<PAGE>
 
                                 UNITED STATES

                      SECURITIES AND EXCHANGE COMMISSION

                           WASHINGTON, D. C.  20549

                                   FORM 10-Q


[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
     For the quarterly period ended March 31, 1999

                                      OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
     For the transition period from _____ to _____


Commission File Number:  0-21317


                       TCI SATELLITE ENTERTAINMENT, INC.
            ------------------------------------------------------
            (Exact name of Registrant as specified in its charter)

       State of Delaware                                  84-1299995
-------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)
 
 
    8085 South Chester, Suite 300
        Englewood, Colorado                                  80112
----------------------------------------                  ----------
(Address of principal executive offices)                  (Zip Code)
 

      Registrant's telephone number, including area code: (303) 712-4600


        Indicate by check mark whether the Registrant (1) 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 (2) has been subject to such filing
requirements for the past 90 days [X]  Yes  [  ] No

        The number of shares outstanding of TCI Satellite Entertainment, Inc.'s
common stock as of April 30, 1999, was:

                 Series A common stock - 59,354,966 shares, and
                   Series B common stock - 8,465,324 shares.
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
 
                          Consolidated Balance Sheets
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                             March 31,   December 31,
                                                                               1999          1998
                                                                            ----------   ------------
                                                                               amounts in thousands
<S>                                                                         <C>          <C>
Assets
------
 
Cash and cash equivalents                                                    $     752             --
                                                                                             
Investment in Phoenixstar, Inc.(formerly PRIMESTAR,   Inc.)                                  
 ("Phoenixstar") (notes 3 and 7)                                                    --             --
                                                                                             
Satellites, at cost (note 8)                                                   239,118        463,133
                                                                             ---------       --------
                                                                                             
                                                                             $ 239,870        463,133
                                                                             =========       ========
                                                                                             
Liabilities and Stockholders' Deficit                                                        
-------------------------------------
                                                                                             
Due to Phoenixstar (note 8)                                                  $ 332,818        469,498
                                                                             ---------       --------

Stockholders' Deficit:                                                                       
 Preferred stock, $.01 par value;                                                            
   authorized 5,000,000 shares; none issued                                         --             --
 Series A common stock, $1 par value;
   authorized 85,000,000 shares; issued
   59,354,966 in 1999 and 59,280,466 in 1998                                    59,355          59,280
 Series B common stock, $1 par value;         
  authorized 10,000,000 shares; issued
  8,465,324 in 1999 and 1998                                                     8,465          8,465
 Additional paid-in capital                                                    825,382        825,276
 Accumulated deficit                                                          (986,150)      (899,386)
                                                                             ---------       --------
                                                                                             
    Total stockholders' deficit                                                (92,948)        (6,365)
                                                                             ---------       --------
                                                                                             
                                                                             $ 239,870        463,133
                                                                             =========       ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      I-1
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
 
                     Consolidated Statements of Operations
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                                   Three months ended
                                                                                        March 31,
                                                                                 -----------------------
                                                                                    1999         1998
                                                                                 ---------    ----------
                                                                                   amounts in thousands,
                                                                                 except per share amounts
<S>                                                                              <C>          <C> 
Revenue                                                                           $    --        168,500
                                                                                                
Operating costs and expenses:                                                                   
 Charges from PRIMESTAR Partners L.P. (note 9)                                          --        82,235
 Operating                                                                           2,777         9,847
 Selling, general and administrative                                                    43        55,341
 Stock compensation (note 9)                                                           181         4,869
 Depreciation                                                                           --        65,105
                                                                                  --------      --------
                                                                                     3,001       217,397
                                                                                  --------      --------
                                                                                                
    Operating loss                                                                  (3,001)      (48,897)
                                                                                                
Other income (expense):                                                                         
 Loss on sale of satellite (note 2)                                                (83,765)           --
 Interest expense                                                                       --       (14,177)
 Share of losses of PRIMESTAR Partners L.P.                                             --        (5,822)
 Other, net                                                                              2          (621)
                                                                                  --------      --------
                                                                                   (86,763)      (20,620)
                                                                                  --------      --------
                                                                                                
    Loss before income taxes                                                       (86,764)      (69,517)
                                                                                                
Income tax benefit (note 10)                                                            --            --
                                                                                  --------      --------
                                                                                                
    Net loss                                                                      $(86,764)      (69,517)
                                                                                  ========      ========
                                                                                                
Basic and diluted loss per common share (note 5)                                  $  (1.28)        (1.03)
                                                                                  ========      ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      I-2
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
 
                Consolidated Statement of Stockholders' Deficit

                       Three months ended March 31, 1999
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                                                                
                                                    Common stock         Additional                     Total    
                                                ----------------------    paid-in      Accumulated   stockholders' 
                                                 Series A    Series B     capital        deficit       deficit
                                                ----------  ----------  ------------  -------------  ------------
                                                                    amounts in thousands
<S>                                             <C>         <C>         <C>           <C>            <C>  
Balance at January 1, 1999                      $   59,280       8,465      825,276      (899,386)      (6,365)
                                                                                                    
 Net loss                                               --          --           --       (86,764)     (86,764)
 Recognition of stock compensation                                                                  
  related to stock options and                                                                      
  restricted stock awards (note 9)                      --          --          181                         --
 Issuance of Series A Common Stock                                                                  
  related to restricted stock awards                    75          --          (75)           --           --
                                                ----------  ----------    ---------     ---------     --------
                                                                                                    
Balance at March 31, 1999                       $   59,355       8,465      825,382      (986,150)     (92,948)
                                                ==========  ==========    =========     =========     ========
</TABLE>

See accompanying notes to consolidated  financial statements.

