<PAGE>
 
                                 UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D. C.  20549

                                  F O R M 10-Q


[ X ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934
       For the quarterly period ended June 30, 1998

                                      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 
          incorporation or organization)                   Identification No.)
 
 
           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 July 31, 1998, was:

                 Series A common stock  59,280,466 shares; and
                   Series B common stock  8,465,324 shares.
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                          Consolidated Balance Sheets

                                  (unaudited)

<TABLE>
<CAPTION>
                                                                   
                                                                                   June 30,                 December 31,       
                                                                                     1998                       1997           
                                                                          --------------------------  -------------------------
Assets                                                                                     amounts in thousands                  
------
<S>                                                                       <C>                         <C> 
Cash and cash equivalents                                                          $      --                      6,084
 
Accounts receivable, net of allowance for doubtful  accounts                              --                     35,079
 
Investment in PRIMESTAR, Inc. (notes 2 and 8)                                        335,788                         --
 
Property and equipment, at cost:
 Satellites (note 9)                                                                 463,133                    463,133
 Satellite reception equipment                                                            --                    674,387
 Subscriber installation costs                                                            --                    227,131
 Support equipment                                                                        --                     34,389
                                                                                   ---------                  ---------
                                                                                     463,133                  1,399,040
 Less accumulated depreciation                                                            --                    277,103
                                                                                   ---------                  ---------
                                                                                     463,133                  1,121,937
                                                                                   ---------                  ---------
Deferred financing costs and other assets,
 net of accumulated amortization                                                          --                     41,756
                                                                                   ---------                  ---------
                                                                                   $ 798,921                  1,204,856
                                                                                   =========                  =========
 
Liabilities and Stockholders' Equity
------------------------------------
 
Accounts payable and accrued expenses                                              $      --                    157,050
Subscriber advance payments                                                               --                     29,675
Due to PRIMESTAR, Inc. (note 9)                                                      463,133                    463,133
Debt                                                                                      --                    418,729
                                                                                   ---------                  ---------
   Total liabilities                                                                 463,133                  1,068,587
                                                                                   ---------                  ---------
 
Stockholders' Equity:
 Preferred stock, $.01 par value;
   authorized 5,000,000 shares; none issued                                               --                         --
 Series A common stock, $1 par value; authorized 185,000,000
  shares; issued 59,280,466 in 1998, and 58,239,136 in 1997                           59,280                     58,239 
 Series B common stock, $1 par value; authorized 10,000,000
  shares; issued   8,465,324 in 1998 and 1997                                          8,465                      8,465 
 Additional paid-in capital                                                          824,259                    523,685
 Accumulated deficit                                                                (556,216)                  (454,120)
                                                                                   ---------                  ---------
   Total stockholders' equity                                                        335,788                    136,269
                                                                                   ---------                  ---------
                                                                                   $ 798,921                  1,204,856
                                                                                   =========                  =========
</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                   Six months ended
                                                             June 30,                            June 30,
                                               ------------------------------------  ---------------------------------
                                                      1998               1997             1998              1997
                                               ------------------  ----------------  ---------------  ----------------
                                                                        amounts in thousands
<S>                                            <C>                 <C>               <C>              <C>
Revenue:
  Programming and equipment
      rental                                            $     --           126,729          154,257           240,230
  Installation                                                --            10,652           14,243            20,415
                                                        --------           -------         --------          --------
                                                              --           137,381          168,500           260,645
                                                        --------           -------         --------          --------
Operating costs and expenses:
  Charges from PRIMESTAR
       Partners L.P. (note 10):
         Programming                                          --            42,665           57,461            81,988
         Satellite, marketing and
          distribution                                        --            20,445           24,774            40,381
  Other operating (note 10)                                   --             4,815            9,847            11,072
  Selling, general and   administrative (note 10)             43            47,385           55,384            91,773
  Stock compensation (note 10)                                --             1,158            4,869             1,552
  Depreciation                                                --            58,643           65,105           113,266
                                                        --------           -------         --------          --------
                                                              43           175,111          217,440           340,032
                                                        --------           -------         --------          --------
       Operating loss                                        (43)          (37,730)         (48,940)          (79,387)
 
Other income (expense):
  Interest expense                                            --           (12,025)         (14,177)          (21,408)
  Share of losses of PRIMESTAR,   Inc.
   (note 8)                                              (32,536)               --          (32,536)               --
  Share of losses of PRIMESTAR
   Partners L.P.                                              --            (5,768)          (5,822)           (7,929)
  Other, net                                                  --               464             (621)            1,134
                                                        --------           -------         --------          --------
                                                         (32,536)          (17,329)         (53,156)          (28,203)
                                                        --------           -------         --------          --------
       Loss before income taxes                          (32,579)          (55,059)        (102,096)         (107,590)
 
Income tax benefit (note 11)                                  --                --               --                --
                                                        --------           -------         --------          --------
       Net loss                                         $(32,579)          (55,059)        (102,096)         (107,590)
                                                        ========           =======         ========          ========

Basic and diluted loss per common share
 (note 6):                                              $   (.48)             (.83)           (1.51)            (1.61)
                                                        ========           =======         ========          ========  
                                                        
</TABLE>

See accompanying notes to consolidated financial statements.

