<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION

                           WASHINGTON, D. C.  20549

                                 F O R M 10-Q


[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     For the quarterly period ended March 31, 1998

                                      OR

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


Commission File Number:  0-21317


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

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

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


     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days [X] Yes       [_] No

     The number of shares outstanding of TCI Satellite Entertainment, Inc.'s
common stock as of April 30, 1998, was:

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

                          Consolidated Balance Sheets

                                  (unaudited)


                                                  March 31,     December 31,
                                                    1998            1997
                                                 ----------     ------------
                                                     amounts in thousands
Assets
------
Cash and cash equivalents                        $       --         6,084
 
Accounts receivable                                  28,600        40,386
Less allowance for doubtful accounts                  4,366         5,307
                                                 ----------     ---------
                                                     24,234        35,079
                                                 ----------     ---------
 
Prepaid expenses                                      1,507         1,262
 
Investment in, and related advances to,
 PRIMESTAR Partners L.P.
 ("PRIMESTAR Partners") (note 8)                      5,346        11,093
 
Property and equipment, at cost:
 Satellite reception equipment                      683,155       674,387
 Subscriber installation costs                      241,061       227,131
 Support equipment                                   34,197        34,389
 Satellites (note 9)                                463,133       463,133
                                                 ----------     ---------
                                                  1,421,546     1,399,040
 Less accumulated depreciation                      311,821       277,103
                                                 ----------     ---------
                                                  1,109,725     1,121,937
                                                 ----------     ---------
 
Deferred financing costs and other assets,
 net of accumulated amortization                     29,198        29,401
                                                 ----------     ---------
                                                 $1,170,010     1,204,856
                                                 ==========     =========

                                                                     (continued)

                                      I-1
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                     Consolidated Balance Sheets, continued

                                  (unaudited)


                                                  March 31,     December 31,
                                                    1998            1997
                                                 ----------     ------------
                                                     amounts in thousands
Liabilities and Stockholders' Equity
------------------------------------
Accounts payable                                 $   34,815         50,755
Accrued charges from PRIMESTAR
 Partners (note 8)                                   51,801         48,591
Accrued charges from TCI Communications, Inc.
 ("TCIC") (note 11)                                  14,589         14,225
Accrued commissions                                   2,383         10,435
Accrued interest payable                              3,108          8,658
Other accrued expenses                               29,959         24,386
Subscriber advance payments                          26,561         29,675
Due to PRIMESTAR Partners (note 9)                  463,133        463,133
Debt (note 10)                                      474,865        418,729
                                                 ----------     ----------
 
   Total liabilities                              1,101,214      1,068,587
                                                 ----------     ----------
 
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 
   59,277,912 in 1998, and 58,239,136 
   in 1997                                           59,278         58,239
 Series B common stock, $1 par value; 
   authorized 10,000,000 shares; issued 
   8,465,324 in 1998 and 1997                         8,465          8,465
 Additional paid-in capital                         524,690        523,685
 Accumulated deficit                               (523,637)      (454,120)
                                                 ----------     ----------
 
   Total stockholders' equity                        68,796        136,269
                                                 ----------     ----------
 
Commitments and contingencies
 (note 9)                                       
                                                 $1,170,010      1,204,856
                                                 ==========     ========== 

See accompanying notes to consolidated financial statements.

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

                     Consolidated Statements of Operations

                                  (unaudited)

                                                        Three months ended
                                                             March 31,
                                                    --------------------------
                                                      1998              1997
                                                    --------           -------
                                                       amounts in thousands
Revenue:
   Programming and equipment rental                 $154,257           113,501
   Installation                                       14,243             9,763
                                                    --------           -------
                                                     168,500           123,264
                                                    --------           -------
Operating costs and expenses:
   Charges from PRIMESTAR Partners (note 8)
     Programming                                      57,461            39,323
     Satellite, marketing and distribution            24,774            19,936
   Other operating (note 11)                           9,847             6,257
   Selling, general and administrative (note 11)      55,341            44,388
   Stock compensation (note 11)                        4,869               394
   Depreciation                                       65,105            54,623
                                                    --------           -------
                                                     217,397           164,921
                                                    --------           -------
 
