<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 June 30, 1997

                                      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 July 31, 1997, was:

                Series A common stock - 58,174,354 shares; and
                   Series B common stock - 8,465,564 shares.
                          
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                          Consolidated Balance Sheets
 
                                  (unaudited)
<TABLE>
<CAPTION>
 
                                           June 30,    December 31,
                                             1997          1996
                                          -----------  ------------
                                            amounts in thousands
<S>                                       <C>          <C>
Assets
------
 
Cash and cash equivalents                  $   53,143         6,560
 
Accounts receivable                            24,717        24,731
Less allowance for doubtful accounts            4,089         4,666
                                           ----------     ---------
                                               20,628        20,065
                                           ----------     ---------
 
Prepaid expenses                                  845           927
 
Investment in, and related advances to,
 PRIMESTAR Partners L.P.
 ("PRIMESTAR Partners") (note 7)               23,707        32,240
 
 
Property and equipment, at cost:
 Satellite reception equipment                600,529       595,249
 Subscriber installation costs                196,727       175,553
 Support equipment                             33,883        28,332
 Satellites (note 8)                          462,950       457,685
                                           ----------     ---------
                                            1,294,089     1,256,819
 Less accumulated depreciation                211,282       149,165
                                           ----------     ---------
                                            1,082,807     1,107,654
                                           ----------     ---------
 
Other assets, net of accumulated
 amortization (note 9)                         29,884        12,827
                                           ----------     ---------
 
                                           $1,211,014     1,180,273
                                           ==========     =========
</TABLE>
                                                                     (continued)

                                      I-1
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                     Consolidated Balance Sheets, continued

                                  (unaudited)
<TABLE>
<CAPTION>
 
 
                                            June 30,    December 31,
                                              1997          1996
                                          -----------   ------------
                                             amounts in thousands
<S>                                       <C>           <C>

Liabilities and Stockholders' Equity
------------------------------------
 
Accounts payable                           $   12,473         18,860
Accrued charges from PRIMESTAR
 Partners (note 7)                             42,869         37,943
Accrued charges from TCI
 Communications, Inc. ("TCIC")                
 (note 11)                                      9,915          8,381
Accrued interest payable                        7,862             70
Other accrued expenses                         20,972         15,497
Subscriber advance payments                    26,967         22,249
Due to PRIMESTAR Partners (note 8)            462,950        457,685
Debt (note 10)                                361,054        247,230
                                           ----------      ---------
 
   Total liabilities                          945,062        807,915
                                           ----------      ---------
 
Stockholders' Equity:
 Preferred stock, $.01 par value;
   authorized 5,000,000;
   none issued                                     --             --
 Series A common stock, $1 par value;
  authorized 185,000,000; issued
  58,172,006 in 1997, and
  57,946,044 in 1996                           58,172         57,946
 Series B common stock, $1 par value;
  authorized 10,000,000 shares; issued    
  8,465,564 in 1997 and
  8,466,564 in 1996                             8,466          8,467
 Additional paid-in capital                   522,683        521,724
 Accumulated deficit                         (323,369)      (215,779)
                                           ----------      ---------
 
   Total stockholders' equity                 265,952        372,358
                                           ----------      ---------
 
Commitments and contingencies
 (notes 2, 3, 7, 8, 10, 11 and 12)
 
                                           $1,211,014      1,180,273
                                           ==========      =========
 
</TABLE>
See accompanying notes to financial statements.

                                      I-2
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                           Statements of Operations

                                  (unaudited)
<TABLE>
<CAPTION>
 
                                           Three months ended    Six months ended
                                                June 30,             June 30,
                                          --------------------  -------------------
                                             1997       1996      1997       1996
                                          ----------  --------  ---------  --------
                                                    amounts in thousands
<S>                                       <C>         <C>       <C>        <C>
Revenue:
   Programming and equipment
       rental                              $126,729    80,613    240,230   156,870
   Installation                              10,652    17,275     20,415    36,777
                                           --------   -------   --------   -------
                                            137,381    97,888    260,645   193,647
                                           --------   -------   --------   -------
Operating costs and expenses:
   Charges from PRIMESTAR
    Partners (note 7):
     Programming                             42,665    30,067     81,988    57,464
     Satellite, marketing and
      distribution                           20,445    15,357     40,381    29,422
 
   Other operating:
    TCIC (note 11)                            1,875     5,098      4,490    10,505
    Other                                     2,940     2,363      6,582     4,345
 
   Selling, general and administrative:
    TCIC (note 11)                            7,845     5,099     12,192     9,752
    Other                                    39,540    37,929     79,581    75,314
 
   Stock compensation (note 11)               1,158       (11)     1,552      (176)
 
   Depreciation (note 4)                     58,643    29,338    113,266    53,527
                                           --------   -------   --------   -------
                                            175,111   125,240    340,032   240,153
                                           --------   -------   --------   -------
 
     Operating loss                         (37,730)  (27,352)   (79,387)  (46,506)
 
Other income (expense):
 Interest expense                           (12,025)       --    (21,408)       --
 Interest income                              1,019       100      1,770       194
 Share of losses of PRIMESTAR
  Partners (note 7)                          (5,768)   (1,068)    (7,929)   (1,446)
 Other, net                                    (555)       --       (636)       --
                                           --------   -------   --------   -------
                                            (17,329)     (968)   (28,203)   (1,252)
                                           --------   -------   --------   -------
 
     Loss before income taxes               (55,059)  (28,320)  (107,590)  (47,758)
 
Income tax benefit                               --     9,003         --    14,870
                                           --------   -------   --------   -------
 
     Net loss                              $(55,059)  (19,317)  (107,590)  (32,888)
                                           ========   =======   ========   =======
 
Net loss per common share (note 5):
 Historical                                $   (.83)       --      (1.61)       --
                                           ========   =======   ========   =======
 Pro forma                                 $     --      (.29)        --      (.50)
                                           ========   =======   ========   =======
</TABLE>
See accompanying notes to financial statements.

                                      I-3
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)
 
                 Consolidated Statement of Stockholders' Equity

                         Six months ended June 30, 1997

                                  (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, 1997                     $57,946     8,467     521,724       (215,779)    372,358
 
 Net loss                                           --        --          --       (107,590)   (107,590)
 Recognition of stock compensation
  related to stock options and
  restricted stock awards                           --        --         959             --         959
 Issuance of Series A Common Stock upon
  conversion of convertible securities
  of a TCIC subsidiary                             225        --          --             --         225
 Conversion of Series B common stock
  into Series A common stock                         1        (1)         --             --          --
 
                                               -------  -------- -----------  -------------    --------
Balance at June 30, 1997                       $58,172     8,466     522,683       (323,369)    265,952
                                               =======  ======== ===========  =============    ========
 
 
</TABLE>
See accompanying notes to financial statements.

                                      I-4
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                            Statements of Cash Flows

                                  (unaudited)
<TABLE>
<CAPTION>
 
                                             Six months ended
                                                 June 30,
                                          ----------------------
                                             1997        1996
                                          -----------  ---------
                                          amounts in thousands
                                              (see note 6)
<S>                                       <C>          <C> 
Cash flows from operating activities:
 Net loss                                  $(107,590)   (32,888)
 Adjustments to reconcile net loss to
  net cash provided by operating
  activities:
     Depreciation                            113,266     53,527
     Share of losses of PRIMESTAR              
      Partners                                 7,929      1,446
     Accretion of debt discount                6,644         --
     Deferred income tax expense                  --     11,463
     Other non-cash items                      3,514       (163)
     Changes in operating assets and
      liabilities:
       Change in receivables                    (563)     9,434
       Change in prepaids                         82       (267)
       Change in accruals and payables        16,053     14,359
       Change in subscriber advance            
        payments                               4,718      4,427
                                           ---------   --------
         Net cash provided by operating       
          activities                          44,053     61,338
                                           ---------   --------

Cash flows from investing activities:
 Capital expended for satellites              (5,265)   (36,684)
 Capital expended for property and           
  equipment                                  (85,804)  (175,339)
 Additional investments in and advances
  to PRIMESTAR Partners                       (6,991)   (12,330)
 Repayment received on advances to
  PRIMESTAR Partners                           7,663         --
                                           ---------   --------
 
         Net cash used in investing          
          activities                         (90,397)  (224,353)
                                           ---------   --------
 
Cash flows from financing activities:
 Borrowings of debt                          405,061         --
 Repayments of debt                         (299,172)        --
 Payment of deferred financing costs         (18,452)        --
 Increase in due to PRIMESTAR Partners         5,265      3,319
 Proceeds from issuance of common stock          225         --
 Increase in due to TCIC                          --    164,230
                                           ---------   --------
 
         Net cash provided by financing       
          activities                          92,927    167,549
                                           ---------   --------
 
         Net increase in cash and cash
          equivalents                         46,583      4,534
 
 
         Cash and cash equivalents:
          Beginning of period                  6,560      1,801
                                           ---------   --------
 
          End of period                    $  53,143      6,335
                                           =========   ========
</TABLE>
See accompanying notes to financial statements.

                                      I-5
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements
 
                                 June 30, 1997

                                  (unaudited)

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

     The accompanying financial statements of TCI Satellite Entertainment, Inc.
     ("TSAT") include the historical financial information of (i) certain
     satellite television assets (collectively, "TCI SATCO") of TCIC, a
     subsidiary of Tele-Communications, Inc. ("TCI") for periods prior to the
     December 4, 1996 consummation of the distribution transaction (the
     "Distribution") described in note 3, and (ii) TSAT and its consolidated
     subsidiaries for the period following such date.  Upon consummation of the
     Distribution, TSAT became the owner of the assets that comprise TCI SATCO,
     which assets included (i) a 100% ownership interest in the TCIC business
     that distributes the PRIMESTAR(R) programming service to subscribers within
     specified areas of the continental United States, (ii) a 100% ownership
     interest in Tempo Satellite, Inc. ("Tempo"), and (iii) a 20.86% aggregate
     ownership interest in PRIMESTAR Partners.

     Tempo holds a permit (the "FCC Permit") issued by the Federal
     Communications Commission ("FCC") authorizing the construction, launch and
     operation of a direct broadcast satellite ("DBS") system. 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
     "Company Satellites") and has an option to purchase up to three additional
     satellites. PRIMESTAR Partners, which was formed as a limited partnership
     in 1990 by subsidiaries of TCIC, subsidiaries of several other cable
     operators, and a subsidiary of General Electric Company, broadcasts
     satellite entertainment services that are delivered to subscribers through
     TSAT and certain other authorized distributors.

     In the following text, the "Company" may, as the context requires, refer to
     "TCI SATCO" (prior to the December 4, 1996 completion of the Distribution),
     TSAT and its consolidated subsidiaries (subsequent to the December 4, 1996
     completion of the Distribution) or both.  See note 3.   Additionally,
     unless the context indicates otherwise, references to "TCI" and "TCIC"
     herein are to TCI and TCIC and their respective consolidated subsidiaries
     (other than the Company).

     All significant inter-entity and intercompany transactions have been
     eliminated.

     As further discussed in note 11, the accompanying statements of operations
     include allocations of certain costs and expenses of TCI.  Although such
     allocations are not necessarily indicative of the costs that would have
     been incurred by the Company on a stand-alone basis, management believes
     the resulting allocated amounts are reasonable.


                                                                     (continued)

                                      I-6
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements

 
     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.

     The accompanying financial statements of the Company 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 the Company as of June 30, 1997 and the results of
     its operations for the six months ended June 30, 1997 and 1996.  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 the Company's December 31,
     1996 Annual Report on Form 10-K.

(2)  Proposed Transactions
     ---------------------

     PRIMESTAR Partners Roll-up

     On June 11, 1997, the Company entered into a binding letter agreement,
     including an attached summary of business terms (collectively, the "Roll-up
     Agreement") with PRIMESTAR Partners, affiliates of each of the other
     partners of PRIMESTAR Partners, and a stockholder of the Company.  The
     Roll-up Agreement sets forth the principal terms and conditions of a
     proposed transaction (the "Roll-up Transaction"), through which PRIMESTAR
     Partners, the Company and the PRIMESTAR(R)-related distribution businesses
     of such affiliates will be consolidated into a newly-formed company.  The
     other parties to the Roll-up Agreement include Time Warner Cable ("TWC"),
     Advance/Newhouse Partnership ("Newhouse," and, together with TWC,
     "TWC/Newhouse"), Cox Communications, Inc. ("Cox"), Comcast Corporation
     ("Comcast"), MediaOne of Delaware Inc. ("MediaOne"), and GE American
     Communications, Inc. ("GE Americom").  Affiliates of the Company, TWC,
     Newhouse, Cox, Comcast, MediaOne and GE Americom are general and limited
     partners of PRIMESTAR Partners, and the COMPANY, TWC/Newhouse, Cox, Comcast
     and MediaOne (or their affiliates) are also distributors of PRIMESTAR
     Partners' medium power satellite television service.