                                      I-2
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                 Consolidated Statement of Stockholders' Equity

                         Six months ended June 30, 1998

                                  (unaudited)


<TABLE>
<CAPTION>
                                                                         
                                                      Common stock       Additional                     Total     
                                                ----------------------    Paid-in      Accumulated   stockholders' 
                                                  Series A    Series B    capital        deficit       equity
                                                ------------  --------  ------------  --------------  ---------
                                                                     amounts in thousands
 
<S>                                             <C>           <C>       <C>           <C>             <C>
Balance at January 1, 1998                           $58,239     8,465      523,685        (454,120)   136,269
 
 Net loss                                                 --        --           --        (102,096)  (102,096)
 Recognition of stock compensation related to
  stock options and restricted stock awards               --        --        1,578              --      1,578 
 Issuance of Series A Common Stock related to
  restricted stock awards                                 50        --          (50)             --         --
 Issuance of Series A Common Stock upon
  conversion of convertible securities of
  Tele-Communications, Inc. (note 4)                     991        --           --              --        991 
 Issuance of common stock by
  subsidiary (note 2)                                     --        --      299,046              --    299,046 
                                                     -------  --------      -------        --------   -------- 
Balance at June 30, 1998                             $59,280     8,465      824,259        (556,216)   335,788
                                                     =======  ========      =======        ========   ========
</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>
                                                                               Six months ended
                                                                                   June 30,
                                                                  ------------------------------------------
                                                                          1998                  1997
                                                                  --------------------  --------------------
                                                                            amounts in thousands
                                                                                (see note (7)
<S>                                                               <C>                   <C> 
Cash flows from operating activities:
 Net loss                                                                   $(102,096)             (107,590)
 Adjustments to reconcile net loss to
   net cash provided by operating activities:
     Depreciation                                                              65,105               113,266
     Share of losses of PRIMESTAR, Inc.                                        32,536                    --
     Share of losses of PRIMESTAR Partners L.P.                                 5,822                 7,929
     Accretion of debt discount                                                 4,682                 6,644
     Stock compensation                                                         4,869                 1,552
     Other non-cash items                                                       7,999                 1,962
     Changes in operating assets and liabilities:
       Change in receivables                                                   10,845                  (563)
       Change in other assets                                                    (736)                   82
       Change in accruals and payables                                        (10,209)               16,053
       Change in subscriber advance payments                                   (3,114)                4,718
                                                                            ---------              --------
          Net cash provided by operating activities                            15,703                44,053
                                                                            ---------              --------
 
Cash flows from investing activities:
 Capital expended for property and equipment                                  (73,966)              (85,804)
 Capital expended for satellites                                                   --                (5,265)
 Additional investments in and advances to
   PRIMESTAR Partners L.P.                                                        (75)               (6,991)
 Repayment of advances to PRIMESTAR Partners L.P.                                  --                 7,663
                                                                            ---------              --------
         Net cash used in investing activities                                (74,041)              (90,397)
                                                                            ---------              --------
Cash flows from financing activities:
 Borrowings of debt                                                           113,000               405,061
 Repayments of debt                                                           (61,735)             (299,172)
 Payment of deferred financing costs                                               --               (18,452)
 Increase in due to PRIMESTAR Partners L.P.                                        --                 5,265
 Proceeds from issuance of common stock                                           989                   225
                                                                            ---------              --------
         Net cash provided by financing activities                             52,254                92,927
                                                                            ---------              --------
         Net increase (decrease) in cash and cash
          equivalents                                                          (6,084)               46,583
 
         Cash and cash equivalents:
           Beginning of period                                                  6,084                 6,560
                                                                            ---------              --------
           End of period                                                    $      --                53,143
                                                                            =========              ========
</TABLE>

See accompanying notes to consolidated financial statements.

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

                  Notes to Consolidated Financial Statements

                                 June 30, 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.

     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 June 30, 1998 and the results
     of its operations for the periods ended June 30, 1998 and 1997.  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, 1997 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 1998
     presentation.