     Operating loss                                  (48,897)          (41,657)
 
Other income (expense):
   Interest expense                                  (14,177)           (9,383)
   Share of losses of PRIMESTAR Partners (note 8)     (5,822)           (2,161)
   Other, net                                           (621)              670
                                                    --------           -------
                                                     (20,620)          (10,874)
                                                    --------           -------
 
     Loss before income taxes                        (69,517)          (52,531)
 
Income tax benefit (note 12)                              --                --
                                                    --------           -------
 
     Net loss                                       $(69,517)          (52,531)
                                                    ========           =======
 
Basic and diluted loss per common share (note 6):   $  (1.03)             (.79)
                                                    ========           =======
 


See accompanying notes to consolidated financial statements.

                                      I-3
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                Consolidated Statement of Stockholders' Equity

                       Three months ended March 31, 1998

                                  (unaudited)


<TABLE>
<CAPTION>
                                                    Common stock      Additional                    Total
                                                --------------------    Paid-in    Accumulated   stockholders'         
                                                Series A    Series B    capital      deficit        equity
                                                --------    --------  ----------   -----------   -------------
                                                                      amounts in thousands
 
<S>                                             <C>         <C>       <C>          <C>           <C>
Balance at January 1, 1998                       $58,239      8,465     523,685     (454,120)       136,269
 
 Net loss                                             --         --          --      (69,517)       (69,517)
 Recognition of stock compensation 
  related to stock options and 
  restricted stock awards                             --         --       1,005           --          1,005
 Issuance of Series A Common Stock related to
  restricted stock awards                             50         --          --           --             50
 Issuance of Series A Common Stock upon
  conversion of convertible securities of
  Tele-Communications, Inc. (note 4)                 989         --          --           --            989
                                                --------    -------   ---------    ---------     ----------   
 
Balance at March 31, 1998                        $59,278      8,465     524,690     (523,637)        68,796
                                                ========    =======   =========    =========     ==========    
</TABLE> 

See accompanying notes to consolidated  financial statements.

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

                     Consolidated Statements of Cash Flows

                                  (unaudited)


                                                       Three months ended
                                                            March 31,
                                                      --------------------
                                                        1998        1997
                                                      --------    --------
                                                      amounts in thousands
                                                           (see note 7)
 
Cash flows from operating activities:
 Net loss                                             $(69,517)    (52,531)
 Adjustments to reconcile net loss to
   net cash provided by operating activities:
     Depreciation                                       65,105      54,623
     Share of losses of PRIMESTAR Partners               5,822       2,161
     Accretion of debt discount                          4,682       1,993
     Stock compensation                                  4,869         394
     Other non-cash items                                7,956         641
     Changes in operating assets and liabilities:
       Change in receivables                            10,845       3,501
       Change in prepaids and other assets                (736)       (321)
       Change in accruals and payables                 (10,209)      4,740
       Change in subscriber advance payments            (3,114)      1,088
                                                      --------    --------
 
         Net cash provided by operating activities      15,703      16,289
                                                      --------    --------
 
Cash flows from investing activities:
 Capital expended for property and equipment           (73,966)    (40,371)
 Capital expended for satellites                            --      (4,399)
 Additional investments in and advances to
   PRIMESTAR Partners                                      (75)     (6,584)
 Repayment of advances to PRIMESTAR Partners                --       7,609
                                                      --------    --------
 
         Net cash used in investing activities         (74,041)    (43,745)
                                                      --------    --------
 
Cash flows from financing activities:
 Borrowings of debt                                    113,000     405,061
 Repayments of debt                                    (61,735)   (299,068)
 Payment of deferred financing costs                        --     (18,161)
 Increase in due to PRIMESTAR Partners                      --       4,399
 Proceeds from issuance of common stock                    989         215
                                                      --------    --------
 
         Net cash provided by financing activities      52,254      92,446
                                                      --------    --------
 
         Net increase (decrease) in cash and cash
          equivalents                                   (6,084)     64,990
 
 
         Cash and cash equivalents:
           Beginning of period                           6,084       6,560
                                                      --------    --------
 
           End of period                              $     --      71,550
                                                      ========    ========

See accompanying notes to consolidated financial statements.

