LORAL SPACE & COMMUNICATIONS LTD - 10-Q Quarterly Report

Back to GetFilings.com

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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

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.

As of October 31, 2002, there were 424,831,402 shares of Loral Space &
Communications Ltd. common stock outstanding.

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

PART 1.

FINANCIAL INFORMATION

LORAL SPACE & COMMUNICATIONS LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUES)

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

Note: The December 31, 2001 balance sheet has been derived from the audited
consolidated financial statements at that date.

See notes to condensed consolidated financial statements.

2

LORAL SPACE & COMMUNICATIONS LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

See notes to condensed consolidated financial statements.
3

LORAL SPACE & COMMUNICATIONS LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

See notes to condensed consolidated financial statements.
4

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED 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 11):

Fixed Satellite Services ("FSS"). The Company leases transponder
capacity to customers for various applications, including television and
cable 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") and Loral Skynet do Brasil Ltda.
("Skynet do Brasil") and affiliates such as Satelites Mexicanos, S.A. de
C.V. ("Satmex"), Europe*Star Limited ("Europe*Star") and XTAR, L.L.C.
("XTAR").

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. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules of the Securities and Exchange Commission
("SEC") and, in the opinion of the Company, include all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of results of
operations, financial position and cash flows as of and for the periods
presented. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the U.S. have been condensed or omitted pursuant to SEC rules. The
Company believes that the disclosures made are adequate to keep the information
presented from being misleading. The results of operations for the three and
nine months ended September 30, 2002 are not necessarily indicative of the
results to be expected for the full year. It is suggested that these condensed
consolidated financial statements be read in conjunction with the audited
consolidated financial statements and notes thereto of Loral included in Loral's
latest Annual Report on Form 10-K.

Reclassifications

Certain reclassifications have been made to conform prior period amounts to
the current period presentation.

5

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. COMPREHENSIVE LOSS

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

4. 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.

6

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. INVESTMENTS IN AND ADVANCES TO AFFILIATES

Investments in and advances to affiliates consist of (in thousands):

The Company accounts for its investment in Globalstar's $500 million credit
facility at fair value, with changes in the value (net of taxes) recorded as a
component of other comprehensive loss.

Equity in net losses of affiliates consists of (in thousands):

Subsequent to December 31, 2000, the Company has not recognized any income
or loss related to its share of Globalstar's operating losses.

During the second quarter of 2002, the Company recorded a $9 million charge
to equity in net losses of affiliates relating to liabilities it had guaranteed
in connection with a Globalstar service provider partnership. The related
liabilities were paid in the third quarter of 2002.

In connection with recording its share of Globalstar's operating losses in
2000, the Company recorded as a charge to equity in net losses of affiliates of
$22.3 million representing the estimated probable uncollectible costs relating
to subcontractor obligations to be incurred by the Company on Globalstar's
behalf. During the second quarter of 2002, the Company recovered a claim with a
vendor on the Globalstar program. Of this recovery, $14 million ($8 million
after taxes) has been reflected in the statement of operations as equity income
related to Globalstar, which, combined with recoveries recorded in 2001, fully
offset the probable uncollectible costs originally recorded. Globalstar or its
creditors may assert a claim to some portion or all of this recovery. If so, the
Company will vigorously dispute any such claim.

7

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

The following table presents summary statement of operations data of
Loral's affiliates Satmex and Europe*Star (in thousands):

6. ACCOUNTING FOR GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), which 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 rather be tested at least annually for impairment. SFAS 142
also changed the evaluation criteria for testing goodwill for impairment from an
undiscounted cash flow approach, which was previously utilized under the
guidance in Accounting Principles Board Opinion No. 17, Intangible Assets, to a
test based on fair value. Fair value is determined by the amount at which an
asset or liability could be bought or sold in a current transaction between
willing parties, that is, other than in a forced or liquidation sale. Quoted
market prices in active markets are the best evidence of fair value and must be
used as the basis for the measurement, if available. If quoted market prices are
not available, the estimate of fair value must be based on the best information
available, including prices for
8

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

similar assets and liabilities and the results of using other valuation
techniques, such as public company trading multiples, future discounted cash
flows and merger and acquisition transaction multiples.

Goodwill

In accordance with SFAS 142, the Company's previously recognized cost in
excess of net assets acquired ("goodwill") of $892 million for business
acquisitions accounted for under the purchase method of accounting completed
prior to July 1, 2001, was reviewed under the new transitional guidance as of
January 1, 2002. Goodwill had been previously assigned to the Company's business
segments as follows (based on the net book value at December 31, 2001): FSS $597
million, satellite manufacturing and technology $286 million and data services
$9 million. The Company hired professionals in the valuation consulting business
to determine the fair value of each of the Company's reporting units. Since
there were no quoted market prices in active markets for the Company's reporting
units, the measurement of fair value for each reporting unit was based on the
best information available for that reporting unit, including reasonable and
supportable assumptions and projections, as follows: (1) FSS -- public company
trading multiples, (2) satellite manufacturing and technology -- future
discounted cash flows, and (3) data services -- merger and acquisition
transaction multiples. Based on the fair values concluded on by those
professionals, management determined that the goodwill for each of the Company's
reporting units under the new guidance in SFAS 142 was fully impaired.
Accordingly, as of January 1, 2002, the Company recorded a non-cash charge for
the cumulative effect of the change in accounting principle of $892 million
before taxes ($877 million after taxes).

The charge is the result of a change in the evaluation criteria for
goodwill from an undiscounted cash flow approach which was previously utilized
under the guidance in Accounting Principles Board Opinion No. 17, Intangible
Assets, to the fair value approach which is stipulated in SFAS 142.

The following table presents the actual financial results and as adjusted
financial results without the amortization of goodwill for the Company for the
three and nine months ended September 30, 2001 (in thousands, except per share
amounts):

9

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Other Acquired Intangible Assets

The Company evaluated the useful lives of its other acquired intangible
assets in connection with the adoption of SFAS 142 and determined that no
changes to the useful lives were necessary.

Other acquired intangible assets are included in other assets in the
Company's condensed consolidated balance sheets as follows (in millions):

The weighted average remaining amortization period for regulatory fees was
eight years and for other intangibles was three years, as of September 30, 2002.

Total pre-tax amortization expense for other acquired intangible assets for
both the three months ended September 30, 2002 and 2001 was $0.8 million, and
for the nine months ended September 30, 2002 and 2001 was $2.5 million and $2.8
million, respectively. Annual pre-tax amortization expense for other acquired
intangible assets for the five years ended December 31, 2006 is estimated to be
as follows (in millions):

2002........................................................ $3.4
2003........................................................ 3.4
2004........................................................ 3.3
2005........................................................ 2.5
2006........................................................ 1.4

7. LONG TERM DEBT

10

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. SHAREHOLDERS' (DEFICIT) EQUITY

Under the New York Stock Exchange criteria for continued listing, the
Exchange will normally give consideration to de-listing a company's stock when
the average closing price of the stock is less than $1.00 over a consecutive
30-trading day period. The average closing price of Loral common stock has been
less than $1.00 for 30 consecutive trading days, and on August 22, 2002, the
Company received notice from the New York Stock Exchange that its stock price
was below the Exchange's price criteria. If Loral is unable to cure this
deficiency, the Company's common stock could be de-listed from the Exchange.
De-listing of the Company's common stock by the New York Stock Exchange could
result in a material adverse effect on the liquidity of the Company's common
shares, have an adverse effect on the trading value and impair the Company's
ability to raise funds in the capital markets. The Exchange has informed Loral
that the price is the only criteria for listing that the Company does not
currently meet. The Company has notified the Exchange of its intent to cure this
deficiency. In accordance with the Exchange rules, the Company has six months
from receipt of the notice letter from the New York Stock Exchange to cure this
deficiency. In the event the actions the Company takes to cure this deficiency
require shareholder approval, the six-month cure period will be extended until
after the Company's next annual shareholders' meeting. The Company believes
(although there can be no assurance) that it will be able to cure this
deficiency within this time frame.

The Company's 6% Series C convertible redeemable preferred stock ("the
Series C Preferred Stock") and 6% Series D convertible redeemable preferred
stock ("the Series D Preferred Stock") have mandatory redemption dates in 2006
and 2007, respectively. The Company has the ability to make mandatory redemption
payments to the holders in either cash or common stock, or a combination of the
two. Based upon the price of the Company's common stock at September 30, 2002,
the Company did not have available a sufficient number of authorized shares of
its common stock to effect payment of the total mandatory redemptions in common
stock in 2006 and 2007. Accordingly, as of September 30, 2002, the Company
classified an aggregate of $467 million of its Series C Preferred Stock and
Series D Preferred Stock outside the shareholders' equity section of the balance
sheet, based on the average of the volume weighted average daily price of the
Company's common stock as defined (approximately $0.34 per share at September
30, 2002). Had the volume weighted average daily price of the Company's common
stock as calculated been above $1.84 at September 30, 2002, none of the
Company's preferred stock would have been classified outside the shareholders'
equity section of the balance sheet (see discussion regarding the Company's
October 8, 2002 exchange offers set forth below). 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. The
Company could, subject to shareholder approval, increase the authorized number
of shares of its common stock, which would enable the Company to effect payment
of the total mandatory redemptions in common stock. The amount, if any, of the
Series C

11

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Preferred Stock and Series D Preferred Stock classified outside the
shareholders' equity section will vary in future periods depending on these
factors.

On October 8, 2002, Loral completed exchange offers for its Series C and
Series D preferred stock and converted 4.3 million shares of its Series C
Preferred Stock and 2.7 million shares of its Series D Preferred Stock
(representing approximately 61% of its preferred stock outstanding) for 45.8
million shares of its common stock and $13.4 million in cash. In connection with
the exchange offers, Loral will incur $21.6 million of dividend charges,
comprised of the $13.4 million in cash and non-cash dividend charges of $8.2
million. The non-cash dividend charges relate to the difference between the
value of the common stock issued in the exchanges and the value of the shares
that were issuable under the stated conversion terms of the preferred stock and
will have no impact on Loral's total shareholders' equity as the offset was an
increase in common stock and paid-in capital. As a result of the exchange
offers, Loral retired preferred stock with mandatory redemptions of $350 million
in 2006 and 2007 and will save $21 million in future annual dividend obligations
over the life of the preferred stock retired. After giving effect to the October
8, 2002 exchange offers on a pro forma basis as of September 30, 2002, the
Company's shareholder's equity would have been $219 million after classifying an
aggregate of $133 million of its Series C Preferred Stock and Series D Preferred
Stock outside the shareholders' equity section of the balance sheet, based on
the average of the volume weighted average daily price of the Company's common
stock as defined (approximately $0.34 per share at September 30, 2002). Had the
volume weighted average daily price of the Company's common stock as calculated
been above $0.84 as of September 30, 2002, none of the Company's preferred stock
would have been classified outside the shareholders' equity section of the
balance sheet on a pro forma basis.