(2)  The Roll-up Plan
     ----------------

     On March 6, 1998, the TSAT stockholders voted to approve a proposal to
     adopt the provisions of certain agreements and the transactions
     contemplated thereby, collectively, referred to herein as the "Roll-up
     Plan."  The Roll-up Plan is a two-step transaction, comprising the
     Restructuring and the proposed TSAT Merger, as described below.

                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

     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, PRIMESTAR, Inc., prior to the
     Restructuring a wholly-owned subsidiary of TSAT ("PRIMESTAR"), Time Warner
     Entertainment Company, L.P. ("TWE"), Advance/Newhouse Partnership
     ("Newhouse"), Comcast Corporation ("Comcast"), Cox Communications, Inc.
     ("Cox"), MediaOne of Delaware, Inc., ("MediaOne"), US WEST Media Group,
     Inc. 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 PRIMESTAR, a business combination (the
     "Restructuring") was consummated whereby (a) TSAT contributed and
     transferred to PRIMESTAR (the "TSAT Asset Transfer") all of TSAT's assets
     and liabilities except (I) the capital stock of TSAT's wholly-owned
     subsidiary, Tempo Satellite, Inc. ("Tempo"), (II) the consideration to be
     received by TSAT in the Restructuring and (III) the rights and obligations
     of TSAT under certain agreements with PRIMESTAR and others, and (b) 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 was
     consolidated into PRIMESTAR.

     In connection with the TSAT Asset Transfer, PRIMESTAR assumed all of TSAT's
     indebtedness on such date, and TSAT received from PRIMESTAR such number of
     shares of Class A Common Stock, $.01 par value per share, of PRIMESTAR
     ("PRIMESTAR Class A Common Stock") and Class B Common Stock, $.01 par value
     per share, of PRIMESTAR ("PRIMESTAR Class B Common Stock" and together with
     the PRIMESTAR Class A Common Stock, "PRIMESTAR Common Stock"),
     respectively, as equals the number of shares of Series A Common Stock of
     TSAT ("Series A Common Stock") and Series B Common Stock of TSAT ("Series B
     Common Stock"), respectively, issued and outstanding on the Closing Date,
     in accordance with the Restructuring Agreement and the TSAT Asset Transfer
     Agreement, plus one share of PRIMESTAR Class A Common Stock for each share
     of Series A Common Stock issuable at the Closing Date ("Issuable TSAT
     Shares") pursuant to certain TSAT stock options, restricted stock awards
     and other arrangements.  TSAT received 66.3 million shares of PRIMESTAR
     Class A Common Stock and 8.5 million shares of PRIMESTAR Class B Common
     Stock, and as a result, owns approximately 37% of the outstanding shares of
     common equity of PRIMESTAR at the closing of the Restructuring,
     representing approximately 38% of the combined voting power of such common
     equity.  As a result of the dilution of TSAT's investment in PRIMESTAR from
     100% to approximately 37%, TSAT recognized an increase in its investment in
     PRIMESTAR 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 PRIMESTAR and TSAT's proportionate
     share of PRIMESTAR's equity subsequent to the Restructuring.

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

                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

     TSAT Merger

     Pursuant to an Agreement and Plan of Merger dated as of February 6, 1998
     (the "TSAT Merger Agreement"), between TSAT and PRIMESTAR, it is
     contemplated that TSAT will be merged with and into PRIMESTAR, with
     PRIMESTAR as the surviving corporation (the "TSAT Merger").  In connection
     therewith (i) each outstanding share of Series A Common Stock will be
     converted into the right to receive one share of PRIMESTAR Class A Common
     Stock, and (ii) each outstanding share of Series B Common Stock will be
     converted into the right to receive one share of PRIMESTAR Class B Common
     Stock, subject to adjustment.  Each share of PRIMESTAR Common Stock then
     held by TSAT will be canceled.  The number of shares of PRIMESTAR Common
     Stock issued to TSAT shareholders will be less than the number of shares of
     PRIMESTAR Common Stock owned by TSAT prior to the TSAT Merger to the extent
     Issuable TSAT Shares are not issued and outstanding at the time of the TSAT
     Merger.  However, PRIMESTAR shall assume all obligations of TSAT in respect
     of the Issuable TSAT Shares.

     Consummation of the TSAT Merger is subject to regulatory approval and other
     conditions to closing set forth in the TSAT Merger Agreement.  Accordingly,
     there can be no assurance that the  TSAT Merger will be consummated.

