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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

For the quarterly period ended June 30, 2004

Commission file number 1-14180

Loral Space & Communications Ltd.

c/o Loral SpaceCom Corporation

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.

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

      As of July 31, 2004, there were 44,125,202 shares of Loral Space & Communications Ltd. common stock outstanding.

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PART 1.

LORAL SPACE & COMMUNICATIONS LTD., A DEBTOR IN POSSESSION

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements.

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LORAL SPACE & COMMUNICATIONS LTD., A DEBTOR IN POSSESSION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to condensed consolidated financial statements.

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LORAL SPACE & COMMUNICATIONS LTD., A DEBTOR IN POSSESSION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to condensed consolidated financial statements.

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LORAL SPACE & COMMUNICATIONS LTD., A DEBTOR IN POSSESSION

      Loral Space & Communications Ltd. (“Loral,” the “Company,” “we,” “our” and “us”, terms that include our subsidiaries unless otherwise indicated or the context requires) together with its subsidiaries is a leading satellite communications company with substantial activities in satellite-based communications services and satellite manufacturing. Loral is organized into two operating segments (see Note 17):

	Satellite Services, managed by our Loral Skynet division, generates its revenues and cash from leasing satellite capacity and platforms to customers for video and direct to home (“DTH”) broadcasting, high-speed data distribution, Internet access, communications and networking services.
	Satellite Manufacturing, conducted by our subsidiary, Space Systems/ Loral (“SS/ L”), generates its revenues and cash from designing and manufacturing satellites, space systems and space system components for commercial and government applications including satellite services, DTH broadcasting, broadband data distribution, wireless telephony, digital radio, military communications, weather monitoring and air traffic management.

      On July 15, 2003, Loral and certain of its subsidiaries (the “Debtor Subsidiaries” and collectively with Loral, the “Debtors”), including Loral Space & Communications Corporation, Loral SpaceCom Corporation (“Loral SpaceCom”), Loral Satellite, Inc. (“Loral Satellite”), SS/ L and Loral Orion, Inc. (“Loral Orion”), filed voluntary petitions for reorganization under chapter 11 of title 11 (“Chapter 11”) of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) (Lead Case No. 03-41710 (RDD), Case Nos. 03-41709 (RDD) through 03-41728 (RDD)) (the “Chapter 11 Cases”). We and our Debtor Subsidiaries continue to manage our properties and operate our businesses as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the provisions of the Bankruptcy Code (see Note 3).

      Also on July 15, 2003, Loral and one of its Bermuda subsidiaries (the “Bermuda Group”) filed parallel insolvency proceedings in the Supreme Court of Bermuda (the “Bermuda Court”). On that date, the Bermuda Court entered an order appointing Philip Wallace, Chris Laverty and Michael Morrison, partners of KPMG, as Joint Provisional Liquidators (“JPLs”) in respect of the Bermuda Group. The Bermuda Court granted the JPLs the power to oversee the continuation and reorganization of these companies’ businesses under the control of their boards of directors and under the supervision of the U.S. Bankruptcy Court and the Bermuda Court. The JPLs have not audited the contents of this report.

      As a result of our voluntary petitions for reorganization, all of our prepetition debt obligations were accelerated (see below and Notes 11 and 12). On July 15, 2003, we also suspended interest payments on all of our unsecured debt obligations. A creditors’ committee was appointed in the Chapter 11 Cases to represent all unsecured creditors, including all debt holders, and, in accordance with the provisions of the Bankruptcy Code, has the right to be heard on all matters that come before the Bankruptcy Court (see Note 12).

      For the duration of the Chapter 11 Cases, our businesses are subject to the risks and uncertainties of bankruptcy. For example, the Chapter 11 Cases could adversely affect our relationships with customers, suppliers and employees which in turn could adversely affect the going concern value of our businesses and of our assets, particularly if the Chapter 11 Cases are protracted. Also, transactions outside the ordinary course of business are subject to the prior approval of the Bankruptcy Court which may limit our ability to respond to certain market events or take advantage of certain market opportunities, and, as a result, our operations could be materially adversely affected.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Because we are in Chapter 11, the pursuit of all claims and litigation pending against us that arose prior to or relate to events that occurred prior to our bankruptcy filings is generally subject to an automatic stay under Section 362 of the Bankruptcy Code. Accordingly, absent further order of the Bankruptcy Court, a party is generally prohibited from taking any action to recover any prepetition claims, enforce any lien against or obtain possession of any of our property. In addition, pursuant to Section 365 of the Bankruptcy Code, we may reject or assume prepetition executory contracts and unexpired leases. Parties affected by our rejections of contracts or leases may file claims with the Bankruptcy Court.