                                      I-3
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
 
                     Consolidated Statements of Cash Flows
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                                   Three months ended
                                                                                        March 31,
                                                                                 -----------------------
                                                                                    1999         1998
                                                                                 ---------    ---------- 
                                                                                   amounts in thousands
                                                                                      (see note 6)
<S>                                                                              <C>          <C> 
Cash flows from operating activities:
 Net loss                                                                        $ (86,764)      (69,517)
 Adjustments to reconcile net loss to net cash provided (used)                               
  by operating activities:                                                                   
    Loss on sale of satellite                                                       83,765            --
    Depreciation                                                                        --        65,105
    Share of losses of PRIMESTAR Partners L.P.                                          --         5,822
    Accretion of debt discount                                                          --         4,682
    Stock compensation                                                                 181         4,869
    Other non-cash charges                                                              --         7,956
    Changes in operating assets and liabilities:                                             
       Change in receivables                                                            --        10,845
       Change in other assets                                                           --          (736)
       Change in accruals and payables                                                  --       (10,209)
       Change in subscriber advance payments                                            --        (3,114)
                                                                                 ---------    ----------  
                                                                                             
         Net cash provided (used ) by operating                                              
          activities                                                                (2,818)       15,703
                                                                                 ---------    ----------
Cash flows from investing activities:                                                        
 Proceeds from sale of satellite                                                       750            --
 Capital expended for property and equipment                                            --       (73,966)
 Additional investments in and advances to                                                   
   PRIMESTAR Partners L.P.                                                              --           (75)
                                                                                 ---------    ----------   
         Net cash provided (used) by investing                                               
          activities                                                                   750       (74,041)
                                                                                 ---------    ----------
Cash flows from financing activities:                                                        
 Borrowings of debt                                                                     --       113,000
 Repayments of debt                                                                     --       (61,735)
 Increase in due to Phoenixstar                                                      2,820            --
 Proceeds from issuance of common stock                                                 --           989
                                                                                 ---------    ----------   
                                                                                             
         Net cash provided by financing activities                                   2,820        52,254
                                                                                 ---------    ----------   
         Net increase (decrease) in cash and cash                                            
          equivalents                                                                  752        (6,084)
                                                                                             
         Cash and cash equivalents:                                                          
          Beginning of period                                                           --         6,084
                                                                                 ---------    ----------   
                                                                                             
          End of period                                                           $    752            --
                                                                                 =========    ==========   
</TABLE>

See accompanying notes to consolidated financial statements.

                                      I-4
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                                March 31, 1998
                                  (unaudited)


(1)  Basis of Presentation
     ---------------------

     The accompanying consolidated financial statements include the accounts of
     TCI Satellite Entertainment, Inc. and those of all majority-owned
     subsidiaries ("TSAT" or the "Company").  All significant inter-company
     transactions have been eliminated.

     As a result of the TSAT Asset Transfer described in note 3, TSAT is
     currently a holding company, with no substantial assets or liabilities
     other than (i) 100% of the outstanding capital stock of Tempo Satellite,
     Inc. ("Tempo"), (ii) its ownership interest in Phoenixstar, and (iii) its
     rights and obligations under certain agreements with Phoenixstar and
     others.

     In addition, the Company has no operations subsequent to the TSAT Asset
     Transfer other than (i) expenses associated with the operation and
     maintenance of the Tempo Satellites, as defined below and (ii) general and
     administrative expenses incurred to maintain the Company's status as a
     publicly traded company.

     Tempo holds a permit (the "FCC Permit") issued by the Federal
     Communications Commission ("FCC") authorizing the construction of a direct
     broadcast satellite ("DBS") system in the 119 degrees West Longitude
     ("W.L.") orbital position. Tempo is also a party to a construction
     agreement (the "Satellite Construction Agreement") with Space
     Systems/Loral, Inc. ("Loral"), pursuant to which Tempo arranged for the
     construction of two high power communications satellites (the "Tempo
     Satellites"), one of which is currently in orbit at 119 degrees W.L.
     ("Tempo DBS-1") and one of which was sold on March 10, 1999 ("Tempo DBS-
     2").

     The accompanying interim consolidated financial statements of TSAT are
     unaudited.  In the opinion of management, all adjustments (consisting only
     of normal recurring accruals) have been made which are necessary to present
     fairly the financial position of TSAT as of March 31, 1999 and the results
     of its operations for the periods ended March 31, 1999 and 1998.  The
     results of operations for any interim period are not necessarily indicative
     of the results for the entire year.  These financial statements should be
     read in conjunction with the financial statements and related notes thereto
     included in TSAT's December 31, 1998 Annual Report on Form 10-K.