     Proposed ASkyB Transaction
     --------------------------

     In a separate proposed transaction (the "ASkyB Transaction"), pursuant to
     an asset acquisition agreement, dated as of June 11, 1997 among PRIMESTAR
     Partners, The News Corporation Limited ("News Corp."), MCI
     Telecommunications Corporation, the principal domestic operating subsidiary
     of MCI Communications Corporation ("MCI"), American Sky Broadcasting LLC, a
     wholly-owned subsidiary of News Corp. ("ASkyB") and for certain purposes
     only, each of the partners of PRIMESTAR Partners (collectively, the
     "Partners"), PRIMESTAR has agreed to acquire from MCI two high-power
     communications satellites currently under construction, certain
     authorizations granted to MCI by the Federal Communications Commission
     ("FCC") to operate a direct broadcast satellite business at the 110 West
     Longitude ("W.L.") orbital location using 28 transponder channels, and
     certain related contracts.  In consideration, ASkyB will receive
     approximately $600 million liquidation value of non-voting convertible
     preferred stock, $.01 per value per share, of PRIMESTAR (the "PRIMESTAR
     Convertible Preferred Stock") (convertible into approximately 52 million
     shares of non-voting Series D Common Stock, $.01 par value per share, of
     PRIMESTAR (the "PRIMESTAR Class D Common Stock"), subject to adjustment)
     and approximately $442 million principal amount of convertible subordinated
     notes of PRIMESTAR (the "PRIMESTAR Convertible Subordinated Notes")
     (convertible into approximately 38.5 million shares of PRIMESTAR Class D
     Common Stock).

                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

     The PRIMESTAR Convertible Subordinated Notes will be due and payable, and
     the PRIMESTAR Convertible Preferred Stock will be mandatorily redeemable,
     on the tenth anniversary of the date of issuance.  The PRIMESTAR
     Convertible Preferred Stock will accrue cumulative dividends at the annual
     rate of 5% of the liquidation value of such shares and the PRIMESTAR
     Convertible Subordinated Notes will have an interest rate of 5%.  Dividends
     on the PRIMESTAR Convertible Preferred Stock and interest on the PRIMESTAR
     Convertible Subordinated Notes will be payable in cash or, at the option of
     PRIMESTAR, in shares of the non-voting PRIMESTAR Class D Common Stock, for
     a period of four years.  Thereafter, all dividend and interest payments
     will be made solely in cash.  Such convertible securities, and the shares
     of PRIMESTAR Class D Common Stock to be issued to ASkyB or any of its
     affiliates upon conversion of such PRIMESTAR Convertible Preferred Stock
     and PRIMESTAR Convertible Subordinated Notes, or in payment of dividend or
     interest obligations thereunder, will be non-voting; however, shares of
     PRIMESTAR Class D Common Stock will automatically convert into shares of
     PRIMESTAR Class A Common Stock, on a one-to-one basis, upon transfer to any
     person other than ASkyB, News Corp. or any of their respective affiliates.

     On May 12, 1998, the U.S. Department of Justice ("DOJ") filed a civil
     antitrust action opposing the ASkyB Transaction (the "DOJ Action"), and the
     Federal District Court has set a trial date for February 1, 1999.  The DOJ
     Action seeks to prevent PRIMESTAR from acquiring the direct broadcast
     satellite assets of News Corp. and MCI or, in the alternative, to allow
     such acquisition to go forward and require PRIMESTAR's stockholders
     affiliated with the cable industry to divest their ownership interests in
     PRIMESTAR.

     PRIMESTAR intends to take all appropriate action to pursue its rights,
     including, if necessary, vigorously contesting this matter in the courts.
     However, no assurance can be given as to the outcome of this matter, and an
     unfavorable decision could have a material adverse effect on PRIMESTAR's
     current plans with respect to a high power digital satellite business.
     Moreover, any protracted litigation with the DOJ could result in
     significant additional legal expenses to PRIMESTAR.  PRIMESTAR does not
     believe, however, that the DOJ Action and any resulting litigation will
     have a significant impact on the operation or operating results of
     PRIMESTAR's existing medium power satellite television business.

     PRIMESTAR also intends to pursue further discussions with the DOJ regarding
     a potential consent decree to permit the ASkyB Transaction to go forward.
     However, no assurance can be given that a negotiated resolution of this
     matter is possible on terms acceptable to PRIMESTAR and its stockholders,
     or on any terms.  Additionally, the terms of any such consent decree could
     have a material adverse effect on PRIMESTAR's current high power strategy.