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

                                March 31, 1998

                                  (unaudited)

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

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

     The accompanying interim financial statements of TSAT are unaudited. In the
     opinion of management, all adjustments (consisting only of normal recurring
     accruals) have been made which are necessary to present fairly the
     financial position of TSAT as of March 31, 1998 and the results of its
     operations for the periods ended March 31, 1998 and 1997. The results of
     operations for any interim period are not necessarily indicative of the
     results for the entire year. These financial statements should be read in
     conjunction with the financial statements and related notes thereto
     included in TSAT's December 31, 1997 Annual Report on Form 10-K.

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

     Certain amounts have been reclassified for comparability with the 1998
     presentation.

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

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

                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

     Restructuring

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

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

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

                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

     The TSAT Asset Transfer will be recorded at TSAT's historical cost, and
     TSAT has been identified as the acquiror for accounting purposes and the
     predecessor for financial reporting purposes due to the fact that TSAT owns
     the largest interest in PRIMESTAR immediately following consummation of the
     Restructuring.  The remaining elements of the Restructuring, as set forth
     above, will be treated as the acquisition by PRIMESTAR of the (i)
     PRIMESTAR(R) subscribers and certain related assets and liabilities and
     (ii) the partnership interest in PRIMESTAR Partners of the parties to the
     Restructuring Agreement other than TSAT (the "Non-TSAT Parties"), and such
     acquisition will be accounted for using the purchase method of accounting.
     The fair value of the consideration issued to the Non-TSAT Parties will be
     allocated to the assets and liabilities acquired based upon the estimated
     fair values of such assets and liabilities.

     TSAT Merger

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

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

     The TSAT Merger will be treated as the acquisition of TSAT by PRIMESTAR.
     Such acquisition will be accounted for at TSAT's historical cost since (i)
     the percentage of PRIMESTAR owned by TSAT prior to consummation of the TSAT
     Merger will be approximately equal to the percentage of PRIMESTAR to be
     owned by TSAT shareholders following consummation of the TSAT Merger and
     (ii) the TSAT Merger and the Restructuring are both part of the Roll-up
     Plan.

                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

(3)  Proposed ASkyB Transaction
     --------------------------

     In a separate transaction (the "ASkyB Transaction"), pursuant to an asset
     acquisition agreement, dated as of June 11, 1997 among PRIMESTAR Partners,
     The News Corporation Limited ("News Corp."), MCI Telecommunications
     Corporation, the principal domestic operating subsidiary of MCI
     Communications Corporation ("MCI"), American Sky Broadcasting LLC, a 
     wholly-owned subsidiary of News Corp. ("ASkyB") and for certain purposes
     only, each of the partners of PRIMESTAR Partners (collectively, the
     "Partners"), PRIMESTAR will acquire form MCI two high-power communications
     satellites currently under construction, certain authorizations granted to
     MCI by the Federal Communications Commission ("FCC") to operate a direct
     broadcast satellite business at the 110 West Longitude ("W.L.") orbital
     location using 28 transponder channels, and certain related contracts. In
     consideration, ASkyB will receive approximately $600 million liquidation
     value of non-voting convertible preferred stock, $.01 per value per share,
     of PRIMESTAR (the "PRIMESTAR Convertible Preferred Stock") (convertible
     into approximately 52 million shares of non-voting Series D Common Stock,
     $.01 par value per share, of PRIMESTAR (the "PRIMESTAR Class D Common
     Stock"), subject to adjustment) and approximately $516 million principal
     amount of convertible subordinated notes of PRIMESTAR (the "PRIMESTAR
     Convertible Subordinated Notes") (convertible into approximately 45 million
     shares of PRIMESTAR Class D Common Stock).