In August 2002, Loral's board of directors approved a plan to suspend
indefinitely the future payment of dividends on its two series of preferred
stock. Accordingly, Loral has deferred the payment of quarterly dividends due on
its Series C Preferred Stock on November 1, 2002, and will defer the payment of
quarterly dividends due on its Series D Preferred Stock on November 15, 2002.
Dividends on the two series will continue to accrue. In the event accrued and
unpaid dividends accumulate to an amount equal to six quarterly dividends on the
Series C Preferred Stock, holders of the majority of the outstanding Series C
Preferred Stock will be entitled to elect two additional members to Loral's
board of directors. In the event accrued and unpaid dividends accumulate to an
amount equal to six consecutive quarterly dividends on the Series D Preferred
Stock, holders of the majority of the outstanding Series D Preferred Stock will
be entitled to elect two additional members to Loral's board of directors.

During the second quarter of 2002, in privately negotiated exchange
transactions, Loral converted 1.8 million shares of its Series C Preferred Stock
and 2.7 million shares of its Series D Preferred Stock (representing
approximately 28% of its preferred stock outstanding) into 30.9 million shares
of its common stock. In connection with these transactions, Loral incurred
non-cash dividend charges of $38 million, which primarily relate to the
difference between the value of the common stock issued in the exchanges 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. As a result of these transactions, Loral retired preferred stock with
mandatory redemptions of $224 million in 2006 and 2007 and will save $13 million
in future annual dividend obligations over the life of the preferred stock
retired.

9. COMMITMENTS AND CONTINGENCIES

Loral Skynet has in the past entered into prepaid leases, sales contracts
and other arrangements 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 and other arrangements (19
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

12

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

transponders which do not meet operating specifications. Substantially 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. In the case of
other arrangements, in the event of transponder failure where replacement
capacity is not available on the satellite, one customer is not entitled to
reimbursement, and the other customer's reimbursement value is based on
contractually prescribed amounts that decline over time.

Thirteen of the satellites built by SS/L and launched since 1997, six 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 and is in discussions with PanAmSat to resolve this
matter. In addition, a Loral Skynet satellite has recently experienced a minor
loss of power from its solar arrays, the cause of which may be similar to the
cause of the PAS 7 anomaly. SS/L believes, however, that these failures are
isolated events and do not reflect a systemic problem in either the satellite
design or manufacturing process. Accordingly, SS/L does not believe that these
anomalies will affect other on-orbit satellites built by SS/L. Also, 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 September 30, 2002, SS/L had billed and unbilled accounts
receivable and vendor financing arrangements of $49 million with this customer.
SS/L and the customer have entered into an agreement that provides that, until
December 20, 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
13

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 September
30, 2002, 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. 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.

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 issued a partial decision, which upheld the validity of Loral's
termination effective February 22, 2002 and Alcatel's claims as to certain
breaches. The partial decision was confirmed by the District Court for the
Southern District of New York on June 25, 2002. 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 $350 million in damages in
respect of all of its claims. The Company believes 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 its consolidated financial position or results of operations. In April 2002,
Loral and SS/L filed their statement of counterclaims against Alcatel. The
claims being asserted against Alcatel are for breach of contract, defamation,
misappropriation of SS/L's confidential property, conversion, and intentional
breaches of confidentiality agreements. Loral and SS/L are seeking injunctive
relief, compensatory damages in the amount of $380 million, and punitive
damages. 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 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 have in the past resulted in, and may in the future result in, the
delay of SS/L's performance on its contracts, which could result in the
cancellation of contracts by its customers, the incurrence of penalties or the
loss of incentive payments under these contracts.

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
14

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 Company recorded a charge in the fourth quarter of
2001 for the penalties associated with the Consent Agreement. 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.

If ChinaSat were to terminate its contract with SS/L for ChinaSat-8 as a
result of these delays, ChinaSat may seek a refund of $134 million for payments
made to SS/L as well as penalties of up to $11 million. The Company does not
believe that ChinaSat is entitled to such a refund or penalties and would
vigorously contest any such claims by ChinaSat. A portion of the potential claim
relates to amounts that were paid to a launch vehicle provider. To the extent
that SS/L or ChinaSat is able to recover some or all of the $52 million deposit
payment on the Chinese launch vehicle, this recovery would reduce the amount of
any claim. SS/L believes that ChinaSat bears the risk of loss in the event that
the deposit payments are not refunded by the launch vehicle provider. SS/L has
commenced discussions with the launch vehicle provider to recover this deposit.
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. If ChinaSat were to terminate the contract, SS/L
estimates that 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.

On September 20, 2002, Loral, through its Loral Orion subsidiary, entered
into an agreement with APT Satellite Company Limited ("APT") pursuant to which
Loral will purchase a 50% interest in the APSTAR-V satellite, a satellite under
construction by SS/L for APT. Loral's aggregate purchase price for its 50%
interest in the satellite is $115.1 million, representing 50% of the current
estimated project cost of constructing, launching and insuring the APSTAR-V
satellite, which purchase price will be adjusted if the actual project cost is
greater or lesser than $230.2 million. In addition, Loral has agreed to bear the
cost of modifying the footprint of one of the Ku-band beams on the satellite.
Pursuant to Loral's agreement with APT, Loral will pay one-half of the purchase
price prior to launch for 13.5 transponders on the satellite, a portion of which
is expected to be funded by existing launch vehicle deposits. The corresponding
cumulative costs relating to these transponders have been reflected as
satellites under construction on Loral's condensed consolidated balance sheet as
of September 30, 2002. Subject to certain acceleration rights on the part of
Loral, the remainder of the purchase price for the second 13.5 transponders will
be paid by Loral as follows: on the second anniversary of the satellite's
in-service date, $10.66 million for 2.5 additional transponders; on the third
anniversary of the satellite's in-service date, $12.79 million for three
additional transponders; and on each of the fourth and fifth anniversaries of
the satellite's in-service date, $17.05 million for four additional
transponders. Title to the transponders will pass to Loral upon its payments
thereon. This agreement results in a proportionate amount of the APSTAR-V
satellite becoming a self-constructed asset in Loral's condensed consolidated
financial statements. Accordingly, as of September 30, 2002, $29 million of
revenues and $4 million of profits were included in intercompany eliminations to
reflect this amended arrangement with APT. Amounts attributable to the
transponders to be acquired from APT in the future are being treated for
accounting purposes as a repurchase obligation based on the present value of
such

15

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

obligations and are included in satellites under construction and long-term
liabilities on Loral's condensed consolidated balance sheet as of September 30,
2002.

As of September 30, 2002, SS/L had outstanding vendor financing receivables
totaling $72 million, including accrued interest, due from Sirius Satellite
Radio Inc. ("Sirius"), which is currently in the process of rolling out its
business. On October 17, 2002, Sirius announced that it had reached an agreement
with its major creditors and investors to exchange debt and preferred stock for
common equity. As part of the recapitalization, Sirius will receive $200 million
in cash from third party investors, other than Loral. Under the
recapitalization, almost all $700 million of Sirius's debt and all of its $525
million of preferred stock would be exchanged into its common stock. In
connection with this agreement, SS/L has agreed to exchange its outstanding
vendor financing receivables for common equity of Sirius. Assuming all of SS/L's
vendor financing receivables are exchanged, SS/L will receive 59.4 million
common shares or approximately 6% of Sirius's common stock outstanding after the
exchange. The exchange is subject to various conditions, including, regulatory
and shareholder approval and Sirius expects it to close by the end of the first
quarter of fiscal 2003. In the third quarter of 2002, SS/L recorded a valuation
allowance on the vendor financing receivables due from Sirius of $11 million,
representing the difference between the carrying value of SS/L's interest and
the value of the common shares expected to be received by SS/L based on the
trading price of Sirius's common stock as of September 30, 2002.

SS/L has entered into several long-term launch services agreements with
various launch providers to secure future launches for its customers, including
the Company and its affiliates. Through the assignment of satellites to launch
vehicles, SS/L has utilized $59 million of its launch deposits since December
31, 2001. Nonetheless, SS/L may, as a result of current market conditions,
cancel some of the launchers to which it has committed. SS/L has launch services
agreements with International Launch Services ("ILS") which cover three
launches. On November 13, 2002, SS/L terminated one of those future launches,
which has a termination liability equal to its deposit of $5 million.
Subsequently, on November 13, 2002, SS/L received a letter from ILS alleging
SS/L's breach of the agreements, purporting to terminate all three launches and
asserting a right to retain $42.5 million in deposits, without prejudice to any
other legal claims or remedies. SS/L believes that ILS's claims are without
merit and intends to defend against them vigorously and to seek recovery of its
deposits. To the extent that the Company is unsuccessful in recovering its
deposits, it will recognize a non-cash charge to earnings. Management does not
believe that this matter will have a material adverse effect on the Company's
consolidated financial position and its results of operations, although no
assurances can be provided.

At September 30, 2002, the Company was in compliance with all of the
covenants and conditions under its various lending and funding arrangements
(except for failure to be in compliance with a covenant relating to insurance
under Loral Orion's 10% senior note indenture which has been cured and is
discussed later in this paragraph) and believes that it will continue to meet
these covenants and conditions. Upon acquisition of the Telstar 10/Apstar IIR
satellite by Loral Orion, Loral Orion retained the satellite's existing
insurance policy which provided that a loss of 65% or more of capacity
constituted a total loss. Loral Orion's 10% senior note indenture requires that
its in-orbit insurance provide that a loss of 50% or more of a satellite's
capacity constitute a total loss of that satellite. Loral Orion, upon becoming
aware that the existing insurance policy did not meet the indenture's
requirements, took steps to cure the matter and has obtained insurance meeting
the indenture's requirement that a loss of 50% or more capacity constitutes a
total loss.