                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

(4)  TSAT Spin-off Transaction
     -------------------------

     General

     On December 4, 1996 (the "Spin-off Date"), Tele-Communications, Inc.
     ("TCI") distributed (the "Spin-off") all the capital stock of the Company
     to the holders of Tele-Communications, Inc. Series A TCI Group Common Stock
     (the "Series A TCI Group Stock") and Tele-Communications, Inc. Series B TCI
     Group Common Stock (the "Series B TCI Group Stock" and together with the
     Series A TCI Group Stock, the "TCI Group Stock").  The Spin-off did not
     involve the payment of any consideration by the holders of TCI Group Stock
     (such holders, the "TCI Group Stockholders"), and was intended to qualify
     as a tax-free spin-off.  TCI Group Stockholders received one share of
     Series A Common Stock for each ten shares of Series A TCI Group Stock owned
     and one share of Series B Common Stock for each ten shares of Series B TCI
     Group Stock owned.

     Since the Spin-off, TSAT and TCI have operated independently.  For purposes
     of governing certain of the ongoing relationships between TSAT and TCI
     after the Spin-off, and to provide mechanisms for an orderly transition,
     TSAT and TCI entered into various agreements, including the "Reorganization
     Agreement" (see below), the "Fulfillment Agreement" (see note 10), the
     "Transition Services Agreement" (see note 10), and an amendment to TCI's
     then existing "Tax Sharing Agreement (see note 11).

     Reorganization Agreement

     Pursuant to the Reorganization Agreement, among other items, TSAT assumed
     TCI's obligations under options granted on the Spin-off Date to certain key
     employees of TCI (who are not employees of TSAT) representing, in the
     aggregate, 1,660,190 shares of Series A Common Stock; and TSAT granted to
     TCI an option to purchase up to 4,765,000 shares of Series A Common Stock,
     at an exercise price of $1.00 per share, as required by TCI from time to
     time to meet its obligations under the conversion features of certain
     convertible securities of TCI as such conversion features were adjusted as
     a result of the Spin-off.

(5)  Comprehensive Income
     --------------------

     In June 1997, the Financial Accounting Standards Board issued Statement of
     Financial Accounting Standards No. 130, Reporting Comprehensive Income,
     ("SFAS No. 130") which establishes standards for reporting and disclosure
     of comprehensive income and its components (revenues, expenses, gains and
     losses).  SFAS No. 130 is effective for fiscal years beginning after
     December 15, 1997 and requires reclassification of financial statements for
     earlier periods to be provided for comparative purposes.  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.

                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

(6)  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 (67,746,000 and
     66,631,000 shares for the three months ended June 30, 1998 and 1997,
     respectively; and 67,690,000 and 66,625,000 shares for the six months ended
     June 30, 1998 and 1997, respectively).  Excluded from the computation of
     diluted loss per common share for the six months ended June 30, 1998 and
     1997 are options and convertible securities to acquire 7,007,000 and
     7,752,000 shares of Series A Common Stock, respectively, because inclusion
     of such options would be anti-dilutive.

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

     Cash paid for interest was $13,844,000 and $5,913,000 during the six months
     ended June 30, 1998 and 1997, respectively.  Cash paid for income taxes was
     not significant during either of such periods.

                                                           June 30,
                                                 ----------------------------
                                                      1998          1997
                                                 -------------  -------------
                                                      amounts in thousands
 
     Significant non-cash investing activity-
      increase in equity due to issuance of   
      common stock by subsidiary                  $299,046              --
                                                 =============  =============
                                                                 

(8)  Investment in PRIMESTAR
     -----------------------

     Summarized unaudited operating information for PRIMESTAR for the six months
     ended June 30, 1998 is as follows (amounts in thousands):

     Results of Operations
     ---------------------
         Revenue                                                $ 540,012
         Operating, selling, general and
         administrative expenses                                 (479,252)
         Depreciation and amortization                           (209,863)
                                                                 ---------
          Operating loss                                         (149,103)
 
         Other expense, net                                        (7,805)
                                                                 ---------
          Net loss                                               $(156,908)
                                                                 =========

                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

(9)  Satellites
     ----------
 
     Tempo DBS System

     TSAT, through Tempo, holds a permit (the "FCC Permit") issued by the FCC
     authorizing construction of a high-power direct broadcast satellite ("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 a construction agreement (the "Satellite
     Construction Agreement") with Space Systems/Loral, Inc. ("Loral"), pursuant
     to which Tempo has arranged for the construction of two high power
     communications satellites (the "Tempo Satellites") at a fixed contract
     price of $487,159,500, and has an option to purchase up to three additional
     satellites.

     One of the Tempo Satellites ("Tempo DBS-1") was launched into
     geosynchronous orbit on March 8, 1997. Since the launch of Tempo DBS-1,
     Loral has notified TSAT of at least eight separate occurrences of power
     reductions on Tempo DBS-1. 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 the Tempo Satellites until Tempo accepts delivery of the Tempo
     Satellites. 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 or, following
     consummation of the TSAT Merger, to PRIMESTAR.