                                                                     (continued)

                                      I-7
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements

 
     The Roll-up Agreement provides for the formation of a new corporation ("New
     PRIMESTAR"), which will initially be a wholly-owned subsidiary of the
     Company.  New PRIMESTAR will acquire the PRIMESTAR partnership interests,
     subscribers and related assets, as applicable, of the other parties to the
     Roll-up Transaction in exchange for (i) cash (or the assumption of debt),
     (ii) shares of Series A Common Stock of New PRIMESTAR and (iii) except for
     GE Americom, shares of Series C Common Stock of New PRIMESTAR, in each case
     in an amount determined pursuant to the Roll-up Agreement.  Concurrently,
     the Company would merge with a wholly-owned subsidiary of New PRIMESTAR,
     with the Company surviving, and the outstanding shares of Series A Common
     Stock and Series B Common Stock of the Company would be converted into
     Series A Common Stock and Series B Common Stock of New PRIMESTAR,
     respectively.  It is expected that upon consummation of the Roll-up
     Transaction, shares of the Series A Common Stock and Series B Common Stock
     of New PRIMESTAR will be publicly traded on the Nasdaq National Market tier
     of The Nasdaq Stock Market.

     The Roll-up Agreement provides that the board of directors of New PRIMESTAR
     will initially consist of eleven members, of which three (the "Class B
     Directors") will be elected by holders of the Series B Common Stock of New
     PRIMESTAR and six (the "Class C Directors") will be elected by holders of
     the Series C Common Stock of New PRIMESTAR.  Of the six Class C Directors,
     three will be nominated by TWC/Newhouse and one will be nominated by each
     of Cox, Comcast and MediaOne.  The remaining two directors (the "Common
     Directors") will be nominated by a super-majority vote of the Class B
     Directors and Class C Directors, and elected by the holders of the Series A
     Common Stock, Series B Common Stock and Series C Common Stock, voting
     together as a single class.  The number of Class B Directors will decrease
     as the number of shares of Series B Common Stock outstanding decreases, and
     the number of Class C Directors will decrease as the number of shares of
     Series C  Common Stock outstanding decreases, in each case in accordance
     with a schedule set forth in the Roll-Up Agreement.  The special class
     rights of the holders of Series B Common Stock and Series C Common Stock,
     each voting as a separate class, to elect the Class B Directors and Class C
     Directors, respectively, will automatically terminate at such time as the
     holders of the Series C Common Stock, voting as a class, shall no longer be
     entitled to elect at least three Class C Directors.  At any time that the
     maximum number of Class B Directors or Class C Directors is decreased, the
     number of Common Directors will be correspondingly increased, so that the
     total number of directors constituting the whole board of directors of New
     PRIMESTAR remains eleven.

                                                                     (continued)

                                      I-8
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements

 
     The Series A Common Stock of New PRIMESTAR will be substantially identical
     to the Series A Common Stock of the Company, and the Series B Common Stock
     and Series C Common Stock of New PRIMESTAR will be substantially identical
     to the Series A Common Stock of New PRIMESTAR, except in each case with
     respect to the election of directors as provided above and except in each
     case as follows: (i) holders of the Series B Common Stock and Series C
     Common Stock will be entitled to ten votes per share, while holders of the
     Series A Common Stock will be entitled to one vote per share, on all
     matters as to which such holders are entitled to vote; (ii) each share of
     Series B Common Stock will be convertible into one share of Series A Common
     Stock at the option of the holder, and each share of Series C Common Stock
     will be convertible into one share of Series B Common Stock or one share of
     Series A Common Stock at the option of the holder, but the Series A Common
     Stock will not be convertible; and (iii) the affirmative vote of the
     holders of a majority of the outstanding shares of Series B Common Stock
     and 83% of the outstanding shares of Series C Common Stock, each voting as
     a separate class, will be required to approve certain actions by New
     PRIMESTAR, including substantive charter and by-law amendments, mergers and
     consolidations, the sale of substantially all the assets of New PRIMESTAR,
     dissolution, certain stock issuances, the filing of a voluntary bankruptcy
     petition, and, with certain exceptions, engagement by New PRIMESTAR in any
     business outside the Satellite Television Business (as defined in the Roll-
     up Agreement). On the tenth anniversary of the first issue of Series C
     Common Stock, all Series C Common Stock will be mandatorily converted into
     Series B Stock on a one-to-one basis.

     Under the terms of the Roll-up Agreement, current stockholders of the
     Company would hold approximately 37% common equity ownership of New
     PRIMESTAR at the closing of the Roll-up Transaction, and TWC/Newhouse,
     Comcast, MediaOne, Cox and GE would own approximately 30%, 10%, 10%, 9% and
     4% respectively, of New PRIMESTAR common equity at closing, subject in each
     case to adjustments based on closing subscriber counts, inventory amounts
     and other factors.

     Although the parties contemplate the negotiation, execution and delivery of
     definitive documentation with respect to the Roll-up Transaction, such
     documentation is not a condition to the closing of the Roll-up Transaction,
     and in the absence of such documentation, the Roll-up Agreement will remain
     a binding agreement among the parties.  The consummation of the Roll-up
     Transaction is however subject to certain closing conditions, including
     receipt of necessary regulatory approvals, approval of the Company's
     stockholders and certain due diligence matters.  In connection with the
     execution of the Roll-up Agreement, John C. Malone, a stockholder of the
     Company and the Chairman of its Board of Directors, has agreed to vote all
     shares of common stock of the Company owned by him in favor of the Roll-up
     Transaction, in any vote of the stockholders of the Company to approve such
     transaction.

                                                                     (continued)

                                      I-9
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements

 
     Acquisition of Certain Satellite Assets

     On June 11, 1997, PRIMESTAR Partners announced that it had entered into a
     binding asset acquisition agreement (the "ASkyB Agreement") with The News
     Corporation Limited ("News Corp"), MCI Telecommunications Corporation
     ("MCI"), American Sky Broadcasting LLC, a joint venture between News Corp.
     and MCI ("ASkyB"), PRIMESTAR Partners, and, for certain purposes only, each
     of the general and limited partners of PRIMESTAR Partners.  The ASkyB
     Agreement provides for the sale and transfer to New PRIMESTAR of two high
     power communications satellites currently under construction, certain
     authorizations granted to MCI by the FCC to operate a direct broadcast
     satellite business at the 110 degrees West longitude orbital location using
     28 transponder channels (the "110 degrees License"), and certain related
     contracts (collectively, the "ASkyB Transaction"). In consideration, ASkyB
     will receive non-voting convertible securities of New PRIMESTAR with a
     total liquidation value of approximately $1.1 billion, comprising
     approximately $600 million liquidation value of non-voting convertible
     preferred stock (convertible into approximately 52 million shares of non-
     voting common stock of New PRIMESTAR, subject to adjustment) and
     approximately $500 million principal amount of convertible subordinated
     notes (convertible into approximately 43 million shares of non-voting
     common stock of New PRIMESTAR, subject to adjustment). The preferred stock
     will pay cumulative dividends at the annual rate of 5% of the liquidation
     value of such shares and the subordinated notes will have an interest rate
     of 5%. dividends on the preferred stock and interest on the subordinated
     notes will be payable in cash or, at the option of New PRIMESTAR, in shares
     of non-voting common stock of New PRIMESTAR, for a period of four years.
     Thereafter, all dividend and interest payments will be made solely in cash.
     Shares of non-voting common stock issued to ASkyB or any of its affiliates
     upon conversion of such convertible preferred stock and subordinated notes,
     or in payment of dividend or interest obligations thereunder, shall in turn
     automatically convert into shares of the series a common stock of New
     PRIMESTAR, on a one-to-one basis, upon transfer to any person other than
     ASkyB, News Corp. or any of their respective affiliates.

     Consummation of the transactions contemplated by the ASkyB Agreement is
     contingent on, among other things, receipt of all necessary government and
     regulatory approvals.

                                                                     (continued)

                                      I-10
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements

 
(3)  Distribution Transaction
     ------------------------

     General

     On June 17, 1996, the Board of Directors of TCI announced its intention to
     distribute 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 Common Stock") and Tele-Communications, Inc. Series B TCI Group
     Common Stock (the "Series B TCI Group Common Stock" and, together with the
     Series A TCI Group Common Stock, the "TCI Group Common Stock"). On December
     4, 1996, the Distribution was effected as a distribution by TCI to holders
     of record of its TCI Group Common Stock as of the close of business on
     November 12, 1996 (the "Record Date") of shares of the Series A Common
     Stock of the Company (the "Series A Common Stock") and Series B Common
     Stock of the Company (the "Series B Common Stock"). The Distribution did
     not involve the payment of any consideration by the holders of TCI Group
     Common Stock (such holders, the "TCI Group Stockholders"), and is intended
     to qualify as a tax-free spinoff.

     TCI Group Stockholders on the Record Date received one share of Series A
     Common Stock for each ten shares of Series A TCI Group Common Stock owned
     of record at the close of business on the Record Date and one share of
     Series B Common Stock for each ten shares of Series B TCI Group Common
     Stock owned of record as of the close of business on the Record Date.
     Fractional shares were not issued. Fractions of one-half or greater of a
     share were rounded up and fractions of less than one-half of a share were
     rounded down to the nearest whole number of shares of Series A Common Stock
     and Series B Common Stock.  Immediately following the Distribution,
     57,941,044 shares of Series A Common Stock and 8,466,564 shares of Series B
     Common Stock were issued and outstanding.

                                                                     (continued)

                                      I-11
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements

 
Subsequent to the Distribution, the Company and TCI have operated independently.
For purposes of governing certain of the ongoing relationships between the
Company and TCI after the Distribution, and to provide mechanisms for an orderly
transition, the Company and TCI have entered into various agreements, including
the "Reorganization Agreement" (see below), the "Fulfillment Agreement" (see
note 11), the "Indemnification Agreements" (see note 12), the "TCIC Credit
Facility" (see note 10), the "Transition Services Agreement" (see note 11), and
an amendment to TCI's existing "Tax Sharing Agreement" (see note 11).

Reorganization Agreement

The Reorganization Agreement provided for, among other things, the transfer to
the Company of the assets of TCI SATCO, and for the assumption by the Company of
related liabilities. No consideration was payable by the Company for these
transfers, except that two subsidiaries of the Company purchased TCIC's
partnership interests in PRIMESTAR Partners for consideration payable by
delivery of promissory notes issued by such subsidiaries, which notes were
assumed by TCI on or before the Distribution Date in the form of a capital
contribution to the Company. The Reorganization Agreement also provides for
certain cross-indemnities designed to make the Company financially responsible
for all liabilities relating to the digital satellite business conducted by TCI
prior to the Distribution, as well as for all liabilities incurred by the
Company after the Distribution, and makes TCI financially responsible for all
potential liabilities of the Company which are not related to the digital
satellite business, including, for example, liabilities arising as a result of
the Company having been a subsidiary of TCI.

Pursuant to the Reorganization Agreement, on the Distribution Date, the Company
issued to TCIC a promissory note (the "Company Note"), in the principal amount
of $250,000,000, representing a portion of the Company's intercompany balance
owed to TCIC on such date. On December 31, 1996, the Company entered into a bank
credit agreement with respect to a senior secured reducing revolving credit
facility (the "Bank Credit Facility") and used a portion of the borrowing
availability thereunder to repay in full all principal and interest due to TCIC
pursuant to the Company Note. See note 10.

                                                                     (continued)

                                      I-12
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements

 
     Pursuant to the Reorganization Agreement, the remainder of the Company's
     intercompany balance owed to TCIC on the Distribution Date (other than
     certain advances made to the Company by TCIC in 1996 to fund certain
     construction and related costs associated with the Company Satellites, as
     described in note 8) was assumed by TCI.  A portion of such assumption of
     debt was affected in the form of a capital contribution to the Company; the
     remainder was affected as consideration for (i) the assumption by the
     Company of TCI's obligations under options to be granted on the
     Distribution Date to certain key employees of TCI (who are not employees of
     the Company) representing, in aggregate, 1,660,190 shares of Series A
     Common Stock and (ii) the granting by the Company to TCI of 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
     Distribution.

