But a confluence of recent trends has brought into sharper focus the very favorable fundamentals of the satellite business, especially the fixed satellite services segment. Witness to this are the impending initial public offerings of three, and possibly four, satellite service operators that are currently privately held. The increased activity in the marketplace has resulted in an awakening of interest in the industry on the part of investors. And I am happy to note that the sector's growth potential, strong cash flow and predictability have received favorable recognition in recent analysts' research reports.

Loral is pleased by this validation of the strategy that we adopted five years ago when we first entered the fixed satellite services business. We saw the opportunity early, and helped serve as a catalyst that ignited interest in a previously neglected segment of the overall communications industry. I would like to share with you our view of the business case for our FSS investment and the resulting value we are building for shareholders.

Already a leading participant in the satellite manufacturing industry, Loral recognized very early the potential value of establishing a satellite-based services business. Taking advantage of the specialized skills we already possessed in satellite technology, we bought Skynet, a small FSS company, from AT&T in 1997. At that time we acquired one on-orbit, 48-transponder satellite, some ground operations, a highly skilled management and employee team and a valued and satisfied customer base. For the nine months in 1997 that we owned Skynet, revenues were $70 million and EBITDA was $42 million. That modest beginning has grown into a formidable enterprise with the fastest growth record in our industry - in terms of revenue, profits and capacity.

By the end of 2001, Skynet revenue soared to $389 million, EBITDA (earnings before interest, taxes, depreciation and amortization) reached $276 million and margins increased 11 percentage points from 60% in 1997 to 71% in 2001. Loral now owns a fleet of seven satellites with 321 transponders and has an additional three satellites under construction, scheduled to enter service over the next nine months. If you include our Global Alliance investments in Satmex and EuropeStar, we have a fleet of ten satellites, soon to be 14, with 2001 revenues of $531 million and EBITDA of $347 million.

To put Skynet's record into perspective:

• The compound annual growth rate in satellites from 1997 through
  early 2003 is 47%;
• The compound growth rate in the number of transponders is 56%;
• In revenue that growth rate through 2001 was 45% and
• In EBITDA the compound growth rate was 51%.

This is a remarkable record of growth - the best in the industry. Some analysts estimate that the business Loral has built at Skynet over the past five years should have an enterprise value of between $3 billion and $3.7 billion -- that's over $3 billion where almost no value existed before.

At the end of 2001 the utilization of the available capacity on our Skynet fleet was 67% -- which, while very profitable, means that, without further investment, there is a significant upside potential for additional profit growth as utilization rises to an expected 85 percent across our young fleet. The average age of the satellites in our fleet is about four years - the youngest of all existing satellite fleets. And, as I've mentioned, we are adding significant capacity - more than 40 percent -- to the Skynet fleet over the next nine or ten months. The rationale and planning that went into the decision to add to our fleet are straight-forward. The new satellites will accomplish many things for us:

• They will improve on-orbit backup protection,
• Further strengthen our already dominant position in our primary broadcast market and in our cable markets,
• Expand into new markets, technologies and services and, most of all,
• Increase EBITDA growth momentum.

We are in the business of providing services to customers for, literally, decades - some satellites have useful lives that will exceed 20 years. While forecasting demand over a 20-year period may be a challenge, overall, demand has been relatively consistent with expectations. Further, the risk/reward ratio of investing in new FSS satellites is most favorable.

Good demand, low risk and high rewards are a potent combination for new satellite investment. I'd like to share with you how this favorable combination of factors formulate a compelling business case. After launch, the yearly incremental cost for each satellite is minimal, around $5 to $10 million. Accordingly, the EBITDA margin on incremental revenues from new satellites is 90 percent and each new satellite covers all costs, other than depreciation, at only 35 percent utilization, versus the expected 85 percent average utilization rate. The result is a quick payback of investment, high profit margins and strong cash flow.

Looking at the demand for in-orbit capacity, it will vary from region to region and it will be influenced by the robustness of the terrestrial infrastructure in a geographic area. But demand is driven by:

• The expansion of existing services
• The ability of the FSS providers to add new, valuable ancillary services,
• The speed of the deployment of new applications.

For example: Video broadcast distribution, the bread and butter of the sector, is well suited to satellites' point-to-multipoint transmission and continues to grow as new channels are introduced, as high-definition TV comes into its own, and as special interest programming becomes more profuse.

Data distribution - already a sizable business - will expand, with increases in corporate networking, government usage of commercial capacity and the introduction of new applications, some of them in the Ka-band frequency, allowing for the use of less costly, smaller receivers. Services that go directly to the user - satellite radio, satellite TV, Internet access - these, too, are emerging demands that we are ready to support.

New applications for homeland security are currently under development as are exciting opportunities for communication links to in-flight commercial aircraft. Loral is also initiating the first commercial deployment of X-band communications services to government and military organizations to satisfy a large unmet need.

In addition, Loral is particularly strong in North America and Latin America, the best markets, and has identified opportunities in various emerging regions like the Middle East and Asia, where growth is already evident and satellites are the best solution to the region's requirements.

We are in a particularly good position to prosper from these opportunities. Our satellite "footprint" is global. We are building a fleet with maximum flexibility to adapt to demand. Skynet has strong, established broadcast neighborhoods that make it attractive to many programmers. The Global Alliance it has with Satmex, EuropeStar and others provides it with back-up security and broad marketing advantages. And, it is rated as best in class by its blue-chip customer base.