     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 (i) TSAT's request for consent to the transfer of control of Tempo to
     PRIMESTAR (the "Transfer Application") and (ii) PRIMESTAR Partner's
     application for consent to the assignment to PRIMESTAR of the high power
     DBS authorizations and certain assets owned by MCI (the "Assignment
     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.

                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

     On April 30, 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 and the Assignment Application, with the condition
     that Tempo not enter into a lease agreement with PRIMESTAR or any similar
     lease arrangement prior to the FCC's decision on the Transfer Application
     and the Assignment Application.  In addition, Tempo voluntarily surrendered
     its permit for 166 degrees W.L.

     Upon delivery of each of the Tempo Satellites, Tempo is obligated to make a
     $10 million incentive payment to Loral.  Tempo 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 1990, Tempo entered into an option agreement with PRIMESTAR
     Partners granting PRIMESTAR Partners the right and option (the "Tempo
     Option"), upon exercise, 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 with the purchase price (or aggregate lease payments) being
     sufficient to cover the costs of constructing, launching and operating such
     DBS system. In connection with the Tempo Option and certain related
     matters, Tempo and PRIMESTAR Partners subsequently 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 ($463,133,000 at June 30, 1998) is
     reflected in "Due to PRIMESTAR, Inc. in the accompanying consolidated
     balance sheets.

     On February 7, 1997, the Partners Committee of PRIMESTAR Partners adopted a
     resolution (i) affirming that PRIMESTAR Partners had unconditionally
     exercised the Tempo Option, (ii) approving the proposed launch  of  Tempo
     DBS-1 into the 119 degrees W.L. orbital position and the use of the second
     Tempo Satellite as a spare or back-up for Tempo DBS-1, pending other
     deployment or disposition as determined by PRIMESTAR Partners, and (iii)
     authorizing the payment by PRIMESTAR Partners to Tempo of a $1,000,000
     exercise fee (the "Exercise Fee") and other amounts in connection with the
     Tempo Option and the Tempo Letter Agreements, including funding of
     substantially all construction and related costs relating to the Tempo
     Satellites not previously funded by PRIMESTAR Partners.

                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

     The Tempo Letter Agreements permit PRIMESTAR Partners to apply its advances
     to Tempo against any payments (other than the Exercise Fee) due under the
     Tempo Option with respect to its purchase or lease of satellite capacity.
     Although TSAT and PRIMESTAR Partners have not entered into an agreement
     with respect to the purchase or lease of 100% of the capacity of the
     proposed Tempo DBS system pursuant to the Tempo Option, TSAT believes that
     its obligations to PRIMESTAR Partners with respect to such advances will be
     satisfied in connection with the completion of such purchase or lease.
     However, if notwithstanding the exercise of the Tempo Option such purchase
     or lease of satellite capacity is not completed, TSAT believes that
     alternative courses of action are available that would allow TSAT to
     recover its costs of constructing the Tempo Satellites.

(10) Transactions with Related Parties
     ---------------------------------

     Pursuant to the terms of the TSAT Merger Agreement, PRIMESTAR shall
     reimburse TSAT for all reasonable costs and expenses incurred by TSAT (i)
     to comply with its tax and financial reporting obligations, (ii) to
     maintain certain insurance coverage and (iii) to maintain its status as a
     publicly traded company.  During the three months ended June 30, 1998, such
     reimbursements aggregated $43,000.  The effects of such reimbursements have
     been reflected as a reduction of TSAT's investment in PRIMESTAR.

     Prior to the Restructuring, the Partnership 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, the Partnership arranged for satellite capacity and uplink
     services, and provided national marketing  and administrative support
     services in exchange for a separate authorization fee.

     During 1997, TCI provided certain installation, maintenance, retrieval and
     other customer fulfillment services to TSAT pursuant to a fulfillment
     agreement (as amended, the "Fulfillment Agreement").  During the six months
     ended June 30, 1997, TSAT's capitalized installation costs included amounts
     charged by TCI to TSAT of $32,009,000.  Maintenance, retrieval and other
     operating expenses charged by TCI to TSAT aggregated $4,490,000 during the
     six months ended June 30, 1997.  The Fulfillment Agreement terminated on
     December 31, 1997.

     TCI also provided corporate administrative services to TSAT pursuant to a
     transition services agreement (the "Transition Services Agreement").
     Pursuant to the Transition Services Agreement, TSAT was required to pay TCI
     a monthly fee of $1.50 per qualified subscriber up to a maximum of
     $3,000,000 per month, and to reimburse TCI quarterly for direct, out-of-
     pocket expenses incurred by TCI to third parties in providing the services.
     Charges under the Transition Services Agreement aggregated $3,174,000 and
     $9,919,000 during the six months ended June 30, 1998 and 1997,
     respectively.  The Transition Services Agreement was terminated in
     connection with the consummation of the Restructuring.