(4)  Changes in Accounting
     ----------------------

     During the fourth quarter of 1996, the Company re-evaluated certain of its
     depreciation policies. After considering relevant accounting literature,
     current accounting practices in similar industries, and other factors, the
     Company concluded that the most appropriate depreciation policy for its
     subscriber installation costs was to depreciate subscriber installation
     costs on a straight line basis over the estimated average life of a
     subscriber, and charge to depreciation expense the unamortized balance of
     installation costs associated with customers who have terminated service
     with the Company. The Company believes the new policy is more appropriate
     than the prior method since, under the new policy, subscriber installation
     costs associated with subscribers whose service has been terminated are no
     longer carried on the Company's balance sheet after the date of
     termination. This change was adopted effective October 1, 1996 and was
     treated as a change in accounting policy that was inseparable from a change
     in estimate. Accordingly, the cumulative effect of such change for periods
     prior to October 1, 1996, together with the fourth quarter 1996 effect of
     such change, was included in the Company's depreciation expense for the
     fourth quarter of 1996.

     In connection with the aforementioned discussion of the Company's
     accounting policies with respect to subscriber installation costs, the
     Company also determined that a reduction in the estimated useful life of
     certain satellite reception equipment was appropriate in light of certain
     changes in the Company's expectations with respect to technological and
     other factors. This change in estimate was given effect on a prospective
     basis as of October 1, 1996.

                                                                     (continued)

                                      I-13
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements

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

     As described in note 3, TSAT issued 66,407,608 shares of Company Common
     Stock pursuant to the Distribution. The pro forma net loss per share
     amounts set forth in the accompanying statements of operations assume that
     the shares issued pursuant to the Distribution were issued and outstanding
     since January 1, 1996. Accordingly, the calculation of the pro forma net
     loss per share assumes 66,407,608 weighted average shares were outstanding
     during the three and six months ended June 30, 1996. The historical net
     loss per common share is based on 66,630,929 and 66,625,103 weighted
     average shares outstanding during the three and six months ended June 30,
     1997, respectively.

     The Financial Accounting Standards Board recently issued Statement of
     Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement
     No. 128"). Statement No. 128 requires the presentation of basic earnings
     per share ("EPS") and, for companies with potentially dilutive securities,
     such as convertible debt, options and warrants, diluted EPS. Statement No.
     128 is effective for annual and interim periods ending after December 31,
     1997. The Company does not believe that the adoption of Statement No. 128
     will significantly impact the calculation of the Company's net loss per
     common share.

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

     Cash paid for interest was $5,913,000 during the six months ended June 30,
     1997, and ,was not significant during the six months ended June 30, 1996.
     Cash paid for income taxes was not significant during the six months ended
     June 30, 1997 and 1996.

     With the exception of certain non-cash stock compensation obligations (see
     note 11), transactions effected through the intercompany account with TCIC
     for periods prior to the Distribution have been considered to be
     constructive cash receipts and payments for purposes of the accompanying
     statements of cash flows.


                                                                     (continued)

                                      I-14
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements

 
(7)  Investment in PRIMESTAR Partners
     --------------------------------

     Summarized unaudited operating information for PRIMESTAR Partners is as
     follows (amounts in thousands):
<TABLE>
<CAPTION>
 
                                       Six months ended
                                           June 30,
                                     ---------------------
                                        1997       1996
                                     ----------  ---------
<S>                                  <C>         <C>
Results of Operations
---------------------
 
    Revenue                          $ 292,169    185,981
    Operating, selling, general and
     administrative expenses          (312,210)  (191,571)
    Depreciation and amortization       (1,958)    (1,626)
                                     ---------   --------
 
      Operating loss                   (21,999)    (7,216)
 
    Other income (expense), net         (7,212)       765
                                     ---------   --------
 
      Net loss                       $ (29,211)    (6,451)
                                     =========   ========
</TABLE>

     The bank credit facility of PRIMESTAR Partners (the "PRIMESTAR Credit
     Facility") was obtained by PRIMESTAR Partners to finance advances to Tempo
     for payments due in respect of the construction of the Company Satellites,
     and is supported by letters of credit arranged for by affiliates of all but
     one of the partners of PRIMESTAR Partners.  At June 30, 1997, PRIMESTAR
     Partners' indebtedness under the PRIMESTAR Credit Facility aggregated
     $547,000,000, including amounts borrowed to pay interest charges.  The
     maturity date of the PRIMESTAR Credit Facility has been extended from June
     30, 1997 to December 31, 1997.  See notes 8 and 12.

     Since March 10, 1997, PRIMESTAR Partners has broadcast from a medium power
     satellite ("GE-2") that was launched on January 30, 1997 by GE Americom.
     Pursuant to an Amended and Restated Memorandum of Agreement, effective as
     of October 18, 1996, between PRIMESTAR Partners and GE Americom, with
     respect to PRIMESTAR Partners' use of transponders on GE-2 (the "GE-2
     Agreement"), PRIMESTAR Partners will be required to make minimum lease
     payments for an initial term of six years from the date of commercial
     operation, extendible, at the option of PRIMESTAR Partners for the
     remainder of the operational life of  GE-2 (the "End-Of-Life Option").  The
     End-Of-Life Option expires if not exercised by December 31, 1997.

     PRIMESTAR Partners provides 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
     arranges for satellite capacity and uplink services, and provides national
     marketing and administrative support services in exchange for a separate
     authorization fee.

                                                                     (continued)

                                      I-15
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)
                         Notes to Financial Statements

 
     Under PRIMESTAR Partners' limited partnership agreement, the Company has
     agreed to fund its share of any capital contributions and/or loans to
     PRIMESTAR Partners that might be agreed upon from time to time by the
     partners of PRIMESTAR Partners. Additionally, those subsidiaries of the
     Company that are general partners of PRIMESTAR Partners are liable as a
     matter of partnership law for all debts of PRIMESTAR Partners in the event
     the liabilities of PRIMESTAR Partners were to exceed its assets. PRIMESTAR
     Partners has contingent liabilities related to legal and other matters
     arising in the ordinary course of business. Management of PRIMESTAR
     Partners is unable at this time to assess the impact, if any, of such
     matters on PRIMESTAR Partners' results of operations, financial position,
     or cash flows.

     As described in note 2, the Company has entered into a binding letter
     agreement with respect to the Roll-up Transaction, whereby the Company,
     PRIMESTAR Partners and the PRIMESTAR(R)-related distribution businesses of
     affiliates of the other partners of PRIMESTAR Partners will be consolidated
     into a newly-formed company.

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

     Tempo DBS System

     The Company, through Tempo, holds the FCC Permit authorizing construction
     of a high power DBS system consisting of two or more satellites delivering
     DBS service in 11 frequencies at the 119 degrees West Longitude ("W.L.")
     orbital position and 11 frequencies at the 166 degrees W.L. orbital
     position. The 119 degrees W.L. orbital position is generally visible to
     home satellite dishes throughout the entire continental U.S.; the 166
     degrees W.L. orbital position is visible only in the western half of the
     continental U.S. as well as Alaska and Hawaii.

     Tempo is also a party to the Satellite Construction Agreement with Loral,
     pursuant to which Tempo has arranged for the construction of the Company
     Satellites at a fixed contract price of $487,159,500, and has an option to
     purchase up to three additional satellites. The cost of constructing the
     Company Satellites is reflected in  "Satellites" in the accompanying
     balance sheets.

     As constructed, each Company Satellite can operate in either "single
     transponder" mode (with 32 transponders broadcasting at 113 watts per
     channel) or in "paired transponder" mode (with 16 transponders broadcasting
     at 220 watts per channel).  Either such configuration can be selected at
     any time, either before or after launch.


                                                                     (continued)

                                      I-16
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements
 
     One of the Company Satellites ("Tempo DBS-1") was outfitted with an antenna
     designed for operation at the 119 degrees W.L. orbital location, and was
     launched into geosynchronous orbit on March 8, 1997. The satellite is
     currently undergoing in-orbit testing pursuant to the Satellite
     Construction Agreement. Assuming the successful in-orbit testing of Tempo
     DBS-1, the Company currently intends to operate such satellite in "paired
     transponder" mode, broadcasting on 11 of the 16 available transponder
     pairs, in accordance with the FCC Permit. The remaining five transponder
     pairs would be available as in-orbit spares. Operating in paired
     transponder mode and broadcasting on 11 transponders Tempo DBS-1 would
     initially be able to deliver approximately 100 channels of digital video
     and music programming. If advances in compression technology currently
     being tested become commercially available, Tempo DBS-1 would be able to
     deliver up to 150 channels of programming. The Company intends, directly or
     through PRIMESTAR Partners, to use Tempo DBS-1 as a platform to provide
     high-power digital video programming services to residential customers, as
     well as multiple dwelling units, commercial customers and resellers. The
     implementation of any high-power strategy, either alone, with PRIMESTAR
     Partners, or in conjunction with the consummation of the ASkyB Transaction,
     is subject to regulatory approval. No assurance can be given that such
     approval will be obtained, or if obtained, that such approval will not be
     conditioned upon modifications to the Company's high-power strategy. See
     note 2.

     Following an unusually intense solar disturbance on April 11, 1997, Loral
     notified the Company of some reduction of electrical power on Tempo DBS-1.
     Although it is possible that this power reduction could eventually affect
     the operation of Tempo DBS-1, either alone or together with other events
     that may arise during the expected life of the satellite, the Company does
     not believe that the value or utility of Tempo DBS-1 is materially
     impaired, and it is not likely that this power reduction will materially
     interfere with the use of the satellite as currently contemplated by the
     Company and PRIMESTAR Partners.

     In light of the pendency of the Roll-up Transaction and ASkyB Transaction
     (see note 2), the Company and PRIMESTAR Partners are evaluating alternative
     future plans with respect to the second Company Satellite, which presently
     serves as a ground spare for Tempo DBS-1.


                                                                     (continued)

                                      I-17
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements
 
     Satellite Launches

     As noted above, Tempo DBS-1 was launched on March 8, 1997 and is currently
     in the process of in-orbit testing. Under the Satellite Construction
     Agreement, delivery of a satellite takes place upon Tempo's acceptance of
     such satellite after completion of in-orbit testing ("Delivery"). Subject
     to certain limits, Loral must reimburse Tempo for Tempo's actual and
     reasonable expenses directly incurred as a result of any delays in the
     Delivery of satellites. The in-orbit useful life of each satellite is
     designed to be a minimum of 12 years. If in-orbit testing confirms that the
     satellite conforms fully to specifications and the service life of the
     satellite will be at least 12 years, Tempo is required to accept the
     satellite. If in-orbit testing determines that the satellite does not fully
     conform to specifications but at least 50% of its transponders are
     functional and the service life of the satellite will be at least six
     years, Tempo is required to accept the satellite but is entitled to receive
     a proportionate decrease in the purchase price. Tempo DBS-1 has not yet
     been accepted, but it is anticipated that Tempo DBS-1 will be accepted
     during the third quarter of 1997. The Company believes that Tempo DBS-1
     does not fully comply with specifications, but has not yet determined the
     extent of such non-compliance. If Loral fails to deliver a satellite, it
     has 29 months to deliver, at its own expense, a replacement satellite.
     Loral may make four attempts to launch the two Company Satellites; however,
     if the two Company Satellites are not delivered in such four attempts,
     Tempo may terminate the Satellite Construction Agreement and receive a
     refund. Tempo also may terminate the contract in the event of two
     successive satellite failures.

     Loral has warranted that, until the satellites are launched, the satellites
     will be free from defects in materials or workmanship and will meet the
     applicable performance specifications. In addition, Loral has warranted
     that all items other than the satellites delivered under the Satellite
     Construction Agreement will be free from defects in materials or
     workmanship for one year from the date of their acceptance and will perform
     in accordance with the applicable performance specifications. Loral bears
     the risk of loss of the Company Satellites until Delivery. Upon Delivery,
     title and risk of loss pass to Tempo. However, Loral is obligated to carry
     risk insurance on each satellite covering the 180-day period following the
     launch of the satellite.  Such risk insurance is required to cover (i) the
     cost of any damages due under the Satellite Construction Agreement; (ii)
     the cost of delivery of a replacement satellite in the event of a satellite
     failure; and (iii) the refund of the fixed contract price for each
     undelivered Company Satellite if Loral fails to deliver both Company
     Satellites after four attempts. Loral is also required to obtain insurance
     indemnifying Tempo from any third party claims arising out of the launch of
     a satellite.