In addition, Telstar 10/Apstar IIR, manufactured by SS/L and owned by Loral
Orion, has the same solar array configuration as two other 1300-class satellites
manufactured by SS/L that have experienced solar array failures. SS/L believes
that these failures are isolated events and do not reflect a systemic problem in
either the satellite design or manufacturing process. Accordingly, the Company
does not believe that these anomalies will affect Telstar 10/Apstar IIR. The
insurance coverage for Telstar 10/Apstar IIR, however, provides for coverage of
losses due to solar array failures only in the event of a capacity loss of 75%
or more.

16

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Some of Loral Orion's bondholders have questioned whether this limitation is in
compliance with the Loral Orion indenture insurance covenant. Management
believes that Loral Orion is in compliance with the covenant as properly
interpreted. If, however, Loral Orion's bondholders were to give notice of a
default under the indenture because of such limitations, and a court ruled
against Loral Orion on this matter, the maturity of Loral Orion's 10% senior
notes could be accelerated, and the bondholders could be able to call on the
Company's guarantee of Loral Orion's senior notes.

While the Company has in the past, consistent with industry practice,
typically obtained in-orbit insurance for its satellites, the Company cannot
guarantee that, upon a policy's expiration, the Company will be able to renew
the insurance on acceptable terms, especially on satellites that have, or that
are part of a family of satellites that have, experienced problems in the past.
Four other satellites owned by Loral Skynet and Loral Orion have the same solar
array configuration as Telstar 10/Apstar IIR. There can be no assurance that the
insurers will not require either exclusions of, or similar limitations on,
coverage due to solar array failures in connection with renewals of insurance
for these satellites in 2003 and 2004. An uninsured loss of a satellite would
have a material adverse effect on the Company's consolidated financial position
and its results of operations.

Loral Skynet has an application pending with the FCC for authorization to
use the C-Band frequency at 121 degrees W.L. in the U.S. using a non-U.S. ITU
filing. Telstar 13, which is currently under construction, is scheduled for
launch into this orbital slot in the first quarter of 2003. New Skies
Satellites, which asserts that its non-U.S. ITU filing at 120.8 degrees W.L. has
date priority over Loral Skynet's ITU filing, has filed comments with the FCC
seeking to impose conditions on Loral Skynet's use of the 121 degrees W.L. slot.
Loral Skynet has opposed New Skies' comments. Loral Skynet is continuing its
international coordination of the 121 degrees W.L. slot and is in discussions
with New Skies to resolve the matter. There can be no assurance, however, that
coordination discussions with New Skies and other operators will be successful,
that the FCC will grant Loral Skynet's application, or, if granted, whether
conditions the FCC may impose will constrain Loral Skynet's operations at the
121 degrees W.L. slot.

On October 21, 2002, National Telecom of India Ltd. ("Natelco") filed suit
against Loral and Loral CyberStar in the United States District Court for the
Southern District of New York. The suit relates to a joint venture agreement
entered into in 1998 between Natelco and ONS Mauritius, Ltd., a subsidiary of
Loral CyberStar, the effectiveness of which was subject to express conditions
precedent. In 1999, ONS Mauritius had notified Natelco that Natelco had failed
to satisfy those conditions precedent. In the suit, Natelco has alleged wrongful
termination of the joint venture agreement, has asserted claims for breach of
contract, tortious interference with contract, fraud in the inducement and lost
profits, and is seeking damages and expenses in the amount of $97 million. The
proceeding is in its very early stages and Loral is not yet obligated to respond
formally to the complaint. Loral believes that the claims are without merit and
intends to vigorously defend against them.

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
17

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. Loral and Mr. Schwartz have filed a
motion to dismiss the amended complaint in its entirety as to Loral and Mr.
Schwartz, which motion is pending before the court.

On March 2, 2002, 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. On May 6, 2002, plaintiffs in the consolidated action filed a
consolidated amended class action complaint alleging (a) that all 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
Loral's financial condition and its investment in Globalstar and (b) that Mr.
Schwartz is secondarily liable for these alleged misstatements and omissions
under Section 20(a) of the Exchange Act as an alleged "controlling person" of
Loral. 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. Loral and Messrs. Schwartz and Townsend have
filed a motion to dismiss the complaint in its entirety.

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 5). On February 15,
2002, Globalstar and certain of its direct subsidiaries filed voluntary
bankruptcy petitions under Chapter 11 of Title 11, United States Code in the
United States Bankruptcy Court for the District of Delaware. 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 its 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, 2002, was $3.1 billion.

18

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 September 30, 2002, $623 million was outstanding under this
facility (including $123 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 September 30, 2002, Loral had no guarantee
obligation.

10. LOSS PER SHARE

Basic loss per share is computed based upon the weighted average number of
shares of common stock outstanding. For the three months and nine months ended
September 30, 2002 and 2001, diluted loss per share excludes the assumed
conversion of the Company's outstanding Series C Preferred Stock and the Series
D Preferred Stock into shares of common stock, as their effect would have been
antidilutive. Weighted options equating to approximately 2.0 million shares and
0.5 million shares of common stock for the nine months ended September 30, 2002
and September 30, 2001, 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.

The following table sets forth the computation of basic and diluted loss
per share (in thousands, except per share data):

19

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. 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 condensed 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.

20

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

THREE MONTHS ENDED SEPTEMBER 30, 2002

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

(1) Includes 100% of Europe*Star's and Satmex's revenues and EBITDA and 100% of
XTAR's EBITDA since July 2001. Loral Skynet's revenue was $80 million and
$100 million for the three months ended September 30, 2002 and 2001,
respectively, and $263 million and $291 million for the nine months ended
September 30, 2002 and 2001, respectively, and its EBITDA was $52 million
and $71 million for the three months ended September 30, 2002 and 2001,
respectively, and $178 million and $206 million for the nine months ended
September 30, 2002 and 2001, respectively.

(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 CyberStar. Equipment sales for data
services were $1 million and $2 million for the three months ended September
30, 2002 and 2001, respectively, and $5 million and $6 million for the nine
months ended September 30, 2002 and 2001, 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 losses of affiliates in Loral's condensed consolidated
statements of operations.

21

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(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.

NINE MONTHS ENDED SEPTEMBER 30, 2002

22

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

THREE MONTHS ENDED SEPTEMBER 30, 2001

23

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NINE MONTHS ENDED SEPTEMBER 30, 2001

12. NEW ACCOUNTING PRONOUNCEMENTS

SFAS 143

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.

SFAS 144

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

24

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

a business. The Company has determined that there was no effect on the Company's
consolidated financial position or results of operations upon the adoption of
SFAS 144 on January 1, 2002.

SFAS 145

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS 145"). SFAS 145 generally requires that any gains or losses on
extinguishment of debt in current or prior periods be classified as other income
(expense), beginning in fiscal 2003, with early adoption encouraged. The Company
is currently evaluating the impact of adopting the provisions of SFAS No. 145 in
its consolidated financial statements.

SFAS 146

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS 146"). SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). SFAS 146
replaces EITF Issue No. 94-3. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.

13. FINANCIAL INFORMATION FOR PARENT, 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 which are fully and unconditionally guaranteed, on a joint and
several basis, by the Parent Company and one of Loral Orion's 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") of Loral Orion as
of September 30, 2002 and December 31, 2001 and for the three and nine months
ended September 30, 2002 and 2001. 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 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 Parent 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
Corporation to the Parent Company in 2001, intercompany notes receivable and
payable with its subsidiaries and intercompany payables and receivables between
its subsidiaries resulting primarily from the funding of the construction of
satellites for the fixed satellite services segment. During the third quarter of
2002, Loral Satellite provided $29.5 million to Loral in the form of a note
receivable which bears no interest and is payable upon maturity of the Loral
Satellite Credit Agreement.

25

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2002
(IN THOUSANDS)

26

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)

27

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)

28

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)

29

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

30

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)

31

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)

32

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)

33

LORAL SPACE & COMMUNICATIONS LTD.

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 Loral's latest 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, its wholly owned subsidiary
Loral Orion, Inc. ("Loral Orion"), 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 its wholly-owned
subsidiaries, Loral Skynet, Loral Orion, Loral Skynet do Brasil Ltda.
("Skynet do Brasil"), its 49%-owned affiliate Satmex, its 47%-owned
affiliate Europe*Star Limited ("Europe*Star") and its 56%-owned affiliate
XTAR L.L.C. ("XTAR"), 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 television and cable 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").

34

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 the three and nine
months ended September 30, 2002 and 2001, respectively. See Note 11 to the
condensed 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 and 100% of
Loral's 56%-owned affiliate XTAR's EBITDA since July 2001. Also includes
Loral's subsidiary, Loral Skynet do Brasil.

(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 CyberStar. Equipment sales for data
services was $1 million and $2 million for the three months ended September
30, 2002 and 2001, respectively and $5 million and $6 million for the nine
months ended September 30, 2002 and 2001, respectively.

35

(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 condensed 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

See the Company's latest Annual Report on Form 10-K filed with the SEC and
Other Matters -- Accounting Pronouncements below.

THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH SEPTEMBER 30, 2001

Revenues as reported for Loral's operating businesses decreased to $211
million in 2002 as compared to $261 million in 2001, after intercompany and
affiliate eliminations of $116 million in 2002 and $79 million in 2001. The
decrease in revenues was primarily due to lower fixed satellite services
revenues and lower data services revenues due to a decrease in volume and prices
resulting from the global economic downturn, which has caused a delay in demand
for new telecommunications applications and services, offset by higher satellite
manufacturing and technology revenues. The increase in satellite manufacturing
and technology revenues resulted from the timing of work performed and costs
incurred on satellite backlog programs under the percentage of completion
method. Intercompany eliminations primarily consist of revenues from satellites
under construction by satellite manufacturing and technology for FSS and FSS
revenues from data services and satellite manufacturing and technology for
transponder capacity. Satellite manufacturing and technology revenues from FSS
increased in 2002, partially due to the Company entering into an agreement with
APT Satellite Company Limited ("APT") to purchase 50% of a satellite which is
under construction by SS/L. FSS revenues from data services declined in 2002 due
to the global economic downturn.