     During the six months ended June 30, 1998 and 1997, TSAT purchased from TCI
     at TCI's cost certain telephony services aggregating $1,354,000 and
     $4,255,000 respectively.

                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

     Beginning in March 1997, and through the Closing Date, TCI provided TSAT
     with customer support services from its Boise, Idaho call center ( the
     "Boise Call Center").  The Boise Call Center responded to calls that
     exceeded the capacity of TSAT's national call center.  Amounts charged by
     TCI to TSAT for such services aggregated $5,026,000 and $2,273,000 during
     the six months ended June 30, 1998 and 1997, respectively.

     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 and $688,000 during the six months ended June 30, 1998 and 1997,
     respectively.

(11) Income Taxes
     ------------

     Through the Spin-off Date, TSAT's results of operations were included in
     TCI's consolidated U.S. Federal income tax returns, in accordance with the
     existing tax sharing arrangements among TCI and its consolidated
     subsidiaries.  Effective July 1, 1995,  TCI, and certain subsidiaries of
     TCI entered into a tax sharing agreement (the "Tax Sharing Agreement"),
     which formalized such pre-existing tax sharing arrangements and implemented
     additional provisions regarding the allocation of certain consolidated
     income tax attributes and the settlement procedures with respect to the
     inter-company allocation of current tax attributes. The Tax Sharing
     Agreement encompasses U.S. Federal, state, local and foreign tax
     consequences and relies upon the U.S. Internal Revenue Code of 1986, as
     amended, (the "Code") and any applicable state, local and foreign tax law
     and related regulations.  In connection with the Spin-off, the Tax Sharing
     Agreement was amended to provide that TSAT be treated as if it had been a
     party to the Tax Sharing Agreement, effective July 1, 1995.

     In connection with the Restructuring, TSAT and TCI entered into a tax
     sharing agreement dated June 1997, to confirm that pursuant to the amended
     Tax Sharing Agreement (i) neither TSAT nor any of its subsidiaries has any
     obligation to indemnify TCI or the TCI shareholders for any tax resulting
     from the Spin-off failing to qualify as a tax-free distribution pursuant to
     Section 355 of the Code; (ii) TCI is obligated to indemnify TSAT and its
     subsidiaries for any taxes resulting from the Spin-off failing to qualify
     as a tax-free distribution pursuant to Section 355 of the Code; (iii) to
     the best knowledge of TCI, TSAT's total payment obligation under the Tax
     Sharing Agreement could not reasonably be expected to exceed $5 million;
     and (iv) the sole agreement between TCI, on the one hand, and TSAT or any
     of its subsidiaries, on the other, relating to taxes is the Tax Sharing
     Agreement

     TSAT recognized no income tax benefit during either of the six month
     periods ended June 30, 1998 and 1997.  As a result of the Spin-off, TSAT is
     no longer a part of the TCI consolidated tax group, and accordingly, 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 June 30, 1998 and December 31, 1997. Additionally, during the first
     several years following the Spin-off, 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-14
<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,
1997.

   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; the continued strength of the multichannel video programming
distribution industry and the satellite services industry and the growth of
satellite delivered television programming; uncertainties inherent in proposed
business strategies, new product launches and development plans, including
uncertainties regarding possible regulatory issues under the Investment Company
Act of 1940, as amended (the "Investment Company Act"); the TSAT Merger; the
ASkyB Transaction; PRIMESTAR's high-power strategy; 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; competitor responses to PRIMESTAR's products and services, and the
overall market acceptance of such products and services, including acceptance of
the pricing of such products and services; 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.

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

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

     As described in note 2 to the accompanying consolidated financial
statements, the Restructuring was consummated on April 1, 1998.  As a result of
such consummation, TSAT is a holding company whose primary assets are (i)
Tempo's authorizations granted by the FCC and other assets and liabilities
relating to a proposed direct broadcast system being constructed by Tempo and
(ii) its investment in PRIMESTAR.  Until the consummation of the TSAT Merger (of
which there can be no assurance), TSAT's operations will consist primarily of
accounting and legal expenses incurred to maintain TSAT as a public company and
TSAT's share of PRIMESTAR's earnings or losses.  PRIMESTAR is a significantly
larger entity than TSAT, and it is anticipated that PRIMESTAR will initially
incur significantly greater losses than TSAT due primarily to disproportionately
higher levels of depreciation, amortization and interest expense.  In addition,
it is anticipated that PRIMESTAR will develop a high-power DBS service, and that
PRIMESTAR may determine to migrate some or all of the existing medium-power
PRIMESTAR(R) customers to such high-power service.  Under such circumstances,
PRIMESTAR would necessarily be operating under a different cost structure than
that of TSAT's medium-power business. In addition, TSAT has entered into certain
binding agreements, including, among others, the TSAT Merger Agreement.  Upon
consummation of the TSAT Merger, TSAT will be consolidated into PRIMESTAR and
TSAT will no longer be a separate public company.  As closing of the TSAT Merger
is subject to regulatory and other conditions, no assurance can be given that
the TSAT Merger will be consummated.