      On July 15, 2003, the New York Stock Exchange suspended trading of our common stock and, on September 2, 2003, removed our securities from listing and registration. Our common stock is being quoted under the ticker symbol LRLSQ on the Pink Sheets and on the Over-The-Counter Bulletin Board Service (see Reorganization below).

      On March 17, 2004, Loral Space & Communications Corporation, Loral SpaceCom Corporation and Loral Satellite, Inc. (collectively, the “Sellers”) consummated the sale (the “Sale”) of our North American satellites and related assets to certain affiliates of Intelsat, Ltd. and Intelsat (Bermuda), Ltd. (collectively, “Intelsat” or the “Purchasers”). At closing, we received approximately $1.011 billion, consisting of approximately $961 million for the North American satellites and related assets, after adjustments, and $50 million for an advance on a new satellite to be built for Intelsat by SS/ L. Our obligations with respect to the $50 million advance are secured by the Telstar 14/ Estrela do Sul-1 satellite and related assets, including insurance proceeds relating to the satellite. We used a significant portion of the funds received to repay all $967 million of our outstanding secured bank debt. In addition, after closing, the Sellers received from Intelsat approximately $16 million to reimburse a deposit made by us for the launch of Telstar 8, and we received an additional $4 million in May 2004 as a purchase price adjustment resulting from resolution of a regulatory issue.

      The North American satellites and related assets have been accounted for as a discontinued operation, resulting in the reclassification of our historical condensed consolidated statements of operations and statements of cash flows to reflect them as discontinued operations separately from continuing operations (see Note 4).

      We intend to reorganize around our satellite manufacturing operations and our remaining fleet of international satellites and do not believe we will require any additional financing to fund operations.

      On July 22, 2004, we announced that we had reached an agreement with the creditors’ committee in our Chapter 11 Cases on the principal terms of a plan of reorganization. Under the proposed plan, reorganized Loral will continue under current management substantially debt-free, with its two businesses, satellite manufacturing, conducted by SS/ L and satellite services, managed by Loral Skynet, intact. The proposed plan will provide that all pre-petition institutional debt will be exchanged for substantially all of the equity of the reorganized company, and that certain other pre-petition general unsecured creditors will be offered a payment plan that may include an option to elect either a discounted cash payment or a payout over time. The proposed plan will not provide for any recovery or participation in reorganized Loral by the holders of our existing common or preferred stock.

      The Bankruptcy Court has extended the period during which we have the exclusive right to file a plan of reorganization through August 27, 2004, subject to any further extension, as to which we can give no assurance. We are currently working with the creditors’ committee to document the proposed consensual plan of reorganization. If we fail to file our plan of reorganization during this exclusive period, or if a plan is filed

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and is not accepted by the required number of creditors within the required period, any party in interest may subsequently file its own plan of reorganization for us.

      Implementation of the proposed plan and the treatment of claims and equity interests as provided therein, are subject to confirmation of the plan in accordance with the provisions of the Bankruptcy Code. Although we expect to file the plan of reorganization within a time frame to permit for Loral’s emergence from Chapter 11 some time in 2004, the timing and terms of resolution of the Chapter 11 cases cannot be predicted with certainty. There can be no assurance that we will be able to obtain court approval of the plan we propose or obtain acceptances from the number of creditors necessary to confirm this plan.

      The accompanying unaudited condensed consolidated financial statements (the “financial statements”) have been prepared assuming Loral, in its current structure, will continue as a going concern. However, the factors mentioned in Note 2 above, among other things, raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our ability to continue as a going concern is dependent on a number of factors including, but not limited to, our submission of a plan of reorganization, the Bankruptcy Court’s confirmation of a plan, and maintaining good relations with our customers, suppliers and employees. If a plan of reorganization is not confirmed and implemented, we may be forced to liquidate under applicable provisions of the Bankruptcy Code. We cannot give any assurance of the level of recovery our creditors would receive in a liquidation. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities if we were forced to liquidate (see Reorganization in Note 2).

      The financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) and, in our opinion, 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. We believe that the disclosures made are adequate to keep the information presented from being misleading. The results of operations for the three and six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year. The December 31, 2003 balance sheet has been derived from the audited consolidated financial statements at that date. It is suggested that these financial statements be read in conjunction with the audited consolidated financial statements included in our latest Annual Report on Form 10-K.

