptcy and is included in long-term liabilities in the
consolidated balance sheets.

Globalstar has reached an agreement with Loral and an informal committee of
noteholders, representing approximately 17% principal amount of Globalstar's
outstanding notes, regarding the substantive terms of a financial and legal
restructuring of Globalstar's business. The proposed restructuring plan, which
will have to be submitted for and will be subject to Court approval, calls for
the establishment of a new Globalstar

36

company which will, in addition to taking ownership of all of Globalstar's
existing assets, acquire certain service provider operations, including Loral's
investment in the Canadian service provider company. Under the proposed
restructuring plan, if approved, the new company will initially be owned by
Globalstar's existing noteholders and other unsecured creditors, including
Loral, which would result in Loral initially holding about a 24% equity interest
in the new company, prior to any dilution that may result from any new
investments. The proposed plan also calls for the cancellation of all existing
partnership interests in Globalstar, but contemplates, subject to the
satisfaction of certain conditions, a rights offering to common and preferred
shareholders in Globalstar Telecommunications Limited and Globalstar's creditors
which could give them the option to purchase up to 15% of the common equity in
the new company. The proposed plan, if approved, will also provide for mutual
releases of claims related to Globalstar to be granted to and by various
persons, including, among others, Globalstar, Globalstar's officers and
directors, Loral and its affiliates, Globalstar partners, service providers
acquired by Globalstar and the members of any official and informal committees
of creditors. On March 5, 2002, the Court appointed an official committee of
creditors. Although the majority of the members of the official committee are
the members of the informal committee, there can be no assurance that the
proposed restructuring plan, including Loral's proposed equity ownership in the
new company, will be approved by Globalstar's remaining creditors or the Court.

As of December 31, 2001, the Company's direct and indirect investment in
connection with Globalstar related activities included about 39% of Globalstar's
common equity (including GTL Common Stock), about 27% of its debt, an investment
in Globalstar Telecommunications Limited preferred stock and investments in and
advances to Globalstar service provider partnerships. During 2000, Loral
recorded after-tax charges of approximately $1.4 billion related to its
investment in and advances in connection with Globalstar related activities,
which included its after-tax share of Globalstar's impairment charges of
approximately $882 million and after-tax impairment charges of $112 million,
resulting from the write-down of investments in and advances to Globalstar
service provider partnerships to their estimated fair value. The Company's
investment in Globalstar related activities as of December 31, 2001 was
approximately $32 million, consisting primarily of the fair value of its
investment in Globalstar's $500 million credit facility, which was based on the
trading values of Globalstar's public debt at December 31, 2001. If Globalstar
were unable to effectuate a successful restructuring, the Company's remaining
investment in Globalstar's $500 million credit facility would be impaired,
which, as discussed above, would have no effect on the Company's results of
operations. Loral's investment in the 2002 operations of those Globalstar
service provider ventures in which it participates as an equity owner is
expected to be less than $5 million in 2002. These Globalstar service providers
own and operate gateways, are licensed to provide services and, through their
sales and marketing organizations, are actively selling Globalstar service, in
their respective territories. See Note 7 to Loral's consolidated financial
statements and Contractual Obligations and Other Commercial Commitments.

TAXATION

Loral, as a Bermuda company, is subject to U.S. federal, state and local
income taxation at regular corporate rates on any income that is effectively
connected with the conduct of a U.S. trade or business. When such income is
deemed removed from the U.S. business, it is subject to an additional 30%
"branch profits" tax. Any portion of the Company's income from sources outside
the United States may be subject to taxation by foreign countries and the extent
to which these countries may require the Company to pay tax or to make payments
in lieu of tax cannot be determined in advance. In January 2001, the United
States Treasury Department issued proposed regulations for the sourcing of space
and communications income. Depending upon how these regulations are finalized, a
substantial portion of Loral's income may be recharacterized as derived from
U.S. sources and as effectively connected with a U.S. trade or business so as to
subject that income to regular U.S. Federal income tax and a 30% branch profits
tax. The Company cannot predict the outcome of that regulatory project.

The Company's U.S. subsidiaries are subject to U.S. taxes on their
worldwide income. In addition, a 30% U.S. withholding tax will be imposed on
dividends and interest paid by such subsidiaries to Loral Space & Communications
Ltd.

37

As of December 31, 2001, the Company had net operating loss carryforwards
of approximately $663 million, which includes $378 million related to foreign
partner interests in Globalstar and CyberStar L.P. from which any realization is
dependent upon Loral generating future taxable income that is effectively
connected with the conduct of a U.S. trade or business (see Note 9 to Loral's
consolidated financial statements). The loss carryforwards are available to
reduce the Company's tax liability in the future and expire at varying dates
from 2011 through 2020.

LIQUIDITY AND CAPITAL RESOURCES

Loral intends to capitalize on its innovative capabilities, market position
and advanced technologies to offer value-added satellite-based services as part
of the evolving worldwide communications networks and, where appropriate, to
form strategic alliances with major telecommunications service providers and
equipment manufacturers to enhance and expand its satellite-based communications
service opportunities. In order to pursue such opportunities, Loral may seek
funds from strategic partners and other investors, and through incurrence of
debt or the issuance of additional equity.

Management believes that cash, available credit and cash flow from
operations will be adequate to meet its expected cash requirements. At December
31, 2001, the Company has met all of the covenants and conditions under its
various lending and funding arrangements and believes that it will continue to
meet these covenants and conditions. The Satellite Credit Agreement, LSC Amended
Credit Agreement, the indenture relating to Loral Orion's new senior notes and
the indenture relating to Loral's 9.5% senior notes provide for cross default or
cross acceleration provisions (see below).

Debt

Satellite Credit Agreement

On December 21, 2001, Loral Satellite, Inc. ("Loral Satellite"), a
subsidiary of Loral Space & Communications Corporation, which in turn is a
subsidiary of Loral, entered into the first amendment to the $500 million
secured credit agreement dated as of November 17, 2000 by and among Loral
Satellite, Bank of America as Administrative Agent, and the other lending
parties thereto (the "Satellite Credit Agreement"). The first amendment extended
the expiration date of the $200 million revolving credit facility to January 7,
2005, and amended the amortization payment schedule on the $300 million term
loan as follows: $11,250,000 per quarter commencing on March 31, 2002 through
September 30, 2004, and $170,250,000 on January 7, 2005. The first amendment
also effected certain changes to provisions relating to the collateral pool
provided to lenders under the Loral Satellite credit facility and imposed
additional limitations on the application of proceeds from any sale of assets
from this collateral pool.

Borrowings under the Satellite Credit Agreement bear interest, at Loral
Satellite's option, at various rates based on fixed margins over the lead bank's
base rate or the London Interbank Offer Rate for periods of one, two, three or
six months. Loral Satellite pays a commitment fee on the unused portion of the
revolver.

The Satellite Credit Agreement is secured by certain assets of Loral
Satellite, including the Telstar 6 and Telstar 7 satellites and the loans due to
Loral under Globalstar's $500 million credit facility (see below). Based on
third party valuations, management believes that the fair value of Telstar 6 and
Telstar 7 is well in excess of $500 million. As of December 31, 2001, the net
book value of Telstar 6 and Telstar 7 was approximately $328 million. In
addition, as part of the first amendment, lenders under the Satellite Credit
Agreement received a junior lien on the assets of Loral SpaceCom Corporation
("LSC") and its subsidiaries pledged in favor of the banks under the LSC Amended
Credit Agreement.

Loral has also agreed to guarantee Loral Satellite's obligations under the
Satellite Credit Agreement, which guarantee agreement contains a minimum net
worth covenant.

The Satellite Credit Agreement contains financial covenants, including
maintenance of a minimum collateral coverage ratio, minimum net worth and
minimum EBITDA. The Satellite Credit Agreement also contains customary
limitations, including those on indebtedness, fundamental changes, asset sales,
dividends (except that Loral Satellite may pay dividends to its parent provided
that the first $100 million of cash
38

transferred to its parent must be in the form of an intercompany note),
investments, capital expenditures, creating liens (other than those created
pursuant to the Satellite Credit Agreement), prepayments or amendments of
indebtedness, and transactions with affiliates.

Proceeds from the Satellite Credit Agreement were used by Loral Satellite
to purchase all of the creditors' interests in the loans outstanding under
Globalstar's $500 million credit agreement (see Acquisitions and Investments).
The guarantee of Globalstar's $500 million credit agreement that had been
provided by Loral Satellite and Loral SatCom Ltd., a subsidiary of Loral, was
terminated and released in connection with this transaction.

LSC Amended Credit Agreement

On December 21, 2001, LSC entered into an Amended and Restated Credit
Agreement with Bank of America, N.A., as Administrative Agent, and the other
lenders parties thereto (the "LSC Amended Credit Agreement"). The LSC Amended
Credit Agreement provides for a $200 million revolving credit facility expiring
January 7, 2005 and a $400 million term loan subject to the following
amortization payment schedule: $5 million on each of March 31, June 30, and
September 30, 2002; $25 million on December 31, 2002; $5 million on each of
March 31, June 30, September 30 and December 31, 2003; $20 million on each of
March 31, June 30 and September 30, 2004; and $280 million on January 7, 2005.
Borrowings under the LSC Amended Credit Agreement bear interest, at LSC's
option, at various rates based on margins over the lead bank's base rate or the
London Interbank Offered Rate for periods of one, two, three or six months. The
margin levels have increased under the new amended agreement and are fixed
through September 30, 2002. As a result of this increase in margin levels,
interest costs will increase by approximately $11 million annually. LSC pays a
commitment fee on the unused portion of the revolver.

The LSC Amended Credit Agreement contains financial covenants of LSC and
its subsidiaries, such as maintenance of interest coverage, leverage ratios and
minimum net worth. The LSC Amended Credit Agreement also contains limitations on
LSC and its subsidiaries, including those on indebtedness, liens, fundamental
changes, asset sales, dividends, investments, capital expenditures, transactions
with affiliates and certain other intercompany transactions. The LSC Amended
Credit Agreement allows dividend payments to Loral if cumulative dividend
payments do not exceed 50% of its cumulative consolidated net income and the
ratio of its funded debt to EBITDA is less than 3.0 to 1.0. For the year ended
December 31, 2001, Loral SpaceCom had no capacity under this covenant to pay
Loral any dividends.

The LSC Amended Credit Agreement is secured by substantially all of the
assets of and the stock of LSC and its subsidiaries, including SS/L. LSC's
obligations under the LSC Amended Credit Agreement have been guaranteed by
certain of LSC's subsidiaries, including SS/L. See Other Commercial Commitments
discussed below.

Loral Orion Debt Agreements

On December 21, 2001, Loral Orion completed exchange offers and consent
solicitations by issuing $613 million principal amount of new senior notes due
2006 guaranteed by Loral, in exchange for the extinguishment of $841 million
principal amount of Loral Orion senior notes due in 2007 and senior discount
notes due 2007 as discussed below. As part of the exchange, Loral issued to the
new note holders 6.04 million five-year warrants to purchase Loral common stock
(approximately 1.8% of the Company's outstanding common stock) at a price of
$2.37 per share. The warrants were valued at $7 million using the Black Scholes
option pricing model with the following assumptions: stock volatility, 75%, risk
free interest rate, 4.36%, and no dividends during the expected term. Principal
amount of $37 million of the existing senior notes and principal amount of $49
million of the existing senior discount notes remain outstanding at their
original maturities and interest rates.

The interest rate on the new senior notes is 10%, a reduction from the
11.25% interest rate on the existing senior notes and the 12.5% rate on the
existing senior discount notes. Interest is payable semi-annually on July 15 and
January 15, beginning July 15, 2002. As a result of the lower interest rate and
the $229 million reduction in principal amount of debt, Loral Orion's annual
cash interest payments will be reduced by approximately $39 million. Under U.S.
generally accepted accounting principles dealing with debt restructur-
39

ings, the Company recorded an after-tax extraordinary gain of $22 million on the
exchange, after expenses of $8 million. The carrying value of the new senior
notes on the balance sheet is $904 million, although the actual principal amount
of the new senior notes is $613 million. The difference between this carrying
value and the actual principal amount of the new senior notes will be amortized
over the life of the new senior notes, fully offsetting interest expense through
maturity of the new senior notes. The indenture relating to the new senior notes
contains limitations on Loral Orion and its subsidiaries, including, without
limitation, restrictions on Loral Orion's ability to pay dividends or make loans
to Loral.

In connection with the consummation of the exchange offer, LSC canceled its
$79.7 million intercompany note issued to it by Loral Orion, which ranked pari
passu to senior debt, in exchange for the transfer of Loral Orion's data
services business and the issuance of a new note to LSC in the principal amount
of $29.7 million due 2006, having an interest rate of 10% per annum payable in
kind, subordinated to Loral Orion's New Senior Notes. Loral Orion's data
services business was transferred to a newly-formed subsidiary of Loral, which
assumed the name "Loral CyberStar, Inc".

Other Debt Agreements

In January 1999, Loral sold $350 million of 9.5% senior notes due 2006. The
related indenture contains customary covenants, including, without limitation,
restrictions on incurring indebtedness and paying dividends.

Equity

On April 16, 2001, the Company completed exchange offers for its Series C
Preferred Stock and its Series D Preferred Stock. As a result, 3.7 million
shares of its Series C Preferred Stock and 1.9 million shares of its Series D
Preferred Stock were tendered and exchanged (representing approximately 27% and
24%, respectively, of the outstanding shares of the two issues) into 30.9
million shares of the Company's common stock. Loral incurred non-cash dividend
charges in the second quarter of 2001 of approximately $29 million, which
primarily relates to the difference between the value of the common stock issued
in the exchange offers and the value of the shares that were issuable under the
stated conversion terms of the preferred stock. The non-cash dividend charges
had no impact on Loral's total shareholders' equity as the offset was an
increase in common stock and paid-in capital. In addition, Loral will save
approximately $17 million annually in preferred dividend payments and will avoid
approximately $277 million in mandatory redemptions in 2006 and 2007.

On March 31, 2000, Lockheed Martin Corporation ("Lockheed Martin")
converted 45,896,978 shares of Loral's Series A preferred stock into 45,896,978
shares of Loral common stock. Loral filed a registration statement to register
the resale by Lockheed Martin of the shares of common stock acquired upon the
conversion of the Series A preferred stock, which became effective in May 2000.

In February 2000, Loral sold $400 million of Series D Preferred Stock due
2007 in an offering exempt from registration.

In February 2000, 1.4 million shares of Series C Preferred Stock were
converted into 3.5 million shares of Loral common stock. In connection with this
conversion, Loral issued to converting holders 332,777 additional shares of its
common stock, which approximated the dividend prepayments to which they would
have been entitled if a provisional redemption of those securities had been made
(which resulted in a non-cash dividend charge of $6 million).

The Company has the ability to make the mandatory redemption payments due
on its Series C and Series D Preferred Stock in cash, common stock, or a
combination of the two. The number of shares of the Company's common stock to be
issued on redemption is based on the aggregate redemption value divided by the
average of the volume weighted average daily price of the Company's common stock
for the 10 trading-day period ending on the second business day prior to the
redemption date (approximately $2.26 per share at December 31, 2001). The
mandatory redemption payments are due in 2006 for the Series C Preferred Stock
and in 2007 for the Series D Preferred Stock. The exact number of shares of the
Company's common stock that may be issued on a mandatory redemption date cannot
be determined at this time, but may involve the issuance of a significant number
of shares of our common stock. That number will depend on a number of
40

factors not known today, such as the price of the Company's common stock and the
number of shares of the Company's preferred stock outstanding at that time. The
Company has in the past from time to time effected voluntary exchanges of its
preferred stock for common stock. To the extent that the Company makes such
additional exchanges in the future, the Company will reduce the number of shares
of its preferred stock subject to redemption in 2006 and 2007. However, there is
no guarantee that theses exchanges will or can be made in the future.

Cash and Available Credit

As of December 31, 2001, Loral had $229 million of cash and available
credit (including $69 million of available credit from the credit facilities
described above under the captions "Satellite Credit Agreement" and "LSC Amended
Credit Agreement").

Net Cash Provided by (Used in) Operating Activities

Net cash provided by operating activities for 2001 was $169 million,
primarily due to the net loss as adjusted for non-cash items of $139 million,
increases in customer advances of $78 million, primarily resulting from the
timing of satellite program milestone payments and inventories of $22 million
due to progress on satellite programs, offset by increases in long-term
receivables of $45 million due to increases in orbital incentives and vendor
financing and decreases in long-term liabilities of $31 million primarily due to
decreases in vendor financing.

Net cash provided by operating activities for 2000 was $258 million,
primarily due to the net loss as adjusted for non-cash items of $71 million,
decreases in contracts-in-process of $185 million primarily as a result of
collections on two significant customer contracts, inventories of $31 million
due to progress on satellite programs and deposits of $34 million due to the
assignment of launch vehicles for satellite programs, offset by a decrease in
accounts payable of $77 million primarily due to launch vehicle payments.

Net Cash Used in Investing Activities

Net cash used in investing activities for 2001 was $247 million, primarily
as a result of capital expenditures of $238 million mainly for the construction
of satellites.

Net cash used in investing activities for 2000 was $377 million, primarily
as a result of capital expenditures of $424 million mainly for the construction
or acquisition of satellites (including $181 million for the final payment for
Telstar 10/Apstar IIR), $169 million of investments in affiliates and the
purchase of Globalstar loans of $68 million, offset by a reduction in restricted
and segregated cash of $187 million and proceeds from sales of
available-for-sale securities and investments of $97 million.

Net Cash (Used in) Provided by Financing Activities

Net cash used in financing activities for 2001 was $156 million, primarily
due to net payments of debt obligations and costs of $120 million and preferred
dividends of $52 million, offset by proceeds from common stock issuance of $16
million.

Net cash provided by financing activities for 2000 was $273 million,
primarily due to net proceeds of $388 million from the Company's issuance of
Series D Preferred Stock and proceeds from common stock issuance of $26 million,
offset by net repayments of debt obligations of $80 million and preferred
dividends of $62 million.

41

OTHER LIQUIDITY MATTERS

Fixed Satellite Services

Satellites are carefully built and tested and have some redundant
components to save the satellite in case of a component failure. Due to the
failure of primary components, certain of our satellites are currently operating
using back-up components. If these back-up components fail and the primary
components cannot be restored, these satellites could lose a significant amount
of capacity or be total losses which, until replacement satellites are placed
in-orbit, would result in lost revenues and lost profits to the Company.

Loral Orion

Loral Orion anticipates it will have additional requirements over the next
three years to fund the replacement of Telstar 11 which is expected to reach the
end of its useful life in 2005. To the extent that excess cash flow from Loral
Orion's satellites is not sufficient to meet these requirements, Loral Orion
will need to secure funding from Loral, or raise additional financing to fund
this requirement. Sources of additional capital may include public or private
debt, vendor financing, equity financings or strategic investments. To the
extent that Loral Orion seeks to raise additional debt financing, its indenture
relating to its 10% senior notes limits the amount of such additional debt to
$100 million for such replacement satellite and prohibit Loral Orion from using
Telstar 11, Telstar 10/Apstar IIR and Telstar 12 as collateral for indebtedness.

Telstar 12, originally intended to operate at 12 degrees W.L., was launched
aboard an Ariane launch vehicle in October 1999 into the orbital slot located at
15 degrees W.L., and commenced operations in January 2000. Under an agreement
reached with Eutelsat, Loral Orion agreed to operate Telstar 12 at 15 degrees
W.L. while Eutelsat continues to develop its services at 12.5 degrees W.L.
Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to
assert its priority rights at such location on Loral Orion's behalf. As part of
this coordination effort, Loral Orion agreed to provide to Eutelsat four 54 MHz
transponders on Telstar 12 for the life of the satellite and has retained risk
of loss with respect to those transponders. Eutelsat also has the right to
acquire, at cost, four transponders on the next replacement satellite for
Telstar 12. As part of the international coordination process, Loral continues
to conduct discussions with various administrations regarding Telstar 12's
operations at 15 degrees W.L. If these discussions are not successful, Telstar
12's useable capacity may be reduced.

On September 28, 1999, Loral Orion purchased from APT Satellite Company
Limited ("APT") for approximately $273 million, the rights to all transponder
capacity and existing customer leases on the Apstar IIR satellite (except for
one C-band transponder retained by APT), and renamed the satellite the Telstar
10/Apstar IIR satellite. Loral Orion has full use of the transponders for the
remaining life of Telstar 10/Apstar IIR. Loral Orion also has the right to
provide replacement satellites upon the end of life of Telstar 10/Apstar IIR,
for which it will be required to pay a fee to APT for the right to use the
orbital slot.

Satmex

Satmex currently has two satellites in orbit (Solidaridad 2 and Satmex 5)
and one satellite in inclined orbit (Morelos 2). In August 2000, Satmex
announced that its Solidaridad 1 satellite ceased operation and was
irretrievably lost. The loss was caused by the failure of the back-up control
processor on board the satellite. Solidaridad 1, which was built by Hughes Space
and Communications ("Hughes") and launched in 1994, experienced a failure of its
primary control processor in April 1999, and had been operating on its back-up
processor since that time. The majority of Solidaridad 1 customers were provided
replacement capacity on other Satmex satellites or on satellites operated by
Loral Skynet. Satmex received net insurance proceeds of $235 million relating to
the loss of Solidaridad 1. In connection with this loss, Satmex recognized an
after-tax gain of $67 million in 2000 and $5 million in 2001, which resulted
from the insurance proceeds in excess of the carrying amount of the satellite
and the incremental costs associated with providing replacement capacity, as
required by its contracts with its customers. Satmex has contracted with SS/L to
build a replacement satellite. This satellite, known as Satmex 6, is scheduled
to be launched in the first quarter of 2003, and is designed to provide broader
coverage and higher power levels than any other satellite currently in the
Satmex fleet.

42

At December 31, 2001, Solidaridad 2 had a remaining estimated useful life
of seven years. Solidaridad 2 was also manufactured by Hughes and is similar in
design to Solidaridad 1 and to other Hughes satellites which have experienced
in-orbit component failures. While Satmex has obtained in-orbit insurance for
Solidaridad 2, a satellite failure may result in a drop in Satmex's profits,
which loss of profits would not be insured. The in-orbit insurance for
Solidaridad 2 expires in November 2002. Satmex cannot guarantee that it will be
able to renew the insurance at the end of this period, or that if renewal is
available, that it would be on acceptable terms. For example, a renewal policy
for Solidaridad 2 may not insure against an in-orbit failure due to the loss of
the satellite's control processor, the same component that caused the loss of
Solidaridad 1 and other Hughes satellites. An uninsured loss would have a
material adverse effect on Satmex's results of operations and financial
condition.

In August 2001, the Mexican government granted market access rights for
satellites owned by non-Mexican satellite operators, including SES Global and
PanAmSat, resulting in increased competition for Satmex.

In connection with the privatization of Satmex by the Mexican Government of
its fixed satellite services business, Loral and Principia formed a joint
venture, Firmamento Mexicano, S.A. de R.L. de C.V. ("Holdings"). In 1997,
Holdings acquired 75% of the outstanding capital stock of Satmex. As part of the
acquisition, Servicios Corporativos Satelitales, S.A. de C.V. ("Servicios"), a
wholly owned subsidiary of Holdings, issued a seven-year Government Obligation
("Government Obligation") to the Mexican Government in consideration for the
assumption by Satmex of the debt incurred by Servicios in connection with the
acquisition. The Government Obligation had an initial face amount of $125
million, which accretes at 6.03% and expires in December 2004. The debt of
Satmex and Holdings is non-recourse to Loral and Principia. However, Loral and
Principia have agreed to maintain assets in a collateral trust in an amount
equal to the value of the Government Obligation through December 30, 2000 and,
thereafter, in an amount equal to 1.2 times the value of the Government
Obligation until maturity. As of December 31, 2001, Loral and Principia have
pledged their respective shares in Holdings in such trust. Loral has a 65%
economic interest in Holdings and a 49% indirect economic interest in Satmex.
Loral accounts for Satmex using the equity method. The covenants of Satmex's
debt instruments restrict the ability of Satmex to pay dividends to Loral.

Contractual Obligations and Other Commercial Commitments

The following tables aggregate the contractual obligations and other
commercial commitments of Loral as of December 31, 2001 (in thousands).