EBITDA as reported for Loral's operating businesses decreased to $38
million in 2002 as compared to $49 million in 2001, after intercompany and
affiliate eliminations of $23 million in 2002 and $24 million in 2001. The
decrease in 2002 arose primarily from lower FSS EBITDA primarily due to lower
revenues. The decrease was offset by higher satellite manufacturing and
technology EBITDA primarily due to overall improved satellite program
performance and reduced costs, which was mitigated by a valuation allowance
recorded in connection with an agreement reached with a customer relating to
vendor financing receivables and reduced corporate expenses. Intercompany
eliminations increased in 2002 primarily due to increased sales by SS/L to FSS
discussed above.

Depreciation and amortization was $46 million in 2002 and $56 million in
2001. In 2002, amortization expense decreased by $7 million as a result of the
Company adopting SFAS No. 142 (see Accounting Pronouncements).

As a result of the above, the Company's operating loss increased to $9
million in 2002, as compared to $7 million in 2001.

Interest and investment income was $1 million in 2002 as compared to $6
million in 2001. This decrease was principally due to lower average cash
balances available for investment and lower interest rates and lower interest
earned relating to satellite programs in 2002 as compared to 2001.

36

Interest expense was $20 million in 2002, net of capitalized interest of $9
million, as compared to $45 million in 2001, net of capitalized interest of $6
million. The decrease was primarily due to the Company not recognizing any
interest expense on Loral Orion's new 10% senior notes issued in connection with
the Loral Orion exchange offers completed in December 2001, since interest
expense on the new notes is fully offset by amortization of the deferred gain on
the debt exchanges (see Liquidity and Capital Resources) and lower debt balances
and interest rates in 2002 as compared to 2001.

Loral, as a Bermuda company, 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 has cumulatively from its inception received no
tax benefit as a result of being established in Bermuda because of substantial
losses incurred outside the U.S. Loral's U.S. subsidiaries are subject to
regular corporate tax on their worldwide income. In 2002, the Company recorded
an income tax benefit of $5 million on a pre-tax loss of $27 million, as
compared to an income tax benefit of $6 million on a pre-tax loss of $46 million
in 2001. The decrease in the tax benefit in 2002 was primarily attributable to
reduced losses for which U.S. tax benefits can be claimed.

Equity in net losses of affiliates was $21 million in 2002 as compared to
$13 million in 2001. Loral's share of equity in net losses of Satmex was $6
million in 2002, as compared to zero in 2001. Loral's share of equity in net
losses of Europe*Star, managed by Alcatel, increased to $16 million in 2002, as
compared to $7 million in 2001, which was primarily due to Europe*Star's loss on
the sale of an equity investment in 2002. Loral's share of equity in net losses
attributable to Globalstar related activities, net of taxes, reduced to zero in
2002 as compared to $4 million in 2001 (see Note 5 to the condensed consolidated
financial statements).

Preferred dividends were $9 million in 2002 as compared to $12 million in
2001. The decrease was primarily due to the conversion, in the second quarter of
2002, of 1.8 million shares of Loral's 6% Series C convertible redeemable
preferred stock (the "Series C Preferred Stock") and 2.7 million shares of
Loral's 6% Series D convertible redeemable preferred stock (the "Series D
Preferred Stock") into 30.9 million shares of the Company's common stock in
connection with privately negotiated exchange transactions (see Liquidity and
Capital Resources). The exchange offers recently completed by the Company in
October 2002 will result in the elimination of approximately $21 million of
future annual dividend obligations (see Liquidity and Capital Resources).

As a result of the above, net loss applicable to common shareholders' was
$52 million or $0.14 per basic and diluted share in 2002, as compared to $64
million or $0.19 per basic and diluted share in 2001 ($58 million or $0.17 per
basic and diluted share on an as adjusted basis to exclude the amortization of
goodwill). Basic and diluted weighted average shares were 374 million in 2002
and 334 million in 2001. The increase in shares was primarily due to the
conversions in the second quarter of 2002 of the Company's preferred stock into
common stock mentioned above. The exchange offers recently completed by the
Company in October 2002 resulted in 45.8 million shares of common stock being
issued (see Liquidity and Capital Resources).

NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH SEPTEMBER 30, 2001

Revenues as reported for Loral's operating businesses were $836 million in
2002 as compared to $797 million in 2001, after intercompany and affiliate
eliminations of $255 million in 2002 and $273 million in 2001. The increase in
revenues was primarily due to higher satellite manufacturing and technology
revenues as a result of the timing of work performed and costs incurred on
satellite backlog programs under the percentage of completion method, offset by
lower volume in FSS revenues and data services revenues in 2002. The decline in
service revenues was primarily due to a decrease in volume and prices resulting
from the global economic downturn, which has caused a delay in demand for new
telecommunications applications and services. Satellite manufacturing and
technology revenues from FSS increased in 2002 due to the Company entering into
an agreement with APT to purchase 50% of a satellite. FSS revenues from data
services declined in 2002 due to the global economic downturn.

EBITDA as reported for Loral's operating businesses was $166 million in
2002 as compared to $170 million in 2001, after intercompany and affiliate
eliminations of $53 million in 2002 and $77 million in
37

2001. While FSS EBITDA was lower in 2002 primarily due to lower revenues, this
was offset by the following: data services significantly reduced its EBITDA loss
in 2002 as compared to 2001, which resulted from cost savings realized from
streamlining operations; decreased corporate expenses in 2002; and higher
satellite manufacturing and technology EBITDA, which was primarily due to
overall improved satellite program performance, reduced costs and the effects of
the recovery of a claim from a vendor, which was mitigated by a valuation
allowance recorded in connection with an agreement reached with a customer
relating to vendor financing receivables and additional inventory write-downs
recorded due to the absence of new satellite awards.

Depreciation and amortization was $142 million in 2002 and $166 million in
2001. In 2002, amortization expense decreased by $20 million as a result of the
Company adopting SFAS No. 142 (see Accounting Pronouncements).

As a result of the above, operating income increased to $24 million in
2002, as compared to $4 million in 2001.

Interest and investment income was $11 million in 2002 as compared to $20
million in 2001. This decrease was principally due to lower average cash
balances available for investment and lower interest rates and lower interest
earned relating to satellite programs in 2002 as compared to 2001.

Interest expense was $56 million in 2002, net of capitalized interest of
$25 million, as compared to $141 million in 2001, net of capitalized interest of
$17 million. The decrease was primarily due to the Company not recognizing any
interest expense on Loral Orion's new 10% senior notes issued in connection with
the Loral Orion exchange offers completed in December 2001, since interest
expense on the new notes is fully offset by amortization of the deferred gain on
the debt exchanges (see Liquidity and Capital Resources) and lower debt balances
and interest rates in 2002 as compared to 2001.

Loral, as a Bermuda company, 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 has cumulatively from its inception received no
tax benefit as a result of being established in Bermuda because of substantial
losses incurred outside the U.S. Loral's U.S. subsidiaries are subject to
regular corporate tax on their worldwide income. In 2002, the Company recorded
income tax expense of $9 million on a pre-tax loss of $22 million, as compared
to an income tax benefit of $8 million on a pre-tax loss of $117 million in
2001. The increase in tax expense in 2002 was primarily attributable to a higher
amount of income subject to U.S. tax during the current period.

Equity in net losses of affiliates was $50 million in 2002 as compared to
$56 million in 2001. Loral's share of equity in net losses attributable to
Globalstar related activities, net of taxes, reduced to $3 million in 2002 as
compared to $27 million in 2001. The reduction in 2002 primarily resulted from
the recovery of a claim from a vendor on the Globalstar program of which $14
million ($8 million after taxes) was recorded as a benefit to equity in net
losses of affiliates and reduced equity in net losses of Globalstar service
provider partnerships recorded, offset by a $9 million charge relating to
liabilities the Company had guaranteed in connection with a Globalstar service
provider partnership. Loral's share of equity in net losses of Satmex was $16
million in 2002, as compared to $9 million in 2001. Loral's share of equity in
net losses of Europe*Star, managed by Alcatel, increased to $29 million in 2002,
as compared to $19 million in 2001, which was primarily due to Europe*Star's
loss on the sale of an equity investment in 2002 (see Note 5 to the condensed
consolidated financial statements).

On January 1, 2002 the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, which resulted in the Company recording a charge for the
cumulative effect of change in accounting principle, net of taxes, of $877
million (see Accounting Pronouncements). The cumulative effect of change in
accounting principle, net of taxes, in 2001 related to the Company's adoption of
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.

Preferred dividends were $67 million in 2002 as compared to $69 million in
2001. The decrease was primarily due to the conversion of 1.8 million shares of
Loral's Series C Preferred Stock and 2.7 million shares of Loral's Series D
Preferred Stock into 30.9 million shares of the Company's common stock in
connection
38

with privately negotiated exchange transactions in the second quarter of 2002,
which was substantially offset by the non-cash dividend charges of $38 million
(or $0.11 per share) incurred in the second quarter of 2002 in connection with
the exchange transactions, as compared to the non-cash dividend charges of $29
million (or $0.09 per share) incurred on the conversion in April 2001 of 3.7
million shares of Loral's Series C Preferred Stock and 1.9 million shares of
Loral's Series D Preferred Stock into 30.9 million shares of the Company's
common stock, in connection with the Company's exchange offers (see Liquidity
and Capital Resources). The exchange offers recently completed by the Company in
October 2002 will result in the elimination of approximately $21 million of
future annual dividend obligations (see Liquidity and Capital Resources).

As a result of the above, net loss applicable to common shareholders'
before the cumulative effect of the change in accounting principle relating to
cost in excess of net assets acquired ("goodwill") was $148 million or $0.41 per
basic and diluted share in 2002, as compared to $235 million or $0.73 per basic
and diluted share in 2001 ($215 million or $0.67 per basic and diluted share on
an as adjusted basis to exclude the amortization of goodwill). Basic and diluted
weighted average shares were 356 million in 2002 and 320 million in 2001. The
increase in shares was primarily due to the conversions of the Company's
preferred stock into common stock in the second quarter of 2002 and 2001
mentioned above. The exchange offers recently completed by the Company in
October 2002 resulted in 45.8 million shares of common stock being issued (see
Liquidity and Capital Resources).