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

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

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

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

     
                                                                (continued)

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

                  Notes to Consolidated Financial Statements

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

     General

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

     Since the Spin-off, TSAT and TCI have operated independently.  For purposes
     of governing certain of the ongoing relationships between TSAT and TCI
     after the Spin-off, and to provide mechanisms for an orderly transition,
     TSAT and TCI entered into various agreements, including the "Reorganization
     Agreement" (see below), the "Fulfillment Agreement" (see note 11), the
     "Transition Services Agreement" (see note 11), and an amendment to TCI's
     then existing "Tax Sharing Agreement (see note 12).

     Reorganization Agreement

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

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

     In June 1997, the Financial Accounting Standards Board issued Statement of
     Financial Accounting Standards No. 130, Reporting Comprehensive Income,
     ("SFAS No. 130") which establishes standards for reporting and disclosure
     of comprehensive income and its components (revenues, expenses, gains and
     losses).  SFAS No. 130 is effective for fiscal years beginning after
     December 15, 1997 and requires reclassification of financial statements for
     earlier periods to be provided for comparative purposes.  The Company's
     total comprehensive loss for all periods presented herein would not have
     differed from those amounts reported as net loss in the consolidated
     statements of operations.

(6)  Loss Per Common Share
     ---------------------

     The basic and diluted loss per common share is based on 67,633,000 and
     66,619,000 weighted average shares outstanding during the three months
     ended March 31, 1998 and 1997, respectively.  Excluded from the computation
     of diluted loss per common share for the three months ended March 31 1998
     and 1997 are options and convertible securities to acquire 7,172,000 and
     7,619,000 shares of Series A Common Stock, respectively, because inclusion
     of such options would be anti-dilutive.

                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

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

     Cash paid for interest was $13,844,000 and $4,746,000 during the three
     months ended March 31, 1998 and 1997, respectively.  Cash paid for income
     taxes was not significant during either of such periods.

     Accrued capital expenditures of $21,646,000 at March 31, 1998 have been
     excluded from the accompanying statements of cash flows.

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

     Summarized unaudited operating information for PRIMESTAR Partners is as
     follows:


                                               Three months ended
                                                      March 31,
                                             ------------------------
                                               1998            1997
                                             ---------      ---------
                                               amounts in thousands
     Results of Operations
     ---------------------
 
     Revenue                                 $ 196,189        139,206
     Operating, selling, general and
         administrative expenses              (218,905)      (141,670)
     Depreciation and amortization              (1,053)          (768)
                                             ---------      ---------
 
         Operating loss                        (23,769)        (3,232)
 
     Other expense, net                         (4,276)        (3,320)
                                             ---------      ---------
 
         Net loss                            $ (28,045)        (6,552)
                                             =========      =========


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

(9)  Satellites
     -----------

     Tempo DBS System

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

     Tempo is also a party to a construction agreement (the "Satellite
     Construction Agreement") with Space Systems/Loral, Inc. ("Loral"), pursuant
     to which Tempo has arranged for the construction of two high power
     communications satellites (the "Tempo Satellites") at a fixed contract
     price of $487,159,500, and has an option to purchase up to three additional
     satellites.

                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

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

     Under the FCC Permit, the time by which the Tempo Satellites must be
     operational was due to expire in May 1998. TSAT believed that it had
     complied with its FCC obligations with respect to the 119 degrees W.L.
     orbital position, including the obligation that its satellite at that
     position become operational, and also believed that it was in compliance
     with its FCC obligations with respect to constructing a satellite to
     operate 11 channels at 166 degrees W.L. Nevertheless, on April 3, 1998,
     Tempo filed a request with the FCC for an extension of that deadline
     pending FCC review of (i) TSAT's request for consent to the transfer of
     control of Tempo to PRIMESTAR (the "Transfer Application") and (ii)
     PRIMESTAR Partner's application for consent to the assignment to PRIMESTAR
     of the high power DBS authorizations and certain assets owned by MCI (the
     "Assignment Application") should the FCC determine that an extension is
     necessary for Tempo to maintain its FCC authorizations at 119 degrees W.L.
     and 166 degrees W.L.