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

     Certain amounts have been reclassified for comparability with the 1999
     presentation.
                                                                     (continued)

                                      I-5
<PAGE>
 
             TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


(2)  Hughes Transactions
     -------------------

     On January 22, 1999, the Company announced that the Company and Phoenixstar
     had reached an agreement with Hughes Electronics Corporation ("Hughes"), a
     subsidiary of General Motors Corporation, to sell (i) the Tempo Satellites,
     (ii) the FCC Permit and (iii) Phoenixstar's rights relating to Tempo's DBS
     system to Hughes, for aggregate consideration valued at $500 million (the
     "Hughes High Power Transaction").  Pursuant to the agreement, Hughes has
     agreed to assume $465 million of TSAT's liability to PRIMESTAR Partners,
     pay TSAT $2.5 million in cash and pay Phoenixstar and PRIMESTAR Partners
     $32.5 million in cash.  In addition, Phoenixstar and PRIMESTAR Partners
     have agreed to forgive certain amounts due from TSAT in excess of the $465
     million to be assumed by Hughes.  Due to the fact that regulatory approval
     is required to transfer Tempo DBS-1 and the FCC Permit to Hughes, the
     Hughes High Power Transaction will be completed in two steps.

     Effective March 10, 1999, the first closing of the Hughes High Power
     Transaction (the "First Closing") was consummated whereby Hughes acquired
     Tempo DBS-2 and Phoenixstar's option to acquire Tempo DBS-2 (the "Tempo
     DBS-2 Option") for aggregate consideration of $150 million.  Such
     consideration was comprised of the following: (i) $9,750,000 paid to
     Phoenixstar and PRIMESTAR Partners for the Tempo DBS-2 Option and the
     termination of PRIMESTAR Partners' rights with respect to the capacity of
     Tempo's high power DBS assets, (ii) $750,000 paid to TSAT to exercise the
     Tempo DBS-2 Option and (iii) the assumption by Hughes of $139,500,000 due
     to PRIMESTAR Partners from TSAT in exchange for Tempo DBS-2, which had a
     carrying value of $224 million at the time of closing.

     The sale of the remaining assets contemplated by the Hughes High Power
     Agreement (the "Second Closing") is subject to the receipt of appropriate
     regulatory approvals and other customary closing conditions and is expected
     to be consummated in mid-1999.  Tempo has been notified that Tempo DBS-1
     experienced power reductions which occurred on March 29, 1999 and April 2,
     1999.  Although the Company does not believe the extent of such power
     reductions is significant, a definitive assessment of the impact on Tempo
     DBS-1 is not yet complete.  Upon completion of the sale of the Company's
     high power assets, which had a carrying value of $239 million at March 31,
     1999, the Company will receive additional consideration of $327 million in
     the form of cash and debt assumption.

     In a separate transaction completed on April 28, 1999 (the "Hughes Medium
     Power Transaction"), Phoenixstar sold to Hughes Phoenixstar's medium-power
     DBS business and assets for $1.1 billion in cash and 4.871 million shares
     of General Motors Class H common stock ("GMH Stock") valued at
     approximately $258 million on the date of closing.  Phoenixstar is
     responsible for the payment of certain obligations not assumed by Hughes,
     satisfaction of its funded indebtedness and the payment of costs, currently
     estimated to range from $270 million to $340 million, associated with the
     termination of certain vendor and service contracts and lease agreements
     not assumed by Hughes.  Affiliates of stockholders of Phoenixstar, other
     than the Company, and an affiliate of Tele-Communications, Inc. ("TCI")
     have committed to make funds available to Phoenixstar, up to an aggregate
     of $1,013 million to fund such payments.

                                                                     (continued)

                                      I-6
<PAGE>
 
             TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


     In connection with their approval of the Hughes Medium Power Transaction,
     the stockholders of Phoenixstar approved the payment to TSAT of
     consideration in the form of 1.407 million shares of GMH Stock (the
     "Phoenixstar Payment"), subject to the terms and considerations set forth
     in an agreement (the "Phoenixstar Payment Agreement") dated as of January
     22, 1999.  In consideration of the Phoenixstar Payment, the Company agreed
     to approve the Hughes Medium Power Transaction and Hughes High Power
     Transaction as a stockholder of Phoenixstar, to modify certain agreements
     to facilitate the Hughes High Power Transaction, and to issue Phoenixstar a
     share appreciation right (the "TSAT GMH SAR") with respect to the shares of
     GMH Stock received as the Phoenixstar Payment, granting Phoenixstar the
     right to any market price appreciation in such GMH Stock during the one-
     year period following the date of issuance, over an agreed strike price of
     $47.00.  On the Hughes Closing Date, the Company received 1.407 million
     shares of GMH Stock from Phoenixstar in satisfaction of the Phoenixstar
     Payment.

     The TSAT GMH SAR is secured by a first priority pledge and security
     interest in the underlying shares of GMH Stock, and both the TSAT GMH SAR
     and such pledge and security interest have been pledged by Phoenixstar for
     the benefit of certain holders of share appreciation rights issued by
     Phoenixstar with respect to shares of GMH Stock (the "Phoenixstar GMH
     SARs"). The shares of GMH Stock issued to TSAT pursuant to the Phoenixstar
     Payment Agreement are subject to certain restrictions on transfer during
     the first year after the closing of the Hughes Medium Power Transaction,
     and TSAT will be entitled (together with Phoenixstar) to certain
     registration rights with respect to such shares following the expiration of
     such one-year period. Pursuant to the Phoenixstar Payment Agreement, TSAT
     has also agreed to forego any liquidating distribution or other payment
     that may be made in respect of the outstanding shares of Phoenixstar upon
     any dissolution and winding-up of Phoenixstar, or otherwise in respect of
     Phoenixstar's existing equity.