RESULTS BY OPERATING SEGMENT FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2002 AND 2001

The satellite industry suffered a decline in 2001 and has continued to
suffer through the first nine months of 2002, affecting all aspects of the
Company's business. Some of the most significant causes behind this decline are
the downturn in the global economy with its resulting reduction and delay in
demand for new satellite-based applications and services, the difficulty in
obtaining funding in the capital markets by a significant segment of the
industry's customer base, and the competition from fiber and other terresterial
alternatives.

Fixed Satellite Services

FSS revenues (including 100% of Satmex and Europe*Star) decreased to $104
million as compared to $135 million for the three months ended September 30,
2002 and 2001, respectively, and $337 million as compared to $397 million for
the nine months ended September 30, 2002 and 2001, respectively. These decreases
were primarily due to a decrease in transponders leased and lower prices in 2002
due to the global economic downturn and the delay in demand for new applications
and services. EBITDA (including 100% of Satmex, Europe*Star and XTAR) was $61
million as compared to $87 million for the three months ended September 30, 2002
and 2001, respectively, and $209 million as compared to $260 million for the
nine months ended September 2002 and 2001 respectively, which was primarily due
to lower sales, offset by reduced costs. As of September 30, 2002, FSS had 10
operational satellites (three of which are owned by Satmex and Europe*Star).
Funded backlog for the segment totaled $1.7 billion at September 30, 2002 and
$1.8 billion at December 31, 2001, including intercompany backlog of $46 million
and $61 million at September 30, 2002 and December 31, 2001, respectively, and
affiliate backlog for Satmex and Europe*Star of $388 million and $404 million at
September 30, 2002 and December 31, 2001, respectively. At September 30, 2002,
Loral Skynet's backlog of $1.4 billion was equivalent to approximately four
times its annual revenues. Net bookings for the segment increased by $267
million for the nine months ended September 30, 2002 to $272 million as compared
to 2001, due to a substantial decline in de-bookings, offset by an decrease in
gross bookings.

Satellite Manufacturing and Technology

Revenues at SS/L, before intercompany eliminations, increased to $208
million as compared to $183 million for the three months ended September 30,
2002 and 2001, respectively, and increased to $701 million as compared to $596
million for the nine months ended September 30, 2002 and 2001, respectively.
These increases primarily resulted from the timing of work performed on backlog
programs. EBITDA before intercompany eliminations increased to $11 million in
2002 as compared to $1 million for the three months ended September 30, 2002 and
2001, respectively, and increased to $38 million as compared to
39

$36 million for the nine months ended September 30, 2002 and 2001, respectively.
The increase for the three months ended September 30, 2002 was primarily due to
overall improved satellite program performance and lower costs, which was
mitigated by a valuation allowance recorded in connection with an agreement
reached with a customer relating to vendor financing receivables. The increase
for the nine months ended September 30, 2002 was primarily due to overall
improved satellite program performance, lower costs and the effects of the
recovery of a claim from a vendor, which was mitigated by a valuation allowance
recorded in connection with an agreement reached with a customer relating to
vendor financing receivables and additional inventory write-downs recorded due
to the absence of new satellite awards. SS/L has lowered its costs by reducing
its workforce since the beginning of last year, by streamlining certain internal
processes and by instituting tighter controls which are designed to ensure that
subcontracted components are received on time and meet all customer
requirements. Funded backlog for SS/L as of September 30, 2002 and December 31,
2001 was $781 million and $1.6 billion, respectively, including intercompany
backlog of $153 million as of September 30, 2002 and $265 million as of December
31, 2001. The decline in backlog is due to revenues earned on existing backlog
with no new satellite awards in 2002, due to the sluggish economic conditions in
the industry. SS/L gross bookings for the nine months ended September 2002
declined from 2001 by $370 million to $20 million.

Data Services

Revenues for data services decreased to $15 million as compared to $22
million for the three months ended September 30, 2002 and 2001, respectively,
and decreased to $53 million as compared to $77 million for the nine months
ended September 30, 2002 and 2001, respectively. These decreases are primarily
due to the impact of the global economic downturn, which has caused a delay in
demand for telecommunications and Internet services. Data services EBITDA loss
remained steady at approximately $2 million for both the three months ended
September 2002 and 2001. Data services reduced its EBITDA loss by approximately
$14 million to approximately $2 million for the nine months ended September 30,
2002 as compared to 2001. The substantial improvement in EBITDA primarily
resulted from cost savings realized from streamlining operations and reduced
satellite capacity costs. As of September 30, 2002 and December 31, 2001, funded
backlog for the segment was $73 million and $98 million, respectively, which was
all from external sources.

TRANSACTIONS WITH AFFILIATES

Total funded backlog at September 30, 2002 and December 31, 2001 includes
$168 million and $341 million, respectively, as a result of transactions entered
into with affiliates and related parties (primarily with Satmex, XTAR and
Hisdesat) for the construction of satellites.

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

40

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. 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 its 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. In order to pursue such opportunities Loral may utilize funds
generated by growth in operations and may seek funds from strategic partners and
other investors and through incurrence of debt or the issuance of additional
equity. The Company believes that cash, available credit and cash flow from
operations will be adequate to meet its expected cash requirements.

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 in certain circumstances for cross default or cross
acceleration. At September 30, 2002, the Company was in compliance with all of
the covenants and conditions under its various lending and funding arrangements
(except for failure to be in compliance with a covenant relating to insurance
under Loral Orion's 10% senior note indenture which has been cured and is
discussed later in this paragraph) and believes that it will continue to meet
these covenants and conditions. Upon acquisition of the Telstar 10/Apstar IIR
satellite by Loral Orion, Loral Orion retained the satellite's existing
insurance policy which provided that a loss of 65% or more of capacity
constituted a total loss. Loral Orion's 10% senior note indenture requires that
its in-orbit insurance provide that a loss of 50% or more of a satellite's
capacity constitute a total loss of that satellite. Loral Orion, upon becoming
aware that the existing insurance policy did not meet the indenture's
requirements, took steps to cure the matter and has obtained insurance meeting
the indenture's requirement that a loss of 50% or more capacity constitutes a
total loss.

In addition, Telstar 10/Apstar IIR, manufactured by SS/L and owned by Loral
Orion, has the same solar array configuration as two other 1300-class satellites
manufactured by SS/L that have experienced solar array failures. SS/L believes
that these failures are isolated events and do not reflect a systemic problem in
either the satellite design or manufacturing process. Accordingly, the Company
does not believe that these anomalies will affect Telstar 10/Apstar IIR. The
insurance coverage for Telstar 10/Apstar IIR, however, provides for coverage of
losses due to solar array failures only in the event of a capacity loss of 75%
or more. Some of Loral Orion's bondholders have questioned whether this
limitation is in compliance with the Loral Orion indenture insurance covenant.
Management believes that Loral Orion is in compliance with the covenant as
properly interpreted. If, however, Loral Orion's bondholders were to give notice
of a default under the indenture because of such limitations, and a court ruled
against Loral Orion on this matter, the maturity of Loral Orion's 10% senior
notes could be accelerated, and the bondholders could be able to call on the
Company's guarantee of Loral Orion's senior notes.

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 provides
for a $200 million revolving credit facility expiring January 7, 2005 and a term
loan of which $260 million was outstanding as of September 30, 2002, subject to
the following remaining amortization payment schedule: $11.25 million per
quarter on December 31, 2002 through September 30, 2004 and $170 million on
January 7, 2005. 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 Offered Rate for periods of one,
two, three or six months. Loral Satellite pays a commitment fee on the unused
portion of the revolver.
41

The Satellite Credit Agreement is secured by certain assets of Loral
Satellite, including the Telstar 6 and Telstar 7 satellites and the payments due
to Loral Satellite 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 in excess of $500 million. As of September 30, 2002,
the net book value of Telstar 6 and Telstar 7 was approximately $311 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.

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 term loan of which $385 million was outstanding at
September 30, 2002, subject to the following remaining amortization payment
schedule: $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. In December 2001, the
margin levels were increased under the new amended agreement and are fixed
through September 30, 2002. As a result of this increase in margin levels,
interest costs have increased by approximately $11 million annually. Subsequent
to September 30, 2002, the margin levels will increase by one percent for the
foreseeable future. LSC pays a commitment fee on the unused portion of the
revolver.

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. As of September 30, 2002, the net
book value of the assets that secure the LSC Amended Credit Agreement was
approximately $770 million.

Loral Orion Indentures

On December 21, 2001, Loral Orion issued $613 million principal amount of
new senior notes due 2006 and 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 1.6% of the Company's outstanding
common stock at September 30, 2002) 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. As of September 30, 2002, 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, in
December 2001 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 at September 30, 2002 was $858 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 is being 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 covenants, including,
without limitation, restrictions on Loral Orion's ability to pay dividends or
make loans to Loral.
42

Loral 9.5% Senior Notes

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

Under the New York Stock Exchange criteria for continued listing, the
Exchange will normally give consideration to de-listing a company's stock when
the average closing price of the stock is less than $1.00 over a consecutive
30-trading day period. The average closing price of Loral common stock has been
less than $1.00 for 30 consecutive trading days, and on August 22, 2002, the
Company received notice from the New York Stock Exchange that its stock price
was below the Exchange's price criteria. If Loral is unable to cure this
deficiency, the Company's common stock could be de-listed from the Exchange.
De-listing of the Company's common stock by the New York Stock Exchange could
result in a material adverse effect on the liquidity of the Company's common
shares, have an adverse effect on the trading value and impair the Company's
ability to raise funds in the capital markets. The Exchange has informed Loral
that the price is the only criteria for listing that the Company does not
currently meet. The Company has notified the Exchange of its intent to cure this
deficiency. In accordance with the Exchange rules, the Company has six months
from receipt of the notice letter from the New York Stock Exchange to cure this
deficiency. In the event the actions the Company takes to cure this deficiency
require shareholder approval, the six-month cure period will be extended until
after the Company's next annual shareholders' meeting. The Company believes
(although there can be no assurance) that it will be able to cure this
deficiency within this time frame.