     On April 30, the FCC determined that Tempo's satellite at 119 W.L. was not
     operational. It did find, however, that an extension of time was warranted
     for that orbital location and granted and extension to Tempo for 119 W.L.,
     with the condition that it not enter into a lease agreement with PRIMESTAR
     or any similar lease arrangement prior to the FCC's decision on the
     Transfer Application and the Assignment Application. In addition the FCC
     denied the extension of Tempo's permit for 166 W.L. Interested parties,
     including EchoStar and Dominion Video Satellite, Inc. who filed against
     Tempo's extension request, have 30 days to file a Petition for
     Reconsideration or a Petition for Review before the decision becomes final.
     Likewise, the FCC, on its own motion may reconsider its decision.
     Therefore, there can be no assurance that the FCC's decision will not
     change or be modified prior to it becoming final.

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

                                                                     (continued)



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

                  Notes to Consolidated Financial Statements

     Tempo Option

     In February 1990, Tempo entered into an option agreement with PRIMESTAR
     Partners granting PRIMESTAR Partners the right and option (the "Tempo
     Option"), upon exercise, to purchase or lease 100% of the capacity of the
     DBS system to be built, launched and operated by Tempo pursuant to the FCC
     Permit with the purchase price (or aggregate lease payments) being
     sufficient to cover the costs of constructing, launching and operating such
     DBS system. In connection with the Tempo Option and certain related
     matters, Tempo and PRIMESTAR Partners subsequently entered into two letter
     agreements (the "Tempo Letter Agreements"), which provided for, among other
     things, the funding by PRIMESTAR Partners of milestone and other payments
     due under the Satellite Construction Agreement, and certain related costs,
     through advances by PRIMESTAR Partners to Tempo.  The aggregate funding
     provided to Tempo by PRIMESTAR Partners ($463,133,000 at March 31, 1998) is
     reflected in "Due to PRIMESTAR Partners" in the accompanying consolidated
     balance sheets.

     On February 7, 1997, the Partners Committee of PRIMESTAR Partners adopted a
     resolution (i) affirming that PRIMESTAR Partners had unconditionally
     exercised the Tempo Option, (ii) approving the proposed launch of Tempo 
     DBS-1 into the 119 degrees W.L. orbital position and the use of the second
     Tempo Satellite ("Tempo DBS-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 a $1,000,000 exercise fee (the "Exercise Fee") and other amounts in
     connection with the Tempo Option and the Tempo Letter Agreements, including
     funding of substantially all construction and related costs relating to the
     Tempo Satellites not previously funded by PRIMESTAR Partners. Such amounts
     have been paid to TSAT.

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


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

                  Notes to Consolidated Financial Statements

(10) Debt
     -----

     The components of debt are as follows:

                                             March 31,     December 31,
                                               1998            1997
                                             ---------     ------------
                                                amounts in thousands
 
     Bank Credit Facility                    $ 99,500           48,000
     Senior Subordinated Notes                200,000          200,000
     Senior Subordinated Discount Notes       173,463          168,781
     Other                                      1,902            1,948
                                             --------          -------
                                             $474,865          418,729
                                             ========          =======

     All of the Company's debt was assumed by PRIMESTAR in connection with the
     Restructuring.

(11) Transactions with Related Parties
     ---------------------------------

     During 1997, TCIC provided certain installation, maintenance, retrieval and
     other customer fulfillment services to TSAT pursuant to a fulfillment
     agreement (as amended, the "Fulfillment Agreement").  During the three
     months ended March 31, 1997, TSAT's capitalized installation costs included
     amounts charged by TCIC to TSAT of $15,358,000.  Maintenance, retrieval and
     other operating expenses charged by TCIC to TSAT aggregated $2,615,000
     during the three months ended March 31, 1997.

     From January 1, 1997 through July 21, 1997, charges for customer
     fulfillment services provided by TCIC were made pursuant to the Fulfillment
     Agreement, as originally executed by TSAT and TCIC (the "Original
     Fulfillment Agreement").  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 TSAT prior to
     the Spin-off.  In September and October, 1997, TSAT entered into agreements
     with eight regional fulfillment companies to perform the services no longer
     performed by TCIC following the termination of the Fulfillment Agreement.
 