CONTRACTUAL OBLIGATIONS:

43

OTHER COMMERCIAL COMMITMENTS:

- ---------------
(1) Represents cash obligations for principal payments and does not include
differences in carrying values and principal amounts for Loral Orion senior
notes that are amortized over the life of the notes.

(2) Represents future minimum payments under operating leases with initial or
remaining terms of one year or more, net of sub-lease rentals of $5.4
million.

(3) SS/L has entered into various purchase commitments with suppliers due to the
long lead times required to produce purchased parts and launch vehicles. The
commitments included for launch vehicles represent minimum amounts due if
the contract is terminated, net of deposits which the Company believes can
be offset against these minimum amounts. Additional amounts will be incurred
upon utilization of launch vehicles.

(4) Primarily represents vendor financing owed to sub-contractors, of which $46
million is non-recourse to SS/L in the event of non-payment by Globalstar
due to bankruptcy, and committed partner contributions to joint ventures.

(5) Preferred stock can be redeemed in cash, Loral common stock or a combination
of both.

(6) Letters of credit have a maturity of one year and are renewed annually.
Includes $14 million of contingent liabilities in connection with Globalstar
service provider partnerships.

COMMITMENTS AND CONTINGENCIES

Loral Skynet has entered into prepaid leases and sales contracts relating
to transponders on its satellites. Under the terms of these agreements, Loral
Skynet continues to operate the satellites which carry the transponders and
originally provided for a warranty for a period of 10 to 14 years, in the case
of sales contracts (twelve transponders), and the lease term, in the case of the
prepaid leases (nine transponders). Depending on the contract, Loral Skynet may
be required to replace transponders which do not meet operating specifications.
All customers are entitled to a refund equal to the reimbursement value if there
is no replacement, which is normally covered by insurance. In the case of the
sales contracts, the reimbursement value is based on the original purchase price
plus an interest factor from the time the payment was received to acceptance of
the transponder by the customer, reduced on a straight-line basis over the
warranty period. In the case of prepaid leases, the reimbursement value is equal
to the unamortized portion of the lease prepayment made by the customer.

Twelve of the satellites built by SS/L and launched since 1997, five of
which are owned and operated by Loral's subsidiaries or affiliates, have
experienced minor losses of power from their solar arrays. Although to date,
neither the Company nor any of the customers using the affected satellites have
experienced any degradation in performance, there can be no assurance that one
or more of the affected satellites will not experience additional power loss
that could result in performance degradation, including loss of transponder
capacity. In the event of additional power loss, the extent of the performance
degradation, if any, will depend on numerous factors, including the amount of
the additional power loss, the level of redundancy built into the affected
satellite's design, when in the life of the affected satellite the loss occurred
and the number and type of use being made of transponders then in service. A
complete or partial loss of satellites could result in a loss of orbital
incentive payments and, in the case of satellites owned by Loral subsidiaries
and affiliates, a loss of revenues and profits. With respect to satellites under
construction and construction of new satellites, based on its investigation of
the matter, SS/L has identified and has implemented remedial measures that SS/L
believes will prevent newly launched satellites from experiencing similar
anomalies. SS/L does not expect that implementation of these measures will cause
any significant delay in the launch of satellites under construction or
construction of new satellites. Based upon information currently available,
including design redundancies to accommodate small power losses and that no
pattern has been identified as to the timing or specific location within the
solar arrays of the failures, the Company believes that this matter will not
have a material adverse effect on the consolidated financial position or results
of operations of Loral.

44

In September 2001, the PAS 7 satellite built by SS/L for PanAmSat
experienced an electrical power failure on its solar arrays that resulted in the
loss of use of certain transponders on the satellite. As a result, PanAmSat has
claimed that under its contract with SS/L it is entitled to be paid $16 million.
SS/L disputes this claim. SS/L believes that this failure is an isolated event
and does not reflect a systemic problem in either the satellite design or
manufacturing process. Accordingly, SS/L does not believe that this anomaly will
affect other on-orbit satellites built by SS/L. However, in connection with the
renewal of the insurance for the Telstar 10/Apstar IIR satellite in October
2001, the insurance underwriters have excluded losses due to solar array
failures, since Telstar 10/Apstar IIR was manufactured by SS/L and has the same
solar array configuration as PAS 7. Loral is currently in discussions with its
insurers to remove this exclusion from the Telstar 10/Apstar IIR policy, in
return for a deductible for losses arising from electrical problems on the
satellite's solar arrays. There can be no assurance that these discussions will
be successful. Three other satellites operated by Loral Skynet have the same
solar array configuration as Telstar 10/Apstar IIR. There can be no assurance
that the insurers will not require similar exclusions in connection with
renewals of insurance for these satellites in 2003 and 2004. In addition, the
PAS 8 satellite has experienced minor losses of power from its solar arrays, the
cause of which is unrelated to the loss of power on the PAS 7 satellite.
PanAmSat has claimed that under its contract with SS/L it is entitled to be paid
$7.5 million as a result of these minor power losses. SS/L disputes this claim.
SS/L and PanAmSat are in discussions to resolve this matter.

SS/L has contracted to build a spot beam, Ka-band satellite for a customer
planning to offer broadband data services directly to the consumer. The customer
has failed to make certain payments due to SS/L under the contract and has
asserted that SS/L is not able to meet the contractual delivery date for the
satellite. As of December 31, 2001, SS/L had billed and unbilled accounts
receivable and vendor financing arrangements of $47 million with this customer.
SS/L and the customer have entered into an agreement that provides that, until
May 1, 2002, neither party will assert that the other party is in default under
the contract, and the parties are currently engaged in discussions to resolve
their outstanding issues. In addition, SS/L and the customer have agreed to
suspend work on the satellite during these discussions, pending the outcome of
the discussions. If the parties do not resolve their issues, it is likely that
each party would assert that the other is in default. The contract provides that
SS/L may terminate the contract for a customer default 90 days after serving a
notice of default if the default is not cured by the customer; upon such a
default, SS/L would be entitled to recover the contractually agreed price of
items delivered and accepted prior to termination and 115% of its actual costs
incurred for items not delivered prior to termination. The contract also
provides that the customer may terminate the contract for an SS/L default 133
days after serving a notice of default if the default is not cured by SS/L; upon
such a default, SS/L would be obligated to refund all amounts previously paid by
the customer, $78 million as of December 31, 2001, plus interest. Based on the
discussions currently in progress with the customer and other parties who may be
interested in the satellite, management's assessment of the market opportunities
for the satellite and consideration of the satellite's estimated value,
management does not believe that this matter will have a material adverse effect
on the consolidated financial position or results of operations of Loral.

SS/L was a party to an Operational Agreement with Alcatel Space Industries,
pursuant to which the parties had agreed to cooperate on certain satellite
programs, and an Alliance Agreement with Alcatel Space together with Alcatel
Space Industries, Alcatel, pursuant to which Alcatel had certain rights with
respect to SS/L, including the right to appoint two representatives to SS/L's
seven-member board of directors, rights to approve certain extraordinary actions
and certain rights to purchase SS/L shares at fair market value in the event of
a change of control (as defined) of either Loral or SS/L. The agreements between
Alcatel and SS/L were terminable on one year's notice, and, on February 22,
2001, Loral gave notice to Alcatel that they would expire on February 22, 2002.
In April 2001, Alcatel commenced an arbitration proceeding challenging the
effectiveness of Loral's notice of termination and asserting various alleged
breaches of the agreements by SS/L relating to the exchange of information and
other procedural or administrative matters. In February 2002, the arbitral
tribunal upheld the validity of Loral's termination effective February 22, 2002
and Alcatel's claims as to certain breaches. The arbitral tribunal has provided
both parties with an opportunity to file any additional claims or counterclaims
they may have. In March 2002, Alcatel submitted additional claims against Loral
and SS/L and is seeking at least $330 million in damages in respect of all of
its claims. We
45

believe that Alcatel's claims for damages are without merit and have been
asserted for competitive reasons to disadvantage SS/L and that this matter will
not have a material adverse effect on our consolidated financial position or
results of operations. Loral and SS/L will have the opportunity and intend to
assert counterclaims against Alcatel in April 2002. The arbitral tribunal will
decide at a later date whether any of Alcatel's claims or Loral's or SS/L's
counterclaims give rise to damages.

The launch of ChinaSat-8 has been delayed pending SS/L's obtaining the
approvals required for the launch. On December 23, 1998, the Office of Defense
Trade Controls, or ODTC, of the U.S. Department of State temporarily suspended a
previously approved technical assistance agreement under which SS/L had been
preparing for the launch of the ChinaSat-8 satellite. In addition, SS/L was
required to re-apply for new export licenses from the State Department to permit
the launch of ChinaSat-8 on a Long March launch vehicle when the old export
licenses issued by the Commerce Department, the agency that previously had
jurisdiction over satellite licensing, expired in March 2000. On January 4,
2001, the ODTC, while not rejecting these license applications, notified SS/L
that they were being returned without action. On January 9, 2002, Loral, SS/L
and the United States Department of State entered into a consent agreement (the
"Consent Agreement") settling and disposing of all civil charges, penalties and
sanctions associated with alleged violations by SS/L of the Arms Export Control
Act and its implementing regulations. The conduct that gave rise to the alleged
violations occurred in connection with the participation of certain SS/L
employees on an independent review committee formed in the wake of a 1996 crash
of a Long March rocket in China, the purpose of which was to consider whether
studies of the crash made by the Chinese had correctly identified the cause of
the failure. Loral has been informed that the Justice Department has terminated
its investigation of SS/L relating to this matter and has declined to pursue the
matter further. The Consent Agreement provides that SS/L will pay the State
Department a civil penalty totaling $14 million over seven years, without
interest, the present value of which ($12 million) is reflected as a charge to
Loral's earnings in the fourth quarter of 2001. The Consent Agreement also
assesses an additional penalty of $6 million, which is suspended on the
condition that Loral and SS/L apply this amount over the next seven years
towards the implementation of export control compliance measures. The Consent
Agreement provides that the State Department agrees, assuming the Company's and
SS/L's faithful adherence to the terms of the consent agreement, and the Arms
Export Control Act and its implementing regulations, that decisions concerning
export licenses for the ChinaSat-8 spacecraft will be made on the basis of the
security and foreign policy interests of the United States, including matters
relating to U.S. relations with the People's Republic of China, without
reference to the State Department's previously expressed concerns regarding
SS/L's reliability, which concerns are considered to be appropriately mitigated
through the operation of various provisions of the consent agreement.
Discussions between SS/L and the State Department regarding SS/L's obtaining the
approvals required for the launch of ChinaSat-8 are continuing.

In December 1999, SS/L reached an agreement with ChinaSat to extend the
date for delivery of the ChinaSat-8 satellite to July 31, 2000. In return for
this extension and other modifications to the contract, SS/L provided to
ChinaSat three transponders on Telstar 10/Apstar IIR for ChinaSat's use for the
life of those transponders. As a result, the Company recorded a charge to
earnings of $35 million in 1999. If ChinaSat were to terminate its contract with
SS/L as a result of these delays, SS/L may have to refund $134 million in
advances received from ChinaSat and may incur penalties of up to $11 million and
believes it would incur costs of approximately $38 million to refurbish and
retrofit the satellite so that it could be sold to another customer, which
resale cannot be guaranteed. To the extent that SS/L is able to recover some or
all of its $52 million deposit payment on the Chinese launch vehicle, this
recovery would offset a portion of such payments. There can be no assurance,
however, that SS/L will be able either to obtain a refund from the launch
provider or to find a replacement customer for the Chinese launch vehicle.

SS/L is required to obtain licenses and enter into technical assistance
agreements, presently under the jurisdiction of the State Department, in
connection with the export of satellites and related equipment, as well as
disclosure of technical data to foreign persons. Delays in obtaining the
necessary licenses and technical assistance agreements may result in the
cancellation of, or delay SS/L's performance on, existing contracts, and, as a
result, SS/L may incur penalties or lose incentive payments under these
contracts.

46

The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, that arise in the ordinary course of business.
Although the outcome of these claims cannot be predicted with certainty, the
Company does not believe that any of these other existing legal matters will
have a material adverse effect on its consolidated financial position or results
of operations.

Globalstar Related Matters. On September 26, 2001, the nineteen separate
purported class action lawsuits filed in the United States District Court for
the Southern District of New York by various holders of securities of Globalstar
Telecommunications Limited ("GTL") and Globalstar, L.P. ("Globalstar") against
GTL, Loral, Bernard L. Schwartz and other defendants were consolidated into one
action titled In re: Globalstar Securities Litigation. In November 2001,
plaintiffs in the consolidated action filed a consolidated amended class action
complaint against Globalstar, GTL, Globalstar Capital Corporation, Loral and
Bernard L. Schwartz alleging (a) that all defendants (except Loral) violated
Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and
Rule 10b-5 promulgated thereunder, by making material misstatements or failing
to state material facts about Globalstar's business and prospects, (b) that
defendants Loral and Schwartz are secondarily liable for these alleged
misstatements and omissions under Section 20(a) of the Exchange Act as alleged
"controlling persons" of Globalstar, (c) that defendants GTL and Schwartz are
liable under Section 11 of the Securities Act of 1933 (the "Securities Act") for
untrue statements of material facts in or omissions of material facts from a
registration statement relating to the sale of shares of GTL common stock in
January 2000, (d) that defendant GTL is liable under Section 12(2)(a) of the
Securities Act for untrue statements of material facts in or omissions of
material facts from a prospectus and prospectus supplement relating to the sale
of shares of GTL common stock in January 2000, and (e) that defendants Loral and
Schwartz are secondarily liable under Section 15 of the Securities Act for GTL's
primary violations of Sections 11 and 12(2)(a) of the Securities Act as alleged
"controlling persons" of GTL. The class of plaintiffs on whose behalf the
lawsuit has been asserted consists of all buyers of securities of Globalstar,
Globalstar Capital and GTL during the period from December 6, 1999 through
October 27, 2000, excluding the defendants and certain persons related or
affiliated therewith. On February 25, 2002, Loral and Mr. Schwartz filed a
motion to dismiss the amended complaint in its entirety as to Loral and Mr.
Schwartz.

On March 2, 2001, the seven separate purported class action lawsuits filed
in the United States District Court for the Southern District of New York by
various holders of common stock of Loral Space & Communications Ltd. ("Loral")
against Loral, Bernard L. Schwartz and Richard Townsend were consolidated into
one action titled In re: Loral Space & Communications Ltd. Securities
Litigation. The lead plaintiff has been granted until April 18, 2002 to serve a
consolidated amended class action complaint. The class of plaintiffs on whose
behalf the lawsuit has been asserted consists of all buyers of Loral common
stock during the period from November 4, 1999 through February 1, 2001,
excluding the defendants and certain persons related or affiliated therewith.
The original complaints alleged (a) that the defendants violated Section 10(b)
of the Exchange Act and Rule 10b-5 promulgated thereunder, by making material
misstatements or failing to state material facts about Globalstar's and Loral's
business and prospects, and (b) that Messrs. Schwartz and Townsend are
secondarily liable for these alleged misstatements and omissions under Section
20(a) of the Exchange Act as alleged "controlling persons" of Loral.

Loral believes that it has meritorious defenses to the above Globalstar
related class action lawsuits and intends to pursue them vigorously.

Loral holds debt obligations from Globalstar (see Note 7 to the
consolidated financial statements). Globalstar's proposed restructuring plan,
which will be submitted to and subject to bankruptcy court approval,
contemplates the creation of a new company, which will initially be owned by
Globalstar's existing noteholders and other unsecured creditors, including
Loral. In other situations in the past, challenges have been initiated seeking
subordination or recharacterization of debt held by an affiliate of an issuer.
While Loral knows of no reason why such a claim would prevail with respect to
the debt Loral holds in Globalstar, there can be no assurance that such claims
will not be made in Globalstar's bankruptcy proceeding. If such claims were to
prove successful, it will jeopardize the amount of equity interest Loral will
ultimately receive in the new Globalstar company. Moreover, actions may be
initiated in Globalstar's bankruptcy proceeding seeking to characterize payments
previously made by Globalstar to Loral prior to the filing date as preferential
payments subject to repayment. Loral may also find itself subject to other
claims brought by Globalstar creditors and

47

securities holders, who may seek to impose liabilities on Loral as a result of
our relationship with Globalstar. For instance, Globalstar's creditors may seek
to pierce the corporate veil in an attempt to recover Globalstar obligations
owed to them that are recourse to Loral's subsidiaries, which are general
partners in Globalstar and have filed for bankruptcy protection. Globalstar's
cumulative partners deficit at September 30, 2001, was $2.81 billion.
Globalstar's proposed restructuring plan contemplates that mutual releases of
claims related to Globalstar would be granted to and by various persons,
including, among others, Loral and its affiliates, Globalstar, Globalstar's
officers and directors, Globalstar partners, service providers acquired by
Globalstar and the members of any official and informal committee of creditors.
There can be no assurance that these releases will be approved by the bankruptcy
court or, if approved, as to the scope of any releases finally obtained.

In May 2000, Globalstar finalized $500 million of vendor financing
arrangements with Qualcomm. The original terms of this vendor financing provided
for interest at 6%, a maturity date of August 15, 2003 and required repayment
pro rata with the term loans due to Loral under Globalstar's $500 million credit
facility. As of December 31, 2001, $608 million was outstanding under this
facility (including $108 million of capitalized interest).

Loral has agreed that if the principal amount outstanding under the
Qualcomm vendor financing facility exceeds the principal amount due Loral under
Globalstar's $500 million credit facility, as determined on certain measurement
dates, then Loral will guarantee 50% of such excess amount. As of December 31,
2001, Loral had no guarantee obligation.

OTHER MATTERS

Insurance Costs

The Company has received indications that the satellite industry will be
faced with significantly higher premiums on launch and in-orbit insurance in the
future and significantly shorter coverage periods than those that have been
available in the past. Any such increase will increase the cost of doing
business for the industry, including both the Company's satellite manufacturing
and fixed satellite services segments. The Company intends to pass on such
increased cost to its customers. There can be no assurance, however, that it
will be able to do so.

Accounting Pronouncements

On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives that do not qualify, or are not
effective as hedges, must be recognized currently in earnings. Upon adoption,
the Company recorded a $1.7 million reduction in net income, net of tax, and a
$1.2 million increase in other comprehensive income (OCI), net of tax, relating
to the cumulative effect of the change in adopting this new accounting
principle. The Company recorded these adjustments to recognize the fair value of
foreign currency forward contracts that qualify as derivatives under SFAS 133
and to recognize the fair value of firm commitments designated as hedged items
in fair value hedge relationships. Furthermore, the transition adjustments
reflect the derecognition of any deferred gains or losses recorded on the
balance sheet prior to the effective date of SFAS No. 133 on foreign exchange
contracts designated as hedges of foreign currency exposures on long-term
construction contracts in process.

In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS
140"). SFAS 140 replaces SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. It revises the standards
for accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. The Company adopted the applicable
disclosure requirements of SFAS 140 in its consolidated financial statements for
the year ended December 31, 2000. The Company has determined that there was no
effect on the

48

Company's consolidated financial position or results of operations relating to
the adoption of the other provisions of SFAS 140.

In June 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS
141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS
141 requires that all business combinations initiated after June 30, 2001, be
accounted for under the purchase method and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. SFAS 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the accounting
for goodwill and other intangible assets subsequent to their acquisition. SFAS
142 provides that intangible assets with finite useful lives be amortized and
that goodwill and intangible assets with indefinite lives not be amortized, but
will rather be tested at least annually for impairment. The Company will adopt
SFAS 142 on January 1, 2002. Upon adoption of SFAS 142, the Company will stop
the amortization of goodwill with an expected net carrying value of
approximately $892 million at the date of adoption and annual amortization of
approximately $27 million that resulted from business combinations completed
prior to the adoption of SFAS 141. Based on management's preliminary evaluation
under the new transitional impairment test in SFAS 142, the Company expects to
record a non-cash charge in the first quarter of 2002 to write-off a portion or
all of its goodwill. Any transitional impairment loss will be recognized as a
change in accounting principle.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and the normal operation of a long-lived
asset, except for certain obligations of lessees. The Company is required to
adopt SFAS 143 on January 1, 2003. The Company has not yet determined the impact
that the adoption of SFAS 143 will have on its results of operations or its
financial position.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. It
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of APB 30, Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business. The Company is required to adopt SFAS 144 on January 1, 2002. The
Company expects that there will be no effect on the Company's consolidated
financial position or results of operations relating to the adoption of SFAS
144.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency

The Company, in the normal course of business, is subject to the risks
associated with fluctuations in foreign currency exchange rates. Loral routinely
enters into forward exchange contracts to establish with certainty the U.S.
dollar amount of future anticipated cash receipts and payments and firm
commitments for cash payments denominated in a foreign currency. The primary
business objective of this hedging program is to minimize the gains and losses
resulting from exchange rate changes. As of December 31, 2001, the Company had
foreign currency exchange contracts (forwards) with several banks to purchase
and sell foreign currencies, primarily Japanese yen, with aggregate notionals of
$176.1 million. Such contracts were designated as hedges of certain foreign
contracts and subcontracts to be performed by SS/L through May 2006. The fair
value of these forward contracts based on quoted market prices as of December
31, 2001 and 2000 was $20.0 million and $6.4 million, respectively.

49

The Company is exposed to credit-related losses in the event of
non-performance by counter parties to these financial instruments, but does not
expect any counter party to fail to meet its obligation. The maturity of foreign
currency exchange contracts held as of December 31, 2001 is consistent with the
contractual or expected timing of the transactions being hedged, principally
receipt of customer payments under long-term contracts and payments to vendors
under subcontracts. These foreign exchange contracts mature as follows (in
thousands):

Loral does not enter into foreign currency transactions for trading or
speculative purposes. Loral attempts to limit our exposure to credit risk by
executing foreign contracts with high-quality financial institutions. A
discussion of our accounting policies for derivative financial instruments is
included in the notes to Loral's consolidated financial statements.

Interest

The Company's primary interest rate exposure is to loss of earnings and
cash flow that could result from the movement in market interest rates on its
long-term debt requirements. As of December 31, 2001, approximately 58% of the
Company's outstanding debt had fixed interest rates. The Company strives to
manage its interest rate risk by balancing the composition of its fixed versus
variable rate borrowings combined with the monitoring of the overall level of
borrowings and does not actively manage its interest rate risk through the use
of derivatives or other financial instruments. The Company does not believe that
movements in the fair value of its outstanding debt, represents a significant
quantitative risk.

As of December 31, 2001, the carrying value of the Company's long-term debt was
$2.36 billion and the fair value of such debt was $1.65 billion. The fair value
of the Company's long-term debt is based on carrying value for those obligations
that have short term variable interest rates on the outstanding borrowings and
quoted market prices for obligations with long-term or fixed interest rates. The
table below provides information about the carrying amount of the Company's
market sensitive long-term debt obligations by fiscal year of maturity (in
thousands).

Approximately $291 million of the difference between the carrying amount
and the fair value of the Company's long-term debt as of December 31, 2001 is
attributable to the accounting for the Loral Orion exchange offers (see Note 8
to the consolidated financial statements).
50

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Financial Statements and Financial Statement Schedules on page
F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

51

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

Information required for this item will be presented in the Company's 2001
definitive proxy statement which is incorporated herein by reference.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information concerning the executive
officers of Loral as of March 1, 2002.*

- ---------------

* Michael P. DeBlasio, First Senior Vice President of the Company, announced
his retirement from the Company effective as of March 29, 2002.

53

PART IV

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required under Items 11, 12 and 13, is presented in the
Company's 2001 definitive proxy statement which is incorporated herein by
reference.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

- ---------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form 10 (No. 1-14180).

(2) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on September 27, 1996.
(3) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on March 28, 1997.
(4) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on October 10, 1997.

(5) Incorporated by reference from the Registrant's Registration Statement on
Form S-4 filed on February 17, 1998 (File No. 333-46407).

(6) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the nine month period ended December 31, 1996.

(7) Incorporated by reference from the Registration Statement on Form S-1 of
Globalstar Telecommunications Limited (File No. 33-86808).

(8) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on August 13, 1996.

(9) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on July 8, 1997.

(10) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on December 9, 1997.

(11) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.

(12) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.

(13) Incorporated by reference from the Current Report on Form 8-K filed on
December 21, 1999 by Globalstar Telecommunications Limited and Globalstar,
L.P.

(14) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on August 23, 1999.