                                                                     (continued)

                                      I-18
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements
 
     Tempo Option

     In February 1990, Tempo entered into the Tempo 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. Under the Tempo Option Agreement, upon the exercise of the
     Tempo Option, PRIMESTAR Partners was obligated to pay Tempo $1,000,000 (the
     "Exercise Fee") and to lease or purchase the entire capacity of the DBS
     system 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. PRIMESTAR Partners
     financed such advances to Tempo through borrowings under the PRIMESTAR
     Credit Facility, which is supported by letters of credit arranged for by
     affiliates of all but one of the partners of PRIMESTAR Partners. The
     aggregate funding provided to Tempo by PRIMESTAR Partners ($462,950,000 at
     June 30, 1997) is reflected in "Due to PRIMESTAR Partners" in the
     accompanying balance sheets. At June 30, 1997, the amount borrowed by
     PRIMESTAR Partners under the PRIMESTAR Credit Facility was $547,000,000,
     including amounts borrowed to pay interest charges. See notes 7 and 12.

     During 1996, TCIC made intercompany advances to the Company to fund the
     majority of the construction and related costs associated with the Company
     Satellites. Prior to 1996, PRIMESTAR Partners had funded substantially all
     of the construction and related costs associated with the Company
     Satellites. In connection with the Distribution, a determination was made
     that such 1996 advances from TCIC would be repaid by the Company to TCIC,
     to the extent (and only to the extent) that Tempo received corresponding
     advances from PRIMESTAR Partners. As a result of negotiations between the
     Company and PRIMESTAR Partners to resolve a disagreement concerning the
     Company Satellites, PRIMESTAR Partners advanced $73,786,000 to Tempo in
     December 1996 to reimburse Tempo for all of the 1996 costs which previously
     had been funded by TCIC. Upon receipt, such advance was paid to TCIC by
     Tempo in repayment of such 1996 advances by TCIC.

                                                                     (continued)

                                      I-19
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements
 
     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 Satellite
     No. 2 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 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 Company Satellites not previously funded by PRIMESTAR
     Partners. Such amounts have been paid to the Company.

     The Tempo Letter Agreements permit PRIMESTAR Partners to apply its advances
     to Tempo against any payments due under the Tempo Option with respect to
     such purchase or lease of satellite capacity.  Although the Company and
     PRIMESTAR Partners have not entered into an agreement with respect to the
     lease or purchase of 100% of the capacity of the proposed Tempo DBS system
     pursuant to the Tempo Option, the Company 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, the Company believes that alternative
     courses of action are available that would allow the Company to recover the
     Company's costs of constructing the Company Satellites.  See note 2.
 
(9)  Other Assets
     ------------

     The components of other assets are as follows (amounts in thousands):
<TABLE>
<CAPTION>
 
                                                         June 30,   December 31,
                                                           1997         1996
                                                         ---------  ------------
 
<S>                                                      <C>        <C>
Deferred financing costs, net of accumulated
  amortization                                             $24,393         7,000
Investment in, and advances to, ResNet 
  Communications, Inc.                                       5,491         5,827
                                                           -------        ------
                                                           $29,884        12,827
                                                           =======        ======
</TABLE>
                                                                     (continued)

                                      I-20

<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements
  
(10) Debt
     ----

     The components of debt are as follows (amounts in thousands):
<TABLE>
<CAPTION>
                                            June 30,   December 31,
                                              1997         1996
                                            ---------  ------------
<S>                                         <C>        <C>
     Bank Credit Facility (a)                $     --       246,000
     Senior Subordinated Notes (b)            200,000            --
     Senior Subordinated Discount Notes (b)   158,705            --
     Other                                      2,349         1,230
                                             --------       -------
                                             $361,054       247,230
                                             ========       =======
</TABLE>

     (a)  Bank Credit Facility

          On December 31, 1996, the Company entered into the Bank Credit
          Facility. As a result of the February 1997 issuance of the Notes and
          the March 1997 determination that GE-2 was commercially operational,
          the maximum commitments under the Bank Credit Facility were increased
          from $350,000,000 to $750,000,000. At June 30, 1997, $720,000,000 of
          such maximum commitments was unused. The availability of such
          commitments for borrowing is subject to the Company's compliance with
          operating and financial covenants and other customary conditions.
          Commencing March 31, 2001, aggregate commitments will be reduced
          quarterly in accordance with a schedule, until final maturity at June
          30, 2005. The Company's initial borrowings under the Bank Credit
          Facility were used to repay in full the principal amount of and
          accrued interest on the Company Note and to fund financing costs
          associated with the arrangement of the facility.

          Borrowings under the Bank Credit Facility bear interest at variable
          rates. In addition, the Company is required to pay a commitment fee
          equal to 0.375% on the average daily unused portion of the available
          commitments, payable quarterly in arrears and at maturity. Such
          commitment fees aggregated $1,069,000 during the six months ended June
          30, 1997.

                                                                     (continued)

                                      I-21

<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements
  
     Borrowings under the Bank Credit Facility are guaranteed by TSAT's
     restricted subsidiaries (currently all of the Company's subsidiaries except
     Tempo) (the "Restricted Subsidiaries"), and secured by collateral
     assignments or other security interests in (i) all capital stock of certain
     of the Company's Restricted Subsidiaries and (ii) substantially all of the
     Company's assets (other than the Company Satellites). The Bank Credit
     Facility contains affirmative covenants regarding minimum subscribers,
     revenue per subscriber and debt service coverage, as well as negative
     covenants that restrict the Company and its Restricted Subsidiaries from,
     among other things, (i) incurring indebtedness, (ii) creating liens and
     other encumbrances, (iii) entering into merger or consolidation
     transactions, (iv) entering into transactions with affiliates, (v) making
     investments, (vi) making capital expenditures, (vii) paying dividends and
     making other distributions, (viii) redeeming stock, (ix) redeeming or
     purchasing of subordinated debt (except under certain limited
     circumstances) (x) paying interest on or principal of subordinated debt
     during the continuation of (A) an event of default under the Bank Credit
     Facility or (B) a default under the Bank Credit Facility of which
     management of the Company has actual or constructive notice, (xi) entering
     into sale and leaseback transactions and (xii) engaging in non-designated
     activities. The Bank Credit Facility also contains customary events of
     default and provisions for mandatory prepayments and commitment reductions
     in the event of certain asset sales.

     The Company anticipates that it will be required to refinance and/or amend
     the Bank Credit Facility prior to the consummation of the Roll-up
     Transaction described in note 2. No assurance can be given that any such
     refinancing and/or amendment will be completed on terms acceptable to the
     Company.

     During the first quarter of 1997, two letters of credit with an aggregate
     drawable amount of $30,000,000 were issued for the account of TSAT pursuant
     to the Bank Credit Facility. See note 12.

(b)  Notes

     On February 20, 1997, the Company issued 10-7/8% Senior Subordinated Notes
     due 2007 having an aggregate principal amount of $200,000,000 the ("Senior
     Subordinated Notes") and 12-1/4% Senior Subordinated Discount Notes due
     2007 having an aggregate principal amount at maturity of $275,000,000 (the
     "Senior Subordinated Discount Notes", and together with the Senior
     Subordinated Notes, the "Notes"). The net proceeds from the issuance of the
     Notes (approximately $340,500,000 after deducting offering expenses) were
     initially held in escrow and were subsequently released to the Company on
     March 17, 1997. The Company initially used $244,404,000 of such net
     proceeds to repay amounts outstanding under the Bank Credit Facility.

                                                                     (continued)

                                      I-22

<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements

   
          Cash interest on the Senior Subordinated Notes will be payable semi-
          annually in arrears on February 15 and August 15, commencing August
          15, 1997. Cash interest will not accrue or be payable on the Senior
          Subordinated Discount Notes prior to February 15, 2002. Thereafter
          cash interest will accrue at a rate of 12-1/4% per annum and will be
          payable semi-annually in arrears on February 15 and August 15,
          commencing August 15, 2002, provided however, that at any time prior
          to February 15, 2002, the Company may make a Cash Interest Election
          (as defined) on any interest payment date to commence the accrual of
          cash interest from and after the Cash Election Date (as defined). The
          Notes will be redeemable at the option of the Company, in whole or in
          part, at any time after February 15, 2002 at specified redemption
          prices. In addition, prior to February 15, 2000, the Company may use
          the net cash proceeds from certain specified equity transactions to
          redeem up to 35% of the Notes at specified redemption prices. The
          Notes were not originally registered under the Securities Act of 1933,
          as amended (the "Securities Act"), but contained a covenant requiring
          the Company to exchange the Notes for substantially identical notes
          that are so registered ("Exchange Notes") or, alternatively, to
          register the Notes under the Securities Act. Due to the pendency of
          the Roll-up Transaction, the Company is currently unable to register
          the Notes or the Exchange Notes under the Securities Act. Accordingly,
          effective July 5, 1997, the Company began to incur additional interest
          on the Notes. During the 90-day period ended September 3, 1997,
          additional interest on the Notes will be accrued at the rate of $0.05
          per $1000 principal amount per week and will aggregate approximately
          $200,000 during such 90-day period. For each subsequent 90-day period
          in which the Notes are not registered under the Securities Act or
          exchanged for registered Exchange Notes, the additional interest on
          the notes will be increased by $0.05 per $1000 principal amount per
          week up to a maximum of $0.50 per $1000 principal amount per week. The
          Company currently expects that it will not be able to comply with the
          registration requirements under the Notes, and accordingly, will not
          be able to cease the accrual of additional interest, until the first
          quarter of 1998.
 
     With the exception of the Notes, which had an aggregate fair value of
     $360,413,000 at June 30, 1997, the Company believes that the fair value and
     the carrying value of the Company's debt were approximately equal at June
     30, 1997.

                                                                     (continued)

                                      I-23

<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements
   
(11) Transactions with Related Parties
     ---------------------------------

     Through the Distribution Date, the effects of all transactions between the
     Company and TCI were reflected as adjustments to a non-interest bearing
     intercompany account. As described in note 3, all but $250,000,000 of this
     intercompany account was forgiven in connection with the Distribution
     (other than certain advances relating to construction of the Company
     Satellites, which were repaid from advances subsequently received from
     PRIMESTAR Partners). Subsequent to the Distribution Date, the effects of
     transactions between the Company and TCI will be reflected in a non-
     interest bearing account to be settled periodically in cash.

     TCIC provides certain installation, maintenance, retrieval and other
     customer fulfillment services to the Company. During the six months ended
     June 30, 1997 and 1996, the Company's capitalized installation costs
     included amounts charged by TCIC to the Company of $32,009,000 and
     $23,319,000, respectively. Maintenance, retrieval and other operating
     expenses charged by TCIC to the Company aggregated $4,490,000 and
     $10,505,000 during the six months ended June 30, 1997 and 1996,
     respectively. Prior to the Distribution, the foregoing charges were
     allocated from TCIC to the Company based upon a standard charge for each of
     the customer fulfillment activities performed by TCIC.

                                                                     (continued)

                                      I-24

<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements
    
     Since January 1, 1997, TCIC has provided, pursuant to the Fulfillment
     Agreement, fulfillment services on an exclusive basis to TSAT since the
     Distribution with respect to customers of the PRIMESTAR(R) medium power
     service. Such services include installation, maintenance, retrieval,
     inventory management and other customer fulfillment services. Among other
     matters, the Fulfillment Agreement (i) sets forth the responsibilities of
     TCIC with respect to fulfillment services, including performance standards
     and penalties for nonperformance, (ii) provides for TCIC's fulfillment
     sites to be connected to the billing and information systems used by TSAT,
     allowing for on-line scheduling and dispatch of installation and other
     service calls, and (iii) provides scheduled rates to be charged to TSAT for
     the various customer fulfillment services to be provided by TCIC.