(3)  The Restructuring
     -----------------

     Effective April 1, 1998 (the "Closing Date") and pursuant to (i) a Merger
     and Contribution Agreement dated as of February 6, 1998, (the
     "Restructuring Agreement"), among TSAT, Phoenixstar, prior to the
     Restructuring a wholly-owned subsidiary of TSAT, Time Warner Entertainment
     Company, L.P. ("TWE"), Advance/Newhouse Partnership ("Newhouse"), Comcast
     Corporation ("Comcast"), Cox Communications, Inc. ("Cox"), MediaOne of
     Delaware, Inc., ("MediaOne"), and GE American Communications, Inc., and
     (ii) an Asset Transfer Agreement dated as of February 6, 1998, (the "TSAT
     Asset Transfer Agreement") between TSAT and Phoenixstar, a business
     combination (the "Restructuring") was consummated.  In connection with the
     Restructuring, TSAT contributed and transferred to Phoenixstar (the "TSAT
     Asset Transfer") all of TSAT's assets and liabilities except (i) the
     capital stock of Tempo, (ii) the consideration to be received by TSAT in
     the Restructuring and (iii) the rights and obligations of TSAT under
     certain agreements with Phoenixstar and others.  In addition, the business
     of PRIMESTAR Partners L.P. ("PRIMESTAR Partners") and the business of
     distributing the PRIMESTAR(R) programming service ("PRIMESTAR(R)") of each
     of TWE, Newhouse, Comcast, Cox and affiliates of MediaOne were consolidated
     into Phoenixstar.

                                                                     (continued)

                                      I-7
<PAGE>
 
             TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


     In connection with the TSAT Asset Transfer, Phoenixstar assumed all of
     TSAT's indebtedness on such date, and TSAT received from Phoenixstar 66.3
     million shares of Class A Common Stock of Phoenixstar ("Phoenixstar Class A
     Common Stock") and 8.5 million shares of Class B Common Stock of
     Phoenixstar ("Phoenixstar Class B Common Stock" and together with the
     Phoenixstar Class A Common Stock, "Phoenixstar Common Stock"), in
     accordance with the Restructuring Agreement and the TSAT Asset Transfer
     Agreement.  As a result, TSAT owns approximately 37% of the outstanding
     shares of common equity of Phoenixstar, representing approximately 38% of
     the combined voting power of such common equity.  As a result of the
     dilution of TSAT's investment in Phoenixstar from 100% to approximately
     37%, TSAT recognized an increase in its investment in Phoenixstar and an
     increase in additional paid-in capital of $299,046,000, net of income
     taxes.  Such increase represents the difference between TSAT's historical
     investment basis in Phoenixstar and TSAT's proportionate share of
     Phoenixstar's equity subsequent to the Restructuring.

(4)  Comprehensive Loss
     ------------------

     The Company's total comprehensive loss for all periods presented herein did
     not differ from those amounts reported as net loss in the consolidated
     statements of operations.

(5)  Loss Per Common Share
     ---------------------

     The basic and diluted loss per common share is based on the weighted
     average number of shares outstanding during the period (67,783,000 and
     67,633,000 shares for the three months ended March 31, 1999 and 1998,
     respectively).  Excluded from the computation of diluted loss per common
     share for the three months ended March 31, 1999 and 1998 are options and
     convertible securities to acquire 8,515,000 and 8,855,000 shares of Series
     A Common Stock, respectively, because inclusion of such options would be
     anti-dilutive.

(6)  Supplemental Disclosures to Combined Statements of Cash Flows
     -------------------------------------------------------------

     Cash paid for interest was $0 and $13,844,000 during the three months ended
     March 31, 1999 and 1998, respectively.  Cash paid for income taxes was not
     significant during either of such periods.

     Significant non-cash investing and financing activities for the three
     months ended March 31, 1999 are as follows (amounts in thousands):

        Assumption of amounts due to Phoenixstar
         in exchange for Tempo DBS-2                    $139,500
                                                        ========

(7)  Investment in Phoenixstar
     -------------------------

     Prior to the Hughes Medium Power Transaction, Phoenixstar owned and
     operated the PRIMESTAR(R) direct to home satellite service throughout the
     continental United States.  TSAT's basis in Phoenixstar had been reduced to
     zero as of December 31, 1998.

                                                                     (continued)

                                      I-8
<PAGE>
 
             TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

(8)  Satellites
     ----------

     Tempo DBS System

     TSAT, through Tempo, holds the FCC Permit issued by the FCC authorizing
     construction of a high-power DBS system consisting of up to two satellites
     delivering DBS service in 11 frequencies at the 119 degrees W.L. orbital
     position.

     Tempo is also a party to the Satellite Construction Agreement with Loral,
     pursuant to which Tempo has arranged for the construction of the Tempo
     Satellites at a fixed contract price of $487,159,500, and has an option to
     purchase up to three additional satellites.