(15) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999.

(16) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on May 3, 2000.

(17) Incorporated by reference from Registrant's Current Report of Form 8-K
filed on July 7, 2000.

(18) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on November 20, 2000.

(19) Incorporated by reference from Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.

(20) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on December 14, 2001.

(21) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on January 7, 2002.

58

(22) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on January 9, 2002.

(23) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on January 10, 2002.

(24) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on February 27, 2002.

+ Filed herewith.

++ Management compensation plan.

(b) Reports on Form 8-K.

59

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

LORAL SPACE & COMMUNICATIONS LTD.

By: /s/ BERNARD L. SCHWARTZ
------------------------------------
Bernard L. Schwartz
Chairman of the Board and
Chief Executive Officer
Dated: March 26, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

61

INDEX TO FINANCIAL STATEMENTS

Loral Space & Communications Ltd. and Subsidiaries

Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 2001 and
2000................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999....................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2001, 2000 and 1999........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999....................... F-6
Notes to Consolidated Financial Statements................ F-7

F-1

INDEPENDENT AUDITORS' REPORT

TO THE SHAREHOLDERS OF LORAL SPACE & COMMUNICATIONS LTD.

We have audited the accompanying consolidated balance sheets of Loral Space
& Communications Ltd. (a Bermuda company) and its subsidiaries (collectively,
the "Company") as of December 31, 2001 and 2000 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.

As discussed in Notes 2 and 12 to the consolidated financial statements,
the Company was required to adopt Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities, effective
January 1, 2001.

DELOITTE & TOUCHE LLP
San Jose, California
March 5, 2002 (March 26, 2002 as to the seventh paragraph of Note 13)

F-2

LORAL SPACE & COMMUNICATIONS LTD.

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

See notes to consolidated financial statements.
F-3

LORAL SPACE & COMMUNICATIONS LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

See notes to consolidated financial statements.
F-4

LORAL SPACE & COMMUNICATIONS LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except per share amounts)

See notes to consolidated financial statements.
F-5

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

See notes to consolidated financial statements.
F-6

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND PRINCIPAL BUSINESS

Loral Space & Communications Ltd. together with its subsidiaries ("Loral"
or the "Company") is one of the world's leading satellite communications
companies with substantial activities in satellite-based communications services
and satellite manufacturing. Loral is organized into three operating businesses
(see Note 16):

Fixed Satellite Services ("FSS"): The Company leases transponder capacity
to customers for various applications, including broadcasting, news
gathering, Internet access and transmission, private voice and data
networks, business television, distance learning and direct-to-home
television ("DTH") and provides telemetry, tracking and control services
("TT&C") and network services to customers. The Company operates its
business through wholly-owned subsidiaries such as Loral Skynet, Loral
Orion, Inc. ("Loral Orion"), formerly known as Loral CyberStar, Inc. and
Loral Skynet do Brasil Ltda. ("Skynet do Brasil") and affiliates such as
Satelites Mexicanos, S.A. de C.V. ("Satmex") and Europe*Star Limited
("Europe*Star").

Satellite Manufacturing and Technology: The Company designs and
manufactures satellites and space systems and develops satellite technology
for a broad variety of customers and applications through Space
Systems/Loral, Inc. ("SS/L").

Data Services: The Company provides managed communications networks and
Internet and intranet services through Loral CyberStar, Inc. ("Loral
CyberStar") and delivers high-speed broadband data communications, business
television and business media services through Loral Cyberstar and
CyberStar, L.P. ("CyberStar LP").

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Loral, a Bermuda company, has a December 31 year-end. The consolidated
financial statements for the three years ended December 31, 2001, include the
results of Loral and its subsidiaries and have been prepared in accordance with
U.S. generally accepted accounting principles ("U.S. GAAP"). All intercompany
transactions have been eliminated.

Investments in Satmex, Europe*Star, XTAR, L.L.C. ("XTAR") and Globalstar,
L.P. ("Globalstar") as well as other affiliates, are accounted for using the
equity method, due to the Company's inability to control significant operating
decisions. Income and losses of affiliates are recorded based on Loral's
beneficial interest. Intercompany profit arising from transactions with
affiliates is eliminated to the extent of the Company's beneficial interest. Any
difference in the carrying value of these investments over Loral's interest in
the underlying net assets is being amortized in accordance with Loral's policy
for costs in excess of net assets acquired and, if applicable, begins upon the
commencement of commercial service of the affiliate (see New Accounting
Pronouncements). Advances to affiliates consist of amounts due under extended
payment terms. Equity in losses of affiliates is not recognized after the
carrying value of an investment, including advances and loans, has been reduced
to zero, unless guarantees or other obligations exist. Loral capitalizes
interest cost on its investments, until such entities commence commercial
operations. Certain of the Company's affiliates are subject to the risks
associated with new businesses.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the amounts of revenues
and expenses reported for the period. Actual results could differ from
estimates.

F-7

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

A significant portion of Loral's satellite manufacturing and technology
revenue is associated with long-term contracts which require significant
estimates. These estimates include forecasts of costs and schedules, estimating
contract revenue related to contract performance (including orbital incentives)
and the potential for component obsolescence in connection with long-term
procurements. Significant estimates also include the estimated useful lives of
the Company's satellites and the amortization period of cost in excess of net
assets acquired. See New Accounting Pronouncements.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and highly liquid
investments with original maturities of three months or less.

Concentration of Credit Risk

Financial instruments which potentially subject Loral to concentrations of
credit risk consist principally of cash and cash equivalents, foreign exchange
contracts, contracts-in-process, long-term receivables and advances and loans to
affiliates (see Note 7). Loral's cash and cash equivalents are maintained with
high-credit-quality financial institutions. Historically, Loral's customers have
been primarily large multinational corporations and U.S. and foreign governments
for which the creditworthiness was generally substantial. In recent years, the
Company has added commercial customers which include companies in emerging
markets or the development stage, some of which are highly leveraged or
partially funded. Management believes that its credit evaluation, approval and
monitoring processes combined with negotiated billing arrangements mitigate
potential credit risks with regard to the Company's current customer base.

Accounts Receivable

As of December 31, 2001 and 2000, accounts receivable was reduced by an
allowance for doubtful accounts of $3.8 million and $11.1 million, respectively.

Inventories

Inventories consist principally of parts and subassemblies used in the
manufacture of satellites which have not been specifically identified to
contracts-in-process, and are valued at the lower of cost or market. Cost is
determined using the first-in-first-out (FIFO) or average cost method.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is provided
on the straight-line method for satellites and related equipment over the
estimated useful lives of the related assets. Depreciation is provided primarily
on an accelerated method for other owned assets over the estimated useful life
of the related assets. Leasehold improvements are amortized over the shorter of
the lease term or the estimated useful life of the improvements.

Costs incurred in connection with the construction and successful
deployment of the Company's satellites and related equipment are capitalized.
Such costs include direct contract costs, allocated indirect costs, launch
costs, launch insurance and construction period interest. Capitalized interest
related to the construction of satellites for 2001, 2000 and 1999 was $23.0
million, $12.2 million and $40.8 million, respectively. All capitalized
satellite costs are amortized over the estimated useful life of the related
satellite. The estimated useful life of the satellites, ranging from 12 to 18
years, was determined by engineering analyses performed at the in-service date.
Satellite lives are reevaluated periodically. Losses from unsuccessful launches
and in-orbit failures of the Company's satellites, net of insurance proceeds,
are recorded in the period a loss occurs.

F-8

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Cost in Excess of Net Assets Acquired

The excess of the cost of purchased businesses over the fair value of net
assets acquired is primarily being amortized over 40 years using the
straight-line method. Accumulated amortization was $113.0 million and $85.9
million as of December 31, 2001 and 2000, respectively. See New Accounting
Pronouncements.

Valuation of Long-Lived Assets and Cost in Excess of Net Assets Acquired

The carrying value of Loral's long-lived assets, including investments in
and advances to affiliates, and cost in excess of net assets acquired is
reviewed for impairment whenever events or changes in circumstances indicate
that an asset may not be recoverable. The Company looks to current and future
profitability, as well as current and future undiscounted cash flows, excluding
financing costs, as primary indicators of recoverability. If an impairment is
determined to exist, any related impairment loss is calculated based on fair
value. Fair value is determined based on quoted market values, discounted cash
flows or appraisals, as appropriate in the circumstances. See New Accounting
Pronouncements.

Deposits

Deposits primarily represent prepaid amounts on satellite launch vehicles
which are expected to be utilized for the launch of customer or Company-owned
satellites.

Investments in Available-For-Sale Securities and Other Securities

The Company's investments in publicly traded common stock are classified as
available-for-sale, and are recorded at fair value, with the resulting
unrealized gain or loss excluded from net loss and reported as a component of
other comprehensive income (loss) until realized (see Notes 3 and 12). As of
December 31, 2001 and 2000, the Company owned approximately 612,000 shares of
The Fantastic Corporation ("Fantastic") common stock, acquired at an average
cost of $2.185 per share. This investment had a fair value of $0.2 million as of
December 31, 2001 and is included in other current assets. In 2000, the Company
sold its entire interest in Sirius Satellite Radio Inc. (1.9 million shares) and
542,000 shares of Fantastic common stock, realizing net gains of $69.7 million.
The Company accounts for its investment in Globalstar's $500 million credit
facility at fair value, with changes in the value (net of tax) recorded as a
component of other comprehensive income (loss). See Note 7.

Revenue Recognition

Revenue from satellite sales under long-term fixed-price contracts is
recognized following the provisions of Statement of Position 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type Contracts,
using the cost-to-cost percentage-of-completion method. Revenue includes the
basic contract price and estimated amounts for penalties and incentive payments,
including award fees, performance incentives, and estimated orbital incentives
discounted to their present value at launch date. Costs include the development
effort required for the production of high-technology satellites, non-recurring
engineering and design efforts in early periods of contract performance, as well
as the cost of qualification testing requirements.

Revenue under cost-reimbursable type contracts is recognized as costs are
incurred; incentive fees are estimated and recognized over the contract term.

Contracts with the U.S. government are subject to termination by the U.S.
government for convenience or for default. Other government contract risks
include dependence on future appropriations and administrative allotment of
funds and changes in government policies. Costs incurred under U.S. government
contracts are subject to audit. Management believes the results of such audits
will not have a material effect on Loral's financial position or its results of
operations.

F-9

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Losses on contracts are recognized when determined. Revisions in profit
estimates are reflected in the period in which the conditions that require the
revision become known and are estimable.

In accordance with industry practice, contracts-in-process include unbilled
amounts relating to contracts and programs with long production cycles, a
portion of which may not be billable within one year.

Data services equipment represents data network elements (antennas,
transmission equipment, etc.) necessary to enable communication between multiple
terrestrial locations through a customer selected satellite communications
service provider. Revenue from equipment sales is primarily recognized upon
acceptance by the customer, provided that a contract exists, the price is fixed
or determinable and collectibility is reasonably assured. Revenue from equipment
sales under long-term fixed price contracts is recognized using the cost-to-
cost percentage-of-completion method. Losses on contracts are recognized when
determined and revisions in profit estimates are reflected in the period in
which the conditions that require the revision become known and are estimable.

Revenues under arrangements that include both data services and data
services equipment are allocated based on the relative fair values of the
elements of the arrangement.

The Company provides satellite capacity under lease agreements that
generally provide for the use of satellite transponders and, in certain cases,
earth stations for periods generally ranging from one year to the end of life of
the satellite. Some of these agreements have certain obligations, including
providing spare or substitute capacity, if available, in the event of satellite
failure. If no spare or substitute capacity is available, the agreement may be
terminated. Revenue under transponder lease and data services agreements is
recognized as services are performed, provided that a contract exists, the price
is fixed or determinable and collectibility is reasonably assured. Revenues
under contracts that include fixed lease payment increases are recognized on a
straight-line basis over the life of the lease.

Research and Development

Independent research and development costs, which are expensed as incurred,
were $32 million, $48 million and $59 million for 2001, 2000 and 1999,
respectively, and are included in selling, general and administrative expenses.

Foreign Exchange Contracts

Loral enters into foreign exchange contracts as hedges against exchange
rate fluctuations of future accounts receivable and accounts payable under
contracts-in-process which are denominated in foreign currencies. Prior to 2001,
realized and unrealized gains and losses on foreign exchange contracts
designated as hedges were deferred and recognized over the lives of the related
contracts-in-process. On January 1, 2001, the Company adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which
among other things requires that all derivative instruments be recorded on the
balance sheet at their fair value. See Note 12.

Stock-Based Compensation

As permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), Loral accounts for
stock-based awards to employees using the intrinsic value method in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"). The Company accounts for stock-based awards to
non-employees in accordance with SFAS 123 and its interpretations.

F-10

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Income Taxes

As a Bermuda company, Loral Space & Communications Ltd. is subject to U.S.
federal, state and local income taxation at regular corporate rates plus an
additional 30% "branch profits" tax on any income that is effectively connected
with the conduct of a U.S. trade or business. Loral's U.S. subsidiaries are
subject to regular corporate tax on their worldwide income.

Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial and income
tax reporting and are measured by applying tax rates in effect at the end of
each year.

New Accounting Pronouncements

In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS
140"). SFAS 140 replaces SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. It revises the standards
for accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. The Company adopted the applicable
disclosure requirements of SFAS 140 in its consolidated financial statements for
the year ended December 31, 2000. The Company has determined that there was no
effect on the Company's consolidated financial position or results of operations
relating to the adoption of the other provisions of SFAS 140 during 2001.

In June 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS
141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS
141 requires that all business combinations initiated after June 30, 2001, be
accounted for under the purchase method and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. SFAS 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the accounting
for goodwill and other intangible assets subsequent to their acquisition. SFAS
142 provides that intangible assets with finite useful lives be amortized and
that goodwill and intangible assets with indefinite lives not be amortized, but
will rather be tested at least annually for impairment. The Company will adopt
SFAS 142 on January 1, 2002. Upon adoption of SFAS 142, the Company will stop
the amortization of goodwill with a net carrying value of $892 million at the
date of adoption and annual amortization of approximately $27 million that
resulted from business combinations completed prior to the adoption of SFAS 141.
Based on management's preliminary evaluation under the new transitional
impairment test in SFAS 142, the Company expects to record a non-cash charge in
the first quarter of 2002 to write-off a portion or all of its goodwill. Any
transitional impairment loss will be recognized as a change in accounting
principle.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and the normal operation of a long-lived
asset, except for certain obligations of lessees. The Company is required to
adopt SFAS 143 on January 1, 2003. The Company has not yet determined the impact
that the adoption of SFAS 143 will have on its results of operations or its
financial position.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. It
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of APB 30, Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and

F-11

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. The Company is required to adopt SFAS
144 on January 1, 2002. The Company expects that there will be no effect on the
Company's consolidated financial position or results of operations relating to
the adoption of SFAS 144.

Reclassifications

Certain reclassifications have been made to conform prior year amounts to
the current year's presentation.

3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss) are as
follows (in thousands):

See Note 9 for the related tax amounts for the table above.

4. ACQUISITIONS

Data Services

On July 31, 1999, Loral's subsidiary, CyberStar LP, acquired Global Access,
a business television unit of Williams Communications, Inc., for approximately
$11 million in cash. Global Access provides business television, video
conferencing and other communication services to companies in various parts of
the world through networks operated in Singapore, Dallas, London and
Johannesburg. Approximately $8 million of the purchase price was allocated to
cost in excess of net assets acquired, which is being amortized over 10 years
(see New Accounting Pronouncements). Loral's consolidated financial statements
include Global Access's results of operations from August 1, 1999. The above
acquisition was accounted for using the purchase method. The results of
operations of Global Access were not considered material to the Company;
accordingly, pro forma results have not been presented.

F-12

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. CONTRACTS-IN-PROCESS AND LONG-TERM RECEIVABLES

Contracts-in-Process

Unbilled amounts include recoverable costs and accrued profit on progress
completed, which have not been billed. Such amounts are billed in accordance
with the contract terms, typically upon shipment of the product, achievement of
contractual milestones, or completion of the contract and, at such time, are
reclassified to billed receivables.

Long-Term Receivables

Billed receivables relating to long-term contracts are expected to be
collected within one year. Loral classifies billings deferred and the orbital
component of unbilled receivables expected to be collected beyond one year as
long-term. Receivable balances related to satellite orbital incentive payments
and billings deferred as of December 31, 2001 are scheduled to be received as
follows (in thousands):

2002........................................................ $ 11,899
2003........................................................ 41,282
2004........................................................ 54,294
2005........................................................ 22,757
2006........................................................ 27,415
Thereafter.................................................. 44,558
--------
202,205
Less, current portion included in contracts-in-process...... (11,899)
--------
Long-term receivables....................................... $190,306
========

F-13

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. PROPERTY, PLANT AND EQUIPMENT

In September, 1999, Loral Orion purchased from APT Satellite Company
Limited ("APT") for approximately $273 million, the rights to all transponder
capacity and existing customer leases on the Apstar IIR satellite (except for
one C-band transponder retained by APT), and renamed the satellite the Telstar
10/Apstar IIR satellite. Loral Orion has full use of the transponders for the
remaining life of Telstar 10/Apstar IIR. Loral Orion has the right to provide
replacement satellites upon the end of life of Telstar 10/Apstar IIR, for which
it will be required to pay a fee to APT for the right to use the orbital slot.

Depreciation and amortization expense for property, plant and equipment was
$192.8 million, $182.4 million and $139.9 million in 2001, 2000 and 1999,
respectively. Accumulated depreciation and amortization as of December 31, 2001
and 2000 includes $51.8 million and $29.0 million, respectively, related to
satellite transponders where Loral has the rights to transponders for the
remaining life of the related satellite.

Satellites in-orbit are either leased by customers or held for lease by the
Company. Future minimum lease receipts due from customers under long-term
operating leases for transponder capacity on the Company's satellites in-orbit
and for service agreements as of December 31, 2001, are as follows (in
thousands):

2002............................................. $ 340,089
2003............................................. 244,388
2004............................................. 189,371
2005............................................. 141,624
2006............................................. 104,902
Thereafter....................................... 417,968
----------
$1,438,342
==========

F-14

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INVESTMENTS IN AND ADVANCES TO AFFILIATES

Investments in and Advances to Affiliates consists of (in thousands):

Equity in net (loss) income of affiliates consists of (in thousands):

The consolidated statements of operations reflect the effects of the
following amounts related to transactions with or investments in affiliates (in
thousands):

F-15

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)

Satmex

In connection with the privatization by the Federal Government of Mexico
(the "Mexican Government") of its fixed satellite services business, Loral and
Principia, S.A. de C.V. ("Principia") formed a joint venture, Firmamento
Mexicano, S.A. de R.L. de C.V. ("Holdings"). In 1997, Holdings acquired 75% of
the outstanding capital stock of Satmex. As part of the acquisition, Servicios
Corporativos Satelitales, S.A. de C.V. ("Servicios"), a wholly owned subsidiary
of Holdings, issued a seven-year obligation to the Mexican Government (the
"Government Obligation") in consideration for the assumption by Satmex of the
debt incurred by Servicios in connection with the acquisition. The Government
Obligation had an initial face amount of $125 million, which accretes at 6.03%
and expires in December 2004. The debt of Satmex and Servicios is non-recourse
to Loral and Principia; however, Loral and Principia have agreed to maintain
assets in a collateral trust in an amount equal to 1.2 times the value of the
Government Obligation until maturity. As of December 31, 2001, Loral and
Principia have pledged their respective shares in Holdings in such trust. Loral
has a 65% economic interest in Holdings and a 49% indirect economic interest in
Satmex.

Loral and Principia are responsible for managing Satmex. They are entitled
to receive an aggregate management fee, based on a sliding scale, applied to
Satmex's quarterly gross revenues up to a maximum of 3.75% of each year's
cumulative gross revenues. Loral recognized management fee income of $2.1
million and $2.7 million in 2001 and 2000, respectively, which is included in
revenues. Loral and Principia agreed to waive such fee for 1999. Beginning in
1999, Loral licensed certain intellectual property to Satmex for a fee of up to
1.5% of Satmex's gross revenues, as defined, resulting in $1.8 million, $2.0
million and $1.0 million of such fees in 2001, 2000 and 1999, respectively.

On March 30, 1999, Loral acquired 577,554 shares of preferred stock of
Satmex at a purchase price of $30.3 million. The preferred stock has limited
voting rights, pays a dividend in limited voting common stock of Satmex and is
exchangeable, at Satmex's option, into limited voting common stock of Satmex
based upon a predetermined exchange ratio. In May 2000, Satellites Enigma S.A.
de C.V., a subsidiary of Principia, exercised its option to purchase 104,105
shares of this preferred stock from Loral for $6.6 million in cash and Loral
realized a gain of $1 million, which is included in gain on investments on
Loral's consolidated statements of operations.

In August 2000, Satmex announced that its Solidaridad 1 satellite ceased
operation and was irretrievably lost. The loss was caused by the failure of the
back-up control processor on board the satellite. Solidaridad 1, which was built
by Hughes Space and Communications and launched in 1994, experienced a failure
of its primary control processor in April 1999, and had been operating on its
back-up processor since that time. The majority of Solidaridad 1 customers were
provided replacement capacity on other Satmex satellites or on satellites
operated by Loral Skynet. Satmex received net insurance proceeds of $235 million
relating to the loss of Solidaridad 1 and recognized an after tax gain of $67
million in 2000 and $5 million in 2001, which resulted from the insurance
proceeds in excess of the carrying amount of the satellite and the incremental
costs associated with providing replacement capacity. Satmex has contracted with
SS/L to build a replacement satellite, known as Satmex 6, for $243 million which
is scheduled to be launched in the first quarter of 2003, and is designed to
provide broader coverage and higher power levels than any other satellite
currently in the Satmex fleet.

At December 31, 2001, Solidaridad 2 had a remaining estimated useful life
of seven years. Solidaridad 2 was also manufactured by Hughes and is similar in
design to Solidaridad 1 and to other Hughes satellites which have experienced
in-orbit component failures. While Satmex has obtained in-orbit insurance for
Solidaridad 2, a satellite failure would result in a decrease in Satmex's
profits, which would not be insured. The in-orbit insurance for Solidaridad 2
expires in November 2002. Satmex cannot guarantee that it will be able to renew
the insurance at the end of this period, or that if renewal is available, that
it would be on

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)

acceptable terms. For example, a renewal policy for Solidaridad 2 may not insure
against an in-orbit failure due to the loss of the satellite's control
processor, the same component that caused the loss of Solidaridad 1 and other
Hughes satellites. Such an uninsured loss would have a material adverse effect
on Satmex's results of operations and financial condition.

The following table presents summary financial data for Satmex as of
December 31, 2001 and 2000 and for each of the three years in the period ended
December 31, 2001 (in thousands):

- ---------------
(1) During 2000, Satmex recognized an after-tax gain of $67 million from its net
insurance recovery on the loss of a satellite.

(2) During 1999, Satmex sold three Ku-band transponders on Satmex 5 to Loral
Skynet for $25.5 million, resulting in a gain of $11.2 million. Loral's
proportionate share of the profit on these transponders of $3.6 million was
eliminated in Loral's consolidated results.

Europe*Star

Europe*Star, a joint venture between Loral and Alcatel, launched
Europe*Star 1, an all Ku-band satellite, in October 2000. Europe*Star 1,
marketed as part of the Loral Global Alliance, commenced service in January
2001. Alcatel was the prime contractor of Europe*Star 1, with SS/L acting as a
subcontractor under contracts aggregating $122 million. During 2001 and 2000,
Loral invested $4 million and $6 million in Europe*Star, respectively. As of
December 31, 2001 and 2000 Loral owned 47% of Europe*Star. Pursuant to the terms
of the shareholders agreement, Loral has permitted Alcatel to fund additional
expenditures to develop Europe*Star's business and infrastructure through $181
million in loans to the venture, which Alcatel claims are payable on demand.
Loral has provided $40.3 million and $38.1 million of advances to Europe*Star as
of December 31, 2001 and 2000, respectively.