The Company's 6% Series C convertible redeemable preferred stock ("the
Series C Preferred Stock") and 6% Series D convertible redeemable preferred
stock ("the Series D Preferred Stock") have mandatory redemption dates in 2006
and 2007, respectively. The Company has the ability to make mandatory redemption
payments to the holders in either cash or common stock, or a combination of the
two. Based upon the price of the Company's common stock at September 30, 2002,
the Company did not have available a sufficient number of authorized shares of
its common stock to effect payment of the total mandatory redemptions in common
stock in 2006 and 2007. Accordingly, as of September 30, 2002, the Company
classified an aggregate of $467 million of its Series C Preferred Stock and
Series D Preferred Stock outside the shareholders' equity section of the balance
sheet, based on the average of the volume weighted average daily price of the
Company's common stock as defined (approximately $0.34 per share at September
30, 2002). Had the volume weighted average daily price of the Company's common
stock as calculated been above $1.84 at September 30, 2002, none of the
Company's preferred stock would have been classified outside the shareholders'
equity section of the balance sheet (see discussion regarding the Company's
October 8, 2002 exchange offers set forth below). 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. The
Company could, subject to shareholder approval, increase the authorized number
of shares of its common stock, which would enable the Company to effect payment
of the total mandatory redemptions in common stock. The amount, if any, of the
Series C Preferred Stock and Series D Preferred Stock classified outside the
shareholders' equity section will vary in future periods depending on these
factors.

On October 8, 2002, Loral completed exchange offers for its Series C and
Series D preferred stock and converted 4.3 million shares of its Series C
Preferred Stock and 2.7 million shares of its Series D Preferred Stock
(representing approximately 61% of its preferred stock outstanding) for 45.8
million shares of its common stock and $13.4 million in cash. In connection with
the exchange offers, Loral will incur $21.6 million of dividend charges,
comprised of the $13.4 million in cash and non-cash dividend charges of $8.2
million. The non-cash dividend charges relate to the difference between the
value of the common stock issued in the exchanges and the value of the shares
that were issuable under the stated conversion terms of the preferred stock and
will have no impact on Loral's total shareholders' equity as the offset was an
increase in common stock and paid-in capital. As a result of the exchange
offers, Loral retired preferred stock with mandatory redemptions of $350 million
in 2006 and 2007 and will save $21 million in future annual dividend

43

obligations over the life of the preferred stock retired. After giving effect to
the October 8, 2002 exchange offers on a pro forma basis as of September 30,
2002, the Company's shareholder's equity would have been $219 million after
classifying an aggregate of $133 million of its Series C Preferred Stock and
Series D Preferred Stock outside the shareholders' equity section of the balance
sheet, based on the average of the volume weighted average daily price of the
Company's common stock as defined (approximately $0.34 per share at September
30, 2002). Had the volume weighted average daily price of the Company's common
stock as calculated been above $0.84 as of September 30, 2002, none of the
Company's preferred stock would have been classified outside the shareholders'
equity section of the balance sheet on a pro forma basis.

In August 2002, Loral's board of directors approved a plan to suspend
indefinitely the future payment of dividends on its two series of preferred
stock. Accordingly, Loral has deferred the payment of quarterly dividends due on
its Series C Preferred Stock on November 1, 2002, and will defer the payment of
quarterly dividends due on its Series D Preferred Stock on November 15, 2002.
Dividends on the two series will continue to accrue. In the event accrued and
unpaid dividends accumulate to an amount equal to six quarterly dividends on the
Series C Preferred Stock, holders of the majority of the outstanding Series C
Preferred Stock will be entitled to elect two additional members to Loral's
board of directors. In the event accrued and unpaid dividends accumulate to an
amount equal to six consecutive quarterly dividends on the Series D Preferred
Stock, holders of the majority of the outstanding Series D Preferred will be
entitled to elect two additional members to Loral's board of directors.

During the second quarter of 2002, in privately negotiated exchange
transactions, Loral converted 1.8 million shares of its Series C Preferred Stock
and 2.7 million shares of its Series D Preferred Stock (representing
approximately 28% of its preferred stock outstanding) into 30.9 million shares
of its common stock. In connection with these transactions, Loral incurred
non-cash dividend charges of $38 million, which primarily relate to the
difference between the value of the common stock issued in the exchanges 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. As a result of these transactions, Loral retired preferred stock with
mandatory redemptions of $224 million in 2006 and 2007 and will save $13 million
in future annual dividend obligations over the life of the preferred stock
retired.

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 26% of
the preferred stock outstanding) into 30.9 million shares of the Company's
common stock. Loral incurred non-cash dividend charges in the second quarter of
2001 of $29 million. As a result of these transactions, Loral retired preferred
stock with mandatory redemptions of $277 million in 2006 and 2007 and will save
$17 million in future annual dividend obligations over the life of the preferred
stock retired.

In connection with the Company's exchanges of its preferred stock for
common stock in 2002 and 2001 noted above, the Company has retired preferred
stock with mandatory redemptions aggregating $851 million in 2006 and 2007 and
will save $51 million in future annual dividend obligations.

For 2002, the Company's pension plan is considered fully funded (i.e.
assets are greater than liabilities) under the Internal Revenue Code and
regulations thereunder and there was no contribution required. However, the
significant declines experienced in the financial markets have unfavorably
impacted pension plan asset performance. This, coupled with historically low
interest rates (a key factor when estimating pension plan liabilities), is
likely to cause the Company to recognize a non-cash charge to equity in the
fourth quarter of 2002. This charge would not impact reported earnings, and
would be reversible if either interest rates increased or market performance and
plan returns improved.

Cash and Available Credit

As of September 30, 2002, Loral had $165 million of cash and available
credit (including $66 million of available credit from the credit facilities
described above under the captions "Satellite Credit Agreement" and "LSC Amended
Credit Agreement").
44

Net Cash Provided by Operating Activities

Net cash provided by operating activities for the nine months ended
September 30, 2002 was $264 million. This was primarily due to the EBITDA
contribution of $166 million, resulting in net income as adjusted for non-cash
items, of $145 million and decreases in contracts-in-process of $64 million
resulting from net collections on customer contracts and deposits of $59 million
resulting from the assignment of launch vehicles to satellite programs.

Net cash provided by operating activities for the nine months ended
September 30, 2001 was $95 million. This was primarily due to the EBITDA
contribution of $170 million, resulting in net income as adjusted for non-cash
items, of $79 million and the increase in customer advances of $56 million,
primarily resulting from the timing of satellite program milestone payments,
offset by an increase in contracts-in-progress of $56 million primarily due to
continued progress on satellite contracts and achievement of milestones.

Net Cash Used in Investing Activities

Net cash used in investing activities for the nine months ended September
30, 2002 and 2001 was $226 million and $183 million, respectively, primarily as
a result of capital expenditures mainly for the construction of satellites and
investments in and advances to affiliates.

Net Cash Used in Financing Activities

Net cash used in financing activities for the nine months ended September
30, 2002 and 2001 was $98 million and $126 million, respectively, primarily due
to net debt repayments of $78 million and $99 million in 2002 and 2001,
respectively and preferred dividends of $29 million and $40 million in 2002 and
2001, respectively.

Fixed Satellite Services

Satellites are carefully built and tested and have some redundant
components to permit the continued operation of a satellite in case of a
component failure. Due to the failure of primary components, certain of the
Company and its affiliates 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.

On September 20, 2002, Loral, through its Loral Orion subsidiary, entered
into an agreement with APT pursuant to which Loral will purchase a 50% interest
in the APSTAR-V satellite, a satellite under construction by SS/L for APT.
Loral's aggregate purchase price for its 50% interest in the satellite is $115.1
million, representing 50% of the current estimated project cost of constructing,
launching and insuring the APSTAR-V satellite, which purchase price will be
adjusted if the actual project cost is greater or lesser than $230.2 million. In
addition, Loral has agreed to bear the cost of modifying the footprint of one of
the Ku-band beams on the satellite. APSTAR-V will have a total of 54
transponders, comprised of 24 standard C-band transponders, 14 extended C-band
transponders and 16 Ku-band transponders. Under this transaction, Loral has
agreed to purchase 12 standard C-band, 7 extended C-band and 8 Ku-band
transponders on APSTAR-V, which capacity will be designated Telstar 18. Loral
will also have the option to enter into similar arrangements with APT on
replacement satellites upon the end of life of APSTAR-V. To be located at 138
degrees East Longitude, APSTAR-V is currently scheduled to be launched in the
third quarter of 2003 and will be capable of providing Ku-band voice, video and
data services to China, India and East Asia, and broadbeam C-band services
throughout the Asia-Pacific region, including Australia and Hawaii. To ensure a
timely launch of APSTAR-V, Loral, APT and SS/L have agreed that a non-Chinese
launch provider will be used.

Pursuant to Loral's agreement with APT, Loral will pay one-half of its
purchase price prior to launch for 13.5 transponders on the satellite, a portion
of which is expected to be funded by existing launch vehicle deposits. The
corresponding cumulative costs relating to these transponders have been
reflected as satellites

45

under construction on Loral's condensed consolidated balance sheet as of
September 30, 2002. Subject to certain acceleration rights on the part of Loral,
the remainder of the purchase price for the second 13.5 transponders will be
paid by Loral as follows: on the second anniversary of the satellite's
in-service date, $10.66 million for 2.5 additional transponders; on the third
anniversary of the satellite's in-service date, $12.79 million for three
additional transponders; and on each of the fourth and fifth anniversaries of
the satellite's in-service date, $17.05 million for four additional
transponders. Title to the transponders will pass to Loral upon its payments
thereon. This agreement results in a proportionate amount of the APSTAR-V
satellite becoming a self-constructed asset in Loral's condensed consolidated
financial statements. Accordingly, as of September 30, 2002, $29 million of
revenues and $4 million of profits were included in intercompany eliminations to
reflect this amended arrangement with APT. Amounts attributable to the
transponders to be acquired from APT in the future are being treated for
accounting purposes as a repurchase obligation based on the present value of
such obligations and are included in satellites under construction and long-term
liabilities on Loral's condensed consolidated balance sheet as of September 30,
2002.