For Loral, the advantages of being in the FSS business are obvious. The future revenue stream -- without further investment - from the ten satellites that will populate the Skynet fleet by early 2003, is estimated at $9 to $10 billion over the satellites' remaining lives. The EBITDA generated will provide Loral with the resources to expand the fleet at a rate of at least one satellite every year from internal sources after debt service. And, we are one of very few global players in this high-return field - a business distinguished by its high cost of entry, its limits in terms of the finite availability of orbital slots, its dependence upon a workforce with very specialized skills, its significant capital investment requirement, and the essential, non-commodity service it provides.

As I've said, we recognized early on that this was an excellent business. I think the results of our performance and execution have proved us right. In 2001, Loral Skynet contributed 92% of Loral's total EBITDA - a dramatic shift from five years ago. I suspect that as this year progresses and other FSS companies enter the public market, the investment community will give this segment - and Loral - the credit, long delayed, that it has earned.

Similarly, the satellite manufacturing business - which provides an essential component of the global telecommunications infrastructure - is not properly valued or understood. Space Systems/Loral is one of only five major manufacturers of commercial geosynchronous satellites in the world. It is the second largest company and in 2001, had a market share of more than 22%. Revenues in 2002 are expected to total around $1 billion, with improved margins and EBITDA over the prior year.

One of the most important factors to consider in evaluating Loral's position in the satellite manufacturing market is SS/L's sustained record of reliability. One measure of reliability is the length of time a satellite continues to generate revenue for our customer versus the satellite's "design life." That means, if the customer specified a satellite with a design life of 12 years and the satellite remained on-orbit, generating revenue, for 18 years, the operator received six "free" years of revenue generation. SS/L has consistently exceeded customer requirements, delivering 31% more "life" than required under contract. In addition to reliability, SS/L has built a reputation for innovation based on the technological advances it has introduced that result in satellites with higher power, longer life, and greater flexibility to match increasingly complex customer objectives.

SS/L claims another distinction that we believe sets it apart from its competitors. Because of its relationship with Skynet, SS/L has the advantage of learning early what the market's requirements are as new applications emerge. At the same time, Skynet benefits from SS/L's significant insight into evolving technologies that develop into new products. We believe this two-way synergy has a unique value.

Currently, SS/L has a full factory - 20 satellites are under construction and we expect to deliver nine or ten of them this year. As the satellites in backlog are shipped, they provide a substantial source of cash over the next several years. But orders, thus far this year, have not materialized for any manufacturer worldwide - a result of postponed capital investment commitments due to both the uncertain economy and slow development of the broadband data market. Fortunately, we have a backlog of $1.2 billion at SS/L that cushions the impact of the current booking inactivity.

In the second half of this year we expect to see a pick up in satellite orders spurred by further economic recovery, a resumption of broadband projects and, in particular, by fleet operators' need to replace aging satellites. There are approximately 260 commercial geosynchronous satellites in orbit today. The average life of on-orbit satellites is 12 to 15 years, suggesting that the need for replacements will average about 20 per year. This suggests that pent-up demand will result in a bow wave of orders by next year. We expect SS/L to maintain at least its current market share as orders start to come in this year.

CyberStar, Loral's data services business, is a leading operator in a highly competitive market. While it is not a core Loral business, its products complement our FSS offerings as a value-added component. CyberStar met its targets in 2001, achieving $93 million in revenue and turning EBITDA positive in the final quarter of the year. We expect to further improve EBITDA performance this year.

Overall, we are confident in the strategy we've devised for our core operating businesses and gratified by the sound performances delivered in a tough economic and industry environment. We believe that both businesses are in very strong positions not only to maintain their leadership in the industry but to continue to effectively execute their business plans and further their growth as economic and industry momentum increase.

On the financial side, we have improved significantly during the year. We undertook several financing initiatives in 2001 and earlier this year - including preferred stock exchanges, extensions of our bank credit facilities and debt exchanges. These actions strengthened our balance sheet and addressed concerns about Loral's liquidity. The result to date is that we reduced our principal obligations by $615 million and our annual cash interest and dividend payments by $51 million. In the future, the EBITDA generated by our core businesses, after servicing scheduled debt, will support our plans for continuous growth. Again, we are adhering to the plan we outlined a year ago - our overall debt obligation has declined and our core businesses are well positioned for the future.

This is not to say that current shareholder value has reflected this progress. It clearly has not. Despite the fact that we acted early and effectively to maintain our sustained growth, increase our margins and strengthen our balance sheet, our company remains severely undervalued. We believe that we are doing the right things in our business. I think it fair to point out, however, that the stock market has not cooperated to improve our share price. This is neither consolation nor an excuse. Our price performance must be considered relative to the overall market trends. Telecommunications stocks have been savaged and Loral was not exempt from the onslaught. Many of the blue chips, the DJIA, the S&P index, NASDAQ, and all the satellite indices have declined dramatically since last year.

Certain market-related factors that effect stock price are beyond our control. What is within our control, however, is performance - vision, planning and execution. Shareholder value will be driven by our sustained good performance and this is our only objective. We are grateful for our shareholders' patience and perseverance - and ask that you recognize and appreciate the energy, vision, and execution of over 3000 dedicated, competent men and women of Loral who contributed so much to the company's good performance.

Given the health of our core businesses, our improved financial condition, faint but real signs of economic recovery, and our expectation that Loral will produce positive earnings per share by the end of next year -- we have solid reasons to be hopeful that next year at this time shareholder value will have improved.