     Tempo DBS-1 was launched into geosynchronous orbit on March 8, 1997. During
     1997, Loral notified TSAT of nine separate occurrences of power reductions
     on Tempo DBS-1.  In addition, Loral notified TSAT of two additional power
     reductions that occurred on March 29, 1999 and April 2, 1999.  TSAT does
     not currently know the extent of such power reductions, and cannot confirm
     the precise causes thereof; however, such reductions could eventually
     affect the proposed operation of Tempo DBS-1, either alone or together with
     other events that may arise during the expected life of the satellite.  As
     a result of such power reductions, in-orbit testing has been extended and
     Tempo DBS-1 has not yet been accepted.  Pursuant to the Satellite
     Construction Agreement, Loral bears the risk of loss of Tempo DBS-1 until
     Tempo accepts delivery of Tempo DBS-1.  TSAT currently believes that Tempo
     DBS-1 may not fully comply with specifications, but has not yet determined
     the extent of any such non-compliance.  Tempo and Loral are currently
     engaged in negotiations regarding this matter, including the timing, extent
     and methodology of any further tests to be conducted and the terms of any
     monetary settlement with respect to the satellite to which Tempo may be
     entitled under the Satellite Construction Agreement.  Certain launch
     defects or damages affecting Tempo DBS-1 could cause a substantial monetary
     loss to TSAT.

     Under the FCC Permit, the time by which the Tempo Satellites must be
     operational was due to expire in May 1998.  On April 3, 1998, Tempo filed a
     request with the FCC for an extension of that deadline pending FCC review
     of TSAT's request for consent to the transfer of control of Tempo to
     Phoenixstar (the "Transfer Application") should the FCC determine that an
     extension is necessary for Tempo to maintain its FCC authorizations at 
     119 degrees W.L. and 166 degrees W.L.

     On April 30, 1998, the FCC determined that Tempo's satellite at 119 W.L.
     was not operational.  It did find, however, that an extension of time was
     warranted for that orbital location and granted an extension to Tempo for
     119 W.L.  Such extension was granted until six months after the FCC
     determination on the Transfer Application, with the condition that Tempo
     not enter into a lease agreement with Phoenixstar or any similar lease
     arrangement prior to the FCC's decision on the Transfer Application.  In
     addition, Tempo voluntarily surrendered its permit for 166 W.L.

                                                                     (continued)

                                      I-9
<PAGE>
 
             TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


     On November 25, 1998, Tempo and Phoenixstar requested expedited action by
     the FCC on the Transfer Application.  Several parties filed responses to
     that request, objecting to the proposed transfer.  Phoenixstar and Tempo
     filed a joint reply to those objections.  On January 27, 1999, Tempo filed
     a joint application with DIRECTV Enterprises, Inc. seeking FCC approval to
     assign Tempo's DBS authorization to DIRECTV ("DIRECTV Application").  In
     addition, Tempo and Phoenixstar jointly filed a letter seeking to maintain
     the status quo with respect to the Transfer Application until the FCC
     decides the DIRECTV Application.  Therefore, Tempo and Phoenixstar
     requested that the Transfer Application be held in abeyance and, subject to
     and contemporaneously with approval of the DIRECTV Application, that the
     FCC dismiss the Transfer Application.

     Upon delivery of Tempo DBS-1, Phoenixstar, on behalf of Tempo, is obligated
     to make a $10 million incentive payment to Loral.  Phoenixstar is eligible
     to receive a pro rata warranty payback of each such incentive payment to
     the extent that transponder failures occur during the twelve-year period
     following delivery.  Satellite incentive payments and any related warranty
     paybacks are treated as adjustments of the cost of the applicable Tempo
     Satellite.

     Tempo Option

     In February 1997, PRIMESTAR Partners exercised its option (the "Tempo
     Capacity Option"), to purchase or lease 100% of the capacity of the DBS
     system to be built, launched and operated by Tempo pursuant to the FCC
     Permit.  The purchase price (or aggregate lease payments) are to be
     sufficient to cover the costs of constructing, launching and operating such
     DBS system. In connection with the Tempo Capacity Option and certain
     related matters, Tempo and PRIMESTAR Partners entered into two letter
     agreements (the "Tempo Letter Agreements"), which provided for, among other
     things, the funding by PRIMESTAR Partners of milestone and other payments
     due under the Satellite Construction Agreement, and certain related costs,
     through advances by PRIMESTAR Partners to Tempo.  The aggregate funding
     provided to Tempo by PRIMESTAR Partners is reflected in due to Phoenixstar,
     Inc. in the accompanying consolidated balance sheets.

     In connection with the Hughes High Power Transaction, Hughes has agreed to
     assume, and to satisfy and discharge $465 million of Tempo's obligation to
     PRIMESTAR Partners, and PRIMESTAR Partners has agreed to forgive the
     remaining balance.  In addition, PRIMESTAR Partners has agreed to terminate
     its rights under the Tempo Capacity Option.

                                                                     (continued)

                                      I-10
<PAGE>
 
             TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


(9)  Transactions with Related Parties
     ---------------------------------

     Prior to the Restructuring, PRIMESTAR Partners provided programming
     services to the Company and other authorized distributors in exchange for a
     fee based upon the number of subscribers receiving programming services.
     In addition, PRIMESTAR Partners arranged for satellite capacity and uplink
     services, and provided national marketing  and administrative support
     services in exchange for a separate authorization fee.