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. The loss of Solidaridad 1 was fully covered by insurance proceeds.
Satmex has contracted with SS/L to build a replacement satellite. This
satellite, known as Satmex 6, is scheduled to be launched in the second quarter
of 2003, and is designed to provide broader coverage and higher power levels
than any other satellite currently in the Satmex fleet.

Satmex is currently pursuing loans supported by export credit agencies to
raise additional financing, the terms of which will likely require Satmex to
extend the maturities of its fixed rate notes, which would require the consent
of Satmex's fixed rate noteholders. These loans, if obtained, will be used to
fund the remaining cost of placing Satmex 6 in orbit and to repay existing
secured debt which would extend the maturity of, and improve the terms and
conditions of Satmex's debt (including the financial covenants to which it is
subject). Moreover, Satmex has commenced a solicitation of its debtholders to
permit certain amendments to its debt documents to avoid a default under the
insurance covenant contained in its fixed rate note indenture. There can be no
assurance that Satmex will be able to obtain such financing or amendments. If
Satmex is unable to successfully raise additional financing or obtain the
necessary amendments to its debt documents, the Company's investment in Satmex
may be adversely affected.

At September 30, 2002, 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.

46

("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 September 30, 2002, 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.

Europe*Star

Europe*Star, which owns and operates the Europe*Star 1 satellite, commenced
service in 2001 and is a member of the Loral Global Alliance, which is led by
Loral Skynet. Through September 30, 2002, Loral has invested $76 million in
Europe*Star. As of September 30, 2002, 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
by Europe*Star on demand. Such loans are non-recourse to Loral.

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 September 30, 2002,
the partners in proportion to their respective ownership interests have
contributed $55 million to XTAR. XTAR is seeking to raise the remaining amount
of the funds it needs to construct and launch its satellite through vendor and
other third-party financings. If XTAR is unable to raise the remaining funds it
needs to construct, launch and operate its satellite, it would adversely effect
the Company's investment in XTAR. Loral has no further obligations with respect
to XTAR.

Globalstar and GTL

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 5 to the condensed
consolidated financial statements). The Company recognized unrealized net losses
after taxes as a component of other comprehensive loss of $11 million in 2002
and $26 million in 2001, 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 bankruptcy 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 bankruptcy 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

47

$78 million of financing related to deferred billings SS/L has provided to
Globalstar at September 30, 2002, 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 condensed consolidated balance
sheets.

In February 2002, Globalstar reached an agreement (the "Globalstar
Restructuring 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. In March 2002, the Court appointed an official committee
of creditors which was substituted as a party in the Globalstar Restructuring
Agreement in place of the informal committee of noteholders. The Globalstar
Restructuring Agreement was subject to a number of conditions, including
conditions that a plan of reorganization and related disclosure statement
reflecting the Globalstar Restructuring Agreement be approved by the Court by
August 12, 2002. The condition relating to approval of the plan and related
disclosure statement has not been satisfied and the official committee of
noteholders has terminated the agreement. Globalstar, Loral and the official
committee are in discussions to modify the terms and conditions of the
Globalstar Restructuring Agreement. There can be no assurance that a revised
agreement will be reached. In addition, Globalstar has received an offer from a
potential new investor and is in discussions with that investor regarding the
terms of its investment and the overall financial and legal restructuring of
Globalstar. There can be no assurance that Globalstar will be able to negotiate
terms of a restructuring with a new investor satisfactory to Globalstar, Loral,
the official committee or Globalstar's other creditors or what aspects, if any,
of the Globalstar Restructuring Agreement, such as mutual releases, might be
incorporated in any such restructuring. Any restructuring plan will have to be
submitted for and will be subject to Court approval.

As of September 30, 2002, the Company's investment in Globalstar related
activities was $15 million, consisting 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 September 30, 2002. 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 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. In the third quarter of 2002, the Company paid $10 million it had
guaranteed in connection with a Globalstar service provider partnership.
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.

Contractual Obligations

Contractual obligations as previously disclosed in the Company's Latest
Annual Report on Form 10-K have not materially changed, except for the reduction
in the mandatory redemptions of $224 million resulting from the exchanges of the
Company's preferred stock for common stock in the second quarter of 2002, and
the mandatory redemptions of $350 million resulting from the exchanges of the
Company's preferred stock for common stock in the fourth quarter of 2002 (see
Liquidity and Capital Resources) and as otherwise set forth herein.

COMMITMENTS AND CONTINGENCIES

Loral Skynet has in the past entered into prepaid leases, sales contracts
and other arrangements 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 and other arrangements (19
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. Substantially
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
48

the unamortized portion of the lease prepayment made by the customer. In the
case of other arrangements, in the event of transponder failure where
replacement capacity is not available on the satellite, one customer is not
entitled to reimbursement, and the other customer's reimbursement value is based
on contractually prescribed amounts that decline over time.

Thirteen of the satellites built by SS/L and launched since 1997, six 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.

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 and is in discussions with PanAmSat to resolve this
matter. In addition, a Loral Skynet satellite has recently experienced a minor
loss of power from its solar arrays, the cause of which may be similar to the
cause of the PAS 7 anomaly. SS/L believes, however, that these failures are
isolated events and do not reflect a systemic problem in either the satellite
design or manufacturing process. Accordingly, SS/L does not believe that these
anomalies will affect other on-orbit satellites built by SS/L. Also, 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 September 30, 2002, SS/L had billed and unbilled accounts
receivable and vendor financing arrangements of $49 million with this customer.
SS/L and the customer have entered into an agreement that provides that, until
December 20, 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 September 30, 2002, plus interest. Based on the
discussions currently in progress with the customer and other parties who may be
interested in the satellite, management's

49

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. 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.

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 issued a partial decision, which upheld the validity of Loral's
termination effective February 22, 2002 and Alcatel's claims as to certain
breaches. The partial decision was confirmed by the District Court for the
Southern District of New York on June 25, 2002. 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 $350 million in damages in
respect of all of its claims. The Company believes 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 its consolidated financial position or results of operations. In April 2002,
Loral and SS/L filed their statement of counterclaims against Alcatel. The
claims being asserted against Alcatel are for breach of contract, defamation,
misappropriation of SS/L's confidential property, conversion, and intentional
breaches of confidentiality agreements. Loral and SS/L are seeking injunctive
relief, compensatory damages in the amount of $380 million, and punitive
damages. 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 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 have in the past resulted in, and may in the future result in, the
delay of SS/L's performance on its contracts, which could result in the
cancellation of contracts by its customers, the incurrence of penalties or the
loss of incentive payments under these contracts.

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 Company recorded a charge in the
fourth quarter of 2001 for the penalties associated with the Consent Agreement.
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

50

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.

If ChinaSat were to terminate its contract with SS/L for ChinaSat-8 as a
result of these delays, ChinaSat may seek a refund of $134 million for payments
made to SS/L as well as penalties of up to $11 million. The Company does not
believe that ChinaSat is entitled to such a refund or penalties and would
vigorously contest any such claims by ChinaSat. A portion of the potential claim
relates to amounts that were paid to a launch vehicle provider. To the extent
that SS/L or ChinaSat is able to recover some or all of the $52 million deposit
payment on the Chinese launch vehicle, this recovery would reduce the amount of
any claim. SS/L believes that ChinaSat bears the risk of loss in the event that
the deposit payments are not refunded by the launch vehicle provider. SS/L has
commenced discussions with the launch vehicle provider to recover this deposit.
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. If ChinaSat were to terminate the contract, SS/L
estimates that 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.

As of September 30, 2002, SS/L had outstanding vendor financing receivables
totaling $72 million, including accrued interest, due from Sirius Satellite
Radio Inc. ("Sirius"), which is currently in the process of rolling out its
business. On October 17, 2002, Sirius announced that it had reached an agreement
with its major creditors and investors to exchange debt and preferred stock for
common equity. As part of the recapitalization, Sirius will receive $200 million
in cash from third party investors, other than Loral. Under the
recapitalization, almost all $700 million of Sirius's debt and all of its $525
million of preferred stock would be exchanged into its common stock. In
connection with this agreement, SS/L has agreed to exchange its outstanding
vendor financing receivables for common equity of Sirius. Assuming all of SS/L's
vendor financing receivables are exchanged, SS/L will receive 59.4 million
common shares or approximately 6% of Sirius's common stock outstanding after the
exchange. The exchange is subject to various conditions, including, regulatory
and shareholder approval and Sirius expects it to close by the end of the first
quarter of fiscal 2003. In the third quarter of 2002, SS/L recorded a valuation
allowance on the vendor financing receivables due from Sirius of $11 million,
representing the difference between the carrying value of SS/L's interest and
the value of the common shares expected to be received by SS/L based on the
trading price of Sirius's common stock as of September 30, 2002.

SS/L has entered into several long-term launch services agreements with
various launch providers to secure future launches for its customers, including
the Company and its affiliates. Through the assignment of satellites to launch
vehicles, SS/L has utilized $59 million of its launch deposits since December
31, 2001. Nonetheless, SS/L may, as a result of current market conditions,
cancel some of the launchers to which it has committed. SS/L has launch services
agreements with International Launch Services ("ILS") which cover three
launches. On November 13, 2002, SS/L terminated one of those future launches,
which has a termination liability equal to its deposit of $5 million.
Subsequently, on November 13, 2002, SS/L received a letter from ILS alleging
SS/L's breach of the agreements, purporting to terminate all three launches and
asserting a right to retain $42.5 million in deposits, without prejudice to any
other legal claims or remedies. SS/L believes that ILS's claims are without
merit and intends to defend against them vigorously and to seek recovery of its
deposits. To the extent that the Company is unsuccessful in recovering its
deposits, it will recognize a non-cash charge to earnings. Management does not
believe that this matter will have a material adverse effect on the Company's
consolidated financial position and its results of operations, although no
assurances can be provided.