     From January 1, 1997 through July 21, 1997, charges for customer
     fulfillment services provided by TCIC were made pursuant to the Fulfillment
     Agreement originally entered into by the Company and TCIC in connection
     with the Distribution (the "Original Fulfillment Agreement"). The Original
     Fulfillment Agreement had an initial term of two years and was terminable,
     on 180 days notice to TCIC, by the Company at any time during the six month
     period ended June 30, 1997. The cost to the Company of the services
     provided by TCIC under the Original Fulfillment Agreement exceeded the
     standard charges allocated to the Company for such services through
     December 31, 1996. Effective July 22, 1997, the Original Fulfillment
     Agreement was amended to, among other items, (i) change the termination
     date to December 31, 1997 and, (ii) reduce the scheduled rates for the
     customer fulfillment services provided by TCIC to rates that are comparable
     to those that were used to allocate fulfillment charges to the Company
     prior to the Distribution. The Company is currently seeking to arrange for
     unaffiliated third parties to perform the customer fulfillment services
     that will no longer be performed by TCIC following the termination of the
     amended Fulfillment Agreement. There can be no assurance that comparable
     services can be obtained by the Company from third parties on acceptable
     terms.

     TCIC also provides corporate administrative services to the Company. The
     charges for such administrative services aggregated $9,919,000 and
     $9,752,000 during the six months ended June 30, 1997 and 1996,
     respectively. Prior to the Distribution, such administrative expenses were
     allocated from TCIC to the Company based on the estimated cost of providing
     the service.

                                                                     (continued)

                                      I-25
                      
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements
    
     Since the Distribution Date, charges for administrative services provided
     by TCIC have been made pursuant to the Transition Services Agreement
     entered into by the Company and TCI in connection with the Distribution.
     Pursuant to the Transition Services Agreement between TCI and the Company,
     TCI is obligated to provide to the Company certain services and other
     benefits, including certain administrative and other services that were
     provided by TCI prior to the Distribution. Pursuant to the Transition
     Services Agreement, TCI has also agreed to provide the Company with certain
     most-favored-customer rights to programming services that TCI or a wholly-
     owned subsidiary of TCI may own in the future and access to any volume
     discounts that may be available to TCI for purchase of home satellite
     dishes, satellite receivers and other equipment. As compensation for the
     services rendered and for the benefits made available to the Company
     pursuant to the Transition Services Agreement, the Company is required to
     pay TCI a monthly fee of $1.50 per qualified subscribing household or other
     residential or commercial unit (counted as one subscriber regardless of the
     number of satellite receivers), 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. The Transition Services
     Agreement continues in effect until the close of business on December 31,
     1999, and will be renewed automatically for successive one-year periods
     thereafter, unless earlier terminated by (i) either party at the end of the
     initial term or the then current renewal term, as applicable, on not less
     than 180 days' prior written notice to the other party, (ii) TCI upon
     written notice to the Company following certain changes in control of the
     Company, and (iii) either party if the other party is the subject of
     certain bankruptcy or insolvency-related events. Pursuant to the terms of
     the Transition Services Agreement, TCI has the right to terminate the
     agreement upon the consummation of the Roll-up Transaction. The Company
     believes that TCI will exercise its right to terminate the Transition
     Services Agreement concurrently with the consummation of the Roll-up
     Transaction. The Company does not believe that any such termination will
     have a material adverse effect on the Company.

     Beginning in March 1997, TCIC began providing the company with customer
     support services from its Boise, Idaho call center ( the "Boise Call
     Center").  The Boise Call Center responds to calls  that exceed the
     capacity of the Company's National Call Center.  Amounts charged by TCIC to
     the Company for such services aggregated $2,273,000 during the six months
     ended June 30, 1997.

                                                                     (continued)

                                      I-26

<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements
    
     Certain key employees of the Company hold 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 the Company have been recorded
     in the accompanying financial statements, but are subject to future
     adjustment based upon the market value of the underlying TCI common stock
     and, ultimately, on the final determination of market value when the rights
     are exercised. Non-cash increases (decreases) to the Company's share of
     TCI's estimated stock compensation liability aggregated $688,000 and
     $(176,000) during the six months ended June 30, 1997 and 1996,
     respectively.

     A tax sharing agreement (the "Tax Sharing Agreement") among TCI, TCIC and
     certain other subsidiaries of TCI was implemented effective July 1, 1995.
     The Tax Sharing Agreement formalizes certain of the elements of a pre-
     existing tax sharing arrangement and contains additional provisions
     regarding the allocation of certain consolidated income tax attributes and
     the settlement procedures with respect to the intercompany 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, and any applicable state, local and
     foreign tax law and related regulations. In connection with the
     Distribution, the Tax Sharing Agreement was amended to provide that the
     Company will be treated as if it had been a party to the Tax Sharing
     Agreement, effective July 1, 1995. Pursuant to the amended Tax Sharing
     Agreement, beginning on the July 1, 1995 effective date, TSAT is
     responsible to TCI for its share of current consolidated income tax
     liabilities through the Distribution Date, and TCI is responsible to the
     extent that TSAT's income tax attributes generated after the effective date
     and through the Distribution Date are utilized by TCI to reduce its
     consolidated income tax liabilities. The Company's intercompany income tax
     allocation for the six months ended June 30, 1996 has been calculated in
     accordance with the Tax Sharing Agreement.

(12) Commitments and Contingencies
     -----------------------------

     At June 30, 1997, the Company's future minimum commitments to purchase
     satellite reception equipment aggregated approximately $43,500,000.

     The Company engages master sales agents to recruit, train and maintain a
     network of sub-agents to sell services on behalf of the Company and to
     install, service and maintain equipment located at the premises of the
     subscribers. As a part of the compensation paid for such services, the
     Company has agreed to pay certain residual sales commissions equal to a
     percentage of the programming revenue collected from a subscriber installed
     by a master sales agent during specified periods following the initiation
     of service (generally five years). During the six months ended June 30,
     1997 and 1996, respectively, residual sales commissions to such master
     sales agents aggregated $8,204,000 and $4,597,000, respectively, and were
     charged to expense in the accompanying statements of operations.

                                                                     (continued)

                                      I-27

<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements
   
 
     On the Distribution Date, the Company entered into Indemnification
     Agreements (the "Indemnification Agreements") with TCIC and TCI UA 1, Inc.,
     an indirect subsidiary of TCIC, ("TCI UA 1"). The Indemnification Agreement
     with TCIC provides for the Company to reimburse TCIC for any amounts drawn
     under an irrevocable transferable letter of credit issued for the account
     of TCIC to support the Company's share of PRIMESTAR Partners' obligations
     under the GE-2 Agreement. The drawable amount of such letter of credit is
     $25,000,000. See note 7.

     During the first quarter of 1997, an additional irrevocable transferable
     letter of credit was issued pursuant to the Bank Credit Facility for the
     account of TSAT to support the Company's share of PRIMESTAR Partners'
     obligations under the GE-2 Agreement. The initial drawable amount of this
     letter of credit is $25,000,000, increasing to $50,000,000 if PRIMESTAR
     Partners exercises the End-Of-Life Option. See notes 7 and 10.

     The Indemnification Agreement with TCI UA 1 provides for the Company to
     reimburse TCI UA 1 for any amounts drawn under an irrevocable transferable
     letter of credit issued for the account of TCI UA 1 (the "TCI UA 1 Letter
     of Credit"), which supports the PRIMESTAR Credit Facility. The drawable
     amount of the TCI UA 1 Letter of Credit was $141,250,000 at June 30, 1997.
     See notes 7 and 8.

     During the first quarter of 1997, an additional irrevocable transferable
     letter of credit was issued pursuant to the Bank Credit Facility for the
     account of TSAT to support the PRIMESTAR Credit Facility. The drawable
     amount of this letter of credit is $5,000,000. See notes 7 and 10.

     The Indemnification Agreements provide for the Company to indemnify and
     hold harmless TCIC and TCI UA 1 and certain related persons from and
     against any losses, claims, and liabilities arising out of the respective
     letters of credit or any drawings thereunder. The payment obligations of
     the Company to TCIC and TCI UA 1 under such Indemnification Agreements are
     subordinated in right of payment with respect to the obligations of the
     Company under the Bank Credit Facility. See note 10.

                                                                     (continued)

                                      I-28
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements


 
     During the first quarter of 1997, TCI agreed to cause TCI UA 1 to renew the
     letter of credit arranged by it on the Company's behalf, through December
     31, 1997. During such period the Company and/or PRIMESTAR Partners will
     seek to obtain permanent financing for the Company Satellites (to the
     extent not sold to a person other than PRIMESTAR Partners) on a basis that
     does not require the Company to post a letter of credit with respect
     thereto. If such permanent financing is not available, under certain
     maintenance covenants contained in the Bank Credit Facility, the Company
     would be unable to provide or arrange for such a letter of credit unless
     (i) the lenders under the Bank Credit Facility were to agree to amend or
     waive such covenants to permit the posting of such letter of credit by the
     Company, (ii) TCI were to agree to renew the TCI UA 1 Letter of Credit for
     an additional period, or (iii) the Company were to achieve a greater than
     anticipated increase in operating income before depreciation and stock
     compensation. If the Company and/or PRIMESTAR Partners are unable to
     refinance the Company Satellites (to the extent not sold to a person other
     than PRIMESTAR Partners) without a letter of credit and is unable to post
     (or arrange for the posting of) such a letter of credit, the Company could
     be adversely affected. See notes 7, 8 and 10.

     The International Bureau of the FCC (the "International Bureau") has
     granted EchoStar Satellite Corporation, a subsidiary of EchoStar
     Communications Corp. (together with its consolidated subsidiaries,
     "EchoStar") a conditional authorization to construct, launch and operate a
     Ku-band domestic fixed satellite into the orbital position at 83 degrees
     W.L., immediately adjacent to that occupied by GE-2. Contrary to previous
     FCC policy, EchoStar was authorized to operate at a power level of 130
     watts. If EchoStar were to launch its high power satellite authorized to 83
     degrees W.L. and commence operations at that location at a power level of
     130 watts, it would likely cause harmful interference to the reception of
     the GE-2 PRIMESTAR(R) signal by subscribers to such service.

     Subsequently, GE Americom and PRIMESTAR Partners separately requested
     reconsideration of the International Bureau's authorization for EchoStar to
     operate at 83 degrees W.L. These requests were opposed by EchoStar and
     others. These requests currently are pending at the International Bureau.
     In addition, GE Americom and PRIMESTAR Partners have attempted to resolve
     potential coordination problems directly with EchoStar. It is uncertain
     whether any coordination between PRIMESTAR Partners and EchoStar will
     resolve such interference. There can be no assurance that the International
     Bureau will change slot assignments, or power levels, in a fashion that
     eliminates the potential for harmful interference. Although the ultimate
     outcome of this matter cannot presently be predicted, the Company believes
     that any such outcome would not have a material adverse effect on the
     Company's financial condition and results of operations.

                                                                     (continued)

                                      I-29
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements 


     The Company has contingent liabilities related to legal proceedings and
     other matters arising in the ordinary course of business. Although it is
     reasonably possible the Company may incur losses upon conclusion of such
     matters, an estimate of any loss or range of loss cannot be made. In the
     opinion of management, it is expected that amounts, if any, which may be
     required to satisfy such contingencies will not be material in relation to
     the accompanying financial statements.

                                      I-30
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
            (See note 1 to the accompanying financial statements) 


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 the Company and should be read
in conjunction with (i) the accompanying financial statements of the Company,
and (ii) the financial statements, and related notes thereto, of the Company,
and Management's Discussion and Analysis of Financial Condition and Results of
    --------------------------------------------------------------------------
Operations included in the Company's Annual Report on Form 10-K for the year
----------
ended December 31, 1996.

   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 the Company, 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 the market for satellite delivered television programming;
uncertainties inherent in proposed business strategies and development plans,
including uncertainties regarding the Roll-up Transaction, the ASkyB
Transaction, the Company'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; product launches;
availability of qualified personnel; changes in, or the failure or the inability
to comply with, government regulation, including, without limitation,
regulations of the Federal Communications Commission, and adverse outcomes from
regulatory proceedings; changes in the nature of key strategic relationships
with partners and joint venturers; competitor responses to the Company'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.  The Company expressly disclaims any
obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.