                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

     TCIC also provided corporate administrative and certain telephony services
     to TSAT pursuant to a transition services agreement (the "Transition
     Services Agreement").  As compensation for the services rendered and for
     the benefits made available to TSAT pursuant to the Transition Services
     Agreement, TSAT was 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.  Charges under the Transition Services
     Agreement aggregated $3,174,000 and $2,945,000 during the three months
     ended March 31, 1998 and 1997, respectively.  The Transition Services
     Agreement was terminated in connection with the consummation of the
     Restructuring.

     During the three months ended March 31, 1998 and 1997, TSAT purchased from
     TCIC at TCIC's cost certain telephony services aggregating $1,354,000 and
     $1,402,000 respectively.

     Beginning in March 1997, and through the Closing Date, TCIC provided TSAT
     with customer support services from its Boise, Idaho call center ( the
     "Boise Call Center").  The Boise Call Center responded to calls that
     exceeded the capacity of TSAT's national call center.  Amounts charged by
     TCIC to TSAT for such services aggregated $5,026,000 and $238,000 during
     the three months ended March 31, 1998 and 1997, respectively.

     Since the Spin-off Date, the effects of transactions between TSAT and TCI
     have been reflected in a non-interest bearing account that is settled
     periodically in cash.

     Certain key employees of TSAT 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 TSAT have been recorded in the accompanying
     consolidated financial statements, but are subject to future adjustment
     based upon the market value of the underlying common stock of TCI and,
     ultimately, on the final determination of market value when the rights are
     exercised. Compensation expense (income) recognized by TSAT related to such
     options aggregated $3,814,000 and $(38,000) during the three months ended
     March 31, 1998 and 1997, respectively.


                                                                     (continued)

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

                  Notes to Consolidated Financial Statements

(12) Income Taxes
     ------------

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

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

     TSAT recognized no income tax benefit during either of the three month
     periods ended March 31, 1998 and 1997.  As a result of the Spin-off, TSAT
     is no longer a part of the TCI consolidated tax group, and accordingly, is
     only able to realize income tax benefits for financial reporting purposes
     to the extent that such benefits offset TSAT's income tax liabilities or
     TSAT generates taxable income.  For financial reporting purposes, all of
     TSAT's income tax liabilities had been fully offset by income tax benefits
     at March 31, 1998 and December 31, 1997.  Additionally, during the first
     several years following the Spin-off, TSAT believes that it will incur net
     losses for income tax purposes, and accordingly, will not be in a position
     to realize income tax benefits on a current basis


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

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

General
-------

     The following discussion and analysis provides information concerning the
financial condition and results of operations of TSAT and should be read in
conjunction with (i) the accompanying financial statements of TSAT, and (ii) the
financial statements, and related notes thereto, of TSAT, and Management's
                                                              ------------
Discussion and Analysis of Financial Condition and Results of Operations
------------------------------------------------------------------------
included in TSAT's Annual Report on Form 10-K for the year ended December 31,
1997.

     Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of TSAT, or industry results, to
differ materially from any future results, performance or achievements expressed
or implied by such forward-looking statements. Such risks, uncertainties and
other factors include, among others: general economic and business conditions
and industry trends; the continued strength of the multichannel video
programming distribution industry and the satellite services industry and the
growth of satellite delivered television programming; uncertainties inherent in
proposed business strategies, new product launches and development plans,
including uncertainties regarding the Roll-up Plan; the ASkyB Transaction;
TSAT's high-power strategy; future financial performance, including
availability, terms and deployment of capital; the ability of vendors to deliver
required equipment, software and services; availability of qualified personnel;
changes in, or the failure or the inability to comply with, government
regulations, including, without limitation, regulations of the FCC, and adverse
outcomes from regulatory proceedings; changes in the nature of key strategic
relationships with partners and joint venturers; competitor responses to TSAT's
products and services, and the overall market acceptance of such products and
services, including acceptance of the pricing of such products and services;
possible interference by satellites in adjacent orbital positions with the
satellite currently being used for PRIMESTAR Partners' existing medium power
satellite television business; and other factors referenced in this Report.
These forward-looking statements speak only as of the date of this Report. TSAT
expressly disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein to reflect any
change in TSAT's expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.