F-17

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)

The following table presents summary financial data for Europe*Star as of
December 31, 2001 and 2000 and for each of the three years in the period ended
December 31, 2001 (in thousands):

XTAR

XTAR is a joint venture, formed for the purpose of launching and operating
an X-band satellite to provide satellite services to government customers, in
which Loral owns a 56% interest. Due to the veto rights the other partner in the
joint venture has with respect to certain significant operating decisions and
Loral's inability to control such decisions, this investment is accounted for on
the equity method. In addition, XTAR has agreed to lease certain transponders on
the Spainsat satellite, which is being constructed for Loral's other partner in
XTAR. SS/L is currently constructing both the XTAR and Spainsat satellites under
contracts aggregating $163 million and is eliminating profit on these contracts
to the extent of the Company's beneficial interest in XTAR. As of March 4, 2002,
the partners, in proportion to their respective ownership interests, have
contributed $20 million to XTAR (including $11 million by Loral) and expect to
fund an additional $35 million in 2002 (including $20 million by Loral).

Globalstar

A subsidiary of Loral acts as the managing general partner of Globalstar,
which owns and operates a global telecommunications network designed to serve
virtually every populated area of the world by means of a 52-satellite
constellation, including four in-orbit spares (the "Globalstar System"). The
Globalstar System commenced operations in the first quarter of 2000.

The Company accounts for its investment in Globalstar on the equity method
due to its inability to control significant operating decisions at Globalstar,
recognizing its allocated share of net losses based on the direct and indirect
ordinary partnership interests it owns. In 2000, Loral's allocated share of
Globalstar's losses and Globalstar's impairment charges reduced Loral's
investment in and advances to Globalstar to zero (see below). Accordingly, there
is no longer any requirement for Loral to provide for any of Globalstar net
losses subsequent to December 31, 2000. The Company accounts for its investment
in Globalstar's $500 million credit facility at fair value, with changes in the
value (net of tax) recorded as a component of other

F-18

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)

comprehensive income (loss) (see Notes 3 and 12). The Company recognized
unrealized net gains (losses) after taxes of $(12) million and $33 million in
2001 and 2000, respectively, in connection with this security.

In January 2001, Globalstar suspended indefinitely principal and interest
payments on its debt and dividend payments on its redeemable preferred
partnership interests in order to conserve cash for operations.

On February 15, 2002, Globalstar and certain of its direct subsidiaries
filed voluntary petitions under Chapter 11 of Title 11, United States Code in
the United States Bankruptcy Court for the District of Delaware (the "Court").
In connection therewith, Loral/Qualcomm Satellite Services, L.P., the managing
general partner of Globalstar, its general partner, Loral/Qualcomm Partnership,
L.P. ("LQP"), and certain of Loral's subsidiaries that serve as general partners
of LQP also filed voluntary petitions with the Court. As a result of
Globalstar's bankruptcy petition, several of Globalstar's debt facilities, and
other debt obligations have been accelerated and are immediately due and
payable. Subcontractors have assumed $91 million of financing related to
deferred billings SS/L has provided to Globalstar at December 31, 2001, which
includes $46 million which is non-recourse to SS/L in the event of non-payment
by Globalstar due to bankruptcy and is included in long-term liabilities on the
consolidated balance sheets.

Globalstar has reached an agreement with Loral and an informal committee of
noteholders, representing approximately 17% principal amount of Globalstar's
outstanding notes, regarding the substantive terms of a financial and legal
restructuring of Globalstar's business. The proposed restructuring plan, which
will have to be submitted for and will be subject to Court approval, calls for
the establishment of a new Globalstar company which will, in addition to taking
ownership of all of Globalstar's existing assets, acquire certain service
provider operations, including Loral's investment in the Canadian service
provider company. Under the proposed restructuring plan, if approved, the new
company will initially be owned by Globalstar's existing noteholders and other
unsecured creditors, including Loral, which would result in Loral initially
holding about a 24% equity interest in the new company, prior to any dilution
that may result from any new investments. The proposed plan also calls for the
cancellation of all existing partnership interests in Globalstar, but
contemplates, subject to the satisfaction of certain conditions, a rights
offering to common and preferred shareholders in Globalstar Telecommunications
Limited and Globalstar's creditors which could give them the option to purchase
up to 15% of the common equity in the new company. The proposed plan, if
approved, will also provide for mutual releases of claims related to Globalstar
to be granted to and by various persons, including, among others, Globalstar,
Globalstar's officers and directors, Loral and its affiliates, Globalstar
partners, service providers acquired by Globalstar and the members of any
official and informal committees of creditors. On March 5, 2002, the Court
appointed an official committee of creditors. Although the majority of the
members of the official committee are the members of the informal committee,
there can be no assurance that the proposed restructuring plan, including
Loral's proposed equity ownership in the new company, will be approved by
Globalstar's remaining creditors or the Court.

As of December 31, 2001, the Company's direct and indirect investment in
connection with Globalstar related activities included about 39% of Globalstar's
common equity (including GTL common stock), about 27% of its debt, an investment
in Globalstar Telecommunications Limited preferred stock and investments in and
advances to Globalstar service provider partnerships. The Company also has 3.45
million warrants to acquire Globalstar partnership interests at $91 per
interest. As of December 31, 2001, the market value of the 9.9 million shares of
GTL stock owned by Loral, based on the last reported sale was $1.6 million. The
Company has outstanding options to certain of its officers and directors to
purchase approximately 16% of the GTL common shares owned by Loral, at an
exercise price of $7.09 per share. During 2000, Loral recorded after-tax charges
of approximately $1.4 billion ($1.7 billion pre-tax) related to Loral's
investments in and advances in connection with Globalstar related activities,
consisting of Loral's share of after-tax operating losses of $1.29 billion or
approximately $1.6 billion on a pre-tax basis (including approximately $882
million representing Loral's after-tax share of Globalstar's impairment charges
or approximately $1.2 billion on a pre-
F-19

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)

tax basis) and after-tax impairment charges of $112 million ($125 million
pre-tax), resulting from the write-down of investments in and advances to
Globalstar service provider partnerships to their estimated fair values as of
December 31, 2000. In connection with recording Loral's share of Globalstar's
operating losses for the year ended December 31, 2000, Loral recorded an accrued
obligation of $22.3 million representing the Company's estimate of the probable
uncollectible costs in connection with non-cancellable subcontractor obligations
to be incurred on Globalstar's behalf. In 2001, Loral recognized no income or
loss related to the Company's share of Globalstar's losses. The $5.5 million,
net of taxes, reflected in the Company's statement of operations related to
Globalstar, reflects the recovery of amounts during the year which reduced the
Company's estimate of the remaining probable obligation. The Company's
investment in Globalstar related activities on its balance sheet as of December
31, 2001 was approximately $32 million, consisting primarily of the fair value
of its investment in Globalstar's $500 million credit facility which was based
on the trading values of Globalstar's public debt at December 31, 2001. If
Globalstar were unable to effectuate a successful restructuring, the Company's
remaining investment in Globalstar's $500 million credit facility would be
impaired, which would have no effect on the Company's results of operations.
Loral's investment in the 2002 operations of those Globalstar service provider
ventures, in which it participates as an equity owner, is expected to be less
than $5 million in 2002. These Globalstar service providers have constructed and
operate gateways, are licensed to provide services and, through their sales and
marketing organizations, are actively selling Globalstar service, in their
respective territories. In addition, the Company has contingent liabilities of
approximately $14 million in connection with Globalstar service provider
partnerships, which is supported by letters of credit (see Note 13).

SS/L was the prime contractor for the construction and launch of
Globalstar's satellites, under construction contracts aggregating approximately
$2.2 billion, which are substantially complete. SS/L awarded subcontracts to
third parties, including other investors in Globalstar, for substantial portions
of the work under these contracts.

The following table presents summary financial data for Globalstar as of
December 31, 2000 and for each of the two years in the period ended December 31,
2000 (in thousands):

F-20

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)

Other Affiliates

Other affiliate equity investments include Loral's investment in Mabuhay
Space Holdings Limited ("Mabuhay"), which owns and operates certain satellite
transponders. As of December 31, 2000, the Company's investment in Mabuhay had
been reduced to zero. Loral recorded impairment charges relating to its
investment in Mabuhay in 2000 and 1999 of $12 million and $15 million,
respectively, net of related tax benefits.

8. LONG-TERM DEBT

F-21

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. LONG-TERM DEBT -- (CONTINUED)

Satellite Credit Agreement

On December 21, 2001, Loral Satellite, Inc. ("Loral Satellite"), a
subsidiary of Loral Space & Communications Corporation, which in turn is a
subsidiary of Loral, entered into the first amendment to the $500 million
secured credit agreement dated as of November 17, 2000 by and among Loral
Satellite, Bank of America as Administrative Agent, and the other lending
parties thereto (the "Satellite Credit Agreement"). The first amendment extended
the expiration date of the $200 million revolving credit facility to January 7,
2005, and amended the amortization payment schedule on the $300 million term
loan as follows: $11,250,000 per quarter commencing on March 31, 2002 through
September 30, 2004, and $170,250,000 on January 7, 2005. The first amendment
also effected certain changes to provisions relating to the collateral pool
provided to lenders under the Loral Satellite credit facility and imposed
additional limitations on the application of proceeds from any sale of assets
from this collateral pool.

Borrowings under the Satellite Credit Agreement bear interest, at Loral
Satellite's option, at various rates based on fixed margins over the lead bank's
base rate or the London Interbank Offer Rate for periods of one, two, three or
six months. Loral Satellite pays a commitment fee on the unused portion of the
revolver.

The Satellite Credit Agreement is secured by certain assets of Loral
Satellite, including the Telstar 6 and Telstar 7 satellites and the loans due to
Loral under Globalstar's $500 million credit facility (see below). Based on a
third party valuation, management believes that the fair value of Telstar 6 and
Telstar 7 is in excess of $500 million. As of December 31, 2001, the net book
value of Telstar 6 and Telstar 7 in Loral's consolidated financial statements
was approximately $328 million. In addition, as part of the first amendment,
lenders under the Loral Satellite credit facility received a junior lien on the
assets of Loral SpaceCom Corporation ("LSC") and its subsidiaries pledged in
favor of the banks under the LSC Amended Credit Agreement.

Loral has also agreed to guarantee Loral Satellite's obligations under the
$500 Million Credit Agreement, which guarantee agreement contains a minimum net
worth covenant.

The Satellite Credit Agreement contains financial covenants, including
maintenance of a minimum collateral coverage ratio, minimum net worth and
minimum EBITDA. The Satellite Credit Agreement also contains customary
limitations, including those on indebtedness, fundamental changes, asset sales,
dividends, (except that Loral Satellite may pay dividends to its parent provided
that the first $100 million of cash transferred to its parent must be in the
form of an intercompany note), investments, capital expenditures, creating liens
(other than those created pursuant to the $500 Million Credit Agreement),
prepayments or amendments of indebtedness, and transactions with affiliates.

Proceeds from the Satellite Credit Agreement were used by Loral Satellite
to purchase all of the creditors' interests in the loans outstanding under
Globalstar's $500 million credit agreement. The guarantee of Globalstar's $500
million credit agreement that had been provided by Loral Satellite, was
terminated and released in connection with this transaction.

LSC Amended Credit Agreement

On December 21, 2001, LSC entered into an Amended and Restated Credit
Agreement with Bank of America, N.A., as Administrative Agent, and the other
lenders parties thereto (the "LSC Amended Credit Agreement"). The LSC Amended
Credit Agreement provides for a $200 million revolving credit facility expiring
January 7, 2005 and a $400 million term loan subject to the following
amortization payment schedule: $5 million on each of March 31, June 30, and
September 30, 2002; $25 million on December 31, 2002; $5 million on each of
March 31, June 30, September 30 and December 31, 2003; $20 million on each of
March 31, June 30 and September 30, 2004; and $280 million on January 7, 2005.
Borrowings under the LSC Amended Credit Agreement bear interest, at LSC's
option, at various rates based on margins over the lead

F-22

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. LONG-TERM DEBT -- (CONTINUED)

bank's base rate or the London Interbank Offered Rate for periods of one, two,
three or six months. The margin levels have increased under the new amended
agreement and are fixed through September 30, 2002. LSC pays a commitment fee on
the unused portion of the revolver.

The LSC Amended Credit Agreement contains financial covenants of LSC and
its subsidiaries, such as maintenance of interest coverage, leverage ratios and
minimum net worth. The LSC Amended Credit Agreement also contains limitations on
LSC and its subsidiaries, including those on indebtedness, liens, fundamental
changes, asset sales, dividends, investments, capital expenditures, transactions
with affiliates and certain other intercompany transactions. The LSC Amended
Credit Agreement allows dividend payments to Loral if cumulative dividend
payments do not exceed 50% of its cumulative consolidated net income and the
ratio of its funded debt to EBITDA is less than 3.0 to 1.0. For the year ended
December 31, 2001, Loral SpaceCom had no capacity under this covenant to pay
Loral any dividends.

The LSC Amended Credit Agreement is secured by substantially all of the
assets of and the stock of LSC and its subsidiaries, including SS/L. As of
December 31, 2001, the net book value of the net assets that secure the LSC
Amended Credit Agreement was approximately $1.15 billion. LSC's obligations
under the LSC Amended Credit Agreement have been guaranteed by certain of LSC's
subsidiaries, including SS/L.

Loral Orion Debt Agreements

On December 21, 2001, Loral Orion completed exchange offers and consent
solicitations by issuing $613 million principal amount of new senior notes due
2006 ("New Senior Notes") guaranteed by Loral, in exchange for the
extinguishment of $841 million principal amount of Loral Orion senior notes due
2007 and senior discount notes due 2007 as discussed below. As part of the
exchange, Loral issued to the New Senior Note holders 6.04 million five-year
warrants to purchase Loral common stock (approximately 1.8% of the Company's
outstanding common stock) at a price of $2.37 per share. The warrants were
valued at $7 million using the Black Scholes option pricing model with the
following assumptions: stock volatility, 75%, risk free interest rate, 4.36%,
and no dividends during the expected term. Principal amount of $37 million of
the existing senior notes and principal amount of $49 million of the existing
senior discount notes remain outstanding at their original maturities and
interest rates.

The interest rate on the New Senior Notes is 10%, a reduction from the
11.25% interest rate on the existing senior notes and the 12.5% rate on the
existing senior discount notes. Interest is payable semi-annually on July 15 and
January 15, beginning July 15, 2002. As a result of the lower interest rate and
the $229 million reduction in principal amount of debt, Loral Orion's annual
cash interest payments will be reduced by approximately $39 million. Under U.S.
generally accepted accounting principles dealing with debt restructurings, the
Company recorded an after-tax extraordinary gain of $22 million on the exchange,
after expenses of $8 million. The carrying value of the New Senior Notes on the
balance sheet is $904 million, although the actual principal amount of the New
Senior Notes is $613 million. The difference between this carrying value and the
actual principal amount of the New Senior Notes will be amortized over the life
of the New Senior Notes, fully offsetting interest expense through maturity of
the New Senior Notes. The indenture relating to the New Senior Notes contains
limitations on Loral Orion and its subsidiaries, including, without limitation,
restrictions on Loral Orion's ability to pay dividends or make loans to Loral.

In connection with the consummation of the exchange offer, LSC canceled its
$79.7 million intercompany note issued to it by Loral Orion, which ranked pari
passu to senior debt, in exchange for the transfer of Loral Orion's data
services business and the issuance of a new note to LSC in the principal amount
of $29.7 million due 2006, having an interest rate of 10% per annum payable in
kind, subordinated to Loral Orion's New Senior Notes. Loral Orion's data
services business was transferred to a newly-formed subsidiary of Loral, which
assumed the name "Loral CyberStar, Inc".

F-23

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. LONG-TERM DEBT -- (CONTINUED)

In connection with the Loral Orion acquisition, the carrying value of the
senior notes and senior discount notes were increased to reflect a fair value
adjustment based on quoted market prices at the date of acquisition. Such
adjustment resulted in effective interest rates of 8.69% and 9.69% on the senior
notes and senior discount notes, respectively, through maturity.

The Loral Orion senior notes are due in 2007 and pay interest
semi-annually. The senior discount notes are due in 2007 and pay interest
semi-annually commencing on July 15, 2002. The accreted principal value of the
senior discount notes was $49 million and $427 million as of December 31, 2001
and 2000, respectively. Along with the issuance of each senior note and senior
discount note, one warrant was originally issued to purchase shares of common
stock. Upon the acquisition of Loral Orion, each warrant was converted so that
it could purchase shares of Loral common stock. As of December 31, 2001,
exercisable warrants for 68,045 shares of Loral common stock at an exercise
price of $0.02 per share under the Loral Orion senior notes and 126,359 shares
of Loral common stock at an exercise price of $0.03 per share under the Loral
Orion senior discount notes are yet to be exercised.

Other Debt Agreements

In 1999, Loral sold $350 million principal amount of 9.5% Senior Notes due
2006 ("Senior Notes"). The Senior Notes are general unsecured obligations of
Loral that: (1) are structurally junior in right of payment to all existing and
future indebtedness of Loral's subsidiaries; (2) are equal in right of payment
with all existing and future senior indebtedness of Loral (except as to assets
pledged to secure such indebtedness); and (3) are senior in right of payment to
any future indebtedness which is by its terms junior in right of payment to any
senior indebtedness of Loral. Interest on the Senior Notes accrues at the rate
of 9.5% per annum and is payable semi-annually on January 15 and July 15. The
Senior Notes will mature on January 15, 2006. Loral may redeem all or part of
the Senior Notes on or after January 15, 2003. Upon a change of control (as
defined), each holder of Senior Notes will have the right to require Loral to
repurchase such holder's Senior Notes at a price equal to 101% of the principal
amount thereof plus accrued interest to the date of repurchase.

The Satellite Credit Agreement, LSC Amended Credit Agreement, the indenture
relating to Loral Orion's New Series Notes, and Loral's indenture relating to
its Senior Notes, provide for cross default or cross acceleration provisions.

SS/L borrowed a total of $42.9 million under an export-import credit
facility (the "EX-IM Facility") with a Japanese bank. The EX-IM Facility is
fully secured by a letter of credit arrangement with another bank. As of
December 31, 2001, no amounts remained available for borrowing under this
facility. The outstanding principal is being repaid in semi-annual installments
through November 1, 2005. Interest is charged at LIBOR less 1/4% and is payable
semi-annually on May 1 and November 1.

As of December 31, 2001, Loral believes it was in compliance with all
covenants pertaining to its debt facilities.

The aggregate maturities of the carrying value of total debt for the years
2002 through 2006 are as follows (in millions): $136.6, $131.9, $160.8, $818.7
and $1,028.5.

F-24

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME TAXES

The benefit (provision) for income taxes on the loss before income taxes,
equity in net loss of affiliates, minority interest, Globalstar related
impairment charges, extraordinary gain and cumulative effect of change in
accounting principle consists of the following (in thousands):

The income tax benefit (provision) excludes the following (in thousands):

F-25

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME TAXES -- (CONTINUED)

The benefit (provision) for income taxes on the loss before income taxes,
equity in net loss of affiliates, minority interest, Globalstar related
impairment charges, extraordinary gain and cumulative effect of change in
accounting principle differs from the amount computed by applying the statutory
U.S. Federal income tax rate because of the effect of the following items (in
thousands):

As of December 31, 2001, the Company had net operating loss carryforwards
of approximately $663 million, which includes $378 million related to foreign
partner interests in Globalstar and CyberStar L.P., as well as tax credit
carryforwards of approximately $3 million, which expire at varying dates from
2011 through 2020. Due to uncertainties regarding its ability to realize the
benefits from the loss carryforwards related to the foreign partner interests in
Globalstar and Cyberstar L.P. and certain other deferred tax assets, the Company
established a valuation allowance of $186 million as of December 31, 2001
against these net deferred tax assets. The valuation allowance was $114.0
million at December 31, 2000 and $52.1 million at December 31, 1999. The
increases during 2001 and 2000 primarily related to the additional reserve
established for the benefit from the loss carryforwards related to the foreign
partner interests in Globalstar. During 1999, the reversal of the valuation
allowance for Loral Orion pre-acquisition loss carryforwards resulted from a tax
law change. For the years ended December 31, 2001, 2000 and 1999, loss before
income taxes includes approximately $71 million, $25 million and $20 million,
respectively, of non-U.S. source loss.

F-26

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME TAXES -- (CONTINUED)

The significant components of the net deferred income tax asset are (in
thousands):

The net deferred income tax asset is classified as follows (in thousands):

10. SHAREHOLDERS' EQUITY

Series A Preferred Stock

On March 31, 2000, Lockheed Martin Corporation ("Lockheed Martin")
converted 45,896,978 shares of Loral's Series A preferred stock into 45,896,978
shares of Loral common stock. Loral filed a registration statement to register
the resale by Lockheed Martin of the shares of common stock acquired upon the
conversion of the Series A preferred stock, which became effective in May 2000.

Series B Preferred Stock

The Series B Preferred Stock will, if issued, be junior to any other series
of preferred stock which may be authorized and issued. The Series B Preferred
Stock becomes issuable upon exercise by holders of rights issued under the
Company's rights plan. The rights are issued with the Company's common stock and
become detachable, and thus exercisable, only upon the occurrence of certain
events. Each right, when it becomes exercisable, entitles the holder to purchase
from the Company a unit consisting initially of one-thousandth of a share of
Series B Preferred Stock at a purchase price of $50 per unit, subject to
adjustment.

6% Series C Convertible Preferred Stock

In 1996, the Company sold $600 million of 6% Convertible Preferred
Equivalent Obligations ("CPEO's"), which were mandatorily exchanged in 1997 into
shares of the Company's 6% Series C Convertible Redeemable Preferred Stock
("Series C Preferred Stock"), resulting in a reclassification of these

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LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. SHAREHOLDERS' EQUITY -- (CONTINUED)

amounts into shareholders' equity. In addition, the Company issued additional
CPEOs and shares of Series C Preferred Stock in connection with the acquisition
of interests in SS/L and Globalstar.

In February 2000, 1.4 million shares of the Series C Preferred Stock were
converted into 3.5 million shares of Loral common stock. In connection with this
conversion, Loral issued to the converting shareholders 332,777 additional
shares of its common stock, which approximated the dividend prepayments to which
the holders would have been entitled if a provisional redemption of those
securities had been made (which resulted in a non-cash dividend charge of $6
million).

In April 2001, 3.7 million shares of the Series C Preferred Stock were
converted into 20.1 million shares of Loral common stock in connection with the
Company's exchange offers (see Series C and Series D Preferred Stock Exchange
Offers below).

The Series C Preferred Stock outstanding at December 31, 2001 had an
aggregate liquidation preference equal to its $492 million aggregate redemption
value and a mandatory redemption date of November 1, 2006. The Series C
Preferred Stock is convertible into 24,599,686 shares of common stock of the
Company at a conversion price of $20 per share.

The Series C Preferred Stock is non-voting unless Loral does not pay
dividends for an aggregate of six quarters, and with respect to dividend rights
and rights upon liquidation, winding up and dissolution, ranks pari passu with
Loral's 6% Series D Convertible Redeemable Preferred Stock ("Series D Preferred
Stock") and senior to or pari passu with all other existing and future series of
preferred stock of Loral and senior to Loral common stock. Prior to redemption,
the Series C Preferred Stock is redeemable in cash at any time, in whole or in
part, at the option of the Company (at a premium which declines over time). The
Series C Preferred Stock is redeemable in cash, Loral common stock or a
combination thereof, at the option by the Company, on the mandatory redemption
date. The number of shares of the Company's common stock to be issued on
redemption is based on the aggregate redemption value divided by the average of
the volume weighted average daily price of the Company's common stock for the 10
trading-day period ending on the second business day prior to the redemption
date (approximately $2.26 per share at December 31, 2001). The exact number of
shares of the Company's common stock that may be issued on a mandatory
redemption date cannot be determined at this time. That number will depend on a
number of factors not known today, such as the price of the Company's common
stock and the number of shares of the Company's preferred stock outstanding at
that time.

6% Series D Convertible Preferred Stock

In February 2000, Loral sold $400 million of Series D Preferred Stock due
2007 in an offering exempt from registration.

In April 2001, 1.9 million shares of the Series D Preferred Stock were
converted into 10.8 million shares of Loral common stock in connection with the
Company's exchange offers (see Series C and Series D Preferred Stock Exchange
Offers below).

The Series D Preferred Stock outstanding at December 31, 2001 had an
aggregate liquidation preference equal to its $306 million aggregate redemption
value and a mandatory redemption date of February 15, 2007. The Series D
Preferred Stock outstanding at December 31, 2001 is convertible into 15,407,704
shares of common stock at a conversion price of $19.83 per share.