                                      I-31
<PAGE>
                       TCI SATELLITE ENTERTAINMENT,INC.
             (See note 1 to the accompanying financial statements)

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

        As described in note 2 to the accompanying financial statements of  the
Company, the Company has entered into binding letter agreements with respect to
the Roll-up Transaction and the ASkyB Transaction. Upon consummation of the
Roll-up Transaction and the ASkyB Transaction, the Company will be consolidated
into New PRIMESTAR and the Company will no longer be a separate public company.
New PRIMESTAR will be a significantly larger entity than the Company, and it is
anticipated that New PRIMESTAR will initially incur significantly greater losses
than the Company due primarily to disproportionately higher levels of
depreciation, amortization and interest expense.  In addition, it is anticipated
that New PRIMESTAR will develop a high-power DBS service, and that New PRIMESTAR
may determine to migrate some or all of the existing medium-power PRIMESTAR(R)
customers to such high-power service.  Under such circumstances,  New PRIMESTAR
would necessarily be operating under a different cost structure than that of the
Company's medium-power business.  No assurance can be given that the Roll-up
Transaction and ASkyB Transaction will be consummated.  The following discussion
focuses on the results of operations of the Company as a stand-alone entity
without giving effect to the pending Roll-up Transaction and ASkyB Transaction.

        As described in greater detail below, the Company reported net losses of
$107,590,000 and $32,888,000 during the six months ended June 30, 1997 and 1996,
respectively.  Improvements in the Company's results of operations are largely
dependent upon its ability to increase its customer base while maintaining its
pricing structure, reducing subscriber churn and effectively managing the
Company's costs.  No assurance can be given that any such improvements will
occur.  In addition, the Company incurs significant sales commission and
installation costs when its customers initially subscribe to the service.
Management expects that the costs of acquiring subscribers will continue to be
significant so long as the Company maintains its rapid growth.  The high cost of
obtaining new subscribers also magnifies the negative effects of subscriber
churn.

        During the six months ended June 30, 1997 and 1996, and the years ended
December 31, 1996, 1995 and 1994, (i) the Company's annualized subscriber churn
rate (which represents the annualized number of subscriber terminations divided
by the weighted average number of subscribers during the period) was 29.5%,
40.3%, 38.5%, 24.7% and 16.1%, respectively, and (ii) the average subscriber
life implied by such subscriber churn rate was 3.4 years, 2.5 years, 2.6 years,
4.1 years and 6.2 years, respectively.

                                      I-32
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)

 
Material Changes in Results of Operations (continued)
-----------------------------------------------------

     As set forth above, the Company experienced a higher rate of subscriber
churn in 1996, as compared to the first six months of 1997 and prior periods.
The Company believes that the higher 1996 churn rate is primarily attributable
to the fact that subscribers were allowed to initiate service with no credit
approval during the fourth quarter of 1995 and the first six months of 1996.
Service to a significant number of such subscribers was terminated during 1996
after their accounts became delinquent.  Such delinquent accounts contributed to
a significant increase in the Company's bad debt expense during 1996. The
Company has addressed this issue by implementing more stringent credit policies.
In this regard, the Company began to institute more selective credit policies
during the third quarter of 1996 and further tightened such policies during the
fourth quarter of 1996. The Company believes that a significant percentage of
the subscribers whose service was terminated during 1996 would not have been
allowed to initiate service if the credit policies that are currently in effect
had been in place during 1995.

     Although no assurance can be given, the Company expects that churn rates
for the remainder of 1997 and future periods will improve from the levels
experienced in 1996. If the Company's churn rates were to return to, or increase
from, such 1996 levels, the Company believes that its financial condition and
results of operations would be adversely affected.

     In October 1996, the Company initiated a marketing program that allows
subscribers to purchase the Company's proprietary satellite reception equipment
at a price that is less than the Company's cost. There is no assurance that the
difference between the Company's costs and the revenue generated from the sale
of the equipment would be recoverable. To date, the number of customers
selecting this marketing program has been insignificant. The Company cannot
presently predict whether a significant number of customers will take advantage
of this marketing program in the future.

     Since July 1994, when PRIMESTAR Partners completed its conversion from an
analog to a digital signal, the Company has experienced significant growth in
Authorized Units.  In this regard, the number of Authorized Units was 872,000
and 659,000 at June 30, 1997 and 1996, respectively, and 805,000, 535,000 and
100,000 at December 31, 1996, 1995 and 1994, respectively.  To the extent not
otherwise described, increases in the Company's revenue and operating, selling,
general and administrative expenses, as detailed below, are primarily related to
such growth in Authorized Units.  The Company is operating in an increasingly
competitive environment.  No assurance can be given that such increasing
competition will not adversely affect the Company's ability to continue to
achieve significant growth in Authorized Units and revenue.

                                      I-33
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)

 
Material Changes in Results of Operations (continued)
------------------------------------------------------

     As further described in note 11 to the accompanying financial statements of
the Company, TCIC has historically provided the Company with certain fulfillment
services with respect to customers of the PRIMESTAR(R) programming service. From
January 1, 1997 through July 21, 1997, charges for customer fulfillment services
provided by TCIC were made pursuant to the Original Fulfillment Agreement. The
scheduled rates for the services provided by TCIC under the Original Fulfillment
Agreement exceeded the scheduled rates upon which charges, historically, were
allocated to the Company for such services.  The Original Fulfillment Agreement
had an initial term of two years, and was terminable, on 180 days notice to
TCIC, by the Company at any time during the six-month period ended June 30,
1997.  Effective July 22, 1997, the Original Fulfillment Agreement was amended
to, among other items, (i) change the termination date to December 31, 1997 and,
(ii) reduce the scheduled rates for the customer fulfillment services provided
by TCIC to rates that are comparable to those that were used to allocate
fulfillment charges to the Company prior to the Distribution.  The Company is
currently seeking to arrange for unaffiliated third parties to perform the
customer fulfillment services that will no longer be performed by TCIC following
the termination of the amended Fulfillment Agreement.  There can be no assurance
that comparable services can be obtained by the Company from third parties on
acceptable terms.

     Installation charges from TCIC include direct and indirect costs of
performing installations.  Through the Distribution Date, the Company
capitalized a portion of such charges as subscriber installation costs based
upon amounts charged by unaffiliated third parties to perform similar services.
Subsequent to the Distribution Date, the Company has capitalized the full amount
of installation fees paid to TCIC.

                                      I-34
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)

Material Changes in Results of Operations (continued)
-----------------------------------------------------

     Certain financial information concerning the Company's operations is
presented below (dollar amounts in thousands):
<TABLE>
<CAPTION>
 
                                                     Six months ended June 30,
                                          ------------------------------------------------
                                                   1997                     1996
                                          -----------------------  -----------------------
                                                      Percentage               Percentage
                                                       of total                 of total
                                            Amount      revenue      Amount      revenue
                                          ----------  -----------  ----------  -----------
<S>                                       <C>         <C>          <C>         <C> 
Revenue:
 Programming and equipment rental         $ 240,230       92%       $156,870           81%
 Installation                                20,415        8          36,777           19
                                          ---------     ----        --------         ----
   Total revenue                            260,645      100         193,647          100
                                          ---------     ----        --------         ----
 
Operating costs and expenses:
 Charges from PRIMESTAR Partners:
   Programming                              (81,988)     (31)        (57,464)         (30)
   Satellite, national marketing and
    distribution                            (40,381)     (15)        (29,422)         (15)
                                          ---------     ----        --------         ----
                                           (122,369)     (46)        (86,886)         (45)
 Other operating:
   Allocations from TCIC                     (4,490)      (2)        (10,505)          (5)
   Other                                     (6,582)      (3)         (4,345)          (2)
                                          ---------     ----        --------         ----
                                            (11,072)      (5)        (14,850)          (7)
                                          ---------     ----        --------         ----
 
 Selling, general and administrative:
   Selling and regional marketing           (51,901)     (20)        (53,251)         (28)
   Bad debt                                  (9,831)      (4)         (9,779)          (5)
   Allocations from TCIC                    (12,192)      (5)         (9,752)          (5)
   Other general and administrative         (17,849)      (7)        (12,284)          (6)
                                          ---------     ----        --------         ----
                                            (91,773)     (36)        (85,066)         (44)
                                          ---------     ----        --------         ----
 
   Operating Cash Flow (1)                   35,431       13           6,845            4
 
 Stock compensation                          (1,552)      (1)            176           --
 
 Depreciation                              (113,266)     (43)        (53,527)         (28)
                                          ---------     ----        --------         ----
 
   Operating loss                         $ (79,387)     (31)%      $(46,506)         (24)%
                                          =========     ====        ========         ====
</TABLE>
____________________

(1)  Operating Cash Flow, which represents operating income before depreciation
     and stock compensation, is a commonly used measure of value and borrowing
     capacity.  Operating Cash Flow is not intended to be a substitute for a
     measure of performance in accordance with generally accepted accounting
     principles and should not be relied upon as such.

                                      I-35
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)

 
Material Changes in Results of Operations (continued)
-----------------------------------------------------

     Revenue increased $66,998,000 or 35% during the six months ended June 30,
1997, as compared to the corresponding prior year period.  Such increase
represents the net effect of a $83,360,000 or 53% increase in programming and
equipment rental revenue and a $16,362,000 or 44% decrease in installation
revenue.  The increase in programming and equipment rental revenue is primarily
the result of an increase from the 1996 period to the 1997 period in the average
number of Authorized Units.  Additionally, the Company's average monthly
programming and equipment rental revenue per Authorized Unit increased from $44
during the 1996 period to $48 during the 1997 period.  Such increase was
primarily the result of rate increases implemented in May 1997 as well as an
increase in the average monthly revenue derived from pay-per-view services.  The
decrease in installation revenue is primarily attributable to a reduction from
the 1996 period to the 1997 period in the number of installations performed and
a decrease from $153 during the 1996 period to $110 during the 1997 period in
the average installation revenue from each Authorized Unit installed.  Such
decrease in average installation revenue is primarily attributable to certain
promotional campaigns that were in effect during 1997.

     PRIMESTAR Partners provides programming services to the Company and other
authorized distributors in exchange for a fee based upon the number of customers
receiving programming services.  PRIMESTAR Partners also arranges for satellite
capacity and uplink services, and provides national marketing and administrative
support services, in exchange for a separate authorization fee from each
authorized distributor, including the Company, based on such distributor's total
number of Authorized Units.  The aggregate charges for such services increased
$35,483,000 or 41% during the six months ended June 30, 1997, as compared to the
corresponding prior year period.  The average aggregate monthly amount per
Authorized Unit charged by PRIMESTAR Partners was $24 during each of the six
month periods ended June 30, 1997 and 1996.  For additional information
concerning the operations of PRIMESTAR Partners, see related discussion below.

     Other operating costs and expenses, which are primarily comprised of
amounts related to customer fulfillment activities, decreased $3,778,000 or 25%
during the six months ended June 30, 1997, as compared to the corresponding
prior year period. Such decrease is primarily attributable to the fact that the
Company's other operating costs and expenses for the six months ended June 30,
1996 included $4,894,000 of installation fees paid to TCIC that were not
capitalized.  Other operating costs and expenses for the six months ended June
30, 1997 do not include a similar amount since the Company has capitalized the
full amount of installation fees paid to TCIC subsequent to the Distribution
Date.  As described above, the charges for installation and other customer
fulfillment services provided by TCIC have been made pursuant to the Fulfillment
Agreement since January 1, 1997.

                                      I-36
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)

 
Material Changes in Results of Operations (continued)
-----------------------------------------------------

     Selling, general and administrative expenses increased $6,707,000 or 8%
during the six months ended June 30, 1997, as compared to the corresponding
prior year period.  Selling and regional marketing expenses, which represented
20% of revenue during the 1997 period, include sales commissions, marketing and
advertising expenses, and costs associated with the operation of customer
service call center and five regional sales offices.  Bad debt expense
represented 4% of revenue during the 1997 period.  In total, selling, general
and administrative expenses represented 36% and 44% of revenue during the six
months ended June 30, 1997 and 1996, respectively.  The decrease in such
percentage is primarily attributable to (i) lower sales commission due to a 23%
decrease in installations in 1997 as compared to 1996, and (ii) the relatively
fixed nature of certain components of the Company's selling, general and
administrative expenses.

     The selling, general and administrative charges from TCIC during the six
months ended June 30, 1997 include $9,919,000 that was charged to the Company
pursuant to the Transition Services Agreement and $2,273,000 that was charged to
the Company pursuant to a March 1997 agreement to use TCIC's Boise Call Center
to respond to calls that exceed the capacity of the Company's National Call
Center.  Through the Distribution Date, general and administrative allocations
from TCIC were based upon the estimated cost of the general and administrative
services provided to the Company.  The amounts charged to the Company pursuant
to the Transition Services Agreement are in excess of the amounts that would
have been allocated by TCIC to the Company under the arrangement that was in
effect through the Distribution Date.  If the Transition Services Agreement had
been effective as of January 1, 1996, general and administrative charges from
TCIC would have been approximately $12,055,000 for the six months ended June 30,
1996.  For additional information, see note 11 to the accompanying financial
statements of the Company.