51

Loral Skynet has an application pending with the FCC for authorization to
use the C-Band frequency at 121 degrees W.L. in the U.S. using a non-U.S. ITU
filing. Telstar 13, which is currently under construction, is scheduled for
launch into this orbital slot in the first quarter of 2003. New Skies
Satellites, which asserts that its non-U.S. ITU filing at 120.8 degrees W.L. has
date priority over Loral Skynet's ITU filing, has filed comments with the FCC
seeking to impose conditions on Loral Skynet's use of the 121 degrees W.L. slot.
Loral Skynet has opposed New Skies' comments. Loral Skynet is continuing its
international coordination of the 121 degrees W.L. slot and is in discussions
with New Skies to resolve the matter. There can be no assurance, however, that
coordination discussions with New Skies and other operators will be successful,
that the FCC will grant Loral Skynet's application, or, if granted, whether
conditions the FCC may impose will constrain Loral Skynet's operations at the
121 degrees W.L. slot.

On October 21, 2002, National Telecom of India Ltd. ("Natelco") filed suit
against Loral and Loral CyberStar in the United States District Court for the
Southern District of New York. The suit relates to a joint venture agreement
entered into in 1998 between Natelco and ONS Mauritius, Ltd., a subsidiary of
Loral CyberStar, the effectiveness of which was subject to express conditions
precedent. In 1999, ONS Mauritius had notified Natelco that Natelco had failed
to satisfy those conditions precedent. In the suit, Natelco has alleged wrongful
termination of the joint venture agreement, has asserted claims for breach of
contract, tortious interference with contract, fraud in the inducement and lost
profits, and is seeking damages and expenses in the amount of $97 million. The
proceeding is in its very early stages and Loral is not yet obligated to respond
formally to the complaint. Loral believes that the claims are without merit and
intends to vigorously defend against them.

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. Loral and Mr. Schwartz have
filed a motion to dismiss the amended complaint in its entirety as to Loral and
Mr. Schwartz, which motion is pending before the court.

On March 2, 2002, 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 consoli-
52

dated into one action titled In re: Loral Space & Communications Ltd. Securities
Litigation. On May 6, 2002, plaintiffs in the consolidated action filed a
consolidated amended class action complaint alleging (a) that all 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
Loral's financial condition and its investment in Globalstar and (b) that Mr.
Schwartz is secondarily liable for these alleged misstatements and omissions
under Section 20(a) of the Exchange Act as an alleged "controlling person" of
Loral. 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. Loral and Messrs. Schwartz and Townsend have
filed a motion to dismiss the complaint in its entirety.

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 5 to the condensed
consolidated financial statements). 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 its 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, 2002, was
$3.1 billion.

During the second quarter of 2002, the Company recovered a claim with a
vendor on the Globalstar program. Globalstar or its creditors may assert a claim
to some portion or all of this recovery. If so, the Company will vigorously
dispute any such claim.

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 September 30, 2002, $623 million was outstanding under this
facility (including $123 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 September 30, 2002, Loral had no guarantee
obligation.

OTHER MATTERS

Insurance Matters

The Company, like others in the satellite industry, is faced with
significantly higher premiums on launch and in-orbit insurance, increasing
thresholds in determining total losses for satellites in orbit and significantly
shorter coverage periods than those that have been available in the past, which
is due in part to the events of September 11, 2001. This development in the
insurance industry has increased the cost of doing business. The Company intends
to pass on some of the increased cost to its customers. There can be no
assurance, however, that it will be able to do so. Insurance market conditions
have historically been cyclical in nature. While the Company anticipates that
these conditions will improve in the future, there can be no assurance that they
will.

While the Company has in the past, consistent with industry practice,
typically obtained in-orbit insurance for its satellites, the Company cannot
guarantee that, upon a policy's expiration, the Company will be able to renew
the insurance on acceptable terms, especially on satellites that have, or that
are part of a

53

family of satellites that have, experienced problems in the past. Four other
satellites owned by Loral Skynet and Loral Orion have the same solar array
configuration as Telstar 10/Apstar IIR. There can be no assurance that the
insurers will not require either exclusions of, or similar limitations on,
coverage due to solar array failures in connection with renewals of insurance
for these satellites in 2003 and 2004. An uninsured loss of a satellite would
have a material adverse effect on the Company's consolidated financial position
and its results of operations.

Accounting Pronouncements

SFAS 142

On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS 142") which 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 rather be tested at least annually for impairment. SFAS 142
also changed the evaluation criteria for testing goodwill for impairment from an
undiscounted cash flow approach, which was previously utilized under the
guidance in Accounting Principles Board Opinion No. 17, Intangible Assets, to a
test based on fair value. Fair value is determined by the amount at which an
asset or liability could be bought or sold in a current transaction between
willing parties, that is, other than in a forced or liquidation sale. Quoted
market prices in active markets are the best evidence of fair value and must be
used as the basis for the measurement, if available. If quoted market prices are
not available, the estimate of fair value must be based on the best information
available, including prices for similar assets and liabilities and the results
of using other valuation techniques, such as public company trading multiples,
future discounted cash flows and merger and acquisition transaction multiples.

In accordance with SFAS 142, the Company's previously recognized cost in
excess of net assets acquired ("goodwill") of $892 million for business
acquisitions accounted for under the purchase method of accounting completed
prior to July 1, 2001, was reviewed under the new transitional guidance as of
January 1, 2002. Goodwill had been previously assigned to the Company's business
segments as follows (based on the net book value at December 31, 2001): FSS $597
million, satellite manufacturing and technology $286 million and data services
$9 million. The Company hired professionals in the valuation consulting business
to determine the fair value of each of the Company's reporting units. Since
there were no quoted market prices in active markets for the Company's reporting
units, the measurement of fair value for each reporting unit was based on the
best information available for that reporting unit, including reasonable and
supportable assumptions and projections, as follows: (1) FSS -- public company
trading multiples, (2) satellite manufacturing and technology -- future
discounted cash flows, and (3) data services -- merger and acquisition
transaction multiples. Based on the fair values concluded on by those
professionals, management determined that the goodwill for each of the Company's
reporting units under the new guidance in SFAS 142 was fully impaired.
Accordingly, as of January 1, 2002, the Company recorded a non-cash charge for
the cumulative effect of the change in accounting principle of $892 million
before taxes ($877 million after taxes).

The charge is the result of a change in the evaluation criteria for
goodwill from an undiscounted cash flow approach which was previously utilized
under the guidance in Accounting Principles Board Opinion No. 17, Intangible
Assets, to the fair value approach which is stipulated in SFAS 142.

54

The following table presents the actual financial results and as adjusted
financial results without the amortization of goodwill for the Company for the
three and nine months ended September 30, 2001 (in thousands, except per share
amounts):

SFAS 143

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.

SFAS 144

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 has determined that there was no effect on the Company's
consolidated financial position or results of operations upon the adoption of
SFAS 144 on January 1, 2002.

SFAS 145

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS 145"). SFAS 145 generally requires that any gains or losses on
extinguishment of debt in current or prior periods be classified as other

55

income (expense), beginning in fiscal 2003, with early adoption encouraged. The
Company is currently evaluating the impact of adopting the provisions of SFAS
No. 145 in its consolidated financial statements.

SFAS 146

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS 146"). SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). SFAS 146
replaces EITF Issue No. 94-3. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.

ITEM 4. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Loral's chief
executive officer and its chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in the Securities and Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of
a date (the "Evaluation Date") within 90 days before the filing date of this
quarterly report, have concluded that as of the Evaluation Date, the Company's
disclosure controls and procedures were adequate and designed to ensure that
material information relating to the Company and its consolidated subsidiaries
would be made known to them by others within those entities.

(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or, in other factors that could significantly affect
the Company's disclosure controls and procedures subsequent to the Evaluation
Date.

56

PART II.

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a description of Loral Fairchild Corp.'s CCD lawsuits, see Loral's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. Also, see
Note 9 to the condensed consolidated financial statements.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

The following exhibits are filed as part of this report:

Exhibit 12 -- Computation of Deficiency of Earnings to Cover Fixed Charges

(b) Reports on Form 8-K

57

SIGNATURES

Pursuant to the requirements 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.
Registrant

/s/ RICHARD J. TOWNSEND
--------------------------------------
Richard J. Townsend
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
and Registrant's Authorized Officer

Date: November 14, 2002

58

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Loral Space & Communications Ltd.
(the "registrant") on Form 10-Q for the period ending September 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Quarterly Report"), I, Bernard L. Schwartz, Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec.
302 of the Sarbanes-Oxley Act of 2002, that:

(1) I have reviewed this Quarterly Report on Form 10-Q of Loral Space &
Communications Ltd.;

(2) Based on my knowledge, this Quarterly Report does not contain any
untrue statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Quarterly Report;

(3) Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this Quarterly Report;

(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Quarterly Report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
Quarterly Report (the "Evaluation Date"); and

c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

(6) The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

/s/ BERNARD L. SCHWARTZ
--------------------------------------
Bernard L. Schwartz
Chief Executive Officer

November 14, 2002

59

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Loral Space & Communications Ltd.
(the "registrant") on Form 10-Q for the period ending September 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the "
Quarterly Report "), I, Richard J. Townsend, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec.
302 of the Sarbanes-Oxley Act of 2002, that:

(1) I have reviewed this Quarterly Report on Form 10-Q of Loral Space &
Communications Ltd.;

(2) Based on my knowledge, this Quarterly Report does not contain any
untrue statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Quarterly Report;

(3) Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this Quarterly Report;

(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Quarterly Report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
Quarterly Report (the "Evaluation Date"); and

c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

(6) The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

/s/ RICHARD J. TOWNSEND
--------------------------------------
Richard J. Townsend
Chief Financial Officer

November 14, 2002

60

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Loral Space & Communications Ltd.
(the "Company") on Form 10-Q for the period ending September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Bernard L. Schwartz, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of the
Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

/s/ BERNARD L. SCHWARTZ
--------------------------------------
Bernard L. Schwartz
Chief Executive Officer

November 14, 2002

61

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Loral Space & Communications Ltd.
(the "Company") on Form 10-Q for the period ending September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Richard J. Townsend, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of the
Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

/s/ RICHARD J. TOWNSEND
--------------------------------------
Richard J. Townsend
Chief Financial Officer

November 14, 2002

62

EXHIBIT INDEX