     TSAT recognized no income tax benefit during either of the six month
periods ended June 30, 1998 and 1997.  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 June 30, 1998 and December 31, 1997.
Additionally, TSAT believes that it will incur net losses for income tax
purposes for several years, and accordingly, will not be in a position to
realize income tax benefits on a current basis.

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

     As a holding company, TSAT's ability to satisfy any liabilities or
obligations is dependent solely upon the earnings of Tempo and PRIMESTAR and the
distribution or the payment of such earnings to TSAT in the form of dividends,
loans or other advances.  Moreover, during the term of the TSAT Merger
Agreement, TSAT will be subject to the covenants provided for therein, including
limitations on TSAT's ability to conduct business activities, incur liabilities,
and acquire or dispose of assets.  The payment of dividends or the making of
loans or advances to TSAT by Tempo and PRIMESTAR 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 PRIMESTAR, and PRIMESTAR has no
obligation, contingent or otherwise, to make any funds available to TSAT,
whether by dividends, loans or other payments (except for the obligation of
PRIMESTAR to reimburse TSAT for certain financial reporting, legal, accounting
and other obligations of TSAT as a public company, as provided in the TSAT
Merger Agreement).  In addition, PRIMESTAR is subject to loan agreements that
prohibit or limit the transfer of funds to TSAT in the form of dividends, loans,
or advances and/or require that any indebtedness of such subsidiaries or
affiliates of TSAT be subordinate to the indebtedness under such loan 
agreements.

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

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

     TSAT's right to participate in the distribution of assets of either
PRIMESTAR or Tempo upon the liquidation or reorganization of such entity would
be subject to the prior claims of the creditors of such entity, including trade
creditors, except to the extent that TSAT may itself be a creditor with
recognized claims against such entity.

     Consummation of the TSAT Merger is subject to regulatory and other
conditions, including the right of PRIMESTAR to terminate the TSAT Merger
Agreement under certain circumstances.  Accordingly, there can be no assurance
that the TSAT Merger will be consummated.  If the TSAT Merger is not consummated
then 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.  TSAT has made no decision as to what
course of action it would pursue if the TSAT Merger is not consummated.

     Certain contingent liabilities of TSAT related to (i) indemnification
agreements entered into between TSAT and TCI and (ii) other obligations were
assumed by PRIMESTAR in connection with the Restructuring.

                                      I-17
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 2.   Changes in Securities.
-------   ----------------------

          During the three months ended June 30, 1998, TSAT issued 2,554 shares
          of Series A Common Stock to TCI for aggregate consideration of $2,554.
          Such shares were issued pursuant to a "Share Purchase Agreement"
          between TSAT and TCI to allow TCI to meet its obligations under the
          conversion features of certain convertible securities of TCI. The
          issuance was made in reliance on the exemption from registration
          afforded by Section 4(2) of the Securities Act.

Item 6.   Exhibits and Reports on Form 8-K.
------    -------------------------------- 
          (a) Exhibit
 
              27 - Financial Data Schedule

          (b) Report on Form 8-K filed during quarter ended June 30, 1998 -

                                                           Financial
             Date of                  Items                Statements
             Report                  Reported                Filed
             ------                  --------                -----
 
          April 15, 1998         Item 2 and Item 7           None

                                     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:   August 13, 1998          By: /s/ Gary S. Howard
                                    --------------------------------
                                         Gary S. Howard
                                         Chief Executive Officer
 
 
Date:   August 13, 1998          By: /s/  Kenneth G. Carroll
                                    --------------------------------
                                          Kenneth G. Carroll
                                          Senior Vice President and        
                                          Chief Financial Officer
                                           (Principal Financial Officer)
 
 
Date:   August 13, 1998          By: /s/  Scott D. Macdonald
                                    --------------------------------
                                          Scott D. Macdonald
                                          Vice President and Controller
                                          (Chief Accounting Officer)


                                     II-2