     The $59,739,000 or 112% increase in depreciation during the six months
ended June 30, 1997, as compared to the corresponding prior year period, is the
result of an increase in the Company's depreciable assets due primarily to
capital expenditures with respect to the Company's satellite reception equipment
and subscriber installation costs.  Changes in the Company's depreciation
policies also contributed to the increase.  Effective October 1, 1996, the
Company (i) changed the method used to depreciate its subscriber installation
costs, and (ii) reduced the estimated useful life of certain satellite reception
equipment.  The inception-to-date effect on depreciation expense of the change
in depreciation method was recorded during the fourth quarter of 1996.  The
effect of the reduction in estimated useful life was accounted for on a
prospective basis.  For additional information concerning such accounting
changes, see note 4 to the accompanying financial statements of the Company.

     The Company incurred interest expense of $21,408,000 during the six months
ended June 30, 1997.  Substantially all of such interest was attributable to the
December 31, 1996 completion of the Bank Credit Facility and the February 1997
issuance of the Notes.  The Company expects that it will continue to incur
significant levels of interest expense in future periods.

                                      I-37
<PAGE>
                       TCI SATELLITE ENTERTAINMENT,INC.
             (See note 1 to the accompanying financial statements)

 
Material Changes in Results of Operations (continued)
-----------------------------------------------------

     The Company's share of PRIMESTAR Partners' net losses increased $6,483,000
or 448% during the six months ended June 30, 1997, as compared to the
corresponding prior year period.  Such increase is primarily attributable to
increases in PRIMESTAR Partners' interest expense and operating loss.  The
increase in interest expense is attributable to interest incurred on borrowings
under the PRIMESTAR Credit Facility that were used to fund the construction of
Satellite No. 2.  Prior to the January 1, 1997 determination that construction
of Satellite No. 2 was substantially complete, interest incurred on the
applicable borrowings under the PRIMESTAR Credit Facility had been capitalized.
The increase in PRIMESTAR Partners' operating loss occurred as the increase in
PRIMESTAR Partners' revenue did not fully offset increases in selling, marketing
and certain other expenses.  Historically, PRIMESTAR Partners' operating
deficits have been funded by capital contributions from the Company and the
other partners of PRIMESTAR Partners.  To the extent that future Authorized Unit
growth does not generate increases in PRIMESTAR Partners' revenue sufficient to
offset its operating costs and expenses, the Company anticipates that any such
operating deficit would be funded by PRIMESTAR Partners' then existing external
sources of liquidity (which may include capital contributions from the Company
and PRIMESTAR Partners' other partners), or by increases in the above-described
programming and authorization fees charged by PRIMESTAR Partners to the Company
and other authorized distributors.

     The Company recognized no income tax benefit during the six months ended
June 30, 1997 and an income tax benefit of $14,870,000 during the six months
ended June 30, 1996.  The effective tax rate associated with the 1996 benefit
was 31%.  The Company's income tax benefit for the six months ended June 30,
1996 includes intercompany allocations from TCI of current income tax benefits
of $26,333,000.  As a result of the Distribution, the Company 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 the Company's income tax liabilities or the Company generates
taxable income.  For financial reporting purposes, all of the Company's income
tax liabilities had been fully offset by income tax benefits at December 31,
1996 and June 30, 1997.  Additionally, during the first several years following
the Distribution, the Company 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.  In connection with the Distribution, the Company
became a party to the Tax Sharing Agreement that currently exists among TCI,
TCIC and certain other subsidiaries of TCI.  For additional information, see
note 11 to the accompanying financial statements of the Company.

                                      I-38
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)

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

     As described in note 2 to the accompanying financial statements of the
Company, the Company has entered into binding letter agreements with respect to
the Roll-up Transaction and the ASkyB Transaction.  Upon consummation of the
Roll-up Transaction and the ASkyB Transaction, the Company will be consolidated
into New PRIMESTAR and the Company will no longer be a separate public company.
New PRIMESTAR will be a significantly larger entity than the Company and will
have significant financial obligations.  In this regard, New PRIMESTAR will
incur significant indebtedness in connection with the Roll-up Transaction and
will issue approximately $1.1 billion liquidation value of preferred stock and
subordinated convertible notes in connection with the ASkyB Transaction.  The
debt to be assumed by New PRIMESTAR in connection with the Roll-up Transaction
will include the Notes and any amounts outstanding under the Bank Credit
Facility.  In addition to the foregoing obligations, New PRIMESTAR will be
responsible for payments due under the GE-2 Agreement and various other
commitments and contingent liabilities associated with the businesses and assets
that will comprise New PRIMESTAR following consummation of the Roll-up
Transaction and the ASkyB Transaction.  To the extent not earlier refinanced by
the Company and/or PRIMESTAR Partners, it is anticipated that New PRIMESTAR will
also be required to refinance the Bank Credit Facility and the  PRIMESTAR Credit
Facility.  New PRIMESTAR will also require significant capital in order to fund
its business strategies, including the development of a high-power DBS service,
and any possible migration of some or all of the existing medium-power
PRIMESTAR(R) customers to such high-power service.  No assurance can be given
that the Roll-up Transaction and the ASkyB Transaction will be consummated or
that, if consummated, New PRIMESTAR will be able to obtain sufficient  financial
resources in order to satisfy its short- and long-term liquidity requirements.
The following discussion focuses on the liquidity and capital resources of the
Company as a stand-alone entity without giving effect to the pending Roll-up
Transaction and the ASkyB Transaction.

     Prior to the Distribution Date, the Company relied upon non-interest
bearing advances from TCIC in order to fund the majority of the Company's
working capital requirements and capital expenditures.  On the Distribution
Date, the Company issued the Company Note to TCIC and TCIC agreed to provide the
Company with financing pursuant to the TCIC Credit Facility.  The TCIC Credit
Facility provided for TCIC's commitment to make revolving loans to the Company
(the "TCIC Revolving Loans") and the Company's obligations with respect to the
TCIC Revolving Loans and the Company Note, including the Company's best efforts
obligations to refinance the TCIC Credit Facility.  On December 31, 1996, the
Company entered into the Bank Credit Facility and used proceeds therefrom to
repay the Company Note in full.  In connection with the February 1997 issuance
of the Notes and the March 1997 determination that GE-2 was commercially
operational, borrowing availability pursuant to the TCIC Credit Facility was
terminated.  Accordingly, TCI is not expected to be a source of financing for
the Company in future periods.

     The Company also has relied upon advances from PRIMESTAR Partners to
finance the cost of constructing the Company Satellites. Such advances, which
aggregated $462,950,000 at June 30, 1997, are reflected as a liability in the
balance sheets in the accompanying financial statements of the Company.  See
related discussion below.

                                      I-39
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)
 
Material Changes in Financial Position (continued)
--------------------------------------------------

     On February 20, 1997, the Company issued the 10-7/8% Senior Subordinated
Notes due 2007 having an aggregate principal amount of $200,000,000 and the 12-
1/4% Senior Subordinated Discount Notes due 2007 having an aggregate principal
amount at maturity of $275,000,000. The net proceeds from the issuance of the
Notes (approximately $340,500,000 after deducting offering expenses) were
initially held in escrow and were subsequently released to the Company on March
17, 1997.  The Company initially used $244,404,000 of such net proceeds to repay
amounts outstanding under the Bank Credit Facility and expects to use the
remaining net proceeds to fund capital expenditures and operations and to
provide for working capital and for other general corporate purposes.

     Cash interest on the Senior Subordinated Notes will be payable semi-
annually in arrears on February 15 and August 15, commencing August 15, 1997.
Cash interest will not accrue or be payable on the Senior Subordinated Discount
Notes prior to February 15, 2002.  Thereafter cash interest will accrue at a
rate of 12-1/4% per annum and will be payable semi-annually in arrears on
February 15 and August 15, commencing August 15, 2002, provided however, that at
any time prior to February 15, 2002, the Company may make a Cash Interest
Election (as defined) on any interest payment date to commence the accrual of
cash interest from and after the Cash Election Date (as defined).  The Notes
will be redeemable at the option of the Company, in whole or in part, at any
time after February 15, 2002 at specified redemption prices.  In addition, prior
to February 15, 2000, the Company may use the net cash proceeds from certain
specified equity transactions to redeem up to 35% of the Notes at specified
redemption prices.  The Notes were not originally registered under the
Securities Act, but contained a covenant requiring the Company to exchange the
Notes for Exchange Notes, or, alternatively, to register the Notes under the
Securities Act.  Due to the pendency of the Roll-up Transaction, the Company is
currently unable to register the Notes or the Exchange Notes under the
Securities Act.  Accordingly, effective July 5, 1997, the Company began to incur
additional interest on the Notes.  During the 90-day period ended September 3,
1997, additional interest on the Notes will be accrued at the rate of $0.05 per
$1000 principal amount per week and will aggregate approximately $200,000 during
such 90-day period.  For each subsequent 90-day period in which the Notes are
not registered under the Securities Act, or exchanged for registered Exchange
Notes, the additional interest on the Notes will be increased by $0.05 per $1000
principal amount per week up to a maximum of $0.50 per $1000 principal amount
per week.  The Company currently expects that it will not be able to comply with
the registration requirements under the Notes, and accordingly, will not be able
to cease the accrual of additional interest, until the first quarter of 1998.

                                      I-40
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)

 
Material Changes in Financial Position (continued)
--------------------------------------------------

     At June 30, 1997, there were no outstanding borrowings under the Bank
Credit Facility.  As a result of the February 1997 issuance of the Notes and the
March 1997 determination that GE-2 was commercially operational, the maximum
available commitments under the Bank Credit Facility were increased from
$350,000,000 to $750,000,000.  At June 30, 1997, $720,000,000 of such maximum
commitments was unused.  The availability of such commitments for borrowing is
subject to the Company's compliance with operating and financial covenants and
other customary conditions.  Commencing March 31, 2001, aggregate commitments
under the Bank Credit Facility will be reduced quarterly in accordance with a
schedule, until final maturity at June 30, 2005.  The Company anticipates that
it will be required to refinance and/or amend the Bank Credit Facility prior to
the consummation of the Roll-up Transaction described in note 2.  No assurance
can be given that any such refinancing and/or amendment will be completed on
terms acceptable to the Company.  For additional information concerning the Bank
Credit Facility, see note 10 to the accompanying financial statements of the
Company.

     During the six months ended June 30, 1997 and 1996, the Company's operating
activities provided cash of $44,053,000 and $61,338,000, respectively.  A
significant portion of the cash provided by the Company's operating activities
during the 1996 period is attributable to the $26,333,000 intercompany
allocation of current income tax benefits from TCI.  During the first several
years following the Distribution, the Company believes that it will not be in a
position to realize income tax benefits on a current basis. Additionally,
changes in the Company's receivables, prepaids, accruals and payables and
subscriber advance payments ("Operating Assets and Liabilities") accounted for
$20,290,000 and $27,953,000 of the cash provided by the Company's operating
activities during the six months ended June 30, 1997 and 1996, respectively.
The timing and amount of changes in the balances of the Company's Operating
Assets and Liabilities are subject to a variety of factors, certain of which are
outside of the control of, or not easily predicted by, the Company. Exclusive of
the effects of intercompany allocations of current income tax benefits, and
changes in the Company's Operating Assets and Liabilities, the Company's
operating activities provided cash of $23,763,000 and $7,052,000 during the six
months ended June 30, 1997 and 1996, respectively.

     During the six months ended June 30, 1997 and 1996, the Company used cash
of $5,265,000 and $36,684,000, respectively, to fund the cost of constructing
the Company Satellites and $85,804,000 and $175,339,000, respectively, to fund
(i) the acquisition and installation of satellite reception equipment, and (ii)
certain other capital expenditures.  The Company expects that the majority of
future capital expenditures with respect to the Company's medium-power business
will be used to fund the acquisition and installation of satellite reception
equipment. The actual amount of capital to be required will be primarily a
function of (i) subscriber growth and churn rates, and (ii) the actual cost of
purchasing and installing satellite reception equipment.