The Series D Preferred Stock is non-voting, unless Loral does not pay
dividends for six consecutive quarters, and with respect to dividend rights and
rights upon liquidation, winding up and dissolution, ranks pari passu with
Loral's Series C Preferred Stock and all other existing and future series of
preferred stock of Loral and senior to Loral common stock. The Series D
Preferred Stock is redeemable in cash, Loral common stock
F-28

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. SHAREHOLDERS' EQUITY -- (CONTINUED)

or a combination thereof, at the option by the Company, on the mandatory
redemption date. The number of shares of the Company's common stock to be issued
on redemption is based on the aggregate redemption value divided by the average
of the volume weighted average daily price of the Company's common stock for the
10 trading-day period ending on the second business day prior to the redemption
date (approximately $2.26 per share at December 31, 2001). The exact number of
shares of the Company's common stock that may be issued on a mandatory
redemption date cannot be determined at this time. That number will depend on a
number of factors not known today, such as the price of the Company's common
stock and the number of shares of the Company's preferred stock outstanding at
that time.

Series C and Series D Preferred Stock Exchange Offers

On April 16, 2001, the Company completed exchange offers for its Series C
Preferred Stock and its Series D Preferred Stock. As a result, 3.7 million
shares of its Series C Preferred Stock and 1.9 million shares of its Series D
Preferred Stock were tendered and exchanged (representing approximately 27% and
24%, respectively, of the outstanding shares of the two issues) into 30.9
million shares of the Company's common stock. Loral incurred non-cash dividend
charges in the second quarter of 2001 of approximately $29 million, which
primarily relates to the difference between the value of the common stock issued
in the exchange offers and the value of the shares that were issuable under the
stated conversion terms of the preferred stock. The non-cash dividend charges
had no impact on Loral's total shareholders' equity as the offset was an
increase in common stock and paid-in capital. In addition, Loral will save
approximately $17 million annually in preferred dividend payments and will avoid
approximately $277 million in mandatory redemptions in 2006 and 2007.

Stock Plans

On April 18, 2000, the Board of Directors of Loral approved a new stock
option plan (the "2000 Plan") in order to provide an inducement to attract and
retain the services of qualified employees. The 2000 Plan is intended to
constitute a "broadly-based plan" as defined in Section 312.04(h) of the New
York Stock Exchange ("NYSE") Listed Company Manual, which provides that at least
50% of grants thereunder exclude senior management. The 2000 Plan provides for
the grant of non-qualified stock options only. As of December 31, 2001, up to 37
million shares of common stock may be issued under the 2000 Plan, of which
approximately 30.3 million options at a weighted average exercise price of $3.31
per share were outstanding as of December 31, 2001. Employees of Loral, its
subsidiaries and affiliates are eligible to participate in the 2000 Plan. Such
options become exercisable as determined by the Board, generally over three
years, and generally expire no more than 10 years from the date of the grant.
The 2000 Plan (but not outstanding options) will terminate on the tenth
anniversary of its adoption.

In April 1996, Loral established the 1996 Stock Option Plan. An aggregate
of 18 million shares of common stock have been reserved for issuance, of which
approximately 16.6 million options at a weighted average exercise price of
$12.52 per share were outstanding as of December 31, 2001. Under this plan,
options are granted at the discretion of the Company's Board of Directors to
employees of the Company and its affiliates. Such options become exercisable as
determined by the Board, generally over three to five years, and generally
expire no more than 10 years from the date of the grant.

In connection with the acquisition of Loral Orion, Loral assumed the
unvested employee stock options of Loral Orion.

SFAS 123 requires the disclosure of pro forma net (loss) and (loss) per
share as though the Company had adopted the fair value method. Under SFAS 123,
the fair value of stock-based awards to employees is calculated through the use
of option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's

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LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. SHAREHOLDERS' EQUITY -- (CONTINUED)

calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, six to twelve months
following vesting; stock volatility, 75% in 2001, 45% in 2000 and 30% in 1999;
risk free interest rate, 4.0% to 6.6% based on date of grant; and no dividends
during the expected term. The Company's calculations are based on a multiple
option valuation approach and forfeitures are recognized as they occur. If the
computed fair values of employee awards had been amortized to expense over the
vesting period of the awards, pro forma net (loss) before extraordinary gain and
cumulative effect of change in accounting principle and related (loss) per share
would have been $(234.0) million or $(0.72) per diluted share, respectively, in
2001. If the computed fair values of employee awards had been amortized to
expense over the vesting period of the awards, pro forma net (loss) applicable
to common stockholders and related (loss) per share would have been $(292.7)
million or $(0.90) per diluted share, $(1.55) billion or $(5.25) per diluted
share, and $(254.7) million or $(0.88) per diluted share in 2001, 2000 and 1999,
respectively.

A summary of the status of the Company's stock option plans as of December
31, 2001, 2000 and 1999 and changes during the periods then ended is presented
below:

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LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. SHAREHOLDERS' EQUITY -- (CONTINUED)

The following table summarizes information about Loral's outstanding stock
options at December 31, 2001:

All options granted during 2001 and 2000 were non-qualified stock options.
As of December 31, 2001, 7,233,321 shares of common stock were available for
future grant under the plans.

11. PENSIONS AND OTHER EMPLOYEE BENEFITS

Pensions

The Company maintains a pension plan and a supplemental retirement plan.
These plans are defined benefit pension plans and members in certain locations
may contribute to the pension plan in order to receive enhanced benefits.
Eligibility for participation in these plans vary and benefits are based on
members' compensation and/or years of service. None of the employees associated
with the acquisition of Loral Orion were transferred into these plans. The
Company's funding policy is to fund the pension plan in accordance with the
Internal Revenue Code and regulations thereon and to fund the supplemental
retirement plan on an actuarial basis, including service cost and amortization
amounts. Plan assets are generally invested in U.S. government and agency
obligations and listed stocks and bonds.

Other Benefits

In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees and dependents.
Participants are eligible for these benefits when they retire from active
service and meet the eligibility requirements for the Company's pension plan.
These benefits are funded primarily on a pay-as-you-go basis, with the retiree
generally paying a portion of the cost through contributions, deductibles and
coinsurance provisions.

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LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED)

The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for 2001 and 2000, and a statement
of the funded status as of December 31, 2001 and 2000, respectively.

The following table provides the details of the net pension
asset/(liability) recognized in the balance sheet as of December 31, 2001 and
2000, respectively (in thousands):

The Company has a supplemental retirement plan, which has an accumulated
benefit obligation in excess of plan assets. The accumulated benefit obligation
was $25.4 million and $25.2 million and the fair value of plan assets was $10.0
million and $9.4 million, as of December 31, 2001 and 2000, respectively.

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LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED)

The following table provides the components of net periodic (benefit) cost
for the plans for 2001, 2000 and 1999, respectively (in thousands):

The principal actuarial assumptions were:

Actuarial assumptions used a health care cost trend rate of 8.50%
decreasing gradually to 4.50% by 2005. Assumed health care cost trend rates have
a significant effect on the amounts reported for the health care plans. A 1%
change in assumed health care cost trend rates for 2001 would have the following
effects:

Employee Savings Plan

The Company has an employee savings plan, which provides that the Company
match the contributions of participating employees up to a designated level.
Under this plan, the matching contributions in Loral common stock or cash were
$6.7 million, $6.2 million and $7.0 million in 2001, 2000 and 1999,
respectively.

12. FINANCIAL INSTRUMENTS, DERIVATIVE INSTRUMENTS AND HEDGING

Financial Instruments

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
fair value:

The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments. The fair value of the
investments in available-for-sale securities are based on market quotations or,
for the Companys investment in Globalstar's $500 million credit facility, the
quoted market price of Globalstar's public debt securities (see Note 7). The
fair value of the Company's long-term debt is

F-33

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. FINANCIAL INSTRUMENTS, DERIVATIVE INSTRUMENTS AND HEDGING -- (CONTINUED)

based on carrying value for those obligations that have short-term variable
interest rates on the outstanding borrowings and quoted market prices for
obligations with long-term or fixed interest rates.

The estimated fair values of the Company's financial instruments are as
follows (in thousands):

The fair value of the investments in available-for-sale securities includes
unrealized gains of $32 million and $50 million as of December 31, 2001 and
2000, respectively, which relates to the Company's investment in Globalstar's
$500 million credit facility (see Note 3). Approximately $291 million of the
difference between the carrying amount and the fair value of the long-term debt
as of December 31, 2001 is attributable to the accounting for the Loral Orion
exchange offers (see Note 8).

Foreign Currency

The Company, in the normal course of business, is subject to the risks
associated with fluctuations in foreign currency exchange rates. Loral routinely
enters into forward exchange contracts to establish with certainty the U.S.
dollar amount of future anticipated cash receipts and payments and firm
commitments for cash payments denominated in a foreign currency. The primary
business objective of this hedging program is to minimize the gains and losses
resulting from exchange rate changes. As of December 31, 2001, the Company had
foreign currency exchange contracts (forwards) with several banks to purchase
and sell foreign currencies, primarily Japanese yen, with aggregate notionals of
$176.1 million. Such contracts were designated as hedges of certain foreign
contracts and subcontracts to be performed by SS/L through May 2006. The fair
value of these forward contracts based on quoted market prices as of December
31, 2001 and 2000 was $20.0 million and $6.4 million, respectively.

The Company is exposed to credit-related losses in the event of
non-performance by counter parties to these financial instruments, but does not
expect any counter party to fail to meet its obligation. The maturity of foreign
currency exchange contracts held as of December 31, 2001 is consistent with the
contractual or expected timing of the transactions being hedged, principally
receipt of customer payments under long-term contracts and payments to vendors
under subcontracts. These foreign exchange contracts mature as follows (in
thousands):

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LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. FINANCIAL INSTRUMENTS, DERIVATIVE INSTRUMENTS AND HEDGING -- (CONTINUED)

Loral does not enter into foreign currency transactions for trading or
speculative purposes. Loral attempts to limit our exposure to credit risk by
executing foreign contracts with high-quality financial institutions.

Derivative Instruments and Hedging

On January 1, 2001, the Company adopted SFAS 133, which requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives that do not qualify, or are not
effective as hedges, must be recognized currently in earnings. Upon adoption,
the Company recorded a $1.7 million reduction in net income, net of tax, and a
$1.2 million increase in other comprehensive income ("OCI"), net of tax,
relating to the cumulative effect of the change in adopting this new accounting
principle. The Company recorded these adjustments to recognize the fair value of
foreign currency forward contracts that qualify as derivatives under SFAS 133
and to recognize the fair value of firm commitments designated as hedged items
in fair value hedge relationships. Furthermore, the transition adjustments
reflect the derecognition of any deferred gains or losses recorded on the
balance sheet prior to the effective date of SFAS No. 133 on foreign exchange
contracts designated as hedges of foreign currency exposures on long-term
construction contracts in process.

Foreign Exchange Exposure Management

The Company enters into long-term construction contracts with customers and
vendors, some of which are denominated in foreign currencies, and hedges
substantially all of the foreign currency risks with foreign currency exchange
contracts (forwards) with maturities matching the expected cash flows.
Derivatives are used to eliminate, reduce, or transfer substantially all foreign
currency risks that can be identified and quantified in order to minimize the
risk of foreign exchange rate fluctuations to operating results and cash flows.
Hedges of expected foreign currency denominated contract revenues and related
purchases are designated and documented at inception as cash flow hedges,
evaluated for effectiveness at least quarterly, and have maturities through
2006. As the critical terms of the currency exchange contracts and expected cash
flows from long-term construction contracts are matched at hedge inception,
currency exchange contract effectiveness is calculated by comparing the fair
value of the derivative to the change in value of the expected cash flow, with
the effective portion of highly effective hedges reflected on the balance sheet
and accumulated in OCI. Forward points are excluded from effectiveness testing
on derivatives that are adjusted due to accelerated or delayed cash flows within
the contract. OCI associated with hedges of foreign currency contract revenues
and costs are reclassified to revenue and cost of sales, respectively, based on
a percentage of contract completion, while gains and losses associated with
hedges of receivables and payables are reclassified to interest income or
expense.

The Company also enters into firm commitments with unrelated parties to
purchase required component and subassembly inventory from vendors, some of
which are denominated in foreign currencies, and hedges substantially all of the
foreign currency risk with foreign currency forward contracts or, for short
periods, with

F-35

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. FINANCIAL INSTRUMENTS, DERIVATIVE INSTRUMENTS AND HEDGING -- (CONTINUED)

foreign currency balances. Hedges of firm commitments are designated and
documented at inception as fair value hedges and evaluated for effectiveness at
least quarterly. As the critical terms of the forward contracts and firm
commitments are matched at hedge inception, forward contract effectiveness is
calculated by comparing the fair value of the derivative to the change in value
of the expected inventory purchase. Forward points are excluded from
effectiveness testing on hedges that are adjusted due to accelerated or delayed
payments and cash balances. Changes in the value of both highly effective hedges
and the designated firm commitment are reflected on the balance sheet and
recognized currently in interest income or expense.

Ineffectiveness from all hedging activity was immaterial for the year ended
December 31, 2001. For the year ended December 31, 2001, SS/L recognized charges
of $0.7 million for hedges that no longer qualify as fair value hedges and $1.5
million for excluded forward points on accelerated or delayed cash flows, which
were recorded as interest expense.

Unrealized Net Gains on Derivatives

The following table summarizes the activity in OCI (net of taxes) related
to derivatives classified as cash flow hedges for the year ended December 31,
2001 (in thousands):

Cumulative transition adjustment on January 1, 2001......... $ 1,220
Net increase in foreign currency exchange contracts......... 13,125
Reclassifications into revenue and cost of sales from OCI... (10,983)
--------
Unrealized net gains on derivatives at December 31, 2001.... $ 3,362
========

As of December 31, 2001, the Company anticipates reclassifying $2.1 million
of the balance in OCI to earnings in the next twelve months.

13. COMMITMENTS AND CONTINGENCIES

The Company had outstanding letters of credit of approximately $30 million
and $31 million as of December 31, 2001 and 2000, respectively.

Due to the long lead times required to produce purchased parts and launch
vehicles, the Company has entered into various purchase commitments with
suppliers. These commitments aggregated approximately $397 million as of
December 31, 2001, and primarily related to satellite backlog. The commitments
included for launch vehicles represent minimum amounts due if the contract is
terminated, net of deposits which the Company believes can be offset against
these minimum amounts. The aggregate maturities of these commitments for 2002
through 2006 are as follows (in millions): $247.7, $27.0, zero, zero, and $38.4.
Additional amounts will be incurred upon utilization of launch vehicles.

Loral Skynet has entered into prepaid leases and sales contracts relating
to transponders on its satellites. Under the terms of these agreements, Loral
Skynet continues to operate the satellites which carry the transponders and
originally provided for a warranty for a period of 10 to 14 years, in the case
of sales contracts (twelve transponders), and the lease term, in the case of the
prepaid leases (nine transponders). Depending on the contract, Loral Skynet may
be required to replace transponders which do not meet operating specifications.
All customers are entitled to a refund equal to the reimbursement value if there
is no replacement, which is normally covered by insurance. In the case of the
sales contracts, the reimbursement value is based on the original purchase price
plus an interest factor from the time the payment was received to acceptance of
the transponder by the customer, reduced on a straight-line basis over the
warranty period. In the case of prepaid leases, the reimbursement value is equal
to the unamortized portion of the lease prepayment made by the customer.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

Twelve of the satellites built by SS/L and launched since 1997, five of
which are owned and operated by Loral's subsidiaries or affiliates, have
experienced minor losses of power from their solar arrays. Although to date,
neither the Company nor any of the customers using the affected satellites have
experienced any degradation in performance, there can be no assurance that one
or more of the affected satellites will not experience additional power loss
that could result in performance degradation, including loss of transponder
capacity. In the event of additional power loss, the extent of the performance
degradation, if any, will depend on numerous factors, including the amount of
the additional power loss, the level of redundancy built into the affected
satellite's design, when in the life of the affected satellite the loss occurred
and the number and type of use being made of transponders then in service. A
complete or partial loss of satellites could result in a loss of orbital
incentive payments and, in the case of satellites owned by Loral subsidiaries
and affiliates, a loss of revenues and profits. With respect to satellites under
construction and construction of new satellites, based on its investigation of
the matter, SS/L has identified and is implementing remedial measures that SS/L
believes will prevent newly launched satellites from experiencing similar
anomalies. SS/L does not expect that implementation of these measures will cause
any significant delay in the launch of satellites under construction or
construction of new satellites. Based upon information currently available,
including design redundancies to accommodate small power losses and that no
pattern has been identified as to the timing or specific location within the
solar arrays of the failures, the Company believes that this matter will not
have a material adverse effect on the consolidated financial position or results
of operations of Loral.

In September 2001, the PAS 7 satellite built by SS/L for PanAmSat
experienced an electrical power failure on its solar arrays that resulted in the
loss of use of certain transponders on the satellite. As a result, PanAmSat has
claimed that under its contract with SS/L it is entitled to be paid $16 million.
SS/L disputes this claim. SS/L believes that this failure is an isolated event
and does not reflect a systemic problem in either the satellite design or
manufacturing process. Accordingly, SS/L does not believe that this anomaly will
affect other on-orbit satellites built by SS/L. However, in connection with the
renewal of the insurance for the Telstar 10/Apstar IIR satellite in October
2001, the insurance underwriters have excluded losses due to solar array
failures, since Telstar 10/Apstar IIR was manufactured by SS/L and has the same
solar array configuration as PAS 7. Loral is currently in discussions with its
insurers to remove this exclusion from the Telstar 10/Apstar IIR policy, in
return for a deductible for losses arising from electrical problems on the
satellite's solar arrays. There can be no assurance that these discussions will
be successful. Three other satellites operated by Loral Skynet have the same
solar array configuration as Telstar 10/Apstar IIR. There can be no assurance
that the insurers will not require similar exclusions in connection with
renewals of insurance for these satellites in 2003 and 2004. In addition, the
PAS 8 satellite has experienced minor losses of power from its solar arrays, the
cause of which is unrelated to the loss of power on the PAS 7 satellite.
PanAmSat has claimed that under its contract with SS/L it is entitled to be paid
$7.5 million as a result of these minor power losses. SS/L disputes this claim.
SS/L and PanAmSat are in discussions to resolve this matter.

SS/L has contracted to build a spot beam, Ka band satellite for a customer
planning to offer broadband data services directly to the consumer. The customer
has failed to make certain payments due to SS/L under the contract and has
asserted that SS/L is not able to meet the contractual delivery date for the
satellite. As of December 31, 2001, SS/L had billed and unbilled accounts
receivable and vendor financing arrangements of $47 million with this customer.
SS/L and the customer have entered into an agreement that provides that, until
May 1, 2002, neither party will assert that the other party is in default under
the contract, and the parties are currently engaged in discussions to resolve
their outstanding issues. In addition, SS/L and the customer have agreed to
suspend work on the satellite during these discussions, pending the outcome of
the discussions. If the parties do not resolve their issues, it is likely that
each party would assert that the other is in default. The contract provides that
SS/L may terminate the contract for a customer default 90 days after serving a
notice of default if the default is not cured by the customer; upon such a
default, SS/L would be entitled to recover
F-37

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

the contractually agreed price of items delivered and accepted prior to
termination and 115% of its actual costs incurred for items not delivered prior
to termination. The contract also provides that the customer may terminate the
contract for an SS/L default 133 days after serving a notice of default if the
default is not cured by SS/L; upon such a default, SS/L would be obligated to
refund all amounts previously paid by the customer, $78 million as of December
31, 2001, plus interest. Based on the discussions currently in progress with the
customer and other parties who may be interested in the satellite, management's
assessment of the market opportunities for the satellite and consideration of
the satellite's estimated value, management does not believe that this matter
will have a material adverse effect on the consolidated financial position or
results of operations of Loral.

SS/L was a party to an Operational Agreement with Alcatel Space Industries,
pursuant to which the parties had agreed to cooperate on certain satellite
programs, and an Alliance Agreement with Alcatel Space together with Alcatel
Space Industries, Alcatel, pursuant to which Alcatel had certain rights with
respect to SS/L, including the right to appoint two representatives to SS/L's
seven-member board of directors, rights to approve certain extraordinary actions
and certain rights to purchase SS/L shares at fair market value in the event of
a change of control (as defined) of either Loral or SS/L. The agreements between
Alcatel and SS/L were terminable on one year's notice, and, on February 22,
2001, Loral gave notice to Alcatel that they would expire on February 22, 2002.
In April 2001, Alcatel commenced an arbitration proceeding challenging the
effectiveness of Loral's notice of termination and asserting various alleged
breaches of the agreements by SS/L relating to the exchange of information and
other procedural or administrative matters. In February 2002, the arbitral
tribunal upheld the validity of Loral's termination effective February 22, 2002
and Alcatel's claims as to certain breaches. The arbitral tribunal has provided
both parties with an opportunity to file any additional claims or counterclaims
they may have. In March 2002, Alcatel submitted additional claims against Loral
and SS/L and is seeking at least $330 million in damages in respect of all of
its claims. We believe that Alcatel's claims for damages are without merit and
have been asserted for competitive reasons to disadvantage SS/L and that this
matter will not have a material adverse effect on our consolidated financial
position or results of operations. Loral and SS/L will have the opportunity and
intend to assert counterclaims against Alcatel in April 2002. The arbitral
tribunal will decide at a later date whether any of Alcatel's claims or Loral's
or SS/L's counterclaims give rise to damages.

The launch of ChinaSat-8 has been delayed pending SS/L's obtaining the
approvals required for the launch. On December 23, 1998, the Office of Defense
Trade Controls, or ODTC, of the U.S. Department of State temporarily suspended a
previously approved technical assistance agreement under which SS/L had been
preparing for the launch of the ChinaSat-8 satellite. In addition, SS/L was
required to re-apply for new export licenses from the State Department to permit
the launch of ChinaSat-8 on a Long March launch vehicle when the old export
licenses issued by the Commerce Department, the agency that previously had
jurisdiction over satellite licensing, expired in March 2000. On January 4,
2001, the ODTC, while not rejecting these license applications, notified SS/L
that they were being returned without action. On January 9, 2002, Loral, SS/L
and the United States Department of State entered into a consent agreement (the
"Consent Agreement") settling and disposing of all civil charges, penalties and
sanctions associated with alleged violations by SS/L of the Arms Export Control
Act and its implementing regulations. The conduct that gave rise to the alleged
violations occurred in connection with the participation of certain SS/L
employees on an independent review committee formed in the wake of a 1996 crash
of a Long March rocket in China, the purpose of which was to consider whether
studies of the crash made by the Chinese had correctly identified the cause of
the failure. Loral has been informed that the Justice Department has terminated
its investigation of SS/L relating to this matter and has declined to pursue the
matter further. The Consent Agreement provides that SS/L will pay the State
Department a civil penalty totaling $14 million over seven years, without
interest, the present value of which ($12 million) is reflected as a charge to
Loral's earnings in the fourth quarter of 2001. The Consent Agreement also
assesses an additional penalty of $6 million, which is
F-38

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

suspended on the condition that Loral and SS/L apply this amount over the next
seven years towards the implementation of export control compliance measures.
The Consent Agreement provides that the State Department agrees, assuming the
Company's and SS/L's faithful adherence to the terms of the consent agreement,
and the Arms Export Control Act and its implementing regulations, that decisions
concerning export licenses for the ChinaSat-8 spacecraft will be made on the
basis of the security and foreign policy interests of the United States,
including matters relating to U.S. relations with the People's Republic of
China, without reference to the State Department's previously expressed concerns
regarding SS/L's reliability, which concerns are considered to be appropriately
mitigated through the operation of various provisions of the consent agreement.
Discussions between SS/L and the State Department regarding SS/L's obtaining the
approvals required for the launch of ChinaSat-8 are continuing.

In December 1999, SS/L reached an agreement with ChinaSat to extend the
date for delivery of the ChinaSat-8 satellite to July 31, 2000. In return for
this extension and other modifications to the contract, SS/L provided to
ChinaSat three transponders on Telstar 10/Apstar IIR for ChinaSat's use for the
life of those transponders. As a result, the Company recorded a charge to
earnings of $35 million in 1999. If ChinaSat were to terminate its contract with
SS/L as a result of these delays, SS/L may have to refund $134 million in
advances received from ChinaSat and may incur penalties of up to $11 million and
believes it would incur costs of approximately $38 million to refurbish and
retrofit the satellite so that it could be sold to another customer, which
resale cannot be guaranteed. To the extent that SS/L is able to recover some or
all of its $52 million deposit payment on the Chinese launch vehicle, this
recovery would offset a portion of such payments. There can be no assurance,
however, that SS/L will be able either to obtain a refund from the launch
provider or to find a replacement customer for the Chinese launch vehicle.