     Prior to the Restructuring, certain key employees of TSAT held stock
     options in tandem with stock appreciation rights with respect to certain
     common stock of TCI.  Estimates of the compensation related to the options
     and/or stock appreciation rights granted to employees of TSAT have been
     recorded in the accompanying consolidated financial statements.
     Compensation expense recognized by TSAT related to such options aggregated
     $3,814,000 during the three months ended March 31, 1998.

(10) Income Taxes
     ------------

     TSAT recognized no income tax benefit during either of the three month
     periods ended March 31, 1999 and 1998.  TSAT is only able to realize income
     tax benefits for financial reporting purposes to the extent that such
     benefits offset TSAT's income tax liabilities or TSAT generates taxable
     income.  For financial reporting purposes, all of TSAT's income tax
     liabilities had been fully offset by income tax benefits at March 31, 1999
     and December 31, 1998.  Additionally, during the foreseeable future, TSAT
     believes that it will incur net losses for income tax purposes, and
     accordingly, will not be in a position to realize income tax benefits on a
     current basis.

                                      I-11
<PAGE>
 
             TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES


Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
  Results of Operations
  ---------------------

General
-------

   The following discussion and analysis provides information concerning the
financial condition and results of operations of TSAT and should be read in
conjunction with (i) the accompanying financial statements of TSAT, and (ii) the
financial statements, and related notes thereto, of TSAT, and Management's
                                                              ------------
Discussion and Analysis of Financial Condition and Results of Operations
------------------------------------------------------------------------
included in TSAT's Annual Report on Form 10-K for the year ended December 31,
1998.

   Certain statements in this Quarterly Report on Form 10-Q constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.  Such forward-looking statements involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results, performance or achievements of TSAT, or industry results, to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements.  Such risks, uncertainties and other
factors include, among others:  general economic and business conditions and
industry trends; uncertainties inherent in proposed business strategies and
development plans, including uncertainties regarding possible regulatory issues
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"); uncertainties regarding the Hughes High Power Transaction; future
financial performance, including availability, terms and deployment of capital;
the ability of vendors to deliver required equipment, software and services;
availability of qualified personnel; changes in, or the failure or the inability
to comply with, government regulations, including, without limitation,
regulations of the FCC, and adverse outcomes from regulatory proceedings;
changes in the nature of key strategic relationships with partners and joint
venturers; reliance on software programs used by the Company or its suppliers
containing problems related to the Year 2000; and other factors referenced in
this Report. These forward-looking statements speak only as of the date of this
Report. TSAT expressly disclaims any obligation or undertaking to disseminate
any updates or revisions to any forward-looking statement contained herein to
reflect any change in TSAT's expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.

   Hughes Transactions
   -------------------

   On January 22, 1999, the Company announced that the Company and Phoenixstar
had reached an agreement with Hughes to sell (i) the Tempo Satellites, (ii) the
FCC Permit and (iii) Phoenixstar's rights relating to Tempo's DBS system to
Hughes, for aggregate consideration valued at $500 million.  Pursuant to the
agreement, Hughes has agreed to assume $465 million of TSAT's liability to
PRIMESTAR Partners, pay TSAT $2.5 million in cash and pay Phoenixstar and
PRIMESTAR Partners $32.5 million in cash.  In addition, Phoenixstar and
PRIMESTAR Partners have agreed to forgive certain amounts due from the Company
in excess of the $465 million to be assumed by Hughes.

                                      I-12
<PAGE>
 
             TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

General, continued
------------------

   Effective March 10, 1999, the first closing of the Hughes High Power
Transaction was consummated whereby Hughes acquired Tempo DBS-2 and the Tempo
DBS-2 Option for aggregate consideration of $150 million.  Such consideration
was comprised of the following: (i) $9,750,000 paid to Phoenixstar and PRIMESTAR
Partners for the Tempo DBS-2 Option and the termination of PRIMESTAR Partners
rights under the Tempo Capacity Option, (ii) $750,000 paid to TSAT to exercise
the Tempo DBS-2 Option and (iii) the assumption by Hughes of $139,500,000 due to
PRIMESTAR Partners from TSAT in exchange for Tempo DBS-2, which had a carrying
value of $224 million at closing.

   The sale of the remaining assets contemplated by the Hughes High Power
Agreement is subject to the receipt of appropriate regulatory approvals and
other customary closing conditions and is expected to be consummated in mid-
1999.  Tempo has been notified that Tempo DBS-1 experienced power reductions
which occurred on March 29, 1999 and April 2, 1999.  Although the Company does
not believe the extent of such power reductions is significant, a definitive
assessment of the impact on Tempo DBS-1 is not yet complete.  Upon completion of
the sale of the Company's high power assets, which had a carrying value of $239
million at March 31, 1999, the Company will receive additional consideration of
$327 million in the form of cash and debt assumption.