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

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

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

     During the three months ended March 31, 1998 and 1997, and the years ended
December 31, 1997, 1996 and 1995, (i) TSAT'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 27.1%, 27.2%,
30.1%, 38.5% and 24.7%, respectively, and (ii) the average subscriber life
implied by such subscriber churn rate was 3.7 years, 3.7 years, 3.3 years, 2.6
years and 4.0 years, respectively.

     TSAT 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 TSAT's bad debt expense during 1996. TSAT has
addressed this issue by implementing more stringent credit policies.  TSAT
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.

     During 1997, TSAT began offering a marketing program that allows
subscribers to purchase TSAT's proprietary satellite reception equipment at a
price that is less than TSAT's cost.  Losses incurred by TSAT on such sales of
satellite reception equipment are charged to selling expense in the periods such
sales are consummated and aggregated $7,321,000 during the three months ended
March 31, 1998.


                                     I-18
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

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

     The number of TSAT's customers and active authorized satellite receivers or
integrated receivers/decoders ("Authorized Units") are as follows:

                               March 31,              December 31,
                        ---------------------     -------------------
                           1998         1997        1997        1996
                        ---------     -------     -------     -------
 
Customers                 914,000     734,000     851,000     702,000
 
Authorized Units        1,062,000     842,000     985,000     805,000

     To the extent not otherwise described, increases in TSAT's revenue and
operating, selling, general and administrative expenses, as detailed below, are
primarily related to growth in customers as reflected in the foregoing table

     Certain financial information concerning TSAT's operations is presented
below (dollar amounts in thousands):

<TABLE>
<CAPTION>
                                                     Three months ended March 31,
                                            ---------------------------------------------
                                                     1998                   1997
                                            ----------------------  ---------------------
                                                        Percentage             Percentage
                                                         of total               of total
                                             Amount      revenue     Amount     revenue
                                            --------    ----------  --------   ----------
 
Revenue:
<S>                                         <C>         <C>         <C>        <C>
 Programming and equipment rental           $154,257        92%     $113,501       92%
 Installation                                 14,243         8         9,763        8
                                            --------      ----      --------     ----
   Total revenue                             168,500       100       123,264      100
                                            --------      ----      --------     ----
 
Operating costs and expenses:
 Charges from PRIMESTAR Partners:
   Programming                               (57,461)      (34)      (39,323)     (32)
   Satellite, national marketing and
    distribution                             (24,774)      (15)      (19,936)     (16)
                                            --------      ----      --------     ----
                                             (82,235)      (49)      (59,259)     (48)
                                            --------      ----      --------     ----
 
 Other operating                              (9,847)       (6)       (6,257)      (5)
 
 
 Selling, general and administrative:
   Selling and regional marketing            (38,648)      (23)      (26,335)     (21)
   Other general and administrative          (16,693)      (10)      (18,053)     (15)
                                            --------      ----      --------     ----
                                             (55,341)      (33)      (44,388)     (36)
                                            --------      ----      --------     ----
 
   Operating Cash Flow (1)                    21,077        12        13,360       11
 
 Stock compensation                           (4,869)       (3)         (394)      --
 
 Depreciation                                (65,105)      (38)      (54,623)     (45)
                                            --------      ----      --------     ----
 
   Operating loss                           $(48,897)      (29)%    $(41,657)     (34)%
                                            ========      ====      ========     ====
</TABLE>

                                      I-19
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

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

(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.