SS/L is required to obtain licenses and enter into technical assistance
agreements, presently under the jurisdiction of the State Department, in
connection with the export of satellites and related equipment, as well as
disclosure of technical data to foreign persons. Delays in obtaining the
necessary licenses and technical assistance agreements may result in the
cancellation of, or delay SS/L's performance on, existing contracts, and, as a
result, SS/L may incur penalties or lose incentive payments under these
contracts.

Under an agreement reached with Eutelsat, Loral Orion agreed to operate
Telstar 12, which was originally intended to operate at 12 degrees W.L., at 15
degrees W.L. while Eutelsat continued to develop its services at 12.5 degrees
W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot
and will assert its priority rights over such location on Loral Orion's behalf.
As part of this coordination effort, Loral Orion agreed to provide to Eutelsat
four transponders on Telstar 12 for the life of the satellite and has retained
risk of loss with respect to such transponders. Eutelsat also has the right to
acquire, at cost, four transponders on the next replacement satellite for
Telstar 12. As part of the international coordination process, Loral continues
to conduct discussions with various administrations regarding Telstar 12's
operations at 15 degrees W.L. If these discussions are not successful, Telstar
12's useable capacity may be reduced.

The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, that arise in the ordinary course of business.
Although the outcome of these claims cannot be predicted with certainty, the
Company does not believe that any of these other existing legal matters will
have a material adverse effect on its consolidated financial position or results
of operations.

Globalstar Related Matters. On September 26, 2001, the nineteen separate
purported class action lawsuits filed in the United States District Court for
the Southern District of New York by various holders of securities of Globalstar
Telecommunications Limited ("GTL") and Globalstar, L.P. ("Globalstar") against
GTL, Loral, Bernard L. Schwartz and other defendants were consolidated into one
action titled In re: Globalstar Securities Litigation. In November 2001,
plaintiffs in the consolidated action filed a consolidated amended class action
complaint against Globalstar, GTL, Globalstar Capital Corporation, Loral and
Bernard

F-39

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

L. Schwartz alleging (a) that all defendants (except Loral) violated Section
10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5
promulgated thereunder, by making material misstatements or failing to state
material facts about Globalstar's business and prospects, (b) that defendants
Loral and Schwartz are secondarily liable for these alleged misstatements and
omissions under Section 20(a) of the Exchange Act as alleged "controlling
persons" of Globalstar, (c) that defendants GTL and Schwartz are liable under
Section 11 of the Securities Act of 1933 (the "Securities Act") for untrue
statements of material facts in or omissions of material facts from a
registration statement relating to the sale of shares of GTL common stock in
January 2000, (d) that defendant GTL is liable under Section 12(2)(a) of the
Securities Act for untrue statements of material facts in or omissions of
material facts from a prospectus and prospectus supplement relating to the sale
of shares of GTL common stock in January 2000, and (e) that defendants Loral and
Schwartz are secondarily liable under Section 15 of the Securities Act for GTL's
primary violations of Sections 11 and 12(2)(a) of the Securities Act as alleged
"controlling persons" of GTL. The class of plaintiffs on whose behalf the
lawsuit has been asserted consists of all buyers of securities of Globalstar,
Globalstar Capital and GTL during the period from December 6, 1999 through
October 27, 2000, excluding the defendants and certain persons related or
affiliated therewith. On February 25, 2002, Loral and Mr. Schwartz filed a
motion to dismiss the amended complaint in its entirety as to Loral and Mr.
Schwartz.

On March 2, 2001, the seven separate purported class action lawsuits filed
in the United States District Court for the Southern District of New York by
various holders of common stock of Loral Space & Communications Ltd. ("Loral")
against Loral, Bernard L. Schwartz and Richard Townsend were consolidated into
one action titled In re: Loral Space & Communications Ltd. Securities
Litigation. The lead plaintiff has been granted until April 18, 2002 to serve a
consolidated amended class action complaint. The class of plaintiffs on whose
behalf the lawsuit has been asserted consists of all buyers of Loral common
stock during the period from November 4, 1999 through February 1, 2001,
excluding the defendants and certain persons related or affiliated therewith.
The original complaints alleged (a) that the defendants violated Section 10(b)
of the Exchange Act and Rule 10b-5 promulgated thereunder, by making material
misstatements or failing to state material facts about Globalstar's and Loral's
business and prospects, and (b) that Messrs. Schwartz and Townsend are
secondarily liable for these alleged misstatements and omissions under Section
20(a) of the Exchange Act as alleged "controlling persons" of Loral.

Loral believes that it has meritorious defenses to the above Globalstar
related class action lawsuits and intends to pursue them vigorously.

Loral holds debt obligations from Globalstar (see Note 7). Globalstar's
proposed restructuring plan, which will be submitted to and subject to
bankruptcy court approval, contemplates the creation of a new company, which
will initially be owned by Globalstar's existing noteholders and other unsecured
creditors, including Loral. In other situations in the past, challenges have
been initiated seeking subordination or recharacterization of debt held by an
affiliate of an issuer. While Loral knows of no reason why such a claim would
prevail with respect to the debt Loral holds in Globalstar, there can be no
assurance that such claims will not be made in Globalstar's bankruptcy
proceeding. If such claims were to prove successful, it will jeopardize the
amount of equity interest Loral will ultimately receive in the new Globalstar
company. Moreover, actions may be initiated in Globalstar's bankruptcy
proceeding seeking to characterize payments previously made by Globalstar to
Loral prior to the filing date as preferential payments subject to repayment.
Loral may also find itself subject to other claims brought by Globalstar
creditors and securities holders, who may seek to impose liabilities on Loral as
a result of our relationship with Globalstar. For instance, Globalstar's
creditors may seek to pierce the corporate veil in an attempt to recover
Globalstar obligations owed to them that are recourse to Loral's subsidiaries,
which are general partners in Globalstar and have filed for bankruptcy
protection. Globalstar's cumulative partners deficit at September 30, 2001, was
$2.81 billion. Globalstar's proposed restructuring plan contemplates that mutual
releases of claims related to Globalstar

F-40

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

would be granted to and by various persons, including, among others, Loral and
its affiliates, Globalstar, Globalstar's officers and directors, Globalstar
partners, service providers acquired by Globalstar and the members of any
official and informal committee of creditors. There can be no assurance that
these releases will be approved by the bankruptcy court or, if approved, as to
the scope of any releases finally obtained.

In May 2000, Globalstar finalized $500 million of vendor financing
arrangements with Qualcomm. The original terms of this vendor financing provided
for interest at 6%, a maturity date of August 15, 2003 and required repayment
pro rata with the term loans due to Loral under Globalstar's $500 million credit
facility. As of December 31, 2001, $608 million was outstanding under this
facility (including $108 million of capitalized interest).

Loral has agreed that if the principal amount outstanding under the
Qualcomm vendor financing facility exceeds the principal amount due Loral under
Globalstar's $500 million credit facility, as determined on certain measurement
dates, then Loral will guarantee 50% of such excess amount. As of December 31,
2001, Loral had no guarantee obligation.

Lease Arrangements

The Company leases certain facilities, equipment and transponder capacity
under agreements expiring at various dates. Certain leases covering facilities
contain renewal and or purchase options which may be exercised by the Company.
Rent expense, net of sublease income of $4.3 million, $4.7 million and $4.5
million, was $62.9 million, $62.7 million and $39.8 million in 2001, 2000 and
1999, respectively.

Future minimum payments, by year and in the aggregate, under operating
leases with initial or remaining terms of one year or more consisted of the
following as of December 31, 2001 (in thousands):

2002........................................................ $ 67,472
2003........................................................ 45,428
2004........................................................ 32,096
2005........................................................ 29,277
2006........................................................ 27,477
Thereafter.................................................. 145,646
--------
$347,396
========

Future minimum payments have been reduced by minimum sublease rentals of
$5.4 million due in the future under non-cancelable subleases.

F-41

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. RELATED PARTY TRANSACTIONS

In connection with contract performance, Loral provided services to and
acquired services from Lockheed Martin. A summary of such transactions and
balances as of December 31, 2001 and 2000, and for the three years in the period
ended December 31, 2001, respectively, is as follows (in thousands):

Loral's sales to, purchases from, and balances with three international
aerospace and communications companies (including Alcatel), including the effect
of the related party transactions in Note 7, as of December 31, 2001 and 2000,
and for the three years ended December 31, 2001, respectively, were as follows
(in thousands):

15. LOSS PER SHARE

Basic loss per share is computed based upon the weighted average number of
shares of common stock and the Series A Preferred Stock outstanding. Diluted
loss per share excludes the assumed conversion of the Series C Preferred Stock
and the Series D Preferred Stock (see Note 10), as their effect would have been
antidilutive in 2001, 2000 and 1999, respectively. For 2001, 2000 and 1999,
weighted options equating to approximately 0.4 million, 0.3 million and 1.2
million shares of common stock, respectively, as calculated using the treasury
stock method, were excluded from the calculation of diluted loss per share, as
the effect would have been antidilutive.

F-42

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. LOSS PER SHARE -- (CONTINUED)

The following table sets forth the computation of basic and diluted loss
per share:

The extraordinary gain on debt exchanges decreased the Company's loss per
share calculation by $0.07 per share to $(0.86) per share for the year ended
December 31, 2001 (see Note 8).

The cumulative effect of the change in accounting principle did not affect
the Company's loss per share calculation (see Note 12).

16. SEGMENTS

Loral is organized into three operating businesses: fixed satellite
services, satellite manufacturing and technology and data services (see Note 1).

In evaluating financial performance, management uses revenues and earnings
before interest, taxes, depreciation and amortization ("EBITDA") as the measure
of a segment's profit or loss. Segment results include the results of its
subsidiaries and its affiliates, Satmex, Europe*Star and XTAR, which are
accounted for using the equity method in these consolidated financial
statements. Intersegment revenues primarily consist of satellites under
construction by satellite manufacturing and technology for fixed satellite
services and the leasing of transponder capacity by satellite manufacturing and
technology and data services from fixed satellite services. The accounting
policies of the reportable segments are the same as those described in Note 2.
In 2001, the Company no longer considered global mobile telephone service to be
a reportable segment and has excluded it from its segment presentation and
restated the information for 2000 and 1999 accordingly.

F-43

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. SEGMENTS -- (CONTINUED)

Summarized financial information concerning the reportable segments is as
follows (in millions):

2001 SEGMENT INFORMATION

- ---------------

(1) Includes 100% of Europe*Star's and Satmex's revenues and EBITDA (Europe*Star
commenced revenue service in 2001) and 100% of XTAR's EBITDA since July
2001. Also includes Loral's subsidiary, Loral Skynet do Brasil since
November 2000. For the year ended December 31, 1999, Satmex's results
include $25.5 million in revenues and $11.2 million in EBITDA, respectively,
from the sale by Satmex of transponders to Loral Skynet.

(2) Satellite manufacturing and technology consists of 100% of SS/L's results.

(3) Data services consists of 100% of CyberStar LP (in which Loral owns an 82%
equity interest) and 100% of Loral Orion's data services business, which
business was transferred in December 2001 to a Loral subsidiary which
assumed the name Loral CyberStar. Equipment sales for data services were
$7.9 million, $16.9 million and $0.6 million in 2001, 2000 and 1999,
respectively.

(4) Represents corporate expenses incurred in support of the Company's
operations.

(5) Represents amounts related to unconsolidated affiliates (Satmex, Europe*Star
and XTAR), which are eliminated in order to arrive at Loral's consolidated
results. Loral's proportionate share of these affiliates is included in
equity in net loss of affiliates in Loral's consolidated statements of
operations.

(6) Represents the elimination of intercompany sales and EBITDA, primarily for
satellites under construction by SS/L for wholly-owned subsidiaries; as well
as eliminating revenues for the lease of transponder capacity by satellite
manufacturing and technology and data services from fixed satellite
services.

(7) EBITDA (which is equivalent to operating income/loss before depreciation and
amortization, including amortization of unearned stock compensation) is
provided because it is a measure commonly used in the communications
industry to analyze companies on the basis of operating performance,
leverage and liquidity and is presented to enhance the understanding of
Loral's operating results. EBITDA is not an alternative to net income as an
indicator of a company's operating performance, or cash flow from operations
as a measure of a company's liquidity. EBITDA may be calculated differently
and, therefore, may not be comparable to similarly titled measures reported
by other companies.

(8) Includes amortization of unearned stock compensation charges.

F-44

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. SEGMENTS -- (CONTINUED)

2000 SEGMENT INFORMATION

F-45

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. SEGMENTS -- (CONTINUED)

1999 SEGMENT INFORMATION

F-46

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. SEGMENTS -- (CONTINUED)

Revenue by Customer Location

The following table presents revenues by country based on customer location
for 2001, 2000 and 1999 (in thousands).

During 2001, one customer of the satellite manufacturing and technology
segment accounted for approximately 14% of Loral's consolidated revenues. During
2000, three customers of the satellite manufacturing and technology segment
accounted for 13%, 12% and 11%, respectively, of Loral's consolidated revenues.
During 1999, three customers of the satellite manufacturing and technology
segment accounted for 25%, 18% and 13%, respectively, of Loral's consolidated
revenues.

With the exception of the Company's satellites in-orbit (see Note 6), the
Company's long-lived assets are primarily located in the United States.

17. FINANCIAL INFORMATION FOR SUBSIDIARY ISSUER AND GUARANTOR AND NON-GUARANTOR
SUBSIDIARIES

Loral is a holding company (the "Parent Company"), which is the ultimate
parent of all Loral subsidiaries. In December 2001, the Company's wholly owned
subsidiary, Loral Orion (the "Subsidiary Issuer"), issued New Senior Notes in an
exchange offer (see Note 8) which are fully and unconditionally guaranteed, on a
joint and several basis, by the Parent Company and one of its wholly-owned
subsidiaries (the "Guarantor Subsidiary").

Presented below is condensed consolidating financial information for the
Parent Company, the Subsidiary Issuer, the Guarantor Subsidiary and the other
wholly-owned subsidiaries (the "Non-Guarantor Subsidiaries") for the years ended
December 31, 2001, 2000 and 1999. The condensed consolidating financial
information has been presented to show the nature of assets held, results of
operations and cash flows of the Parent Company, Subsidiary Issuer, Guarantor
Subsidiary and Non-Guarantor Subsidiaries assuming the expected guarantee
structure of the New Senior Notes was in effect at the beginning of the periods
presented.

The supplemental condensed consolidating financial information reflects the
investments of the Parent Company in the Subsidiary Issuer, the Guarantor
Subsidiary and the Non-Guarantor Subsidiaries using the equity method of
accounting. The Company's significant transactions with its subsidiaries other
than the investment account and related equity in net loss of unconsolidated
subsidiaries are the management fee charged by Loral SpaceCom to the Parent
Company and intercompany payables and receivables between its subsidiaries
resulting primarily from the funding of the construction of satellites for the
fixed satellite services segment. Loral's $200 million note receivable for
unconsolidated subsidiaries is due from Loral Space & Communications Corporation
("LSCC"), bears interest at 8.2% per annum with the final due date being October
1, 2008. Interest payments are deferred until April 1, 2005, when LSCC will
begin to make semi-annual installments of $48 million on the first day of April
and October of each year until the note is paid in full. Loral SpaceCom (a
non-guarantor subsidiary) holds a $29.7 million subordinated note receivable
from the subsidiary issuer. The note is subordinated to all existing and future
indebtedness of the subsidiary issuer and guaranteed by the Parent Company. The
note bears interest at a rate of 10% per annum. All principal and interest on
the note is due at maturity on July 30, 2006.

F-47

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. FINANCIAL INFORMATION FOR SUBSIDIARY ISSUER AND GUARANTOR AND NON-GUARANTOR
SUBSIDIARIES -- (CONTINUED)

LORAL SPACE & COMMUNICATIONS LTD.

CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
(IN THOUSANDS)

F-48

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. FINANCIAL INFORMATION FOR SUBSIDIARY ISSUER AND GUARANTOR AND NON-GUARANTOR
SUBSIDIARIES -- (CONTINUED)

LORAL SPACE & COMMUNICATIONS LTD.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)

F-49

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. FINANCIAL INFORMATION FOR SUBSIDIARY ISSUER AND GUARANTOR AND NON-GUARANTOR
SUBSIDIARIES -- (CONTINUED)

LORAL SPACE & COMMUNICATIONS LTD.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)

F-50

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. FINANCIAL INFORMATION FOR SUBSIDIARY ISSUER AND GUARANTOR AND NON-GUARANTOR
SUBSIDIARIES -- (CONTINUED)

LORAL SPACE & COMMUNICATIONS LTD.

CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2000
(IN THOUSANDS)

F-51

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. FINANCIAL INFORMATION FOR SUBSIDIARY ISSUER AND GUARANTOR AND NON-GUARANTOR
SUBSIDIARIES -- (CONTINUED)

LORAL SPACE & COMMUNICATIONS LTD.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)

F-52

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. FINANCIAL INFORMATION FOR SUBSIDIARY ISSUER AND GUARANTOR AND NON-GUARANTOR
SUBSIDIARIES -- (CONTINUED)

LORAL SPACE & COMMUNICATIONS LTD.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)

F-53

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. FINANCIAL INFORMATION FOR SUBSIDIARY ISSUER AND GUARANTOR AND NON-GUARANTOR
SUBSIDIARIES -- (CONTINUED)

LORAL SPACE & COMMUNICATIONS LTD.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)

F-54

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. FINANCIAL INFORMATION FOR SUBSIDIARY ISSUER AND GUARANTOR AND NON-GUARANTOR
SUBSIDIARIES -- (CONTINUED)

LORAL SPACE & COMMUNICATIONS LTD.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)

F-55

LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18. QUARTERLY FINANCIAL INFORMATION (Unaudited, in thousands, except per share
amounts)

- ---------------

(1) The quarterly earnings per share information is computed separately for each
period. Therefore, the sum of such quarterly per share amounts may differ
from the total for the year. The extraordinary gain in the fourth quarter of
2001 reduced the Company's loss per share by $0.07.

(2) The quarter ended September 30, 2000 includes a $33 million after-tax gain
representing Loral's share of Satmex's net insurance recovery on the loss of
a satellite. During the quarter ended December 31, 2000, Loral recorded its
after-tax share of Globalstar's impairment charges amounting to
approximately $882 million or approximately $1.2 billion on a pre-tax basis,
which is included in equity in net loss of affiliates and after-tax
impairment charges related to its investments in and advances to Globalstar
service provider partnerships of approximately $112 million ($125 million
pre-tax).

F-56

INDEPENDENT AUDITORS' REPORT

To the Partners of Globalstar, L.P.:

We have audited the accompanying consolidated balance sheet of Globalstar,
L.P. (a limited partnership) and its subsidiaries (collectively, the
"Partnership") as of December 31, 2000 and the related consolidated statements
of operations, partners' (deficiency) and cash flows for each of the two years
in the period ended December 31, 2000. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Partnership at December 31,
2000 and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 17, the Partnership has filed for reorganization under
Chapter 11 of the Federal Bankruptcy Code. The accompanying consolidated
financial statements do not purport to reflect or provide for the consequences
of the bankruptcy proceedings. In particular, such consolidated financial
statements do not purport to show (a) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities; (b) as to
prepetition liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to partnership
accounts, the effect of any changes that may be made in the capitalization of
the Partnership; or (d) as to operations, the effect of any changes that may be
made in its business.

The accompanying consolidated financial statements have been prepared
assuming that the Partnership will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, uncertainty regarding the
Partnership's ability to raise additional capital raise substantial doubt about
its ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

/s/ DELOITTE & TOUCHE LLP

San Jose, California
March 27, 2001 (March 26, 2002 as
to the 6th paragraph of Note 8 and Note 17)

S-1

GLOBALSTAR, L.P.

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PARTNERSHIP INTERESTS)

See notes to consolidated financial statements.

S-2

GLOBALSTAR, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER ORDINARY PARTNERSHIP INTEREST AMOUNTS)

See notes to consolidated financial statements.

S-3

GLOBALSTAR, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIENCY)
(IN THOUSANDS)

See notes to consolidated financial statements.

S-4

GLOBALSTAR, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

See notes to consolidated financial statements.

S-5

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BUSINESS

Globalstar, L.P. ("Globalstar"), a Delaware limited partnership, was formed
in November 1993, remaining inactive until March 23, 1994, when it received
capital subscriptions for $275 million and commenced operations.

The managing general partner of Globalstar is Loral/QUALCOMM Satellite
Services, L.P. ("LQSS"). The general partner of LQSS is Loral/QUALCOMM
Partnership, L.P. ("LQP"), a Delaware limited partnership comprised of
subsidiaries of Loral Space & Communications Ltd., a Bermuda company (and with
its subsidiaries "Loral") and QUALCOMM Incorporated ("QUALCOMM"). The managing
general partner of LQP is Loral General Partner, Inc. ("LGP"), a subsidiary of
Loral. As of December 31, 2000, Loral owned, directly or indirectly, 25,163,132
(approximately 39%) of the ordinary partnership interests of Globalstar,
including interests attributable to 9,902,990 shares of Globalstar
Telecommunications Limited ("GTL") outstanding common stock.

Globalstar was founded to design, construct and operate a worldwide,
low-earth orbit ("LEO") satellite-based wireless digital telecommunications
system (the "Globalstar System"). The Globalstar System's worldwide coverage is
designed to enable its service providers to extend modern telecommunications
services to millions of people who currently lack basic telephone service and to
enhance wireless communications in areas underserved or not served by existing
or future cellular systems, providing a telecommunications solution in parts of
the world where the build-out of terrestrial systems cannot be economically
justified. On January 31, 1995, the U.S. Federal Communications Commission
("FCC") granted the necessary license to a wholly-owned subsidiary of LQP to
construct, launch and operate the Globalstar System. LQP has agreed to use such
license for the exclusive benefit of Globalstar.

On November 23, 1994, GTL was incorporated as an exempted company under the
Companies Act 1981 of Bermuda. GTL's sole business is acting as a general
partner of Globalstar and its sole assets consist of its equity interests in
Globalstar. The partners in Globalstar have the right to convert their
partnership interests into shares of GTL common stock on an approximate
one-for-four basis following the Full Constellation Date, as defined, of the
Globalstar System and after at least two consecutive reported fiscal quarters of
positive net income, subject to certain annual limitations. As of December 31,
2000, GTL owned 26,668,233 (41.3%) of Globalstar's outstanding ordinary
partnership interests and 100% of the outstanding 8% and 9% convertible
redeemable preferred partnership interests (the "RPPIs").

Globalstar operates in one industry segment, satellite telecommunications,
providing global mobile and fixed wireless voice and data services.

2. BASIS OF PRESENTATION

On January 16, 2001, Globalstar suspended indefinitely principal and
interest payments on its funded debt and dividend payments on its 8% and 9%
RPPIs in order to conserve cash for operations. Non-payment of interest on
Globalstar's debt instruments, credit facility and vendor financing agreements
when they become due, and continuance of non-payment for the applicable grace
period, are "events of default" under the terms of each of the debt instruments.
An event of default has occurred in connection with Globalstar's $500 million
credit facility, its vendor financing facility with QUALCOMM, and its 11 3/8%
senior notes due February 15, 2004 (the "Bond"). Globalstar expects that events
of default will occur with regard to Globalstar's other three senior note
indentures when interest payments become due in May and June of 2001.
Accordingly, for reporting and accounting purposes, Globalstar classified the
$500 million credit facility, the QUALCOMM vendor financing and the four senior
notes as current obligations. See Globalstar's "Notes to Consolidated Financial
Statements," Notes 7-9.