                                      I-41
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)

Material Changes in Financial Position (continued)
--------------------------------------------------

     The Company intends, directly or through PRIMESTAR Partners, to use Tempo
DBS-1 as a platform to provide high-power digital video programming services to
residential customers, as well as multiple dwelling units, commercial customers
and resellers.  The Company presently is unable to reasonably estimate the
amount of capital expenditures that would be required in connection with any
high-power strategy that might be pursued by the Company.  As discussed above,
the Company's capital expenditure requirements would be significantly impacted
by the consummation of the Roll-up Transaction and the ASkyB Transaction.  In
addition, the Company's capital expenditure requirements would be impacted if
the Company were to complete any singificant acquisitions or enter into any
other significant business activities.

     At June 30, 1997, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $43,500,000.

     As part of the compensation paid to the Company's four master sales agents,
the Company has agreed to pay certain residual sales commissions equal to a
percentage of the programming collected from subscribers installed by such
master sales agents during specified periods following the initiation of service
(generally five years). During the six months ended June 30, 1997 and 1996,
residual sales commissions to such master sales agents aggregated $8,204,000 and
$4,597,000, respectively, and were charged to expense in the accompanying
statements of operations of the Company.

     In connection with the Distribution, the Company entered into the
Indemnification Agreements with TCIC and TCI UA 1.  The Indemnification
Agreement with TCIC provides for the Company to reimburse TCIC for any amounts
drawn under an irrevocable transferable letter of credit for the account of TCIC
to support the Company's share of PRIMESTAR Partners' obligations under the GE-2
Agreement. The drawable amount of such letter of credit is $25,000,000.

     During the first quarter of 1997, an additional irrevocable transferable
letter of credit was issued pursuant to the Bank Credit Facility for the account
of TSAT to support the Company's share of PRIMESTAR Partners' obligations under
the GE-2 Agreement.  The initial drawable amount of this letter of credit is
$25,000,000, increasing to $50,000,000 if PRIMESTAR Partners exercises the End-
Of-Life Option.

     The Indemnification Agreement with TCI UA 1 provides for the Company to
reimburse TCI UA 1 for any amounts drawn under the TCI UA 1 Letter of Credit,
which supports the PRIMESTAR Credit Facility.  At June 30, 1997, the drawable
amount of the TCI UA 1 Letter of Credit was $141,250,000.

     During the first quarter of 1997, an additional irrevocable transferable
letter of credit was issued pursuant to the Bank Credit Facility for the account
of TSAT to support the PRIMESTAR Credit Facility.  The drawable amount of this
letter of credit is $5,000,000.

                                      I-42
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)

 
Material Changes in Financial Position (continued)
--------------------------------------------------

     The Indemnification Agreements provide for the Company to indemnify and
hold harmless TCIC and TCI UA 1 and certain related persons from and against any
losses, claims, and liabilities arising out of the respective letters of credit
or any drawings thereunder.  The payment obligations of the Company to TCIC and
TCI UA 1, respectively, under such Indemnification Agreements are subordinated
in right of payment with respect to the obligations of the Company under the
Bank Credit Facility.

     The amounts advanced by PRIMESTAR Partners to the Company to fund the cost
of constructing the Company Satellites ($462,950,000 at June 30, 1997) have been
financed by PRIMESTAR Partners' borrowings under the PRIMESTAR Credit Facility,
which is in turn supported by letters of credit arranged for by affiliates of
all but one of the partners of PRIMESTAR Partners.  At June 30, 1997, PRIMESTAR
Partners' indebtedness under the PRIMESTAR Credit Facility aggregated
$547,000,000, including amounts borrowed to pay interest charges.  The maturity
date of the PRIMESTAR Credit Facility has been extended from June 30, 1997 to
December 31, 1997, and long-term financing alternatives with respect to the
Company Satellites are currently being evaluated.  No assurance can be given
that any such long-term financing will be available on acceptable terms.

     During the first quarter of 1997, TCI agreed to cause TCI UA 1 to renew the
letter of credit arranged by it on the Company's behalf, through December 31,
1997. The Company believes (but cannot assure) that during such period the
Company and/or PRIMESTAR Partners will be able to obtain permanent financing for
the Company Satellites (to the extent not sold to a person other than PRIMESTAR
Partners) on a basis that does not require the Company to post a letter of
credit with respect thereto. If such permanent financing is not available, under
certain maintenance covenants contained in the Bank Credit Facility, the Company
would be unable to provide or arrange for such a letter of credit unless (i) the
lenders under the Bank Credit Facility were to agree to amend or waive such
covenants to permit the posting of such letter of credit by the Company, (ii)
TCI were to agree to renew the TCI UA 1 Letter of Credit for an additional
period, or (iii) the Company were to achieve a greater than anticipated increase
in Operating Cash Flow. If the Company and/or PRIMESTAR Partners are unable to
refinance the Company Satellites (to the extent not sold to a person other than
PRIMESTAR Partners) without a letter of credit and is unable to post (or arrange
for the posting of) such a letter of credit (a "Letter of Credit Event"), the
Company could be adversely affected.

                                      I-43
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)

 
Material Changes in Financial Position (continued)
--------------------------------------------------

     Under PRIMESTAR Partners' limited partnership agreement, the Company has
agreed to fund its share of any capital contributions and/or loans to PRIMESTAR
Partners that might be agreed upon from time to time by the partners of
PRIMESTAR Partners. Additionally, those subsidiaries of the Company that are
general partners of PRIMESTAR Partners are liable as a matter of partnership law
for all debts of PRIMESTAR Partners in the event the liabilities of PRIMESTAR
Partners were to exceed its assets. The Company has additional contingent
liabilities related to PRIMESTAR Partners. See notes 7 and 12 to the
accompanying financial statements of the Company.

     The International Bureau of the FCC has granted EchoStar a conditional
authorization to construct, launch and operate a Ku-band domestic fixed
satellite into the orbital position at 83 degrees W.L., immediately adjacent to
that occupied by GE-2. Contrary to previous FCC policy, EchoStar was authorized
to operate at a power level of 130 watts. If EchoStar were to launch its high
power satellite authorized to 83 degrees W.L. and commence operations at that
location at a power level of 130 watts, it would likely cause harmful
interference to the reception of the GE-2 PRIMESTAR(R) signal by subscribers to
such services.

     Subsequently, GE Americom and PRIMESTAR Partners separately requested
reconsideration of the International Bureau's authorization for EchoStar to
operate at 83 degrees W.L. These requests were opposed by EchoStar and others.
These requests currently are pending at the International Bureau. In addition,
GE Americom and PRIMESTAR Partners have attempted to resolve potential
coordination problems directly with EchoStar. It is uncertain whether any
coordination between PRIMESTAR Partners and EchoStar will resolve such
interference. There can be no assurance that the International Bureau will
change slot assignments, or power levels, in a fashion that eliminates the
potential for harmful interference. Although the ultimate outcome of this matter
cannot presently be predicted, the Company believes that any such outcome would
not have a material adverse effect on the Company's financial condition and
results of operations.

     At June 30, 1997, approximately 9,881,000 shares of Series A Common Stock
were reserved for issuance pursuant to certain option and restricted stock
agreements, and certain arrangements with TCIC.

                                      I-44
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)

 
Material Changes in Financial Position (continued)
--------------------------------------------------

     Effective as of October 21, 1996, the Company acquired 4.99% of the issued
and outstanding capital stock of ResNet Communications, Inc. ("ResNet") for a
purchase price of $5,396,000. Prior to the investment by the Company, ResNet was
a wholly owned subsidiary of LodgeNet Entertainment Corporation ("LodgeNet").
ResNet was formed by LodgeNet in February 1996 to engage in the business of
providing video services to subscribers in multiple dwelling units (the "ResNet
Busienss").  ResNet agreed to purchase from the Company up to $40,000,000 in
satellite reception equipment, to be used in connection with the ResNet Business
exclusively over a five-year period (subject to a one-year extension at the
option of ResNet if ResNet has not purchased the full $40,000,000 in equipment
during the five-year initial term).

     The Company also agreed to make a subordinated convertible term loan to
ResNet, in the principal amount of $34,604,000, the proceeds of which can be
used only to purchase such equipment from the Company. The term of the loan is
five years with an option by ResNet to extend the term for one additional year.
The total principal and accrued and unpaid interest under the loan is
convertible over a four-year period into shares of common stock of ResNet
representing 32% of the issued and outstanding common stock of ResNet. The
Company's only recourse with respect to repayment of the loan is conversion into
ResNet stock or warrants.  Under current interpretations of the FCC rules and
regulations related to restrictions on the provision of cable and satellite
master antenna television services in certain areas, the Company could be
prohibited from holding 5% or more of the stock of ResNet and consequently could
not exercise the conversion rights under the convertible loan agreement. The
Company is required to convert the convertible loan at such time as conversion
would not violate such currently applicable regulatory restrictions.

     At June 30, 1997, the Company held aggregate cash and cash equivalents of
$53,143,000.  The Company believes that such cash and cash equivalents, together
with borrowing availability pursuant to the Bank Credit Facility and any funds
generated by the Company's operating activities will be sufficient through
December 31, 1998, to fund the Company's working capital, debt service and
currently projected capital expenditure requirements associated with its medium-
power satellite distribution business.  However, to the extent that the Company
(i) funds all or any significant portion of the cost of the Company Satellites,
(ii) pursues a strategy with respect to the high power segment of the digital
satellite industry that requires significant capital expenditures, (iii)
completes any significant acquisitions, (iv) enters into any other business
activities that require significant capital investments, (v) suffers a Letter of
Credit Event or is required to meet other significant future liquidity
requirements in addition to those described above, the Company anticipates that
it would be required to obtain additional debt or equity financing.  No
assurance can be given, however, that the Company would be able to obtain
additional financing on terms acceptable to it, or at all.  As described above,
the Company's liquidity and capital resources would be significantly impacted by
the consummation of the pending Roll-up Transaction and ASkyB Transaction.  See
also note 2 of the accompanying financial statements of the Company.

                                      I-45
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)

 
Material Changes in Financial Position (continued)
--------------------------------------------------

     The Company is highly leveraged. The degree to which the Company is
leveraged may adversely affect the Company's ability to compete effectively
against better capitalized competitors and to withstand downturns in its
business or the economy generally, and could limit its ability to pursue
business opportunities that may be in the interests of the Company and its
stockholders. The Company's ability to repay or refinance its debt will require
the Company to increase its Operating Cash Flow or to obtain additional debt or
equity financing. There can be no assurance that the Company will be successful
in increasing its Operating Cash Flow by a sufficient magnitude or in a timely
manner or in raising sufficient additional debt or equity financing to enable it
to repay or refinance its debt.  See related discussion above and note 2 to the
accompanying financial statements of the Company.

                                      I-46
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.

 
PART II - OTHER INFORMATION


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

         During the three months ended June 30, 1997, TSAT issued 9,961 shares
         of Series A Common Stock to TCI for aggregate consideration of $9,961.
         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.

         The Bank Credit Facility contains a negative covenant that restricts
         the Company and its Restricted Subsidiaries from paying dividends and
         making other distributions.

Item 6.  Exhibits and Reports on Form 8-K.
-------  ---------------------------------
 
         (a)  Exhibits
 
              10 - Material Contracts
 
                   10.1 Form of Non-Qualified Stock Option Agreement -
                        1997 Nonemployee Director Stock Option Plan of TSAT
 
                   10.2 Form of 1997 Nonemployee Director Stock Option
                        Plan of TSAT

                   10.3 Form of Restricted Stock Award Agreement - 
                        TSAT 1996 Stock Incentive Plan 

                   10.4 Amendment No. 1 to Fulfillment Agreement between
                        TSAT and TCIC dated as of July 22, 1997
  
              27 - Financial Data Schedule

          (b) Reports on Form 8-K filed during quarter ended June 30, 1997 -
 
              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 11, 1997         By:  /s/  Gary S. Howard
                                   -----------------------------
                                        Gary S. Howard
                                        President and
                                          Chief Executive Officer
 
 
Date: August 11, 1997         By:  /s/  Kenneth G. Carroll
                                   -----------------------------
                                        Kenneth G. Carroll
                                        Senior Vice President and
                                          Chief Financial Officer
                                          (Principal Financial Officer)
 
 
 
 
Date: August 11, 1997         By:  /s/  Scott D. Macdonald
                                   -----------------------------
                                        Scott D. Macdonald
                                        Vice President and Controller
                                          (Chief Accounting Officer)
 
 

                                      II-2