   In a separate transaction completed on April 28, 1999, Phoenixstar sold to
Hughes Phoenixstar's medium-power DBS business and assets for $1.1 billion in
cash and 4.871 million shares of GMH Stock valued at approximately $258 million,
on the date of closing.  Phoenixstar is responsible for the payment of certain
obligations not assumed by Hughes, satisfaction of its funded indebtedness and
the payment of costs, currently estimated to range from $270 million to $340
million, associated with the termination of certain vendor and service contracts
and lease agreements not assumed by Hughes.  Affiliates of stockholders of
Phoenixstar, other than the Company, and affiliates of TCI have committed to
make funds available to Phoenixstar, up to an aggregate of $1,013 million to
fund such payments.

   In connection with their approval of the Hughes Medium Power Transaction, the
stockholders of Phoenixstar approved the payment to TSAT of consideration in the
form of 1.407 million shares of GMH Stock, subject to the terms and
considerations set forth in the Phoenixstar Payment Agreement.  In consideration
of the Phoenixstar Payment, the Company agreed to approve the Hughes Medium
Power Transaction and Hughes High Power Transaction as a stockholder of
Phoenixstar, to modify certain agreements to facilitate the Hughes High Power
Transaction, and to issue to Phoenixstar the TSAT GMH SAR granting Phoenixstar
the right to any appreciation in such GMH Stock during the one-year period
following the date of issuance, over an agreed strike price of $47.00.  On the
Hughes Closing Date, the Company received 1.407 million shares of GMH Stock from
Phoenixstar in satisfaction of the Phoenixstar Payment.

                                      I-13
<PAGE>
 
             TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

General, continued
------------------

   The TSAT GMH SAR is secured by a first priority pledge and security interest
in the underlying shares of GMH Stock, and both the TSAT GMH SAR and such pledge
and security interest have been pledged by Phoenixstar for the benefit of
certain holders of share appreciation rights issued by Phoenixstar with respect
to shares of GMH Stock. The shares of GMH Stock issued to TSAT pursuant to the
Phoenixstar Payment Agreement are subject to certain restrictions on transfer
during the first year after the closing of the Hughes Medium Power Transaction,
and TSAT will be entitled (together with Phoenixstar) to certain registration
rights with respect to such shares following the expiration of such one-year
period. Pursuant to the Phoenixstar Payment Agreement, TSAT has also agreed to
forego any liquidating distribution or other payment that may be made in respect
of the outstanding shares of Phoenixstar upon any dissolution and winding-up of
Phoenixstar, or otherwise in respect of Phoenixstar's existing equity.

   If the Hughes High Power Transaction is consummated, the Company will cease
to be engaged in the direct-to-home satellite television business except through
its ownership of GMH stock.  The Company is currently reviewing potential
business opportunities to take advantage of the Company's industry expertise and
relationships and significant tax loss carryforward. There can be no assurances,
however, that the Company will be able to fund the implementation of any such
potential business opportunity on terms favorable to the Company, or on any
terms, or that any such potential business opportunity will be successfully
implemented.

   Restructuring Transaction
   -------------------------

   Effective April 1, 1998 and pursuant to the Restructuring Agreement and the
TSAT Asset Transfer Agreement, the Restructuring was consummated.  In connection
with the Restructuring, TSAT contributed and transferred to Phoenixstar all of
TSAT's assets and liabilities except (i) the capital stock of Tempo, (ii) the
consideration received by TSAT in the Restructuring and (iii) the rights and
obligations under certain agreements with Phoenixstar and others.  In addition,
the business of PRIMESTAR Partners and the business of distributing the
PRIMESTAR(R) programming service of each of TWE, Newhouse, Comcast, Cox and
affiliates of MediaOne were consolidated into Phoenixstar.

   In connection with the TSAT Asset Transfer, Phoenixstar assumed all of TSAT's
indebtedness and TSAT received from Phoenixstar such number of shares of
Phoenixstar Class A Common Stock and Phoenixstar Class B Common Stock,
respectively, as equaled the number of shares of Series A Common Stock and
Series B Common Stock, respectively, issued and outstanding or deemed to be
issued and outstanding on the closing date.  As of March 31, 1999, TSAT owns
approximately 37% of the outstanding shares of common equity of Phoenixstar
representing approximately 38% of the combined voting power of such common
equity.

                                      I-14
<PAGE>
 
             TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

Material Changes in Results of Operations
-----------------------------------------

     As a result of the consummation of the Restructuring, TSAT's operations
consist of (i) expenses incurred to maintain TSAT as a public company, including
accounting and legal fees ($43,000 during the three months ended March 31,
1999), (ii) expenses associated with the operation and maintenance of the Tempo
Satellites ($2,777,000 during the three months ended March 31, 1999) and (iii)
TSAT's share of PRIMESTAR's earnings or losses (zero during the three months 
ended March 31, 1999).

     TSAT recognized no income tax benefit during either of the three month
periods ended March 31, 1999 and 1998.  TSAT is only able to realize income tax
benefits for financial reporting purposes to the extent that such benefits
offset TSAT's income tax liabilities or TSAT generates taxable income.  For
financial reporting purposes, all of TSAT's income tax liabilities had been
fully offset by income tax benefits at March 31, 1999 and December 31, 1998.
Additionally, TSAT believes that it will incur net losses for income tax
purposes during the foreseeable future, and accordingly, will not be in a
position to realize income tax benefits on a current basis.