Globalstar has retained The Blackstone Group as its financial adviser to
assist in evaluating its business plan and developing initiatives, including
restructuring its debt, identifying funding opportunities and pursuing

S-6

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

other strategic alternatives. At Globalstar's expense, its bondholders have
retained Akin Gump Strauss Hauer & Field LLP as counsel, and Jefferies and
Company, Inc. as financial advisers. Globalstar is currently developing a new
business plan that will offer a basis for a restructuring proposal that it will
provide to its creditors. If it is unable to effectuate an out-of-court
restructuring, Globalstar may be forced to seek protection under the federal
bankruptcy laws. Moreover, its creditors may seek to initiate involuntary
bankruptcy proceedings against Globalstar.

As of December 31, 2000, Globalstar had approximately $197 million in cash
and cash equivalents, including restricted cash. During 2001, Globalstar plans
to use available funds to cover its cash out flow which it expects to include
operating costs of approximately $94 million, progress payments toward the cost
of procurement of eight additional satellites being constructed by SS/L of
approximately $18 million and for the development and maintenance of the ground
segment by QUALCOMM of $40 million. In addition, Globalstar expects to pay
QUALCOMM approximately $19 million for the reimbursable cost of the production
gateways. These expenditures will be offset by expected receipts of
approximately $25 million from the service providers as reimbursement of
production gateway payments made to QUALCOMM. Moreover, Globalstar expects it
will expend an additional $49 million during 2001 for working capital
requirements and restructuring and refinancing costs, partially offset by
revenue receipts to be collected during the year. These cash requirements assume
no interest, principal or dividend payments on outstanding debt and RPPIs.
Globalstar believes that it has sufficient liquidity to fund its operations
through 2001, exclusive of suspended debt service requirements and distribution
payments on its preferred partnership interests.

Globalstar's announcement in January 2001 of its intention to suspend
payments under its long-term debt obligations and RPPIs, and its difficulty in
securing additional financing raise substantial doubt about its ability to
achieve successful operations. These factors raise doubt regarding Globalstar's
ability to continue as a going concern. The accompanying consolidated financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. Globalstar has incurred cumulative ordinary partnership losses of
$4.46 billion through December 31, 2000, which have been funded primarily
through the issuance of partnership interests and debt by Globalstar.

3. IMPAIRMENT OF GLOBALSTAR SYSTEM

Globalstar's revenue performance during the fourth quarter of 2000 has
caused management, in conjunction with its service provider partners, to perform
a reassessment of its business plan and long term revenue projections. In the
fourth quarter of 2000, Globalstar recorded a $2.9 billion impairment charge
related to the $3.2 billion carrying value of the Globalstar System, including
spare satellites, launch deposits, unsold production gateways, user terminals
and related assets. This charge resulted from the revision of estimates of gross
cash flows through 2009, the estimated end of useful life of the Globalstar
System, and the determination that these assets were impaired. The fair value,
for purposes of measuring the impairment at December 31, 2000, was determined by
discounting these cash flows. Gross cash flows are based on revenue projections
offset by estimated expenditures for operations and capital expenditures.
Revenue projections are based on Globalstar's current market outlook, which is
significantly influenced by service provider projections.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the amounts of expenses reported for the period. Actual results
could differ from estimates.

S-7

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Principles of Consolidation

The consolidated financial statements include the accounts of Globalstar
and its wholly-owned subsidiaries, including Globalstar Capital Corporation. All
intercompany accounts and transactions are eliminated.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and highly liquid
investments with original maturities of three months or less.

Restricted Cash

Restricted cash consists of payments received from service providers for
the purchase of gateways. These funds are restricted and must be remitted to
QUALCOMM in accordance with the gateway purchase agreement between Globalstar
and QUALCOMM (see Note 5).

Concentration of Credit Risk

Financial instruments which potentially subject Globalstar to
concentrations of credit risk are cash and cash equivalents. Globalstar's cash
and cash equivalents are maintained with high-credit-quality financial
institutions. The creditworthiness of such institutions is generally substantial
and management believes that its credit evaluation, approval and monitoring
processes mitigate potential credit risks.

Property and Equipment

Property and equipment are stated at historical cost, less accumulated
depreciation. Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets, as follows:

Globalstar System Up to periods of 10 years from
commencement of service in the first
quarter of 2000
Furniture, fixtures & equipment 3 to 8 years
Leasehold improvements Shorter of lease term or the
estimated useful lives of the
improvements

Globalstar System

The Globalstar System includes costs for the design, manufacture, test,
launch and launch insurance for 52 low-earth orbit satellites, including four
in-orbit spare satellites (the "Space Segment"), and ground and satellite
operations control centers, gateways and user terminals (the "Ground System").

Losses from unsuccessful launches and in-orbit failures of Globalstar's
satellites, net of insurance proceeds, are recorded in the period incurred.

The carrying value of the Globalstar System is reviewed for impairment
whenever events or changes in circumstances indicate that the recorded value of
the Space Segment and Ground Segment, taken as a whole, may not be recoverable.
The Company looks to current and future undiscounted cash flows, excluding
financing costs, as primary indicators of recoverability. If an impairment is
determined to exist, any related impairment loss is calculated based on fair
value (see Note 3).

S-8

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Globalstar System Under Construction

At December 31, 2000, the Globalstar System under construction is comprised
of further expenditures on system software for the improvement of system
functionality. Prior to start of service in the first quarter of 2000, it
included costs for the design, manufacture, test, launch and launch insurance
for 52 low-earth orbit satellites, including four in-orbit spare satellites (the
"Space Segment"), and ground and satellite operations control centers, gateways
and user terminals (the "Ground System") which is now the Globalstar System.

Deferred Financing Costs and Interest

Deferred financing costs represent costs incurred in obtaining long-term
credit facilities and the estimated fair value of warrant agreements issued in
connection with the guarantee of these facilities (see Note 8). Such costs are
being amortized over the terms of the credit facilities as interest. Total
amortization of deferred financing costs for 2000 and 1999 was approximately
$54.9 million and $18.6 million, respectively. Accumulated amortization totaled
$63.9 million and $33.7 million at December 31, 2000 and 1999, respectively.

Interest costs incurred during the construction of the Globalstar System
are capitalized. Total interest costs capitalized in 2000 and 1999 was
approximately $9.8 million and $233.8 million, respectively.

Other Assets

Other assets primarily includes the fair value of warrants issued to China
Telecom (see Note 10), the Elsacom/Yuzhnoye advance, and expenditures, including
license fees, legal fees and direct engineering and other technical support, for
obtaining the required FCC licenses. Such amounts are amortized over periods of
up to 10 years, the expected life of the first generation satellites.
Accumulated amortization totaled $4.1 million at December 31, 2000. Other assets
were written down by $68.5 million as a result of the impairment charge taken in
the fourth quarter of 2000 (see Note 3).

Deferred Revenues

Deferred revenues includes the advance payments from Globalstar's strategic
partners to secure exclusive rights to Globalstar service territories and
pre-committed gross revenue relating to promotional programs. The advance
payments are recoverable by the service providers, through credits against a
portion of the service fees payable to Globalstar, after the commencement of
service. The promotional programs include a 25% discount on mobile usage fees
and free minutes, accumulated based on usage, to service providers for the
advance purchase of airtime. A number of Globalstar service providers have
committed to pre-purchase discounted minutes of use, amounting to approximately
$15.3 million in pre-committed gross revenue ($11.5 million net of 25%
discount), of which $8.8 million had been received as of December 31, 2000. Of
the prepaid committed revenue, $1.0 million has been recognized as of December
31, 2000.

Vendor Financing

Globalstar's contracts with Space Systems/Loral, Inc. ("SS/L"), a
subsidiary of Loral, and QUALCOMM, called for a portion of the contract price to
be deferred as vendor financing and to be repaid, over as long as a five-year
period, commencing upon various dates (see Note 7). Amounts deferred as vendor
financing are recorded as incurred.

Senior Notes Payable

Interest accrues on the $500 million, $325 million, $325 million and $300
million principal amount senior notes at 11 3/8%, 11 1/4%, 10 3/4% and 11 1/2%
per annum, respectively. Globalstar is increasing the carrying value of the
senior notes payable to their ultimate redemption value (see Note 9).

S-9

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Preferred Partnership Distributions

Distributions are accrued on redeemable preferred partnership interests at
the stated rate per annum. Distributions are recorded as reductions against the
ordinary partnership capital accounts (see Note 10).

Stock-Based Compensation

As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") Globalstar accounts for
stock-based awards to employees using the intrinsic value method in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company accounts for stock-based awards to
nonemployees in accordance with SFAS 123 and its interpretations.

Service Revenue

Globalstar provides satellite services under agreements with its service
providers and recognizes revenue as satellite services are provided. Gross
service revenue represents the billable usage at the contracted rate for the
respective services provided. Net service revenue reflects Globalstar's service
revenue after promotions and discounts provided to service providers.

Royalties

Royalty income is comprised of royalty payments for Globalstar user
terminals sold by user terminal manufacturers. Revenue is generally recognized
as units are shipped by the user terminal manufacturers.

Research and Development Expenses

Globalstar's research and development costs, which are expensed as
incurred, were $5.3 million and $94 million in 2000 and 1999, respectively, and
are included in operations expense.

Net Loss Allocation

Net losses are allocated among the partners in proportion to their
percentage interests until the adjusted capital account of a partner is reduced
to zero, then in proportion to, and to the extent of, positive adjusted capital
account balances and then to the general partners.

Net income is allocated among the partners in proportion to, and to the
extent of, the distributions made to the partners from distributable cash flow
for the period, as defined, then in proportion to and to the extent of negative
adjusted capital account balances and then in accordance with percentage
interests.

Under the terms of Globalstar's partnership agreement, adjusted partners'
capital accounts are calculated in accordance with the principles of U.S.
Treasury regulations governing the allocation of taxable income and loss
including adjustments to reflect the fair market value (including intangibles)
of partnership assets upon certain capital transactions including a sale of
partnership interests. Such adjustments are not permitted under generally
accepted accounting principles and, accordingly, are not reflected in the
accompanying consolidated financial statements.

Income Taxes

Globalstar was organized as a Delaware limited partnership. As such, no
income tax provision (benefit) is included in the accompanying consolidated
financial statements since U.S. income taxes are the responsibility of its
partners. Generally, taxable loss, deductions and credits of Globalstar will be
passed proportionately through to its partners.

S-10

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Earnings Per Ordinary Partnership Interest

Due to Globalstar's net losses for 2000 and 1999, diluted weighted average
ordinary partnership interests outstanding excludes the weighted average effect
of: (i) the assumed conversion of the 8% Series A convertible redeemable
preferred partnership interests (the "8% RPPIs") into 2.3 million and 3.4
million ordinary partnership interests for 2000 and 1999, respectively; (ii) the
assumed conversion of the 9% Series B convertible redeemable preferred
partnership interests (the "9% RPPIs") into 1.4 million and 0.1 million ordinary
partnership interests for 2000 and 1999, respectively; and (iii) the assumed
issuance of ordinary partnership interests upon exercise of Globalstar warrants
and GTL's outstanding options and warrants, into 9.3 million and 4.2 million
ordinary partnership interests for 2000 and 1999, respectively, as their effect
would have been anti-dilutive. Accordingly, basic and diluted net loss per
ordinary partnership interest are based on the net loss applicable to ordinary
partnership interests and the weighted average ordinary partnership interests
outstanding for 2000 and 1999.

Comprehensive Loss

During the periods presented, Globalstar had no changes in ordinary
partner's capital from transactions or other events and circumstances from
non-owners sources. Accordingly, a statement of comprehensive loss has not been
provided.

New Accounting Pronouncements

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
133 establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities, and is effective for Globalstar's fiscal year 2001. Globalstar has
not engaged in any transactions requiring the use of SFAS 133, accordingly SFAS
133 has no effect on its financial statements.

In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS
140"). SFAS 140 replaces SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. It revises the standards
for accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. Globalstar has adopted the
applicable disclosure requirements of SFAS 140 in its consolidated financial
statements as of December 31, 2000. Globalstar is currently evaluating the
impact of adopting the remaining provisions of SFAS 140, which will be effective
for transactions entered into after March 31, 2001.

5. PRODUCTION GATEWAYS AND USER TERMINALS

In order to accelerate the deployment of gateways around the world,
Globalstar has agreed to help finance approximately $80 million of the cost of
up to 32 of the initial 38 gateways. The contracts for the 38 gateways aggregate
approximately $345 million. Ericsson, QUALCOMM and Telit are in the process of
manufacturing approximately 300,000 handheld and fixed user terminals under
contracts totaling $375 million from Globalstar and its service providers. The
contract to order phones from Ericsson expires in May 2001. In the fourth
quarter of 2000, Globalstar recorded a $2.9 billion impairment charge of which
approximately $113 million was associated with the production gateways and user
terminals (see Note 3).

S-11

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Globalstar has agreed to finance approximately $151 million of the cost of
these handheld and fixed user terminals. Globalstar recoups such costs upon the
acceptance by the service providers of the gateways and user terminals. Amounts
reflected in the consolidated balance sheets represent the amounts financed
under the above contracts as of December 31, 2000.

6. PROPERTY AND EQUIPMENT

Globalstar's property and equipment consists of an in-orbit satellite
constellation, ground equipment located in the U.S. and support equipment
located in various countries around the world. In the fourth quarter of 2000,
Globalstar recorded a $2.9 billion impairment charge of which approximately $2.6
billion was associated with the above assets (see Note 3). Depreciation expense
for 2000 and 1999 was $323.9 million and $2.3 million, respectively.

Globalstar has also agreed to purchase from SS/L eight spare satellites for
$148 million (including performance incentives of up to $16 million). As of
December 31, 2000, costs of $138 million (including a portion of the performance
incentives) have been recognized for these spare satellites. Globalstar has
secured from SS/L twelve and eighteen month call up orders for two additional
Delta launch vehicles. The total future commitment for these launch vehicles is
$89.5 million plus escalation of 3% per year. If these launch vehicles are not
used by the end of 2003, Globalstar will incur a termination charge of
approximately $18.6 million.

Globalstar will receive from QUALCOMM or its licensee(s) a payment of
approximately $400,000 for each installed gateway sold to a Globalstar service
provider. As of December 31, 2000, 26 gateways have been sold resulting in a
$7.2 million reduction in costs associated with the Globalstar System. In
addition, Globalstar will receive a payment of up to $10 on each Globalstar user
terminal shipped by the terminal manufacturer, until Globalstar funding of that
design has been recovered.

7. PAYABLES TO AFFILIATES AND VENDOR FINANCING

In January 2001, Globalstar suspended indefinitely principal and interest
payments on all of its vendor financing, in order to conserve cash for
operations (see Note 2). Non-payment of interest payments when they become due,
and continuance of non-payment for five days, is an "event of default" under the
terms of the QUALCOMM vendor financing facility. An event of default has
occurred in connection with the QUALCOMM vendor financing facility for failure
to pay two installments of interest on January 15, 2001 for separate credit
extensions made under the QUALCOMM vendor financing facility, such extensions
also known as the "Tranche A Facility" and "Tranche B Facility" (or the "Tranche
A and B Facilities"). Upon an event of default, lenders then holding more than
sixty-six and seven-tenths percent (66.7%) of the then aggregate unpaid
principal amount of the Tranche A and B Facilities then outstanding would, at
their option, have the right to declare all of the amounts and obligations under
the Tranche A and B Facilities immediately due and payable. As of March 26,
2001, no such declaration by QUALCOMM has been made. The amounts due under the
QUALCOMM vendor financing facility have been presented in these financial
statements as current liabilities because we expect such debt may become due by
December 31, 2001.

S-12

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SS/L has provided $344 million of billings deferred under its construction
contracts with Globalstar, comprised of: $120 million of orbital incentives, of
which $44 million was repaid by Globalstar in 1999, $60 million was repaid in
2000 and $8 million was scheduled to be repaid in 2001; $90 million of vendor
financing which bears interest and is repayable over five years commencing in
2001; and $134 million of non-interest bearing vendor financing, due over five
years in equal monthly installments, commencing in 2000.

Payables and vendor financing due to affiliates is comprised of the
following (in thousands):

In May 2000, Globalstar finalized $531.1 million of vendor financing
arrangements (including $31.1 million of accrued interest as of May 2000) with
QUALCOMM that replaced the previous $100 million vendor financing agreement. The
original terms provided for interest at 6%, a maturity date of August 15, 2003
and required repayment pro rata with the term loans under Globalstar's $500
million credit facility (see Note 8). As of December 31, 2000, $550.7 million
was outstanding under this facility (including $50.7 million of accrued
interest). In connection with this agreement, QUALCOMM received warrants to
purchase 3,450,000 Globalstar partnership interests at an exercise price of
$42.25 per interest. The exercise price was determined by reference to the fair
market value of GTL's common stock on the closing date of the vendor financing,
based on an approximate one partnership interest for four shares of GTL common
stock. Fifty percent of the warrants vested on the closing date, twenty five
percent vested on September 1, 2000, and the remaining twenty five percent will
vest on September 1, 2001. The warrants will expire in 2007. The fair value of
the vested warrants totaled approximately $33.9 million and is being amortized
over the term of the vendor financing arrangements. The fair value attributable
to the unvested portion of such warrants, approximately $505,000, is subject to
adjustment based upon the future value of GTL's common stock.

8. CREDIT FACILITIES

In January 2001, Globalstar suspended indefinitely principal and interest
payments on its funded debt in order to conserve cash for operations (see Note
2). Non-payment of interest payments when they become due, and continuance of
non-payment for five days, is an "event of default" under the terms of the $500
million credit facility. An event of default has occurred in connection with the
$500 million credit facility for failure to pay two installments of interest on
January 15, 2001 for two separate credit extensions made under the $500 million
credit agreement, such extensions also known as "Term Loan A" (defined below)
and "Term Loan B" (defined below; or "Term Loans A and B"). Upon an event of
default, (i) with the consent of the Loral Satellite, Inc., the Administrative
Agent, Bank of America, shall, by notice to Globalstar, declare the Revolver,
Term Loan A and Term Loan B to be terminated forthwith and (ii) with the consent
of the Loral Satellite, Inc., the Administrative Agent, Bank of America, shall,
by notice of default to Globalstar, declare all loans made under the $500
million credit facility (with accrued interest thereon) to be immediately due
and payable. As of March 26, 2001, no notice to Globalstar of termination or
acceleration had occurred under the $500 million credit facility. The amounts
due under the $500 million credit facility have been presented in these
financial statements as current liabilities because we expect such debt may
become due by December 31, 2001.

S-13

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$250 Million Credit Agreement

On June 30, 2000, Globalstar's $250 million credit facility with The Chase
Manhattan Bank became due, and was thereupon repaid in full by its guarantors,
including Lockheed Martin Corporation ("Lockheed Martin"), QUALCOMM, DASA and
SS/L, who had previously received warrants for GTL common stock in consideration
of their guarantee. Pursuant to the relevant agreements entered into in 1996,
Globalstar issued three-year notes in the amounts of $206.3 million, $21.9
million, $11.7 million and $10.1 million to Lockheed Martin, QUALCOMM, SS/L and
DASA, respectively. The notes are due on June 30, 2003 and bear interest, on a
deferred basis, at a rate of LIBOR plus 3%, and are presented as notes payable
and notes payable to affiliates on the condensed consolidated balance sheet of
Globalstar.

On June 30, 2000, Loral paid $56.3 million on a net basis to Lockheed
Martin in satisfaction of its obligation to indemnify Lockheed Martin for
liability in excess of $150 million under Lockheed Martin's guarantee of
Globalstar's $250 million credit facility. Accordingly, Loral is entitled to
receive notes in respect thereof.

Lockheed Martin, however, has rejected the notes it received and is instead
asking Globalstar to issue new securities with additional rights and enhanced
value, without waiving its claim that it is entitled to receive an immediate
cash reimbursement by Globalstar of its $150 million payment to the bank
lenders. Globalstar disputes Lockheed Martin's interpretation of the relevant
agreements.

If the dispute is not resolved, Globalstar cannot be sure that if the
matter were litigated the court would agree with Globalstar's interpretation of
the agreements. Moreover, if as a result of this dispute, a holder of Globalstar
public bonds claimed a cross default under the applicable indentures, and a
court ruled against Globalstar, the final maturity date of the bonds would be
accelerated. Management believes, however, that a court would agree with
Globalstar's interpretation of the relevant agreements.

During the year ended December 31, 2001, an issue was raised as to whether
the three-year notes issued to the guarantors of The Chase Manhattan Bank $250
million credit facility were prepared in accordance with the recourse provisions
of the guarantee arrangement. Management does not believe that the existing
notes containing non-recourse language will need to be replaced with notes not
containing the non-recourse language. If the existing non-recourse notes were
replaced with notes not containing the non-recourse language, the replacement
would not impact Globalstar's results of operations. However, allocations of
Globalstar's losses to general partners would increase by the amount of the
increase in recourse obligations. Replacement of the notes would not alter the
subordinate position of GTL's shareholders relative to holders of these notes.

$500 Million Credit Agreement with Affiliates

On August 5, 1999, Globalstar entered into a $500 million credit agreement
with a group of banks. The credit agreement provides for a $100 million
three-year revolving credit facility ("Revolver"), a $100 million three-year
term loan ("Term Loan A") and a $300 million four-year term loan ("Term Loan
B"). The creditors' interests under the credit facility were purchased by a
wholly owned subsidiary of Loral on November 17, 2000, which had previously
guaranteed the facility. As of December 31, 2000, all amounts under the $500
million credit agreement were drawn. The following table presents the repayment
schedule for

S-14

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Term Loan A, Term Loan B and the Revolver as per the original terms of the
agreement. These amounts have been included in current liabilities (in
thousands):

Borrowings under the facilities bear interest, at Globalstar's option, at
various rates based on margins over the lead bank's base rate or the London
Interbank Offer Rate ("LIBOR") for periods of one to six months. Globalstar pays
a commitment fee on the unused portion of the facilities. The credit agreement
contains customary financial covenants that commence March 31, 2001, including
minimum revenue thresholds, maintenance of consolidated net worth, interest
coverage ratios and maximum leverage ratios. In addition, the credit agreement
contains customary limitations on indebtedness, liens, contingent obligations,
fundamental changes, asset sales, dividends, investments, optional payments and
modification of subordinated and other debt instruments and transactions with
affiliates.

In consideration for the guarantee by Loral in 1999, Loral and certain
Loral subsidiaries received warrants to purchase an aggregate of 3,450,000
Globalstar partnership interests, valued at $141.1 million, (equivalent to
approximately 13.8 million shares of common stock of GTL) at an exercise price
of $91.00 per partnership interest (equivalent to $22.75 per share of GTL common
stock). Fifty percent of the warrants vested in February 2000 and an additional
25% vested in August 2000. The outstanding warrants expire in 2006. Globalstar
may call the warrants after August 5, 2001 if the market price of GTL common
stock exceeds $45.50 for a defined period.

9. SENIOR NOTES AND WARRANTS

In January 2001, Globalstar suspended indefinitely principal and interest
payments on its funded debt in order to conserve cash for operations.
Non-payment of interest on Globalstar's debt instruments when they become due,
and continuance of non-payment for 30 days, is an "event of default" under the
terms of the senior note indentures. An event of default has occurred in
connection with Globalstar's 11 3/8% senior notes due February 15, 2004 (the
"Bond"). Under the terms of the Bond, the trustee for Globalstar's 11 3/8%
senior notes or the holders of at least 25% in principal amount of such notes
may declare the principal, accrued but unpaid interest, and liquidated damages
(if any) on such securities to be due and payable immediately. Interest payments
under the other three other indentures are due on May 15, June 1 and June 15,
2001; however, an "event of default" would occur only upon (i) non-payment of
each indenture's interest payment after the expiration of the applicable 30-day
grace period, or (ii) the acceleration of payment of Globalstar's defaulted
11 3/8% senior notes or its defaulted credit facilities. The amounts due under
the senior notes have been presented in these financial statements as current
liabilities because we expect such debts to become due by December 31, 2001.
(See Note 2).

S-15

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- ---------------
(1) Note may not be redeemed prior to February 2002 and is subject to a
prepayment premium prior to 2004.

(2) Note may not be redeemed prior to June 2002 and is subject to a prepayment
premium prior to 2004.

(3) Note may not be redeemed prior to November 2002 and is subject to a
prepayment premium prior to 2004.

(4) Note may not be redeemed prior to June 2003 and is subject to a prepayment
premium prior to 2005.

As of December 31, 2000, there were outstanding warrants to purchase
3,810,469 shares of GTL common stock which were issued in connection with the
11 3/8 % Senior Notes, exercisable at a price of $17.394 per share, which expire
on February 15, 2004. Any proceeds from the exercise of the warrants will be
used to purchase Globalstar ordinary partnership interests.