      The financial statements have been prepared in accordance with Statement of Position No. 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code (“SOP 90-7”). SOP 90-7 requires us to distinguish prepetition liabilities subject to compromise from postpetition liabilities in our condensed consolidated balance sheet. The caption “liabilities subject to compromise” reflects the carrying value of prepetition claims that will be restructured in our Chapter 11 Cases. In addition, our condensed consolidated statements of operations portray the results of operations of the reporting entity during Chapter 11 proceedings. As a result, any revenue, expenses, realized gains and losses, and provision for losses resulting directly from the reorganization and restructuring of the organization are reported separately as reorganization items, except those required to be reported as discontinued operations and extraordinary items in conformity with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”) and SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”). We did not prepare condensed combined financial statements for Loral and its Debtor Subsidiaries, since the subsidiaries that did not file voluntary petitions for reorganization under Chapter 11 of

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the Bankruptcy Code were immaterial to our condensed consolidated financial position and results of operations.

      During 2004 and 2003, we continued to maintain the 100% valuation allowance established at December 31, 2002 and recorded no benefit for our domestic loss. As described in Notes 6 and 9, with Globalstar, L.P.’s (“Globalstar”) liquidation on June 29, 2004, we wrote-off the remaining book value of our investment in Globalstar’s $500 million credit facility and reduced to zero the unrealized gains and related deferred tax liabilities previously reflected in accumulated other comprehensive loss. The reversal of these deferred tax liabilities, resulted in a net deferred tax asset of $11.4 million against which we recorded a full valuation allowance. Therefore, for 2004, our provision for continuing operations includes the additional valuation allowance of $11.4 million, a provision for foreign income taxes and no benefit for the loss from continuing and discontinued operations. For 2003, the benefit in continuing operations primarily relates to a reclassification of a provision to income from discontinued operations offset by a deferred tax liability recorded for certain foreign entities.

      The following table provides the components of net periodic benefit cost for our qualified and supplemental retirement plans (the “Pension Benefits”) and health care and life insurance benefits for retired employees and dependents (the “Other Benefits”) for the three and six months ended June 30, 2004 and 2003 respectively (in thousands):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following represents non-cash activities and supplemental information to the condensed consolidated statements of cash flows (in thousands):

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

      As described in Note 2, on March 17, 2004, we completed the sale of our North American satellites and related assets to Intelsat. The operating revenues and expenses of these assets have been classified as discontinued operations under SFAS No. 144 for all periods presented. Due to certain unsettled contingencies, we have deferred the expected gain on the sale of approximately $21 million on our condensed consolidated balance sheet as of June 30, 2004. The determination of the actual gain will be finalized when all contingencies are resolved, which is expected to occur by the end of 2004. Accordingly, the actual gain ultimately recognized may be different than the deferred gain reflected here.

      The following table summarizes certain statement of operations data for the discontinued operations. In 2004, the operating results of the discontinued operations are for the period from January 1, 2004 to March 17, 2004, the date of the sale. The 2004 results include the write-off of approximately $11 million of debt issue costs to interest expense relating to secured debt that we repaid. For the purposes of this presentation, in accordance with SFAS 144, we have included in continuing operations all indirect costs normally associated

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

with these operations, including telemetry, tracking and control, access control, maintenance and engineering, selling and marketing, and general and administrative.

      The satellites sold had a net book value of $935 million, including insurance proceeds receivable on our consolidated balance sheet at December 31, 2003. The related assets and liabilities sold had a net book value of $30 million and $31 million, respectively, as of December 31, 2003.

      In accordance with SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“SFAS 148”), an amendment of SFAS 123, presented below are pro forma results reflecting the application of the fair value-based method of accounting for stock-based employee compensation. Under SFAS 123, the fair value of stock-based awards to employees is calculated using option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from our stock option awards. These models also require subjective assumptions, including future stock price volatility and expected exercise time, which can significantly affect the calculated values. We used the Black-Scholes option pricing model with the following weighted average assumptions in our calculations: expected life, six to twelve months following vesting; stock volatility, 90%; risk free interest rate, 2.4% to 6.6% based on date of grant; and dividends, none during the expected term. Our calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. The following table summarizes what our pro forma net loss and pro forma loss per

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

share would have been if we used the fair value method under SFAS 123 (in millions, except per share amounts):

      The fair values of stock based employee compensation above were calculated based on the relative values of the options at the date of grant. In order for the stock options to have any value to the holders, the market share of our common stock would have to rise from $0.14 at June 30, 2004 to greater than $3.80 (the lowest price of our stock options outstanding).

      Our proposed consensual plan of reorganization would not provide for participation or recovery by our equity holders.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

      As described in Note 9, with Globalstar’s liquidation on June 29, 2004, we wrote-off the remaining book value of our investment in Globalstar’s $500 million credit facility and reduced to zero the unrealized gains and related deferred tax liabilities previously reflected in accumulated other comprehensive loss. The unrealized gains reflected above for the three and six months ended June 30, 2004, include the reversal of $11.4 million of deferred tax liabilities relating to our investment in Globalstar’s $500 million credit facility.