Material Changes in Financial Position
--------------------------------------

     Upon completion of the Hughes High Power Transaction, of which there can be
no assurance, TSAT's remaining assets would be the GMH Stock and cash.

     TSAT is currently considering its course of action with respect to the
receipt of the Phoenixstar Payment.  Options available to the Company include,
but are not limited to, distribution of the Phoenixstar Payment to the Company's
shareholders (subject to a one-year holding period), investment of the
Phoenixstar Payment in a yet undetermined operating business, or retention of
the Phoenixstar Payment for future use.

     As a holding company, TSAT's ability to satisfy any liabilities or
obligations is dependent solely upon the cash flows of Tempo and Phoenixstar and
the distribution or the payment of such cash flows to TSAT in the form of
dividends, loans or other advances.  The payment of dividends or the making of
loans or advances to TSAT by Tempo and Phoenixstar may be subject to statutory,
regulatory or contractual restriction, will be contingent upon the earnings of
those subsidiaries and affiliates, and will be subject to various business
considerations.  Moreover, TSAT does not control Phoenixstar, and Phoenixstar
has no obligation, contingent or otherwise, to make any funds available to TSAT,
whether by dividends, loans or other payments.

     TSAT will continue to be subject to the risks associated with operating as
a holding company including possible regulation under the Investment Company
Act.  TSAT does not currently intend to be an investment company within the
meaning of the Investment Company Act.

                                      I-15
<PAGE>
 
             TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

Material Changes in Financial Position, continued
-------------------------------------------------

     The Company is in the process of identifying and addressing issues
surrounding the Year 2000 ("Y2K") and their impact on the Company's operations.
The issue surrounding the Year 2000 is whether the Company's operations and
financial systems or the systems used by companies with whom the Company
conducts business will properly recognize and process date sensitive information
before and after January 1, 2000.  Pursuant to the TSAT Merger Agreement,
Phoenixstar provides the Company with accounting services and the use of any and
all related information systems.  Therefore, TSAT is coordinating its Y2K
assessment with Phoenixstar.  The following discussion of Phoenixstar's Y2K
project is based on information currently available to the Company.

     Prior to the Hughes Closing Date, Phoenixstar completed an initial
assessment which identified areas of risk associated with the Year 2000.  The
Year 2000 Program Office was established to oversee Phoenixstar's Year 2000
project.  Detailed inventories were gathered and cost estimates were finalized.
For each functional area of the project, detailed work plans were developed and
put into place.  Separate test environments completed construction and testing
in the first quarter of 1999.

     In connection with the Hughes Medium Power Transaction, Hughes acquired
substantially all of Phoenixstar's systems.  Phoenixstar has analyzed and
continues to analyze its remaining internal IT and non-IT systems.  Phoenixstar
believes that such systems are currently capable of functioning without
substantial Y2K compliance problems.

     Through March 1999, Phoenixstar has spent approximately $1,375,000 for Y2K
issues, $1,125,000 of which was spent in 1999, and does not currently expect to
spend any additional amounts for Y2K related issues.

     The Company does not currently believe that any of the foregoing will have
a material adverse effect on its financial condition or its results of
operations.  However, the process of evaluating Phoenixstar's products and third
party products and systems is ongoing.  Although not expected, failures of
critical suppliers and/or systems could have a material adverse effect on the
Company's financial condition or results of operations.  As widely publicized,
Y2K compliance has many issues and aspects, not all of which the Company is able
to accurately forecast or predict.  There is no way to assure that Y2K will not
have adverse effects on the Company, some of which could be material.

                                      I-16
<PAGE>
 
             TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES


PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K.
         -------------------------------- 
 
         (a)  Exhibits

              10.1 - Share Appreciation Rights Agreement, dated as of April 28, 
                     1999.

              10.2 - Pledge and Security Agreement, dated as of April 28, 1999.
 
              27 -   Financial Data Schedule

         (b)  Reports on Form 8-K filed during quarter ended March 31, 1999:

              Date of Report     Items Reported       Financial Statements Filed
              --------------     --------------       --------------------------
 
              February 1, 1999   Items 5 and 7        None
 
              March 25, 1999     Items 2 and 7        Pro forma financial
                                                       information related to
                                                       the disposition of the
                                                       Company's ground-spare
                                                       satellite.

                                      II-1
<PAGE>
 
                                  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.

                                     TCI SATELLITE ENTERTAINMENT, INC.



Date:  May 14, 1999                  By:  /s/  Gary S. Howard
                                          ------------------------------------- 
                                               Gary S. Howard
                                               Chief Executive Officer
       
       
       
       
Date:  May 14, 1999                  By:  /s/  Kenneth G. Carroll
                                          ------------------------------------- 
                                               Kenneth G. Carroll
                                               Senior Vice President and
                                               Chief Financial Officer
                                               (Principal Financial Officer)
 
 
 
 
Date:  May 14, 1999                  By:  /s/  Scott D. Macdonald
                                          ------------------------------------- 
                                               Scott D. Macdonald
                                               Vice President and Controller
                                               (Chief Accounting Officer)


                                      II-2
<PAGE>
 
                                 Exhibit Index

10.1 - Share Appreciation Rights Agreement, dated as of April 28, 1999.
10.2 - Pledge and Security Agreement, dated as of April 28, 1999.
27   - Financial Data Schedule