The senior notes rank pari passu with each other and with all of
Globalstar's other existing indebtedness. The indentures for the notes contain
certain covenants that among other things limit the ability of Globalstar to
incur additional debt, issue preferred stock, or pay dividends and certain
distributions. In certain limited circumstances involving a change of control of
Globalstar, as defined, each note is redeemable at the option of the holder for
101% of the principal amount plus accrued interest.

10. ORDINARY PARTNERS' CAPITAL

Capital Contribution

In April 1998, China Telecom (Hong Kong) Group Ltd. ("China Telecom"),
through a subsidiary, exercised a warrant to acquire 937,500 Globalstar ordinary
partnership interests for $18,750,000. In addition, China Telecom has a warrant
to acquire an additional 937,500 Globalstar ordinary partnership interests for
$18,750,000. Globalstar had previously granted these warrants to China Telecom
in connection with service provider arrangements in China under which China
Telecommunications Broadcast Satellite Corporation ("ChinaSat") acts as the sole
distributor of Globalstar service in China. The fair value of the warrants
issued to China Telecom was approximately $31.9 million and has been recorded in
the accompanying balance sheet in other assets and is being amortized over ten
years, the expected life of the first generation of satellites. Accumulated
amortization as of December 31, 2000 is $1.9 million.

8% Series A Convertible Redeemable Preferred Partnership Interests

On January 21, 1999, Globalstar sold to GTL seven million units (face
amount of $50 per unit) of 8% RPPIs in Globalstar, in connection with GTL's
offering of 7 million shares (face amount of $50 per share) of 8% Series A
convertible redeemable preferred stock due 2011 (the "8% Preferred Stock").
Dividends on the 8% RPPIs and the 8% Preferred Stock accrue at 8% per annum and
are payable quarterly.

On June 30, 1999 and November 29, 1999, 100 and 2,603,605 shares of 8%
Preferred Stock, respectively, were converted into 215 and 5,597,693 shares of
GTL common stock, respectively. As a result of such conversions, the 8% RPPIs
were converted into 1,382,284 Globalstar ordinary partnership interests. In
connection with certain of the conversions, GTL agreed to issue 924,324
additional shares of GTL common

S-16

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock representing the equivalent of the dividend pre-payments to which the
holders would have been entitled if a redemption had been made. A corresponding
dividend make-whole payment was also made by Globalstar for which an additional
231,081 Globalstar ordinary partnership interests were issued.

On December 29, 2000, 200 shares of the 8% Preferred Stock were converted
into 429 shares of GTL common stock. As a result of the conversion, the 8% RPPIs
were converted into 106 Globalstar ordinary partnership interests. The remaining
shares of 8% Preferred Stock outstanding at December 31, 2000 were convertible
into 9,451,348 shares of GTL common stock.

Each 8% RPPI is convertible into .53085 ordinary partnership interests,
subject to adjustment in the event of subdivision, combination, or
reclassification of the ordinary partnership interests. As of December 31, 2000,
the outstanding 8% RPPIs were convertible into 2,333,666 of ordinary partnership
interests.

The 8% RPPIs rank pari passu with the 9% RPPIs and senior to ordinary
partnership interests and have terms substantially similar to the 8% Preferred
Stock. However, they are subordinate to all existing and future liabilities of
Globalstar, and cash distributions thereon are limited to the amount of the
partnership capital accounts that are maintained for such interests. The 8%
RPPIs will convert to ordinary partnership interests upon any conversion of the
8% Preferred Stock into GTL common stock. As of December 31, 2000, the
outstanding 8% RPPIs were convertible into 2,333,666 ordinary partnership
interests. Payments due on the 8% RPPIs may be made in cash, Globalstar ordinary
partnership interests or a combination of both at the option of Globalstar.
Payments made during the fourth quarter of 2000 were paid with 179,766 ordinary
partnership interests. In January 2001, Globalstar suspended distributions on
the 8% RPPIs. As a result, GTL suspended dividend payments on the 8% Preferred
Stock. The partnership agreement provides that, in the event accrued and unpaid
dividends accumulate to an amount equal to six quarterly dividends on the 8%
Preferred Stock, holders of the majority of the outstanding 8% Preferred Stock
and the holders of any other securities having similar voting rights will be
entitled to elect one additional member to the general partners committee of
Globalstar

9% Series B Convertible Redeemable Preferred Partnership Interests

On December 2, 1999, Globalstar sold to GTL three million units (face
amount of $50 per unit) of 9% RPPIs in Globalstar, in connection with GTL's
offering of 3 million shares (face amount of $50 per share) of 9% Series B
convertible redeemable preferred stock due 2011 (the "9% Preferred Stock").
Dividends on the 9% RPPIs and the 9% Preferred Stock accrue at 9% per annum and
are payable quarterly.

In 2000, 41,510 shares of 9% Preferred Stock were converted into 79,958
shares of GTL common stock. As a result of such conversions, the 9% RPPIs were
converted into 19,743 Globalstar ordinary partnership interests. As of December
31, 2000, the outstanding 9% Preferred Stock was convertible into 5,698,851
shares of GTL common stock.

Each 9% RPPI is convertible into .47562 ordinary partnership interests,
subject to adjustment in the event of subdivision, combination, or
reclassification of the ordinary partnership interests. As of December 31, 2000,
the outstanding 9% Preferred RPPIs were convertible into 1,407,057 ordinary
partnership interests.

The 9% RPPIs rank pari passu with the 8% RPPIs and senior to ordinary
partnership interests and have terms substantially similar to the 9% Preferred
Stock. However, they are subordinate to all existing and future liabilities of
Globalstar, and cash distributions thereon are limited to the amount of the
partnership capital accounts that are maintained for such interests. The 9%
RPPIs will convert to ordinary partnership interests upon any conversion of the
9% Preferred Stock into GTL common stock. As of December 31, 2000, the
outstanding 9% RPPIs were convertible into 1,407,057 ordinary partnership
interests. Payments due on the 9% RPPIs may be made in cash, Globalstar ordinary
partnership interests or a combination of both at the option of Globalstar.
Payments made during the fourth quarter of 2000 were paid with 249,175 ordinary
partnership interests. In January 2001, Globalstar suspended distributions on
the 9% RPPIs. As a result, GTL suspended

S-17

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

dividend payments on the 9% Preferred Stock. The partnership agreement provides
that, in the event accrued and unpaid dividends accumulate to an amount equal to
six quarterly dividends on the 9% Preferred Stock, holders of the majority of
the outstanding 9% Preferred Stock and the holders of any other securities
having similar voting rights will be entitled to elect one additional member to
the general partners committee of Globalstar.

Shelf Registration

In July 1999, Globalstar and GTL filed a shelf registration statement (the
"Shelf Registration Statement") with the SEC covering up to $500 million of
securities. Under the Shelf Registration Statement, Globalstar may, from time to
time, offer debt securities, which may be either senior or subordinated or
secured or unsecured and GTL may, from time to time, offer shares of common
stock, preferred stock or warrants, all at prices and on terms to be determined
at the time of the offering (see Note 15).

On February 1, 2000, GTL sold 8,050,000 share of common stock in a public
offering under its Shelf Registration Statement. The sale yielded net proceeds
of approximately $268.5 million to GTL. GTL used the proceeds to purchase
1,987,654 ordinary partnership interests in Globalstar.

On September 19, 2000, GTL entered into a purchase agreement with Bear
Stearns International Limited ("Bear Stearns"), under which Bear Stearns agreed
to purchase over several tranches, up to $105 million of shares of GTL common
Stock. Sales under this agreement were subject to certain conditions, including
the requirement that GTL's share price be trading higher then $4.50. During
2000, Bear Stearns purchased 4,050,000 shares of GTL common stock, resulting in
net proceeds to GTL of $27.8 million. GTL used the proceeds from the sales to
purchase 1,000,001 ordinary partnership interests in Globalstar.

On September 29, 2000, Globalstar's founding partners, Loral, Vodafone,
QUALCOMM, Elsacom and TE.SA.M, purchased an aggregate of 5.2 million shares of
common stock of GTL for $56 million. GTL used the proceeds from the sales to
purchase 1,295,360 ordinary partnership interests in Globalstar.

GTL Equity Securities

GTL's equity securities and convertible securities are represented by
equivalent Globalstar partnership interests on an approximate four-for-one
basis.

Stock Option Arrangements

Officers and employees of Globalstar are eligible to participate in GTL's
1994 Stock Option Plan (the "Plan"), which provides for nonqualified and
incentive stock options. The Plan is administered by a stock option committee
(the "Committee"), appointed by the GTL Board of Directors. The Committee
determines the option price, exercise date and the expiration date of each
option (provided no option shall be exercisable after ten years from the date of
grant). Proceeds received by GTL for options exercised will be used to purchase
Globalstar ordinary partnership interests under an approximate four-for-one
exchange arrangement.

Globalstar issued 6,825 and, 10,273 ordinary partnership interests during
2000 and, 1999, respectively, in exchange for proceeds from GTL option
exercises.

On September 14, 1995, Loral, in its capacity as managing general partner,
granted certain of its officers options to purchase 560,000 shares of the GTL
common stock owned by Loral at an exercise price of $5.00 per share. The
exercise price was greater than the market price at grant date. These options
are immediately exercisable, of which 60,000 options were exercised in 2000 and
expire 12 years from date of grant.

In October 1996 and in January 1998, Loral, in its capacity as managing
general partner, granted certain of its officers options to purchase 608,000 and
20,000 shares, respectively, of GTL common stock owned by Loral at a price $6.34
and $12.50 below market price on the grant date. These options vest over a three
year

S-18

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

period and expire 10 years from date of grant; 40,000 options were exercised in
1999 and no options were cancelled during 2000 and, 1999.

Loral granted options of Loral common stock to certain officers and
employees of Globalstar as follows: April 1996, 94,000 shares at $10.50 per
share, of which 13,200 shares were exercised in 1998 and 1997; April 1997, 5,000
shares at $13.75 per share, of which 1,000 shares were exercised and 4,000
shares were cancelled in 1998; February 1998, 2,000 shares at $24.44 per share,
October 1998, 600 shares at $13.50 per share and December 16, 1999, 30,000
shares at $16.00 per share.

As described in Note 4, Globalstar accounts for its employee stock-based
compensation using the intrinsic value method in accordance with APB 25,
Accounting for Stock Issued to Employees and its related interpretations.
Accordingly, no compensation expense has been recognized in Globalstar's
consolidated financial statements for employee stock-based compensation; except
for $95,000 and, $1,154,000 of compensation expense in 2000 and, 1999,
respectively, related to the below market option grants issued by Loral. In
addition, during 2000 and, 1999, GTL granted stock options to certain
non-employees of Globalstar to purchase 167,000 and, 577,000, respectively,
shares of GTL common stock. The fair value of such options totaled approximately
$393,000 which has been recorded as additional investment in Globalstar and is
being amortized by Globalstar over the vesting period. The fair value
attributable to the unvested portion of such options is subject to adjustment
based upon the future value of GTL's common stock.

SFAS 123 requires the disclosure of pro forma net income and earnings per
share as if Globalstar adopted the fair value method. Under SFAS 123, the fair
value of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from Globalstar's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. Globalstar's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life,
six to twelve months following vesting; stock volatility, 70% for 2000 and, 50%
for 1999; risk free interest rates, 4.4% to 6.6% based on date of grant; and no
dividends during the expected term. Globalstar's calculations are based on a
multiple option valuation approach and forfeitures are recognized as they occur.
If the computed fair values of the awards had been amortized to expense over the
vesting period of the awards, the pro forma net loss applicable to ordinary
partnership interests and related loss per interest would have been
$3,828,896,000 or $61.43 per ordinary partnership interest in 2000 and
$237,245,000 or $4.07 per ordinary partnership interest in 1999.

S-19

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the status of the GTL stock option plan for the years ended
December 31, 2000 and 1999 is presented below:

The options generally expire ten years from the date of grant and become
exercisable over the period stated in each option, generally ratably over a
five-year period except for 4,336,250 options granted in 2000 which become
exercisable ratably over a three-year period. All options granted were
non-qualified stock options with an exercise price equal to fair market value at
the date of grant. As of December 31, 2000, 1,704,100 shares of common stock
were available for future grant under the Plan.

The following table summarizes information about GTL's outstanding stock
options at December 31, 2000:

11. PENSIONS AND OTHER EMPLOYEE BENEFITS

Pensions

Globalstar maintains a pension plan and a supplemental retirement plan.
These plans are defined benefit pension plans and members in certain locations
may contribute to the pension plan in order to receive enhanced benefits.
Eligibility for participation in these plans varies and benefits are based on
members' compensation and years of service. Globalstar's funding policy is to
fund the pension plan in accordance with

S-20

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Internal Revenue Code and regulations thereon and to fund the supplemental
retirement plan on an actuarial basis, including service cost and amortization
amounts. Plan assets are generally invested in U.S. government and agency
obligations and listed stocks and bonds.

Other Benefits

In addition to providing pension benefits, Globalstar provides certain
health care and life insurance benefits for retired employees and dependents.
Participants are eligible for these benefits when they retire from active
service and meet the eligibility requirements for Globalstar's pension plan.
These benefits are funded primarily on a pay-as-you-go basis with the retiree
generally paying a portion of the cost through contributions, deductibles and
coinsurance provisions.

The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for 2000 and 1999, and a statement
of the funded status as of December 31, 2000 and 1999, respectively.

S-21

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table provides the components of net periodic benefit cost
for the plans for the years ended December 31, 2000 and 1999, respectively (in
thousands):

The principal actuarial assumptions were:

Actuarial assumptions used a health care cost trend rate of 7.35%
decreasing gradually to 5.25% by 2003. Assumed health care cost trend rates have
a significant effect on the amounts reported for the health care plans. A 1%
change in assumed health care cost trend rates for 2000 would have the following
effects:

Employee Savings Plan

In April 1996, Globalstar adopted an employee savings plan which provides
that Globalstar match the contributions of participating employees up to a
designated level. Under this plan, the matching contributions in GTL common
stock were approximately $701,000 and $587,000 for 2000 and 1999, respectively.

12. REVENUE BY CUSTOMER LOCATION

For 2000, Globalstar's gross service revenue before discounts and
promotions by geographical location is as follows (in thousands):

Canada...................................................... $ 650
Brazil...................................................... 476
Australia................................................... 392
United States............................................... 357
Other....................................................... 931
------
Gross service revenue before discounts and promotions....... $2,806
======

13. FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
fair value.

S-22

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The carrying amounts of cash and cash equivalents approximates fair value
because of the short maturity of those instruments. The fair value of the Senior
Notes is based on market quotations. The fair value of the vendor financing,
notes payable, notes payable to affiliates, revolving credit facility, term loan
A and B is based on the ratio of the carrying amount to fair value of the senior
notes.

The estimated fair values of Globalstar's financial instruments are as
follows (in thousands):

14. RELATED PARTY TRANSACTIONS

In addition to the transactions described in Notes 5 through 11, Globalstar
has a number of other transactions with its affiliates. Globalstar believes that
the arrangements are as favorable to Globalstar as could be obtained from
unaffiliated parties. The following describes these related-party transactions.

Globalstar has granted to SS/L an irrevocable, royalty-free, non-exclusive
license to use certain intellectual property expressly developed in connection
with the SS/L agreement provided that SS/L will not use, or permit others to
use, such license for the purpose of engaging in any business activity that
would be in material competition with Globalstar. Globalstar has similarly
agreed that it will not license such intellectual property if it will be used
for the purpose of designing or building satellites that would be in competition
with SS/L.

Globalstar has granted to QUALCOMM an irrevocable, non-exclusive, worldwide
perpetual license to intellectual property owned by Globalstar in the Ground
Segment and developed pursuant to the QUALCOMM agreement. QUALCOMM may, pursuant
to such grant, use the intellectual property for applications other than the
Globalstar System provided that QUALCOMM may not for a period of three years
after its withdrawal as a strategic partner or prior to the third anniversary of
the Full Constellation Date (as defined), whichever is earlier, engage in any
business activity that would be in competition with the Globalstar System. The
grant of intellectual property to QUALCOMM described above is generally royalty
free. Under certain specified circumstances, however, QUALCOMM will be required
to pay a 3% royalty fee on such intellectual property.

A support agreement was entered into among QUALCOMM, Loral and Globalstar
pursuant to which QUALCOMM agreed to assist Globalstar and SS/L with
Globalstar's system design, support Globalstar and Loral with respect to various
regulatory matters, and assist Globalstar and Loral in their marketing efforts
with respect to Globalstar. As of December 31, 1998, this effort was complete.

S-23

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Globalstar has entered into agreements with certain limited partners, for
approximately $6.9 million under which, Globalstar will provide for the
integration and testing of the Globalstar System at certain of the partners'
gateways.

Globalstar has entered into consulting agreements with certain limited
partners. Costs incurred under these arrangements for the years ended December
31, 2000 was approximately $1,050,000. There were no costs incurred under these
arrangements in 1999.

QUALCOMM initially agreed to grant at least one vendor a nonexclusive
worldwide license to use QUALCOMM's intellectual property to manufacture and
sell gateways to Globalstar's service providers. The foregoing license would be
granted by QUALCOMM to one or more such vendors on reasonable terms and
conditions, which will in any event not provide for royalty fees in excess of 7%
of a gateway's sales price (not including the approximately $400,000 per gateway
in recoupment expenses payable to Globalstar). Thus far, no other vendor has
committed to manufacture gateways, and we do not expect any other vendor to
manufacture gateways. QUALCOMM has granted a license to manufacture Globalstar
user terminals to Ericsson and Telit and has also agreed to grant a similar
license to at least one additional qualified manufacturer to enable it to
manufacture and sell the Globalstar user terminals to service providers.

Subsidiaries of Loral have formed joint ventures with partners which have
executed service provider agreements granting the joint ventures exclusive
rights to provide Globalstar service to users in Brazil, Canada, Mexico, and
Russia as long as specified minimum levels of subscribers are met. Similar
exclusive service provider agreements have been entered into with certain of
Globalstar's limited partners for specific countries. These service providers
will receive certain discounts from Globalstar's expected pricing schedule
generally over a five-year period. Globalstar has also agreed to provide
QUALCOMM, under certain circumstances, with capacity on the Globalstar System
for its OmniTRACS services at its most favorable rates and to grant to QUALCOMM
the exclusive right to utilize the Globalstar System to provide OmniTRACS-like
services.

Globalstar has granted to Hyundai Electronics Industries Co., Ltd.
("Hyundai") certain rights, including certain sub-contract rights with respect
to its satellite constellation and the right, at Hyundai's election, to act as
Globalstar's exclusive licensee authorized to manufacture and sell Globalstar
Phones in South and North Korea.

Total receivables due from affiliates and amounts financed under the
production gateway and user terminal contracts is as follows (in thousands):

S-24

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Payables and vendor financing due to affiliates is as follows (in
thousands):

Total purchases from affiliates is as follows: (in thousands):

Starting with commencement of service by Globalstar and upon receipt of
revenue, LQP, the general partner of LQSS, will receive a managing partner's
allocation equal to 2.5% of Globalstar's revenues up to $500 million plus 3.5%
of revenues in excess of $500 million. Loral and QUALCOMM ultimately will
receive 80% and 20%, respectively, of such distribution. Should Globalstar incur
a net loss in any year following commencement of operations, the allocation for
that year will be reduced by 50% and LQP will reimburse Globalstar for
allocation payments, if any, received in any prior quarter of such year,
sufficient to reduce its management allocation for the year to 50%. The managing
partners allocation may be deferred (with interest at 4% per annum) in any
quarter in which Globalstar would report negative cash flow from operations if
the managing partner's allocation were made. As of December 31, 2000, the
managing partner's allocation of $28,000 has been deferred.

15. REGULATORY MATTERS

Globalstar and its operations are, and will be, subject to substantial U.S.
and international regulation, including required regulatory approvals in each
country in which Globalstar intends to provide service. Globalstar's business
may be significantly affected by regulatory activities.

16. COMMITMENTS AND CONTINGENCIES

Globalstar leases its primary facility from Lockheed Martin under a
non-cancelable operating lease expiring in 2008. The lease contains renewal
options for up to an additional ten years. The following table

S-25

GLOBALSTAR, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

presents the future minimum lease payments required under operating leases that
have an initial lease term in excess of one year (in thousands):

2001....................................................... $ 3,228
2002....................................................... 3,235
2003....................................................... 3,170
2004....................................................... 3,242
2005....................................................... 3,280
Thereafter................................................. 9,871
-------
Total minimum lease payments............................... $26,026
=======

Rent expense for 2000 and 1999, was approximately $4.1 million and $4.1
million, respectively. Included in rent expense are payments to Lockheed Martin
of $3.7 million and $2.9 million, for 2000 and 1999, respectively.

On February 20, 2001, a purported class action lawsuit was filed against
Globalstar, L.P. and Globalstar Capital Corporation (the "defendants") on behalf
of the owners of 10 3/4% bonds, due November 2004 (the "Bonds") in Superior
Court, New Castle County, Delaware. The Bonds were issued by Globalstar Capital
Corporation and Globalstar, L.P. as joint obligors. The next interest payment
payable on the Bonds is due May 1, 2001. The complaint alleges that the
defendants repudiated the Bonds' Registration Statement, Prospectus and
Indenture, without consent of the bondholders, when Globalstar announced that it
was suspending its future interest payments on the Bonds. The complaint seeks
damages in an unspecified amount. The defendants are required to respond to this
complaint by April 23, 2001.

17. SUBSEQUENT EVENT

On February 15, 2002 Globalstar and certain of its subsidiaries filed
voluntary petitions under Chapter 11 of Title 11, United States Code, in the
United Stated Bankruptcy Court for the District of Delaware (Case Nos. 02-10499,
02-10501, 02-10503 and 02-10504). Globalstar and its subsidiaries remain in
possession of their assets and properties and continue to operate their
businesses as debtors in possession. As a result of Globalstar's bankruptcy
petition, several of Globalstar's debt obligations (see Notes 7, 8, and 9) have
been accelerated and are immediately due and payable.

Negotiations prior to the filing of Globalstar's bankruptcy petition
resulted in an agreement reached among Loral, Globalstar's informal committee of
bondholders, representing approximately 17% of Globalstar's outstanding senior
notes, and Globalstar, regarding the substantive terms of a proposed financial
and legal restructuring of Globalstar's business. Under the proposed
restructuring plan, all of Globalstar's assets would be contributed into a new
Globalstar company, which would be initially owned by Globalstar's existing
noteholders and other unsecured creditors. The proposed plan also calls for the
cancellation of all existing partnership interests in Globalstar, but
contemplates, subject to the satisfaction of certain conditions, a rights
offering to GTL's common and preferred shareholders and Globalstar's creditors
which could give them the option to purchase shares in the new company. The
proposed restructuring plan will be required to be submitted for and be subject
to bankruptcy court approval. The terms of the proposed plan were described in
Globalstar's Form 8-K filing dated February 19, 2002.

S-26

INDEX TO EXHIBITS

- ---------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form 10 (No. 1-14180).

(2) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on September 27, 1996.
(3) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on March 28, 1997.
(4) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on October 10, 1997.

(5) Incorporated by reference from the Registrant's Registration Statement on
Form S-4 filed on February 17, 1998 (File No. 333-46407).

(6) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the nine month period ended December 31, 1996.

(7) Incorporated by reference from the Registration Statement on Form S-1 of
Globalstar Telecommunications Limited (File No. 33-86808).

(8) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on August 13, 1996.

(9) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on July 8, 1997.

(10) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on December 9, 1997.

(11) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.

(12) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.

(13) Incorporated by reference from the Current Report on Form 8-K filed on
December 21, 1999 by Globalstar Telecommunications Limited and Globalstar,
L.P.

(14) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on August 23, 1999.

(15) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999.

(16) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on May 3, 2000.

(17) Incorporated by reference from Registrant's Current Report of Form 8-K
filed on July 7, 2000.

(18) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on November 20, 2000.

(19) Incorporated by reference from Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.

(20) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on December 14, 2001.

(21) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on January 7, 2002.

(22) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on January 9, 2002.

(23) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on January 10, 2002.

(24) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on February 27, 2002.

+ Filed herewith.

++ Management compensation plan.