     Revenue increased $45,236,000 or 37% during the three months ended March
31, 1998, as compared to the corresponding prior year period.  Such increase is
the result of a $40,756,000 or 36% increase in programming and equipment rental
revenue and a $4,480,000 or 46% increase in installation revenue.  The increase
in programming and equipment rental revenue is primarily the result of an
increase from the 1997 period to the 1998 period in the average number of
customers.  Additionally, TSAT's average monthly programming and equipment
rental revenue per customer increased from $53 during the 1997 period to $58
during the 1998 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 increase in installation
revenue is the net result of an increase from the 1997 period to the 1998 period
in the number of installations performed and a decrease from $107 during the
1997 period to $98 during the 1998 period in the average installation revenue
from each customer installed.

     PRIMESTAR Partners provided programming services to TSAT and other
authorized PRIMESTAR(R) distributors in exchange for a fee based upon the number
of customers receiving programming services.  PRIMESTAR Partners also arranged
for satellite capacity and uplink services, and provided national marketing and
administrative support services, in exchange for a separate authorization fee
from each authorized PRIMESTAR(R) distributor, including TSAT, based on such
distributor's total number of Authorized Units.  The aggregate charges for such
services increased $22,976,000 or 39% during the three months ended March 31,
1998, as compared to the corresponding prior year period.  The average aggregate
monthly amount per customer charged by PRIMESTAR Partners was $31 and $28 during
the three months ended March 31, 1998 and 1997, respectively.

     Other operating costs and expenses, which are primarily comprised of
amounts related to customer fulfillment activities, increased $3,590,000 or 57%
during the three months ended March 31, 1998, as compared to the corresponding
prior year period.  The majority of such increase is due to an increase in
installation costs related to customers who purchase their equipment.

     Selling, general and administrative expenses increased $10,953,000 or 25%
during the three months ended March 31, 1998, as compared to the corresponding
prior year period.  Selling and regional marketing expenses, which represented
23% of revenue during the 1998 period, include sales commissions, marketing and
advertising expenses, and costs associated with the operation of a customer
service call center and five regional sales offices.  In total, selling, general
and administrative expenses represented 33% and 36% of revenue during the three
months ended March 31, 1998 and 1997, respectively.  The decrease in such
percentage is primarily attributable to the relatively fixed nature of certain
components of TSAT's selling, general and administrative expenses.

                                      I-20
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

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

     The $10,482,000 or 19% increase in depreciation expense during the three
months ended March 31, 1998, as compared to the corresponding prior year period,
is the result of an increase in TSAT's depreciable assets due primarily to
capital expenditures with respect to TSAT's satellite reception equipment and
subscriber installation costs.

     TSAT incurred interest expense of $14,177,000 and $9,383,000 during the
three months ended March 31, 1998 and 1997, respectively.  Substantially all of
such interest was attributable to the December 31, 1996 completion of TSAT's
bank credit facility and the February 1997 issuance of TSAT's Senior
Subordinated Notes and Senior Subordinated Discount Notes.

     TSAT's share of PRIMESTAR Partners' net losses increased $3,661,000 during
the three months ended March 31, 1998, 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 Partners'
bank credit facility that were used to fund the construction of Tempo DBS-2.
Prior to the January 1, 1997 determination that construction of Tempo DBS-2 was
substantially complete, interest incurred on the applicable borrowings had been
capitalized by PRIMESTAR Partners.  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.

     TSAT recognized no income tax benefit during either of the three month
periods ended March 31, 1998 and 1997.  As a result of the Spin-off, TSAT is no
longer a part of the TCI consolidated tax group, and accordingly, is only able
to realize income tax benefits for financial reporting purposes to the extent
that such benefits offset TSAT's income tax liabilities or TSAT generates
taxable income.  For financial reporting purposes, all of TSAT's income tax
liabilities had been fully offset by income tax benefits at March 31, 1998 and
December 31, 1997.  Additionally, during the first several years following the
Spin-off, TSAT believes that it will incur net losses for income tax purposes,
and accordingly, will not be in a position to realize income tax benefits on a
current basis.  In connection with the Spin-off, TSAT became a party to the Tax
Sharing Agreement that currently exists among TCI, TCIC and certain other
subsidiaries of TCI.

                                      I-21
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

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

     As a holding company, TSAT's ability to satisfy any liabilities or
obligations is dependent solely upon the earnings of Tempo and PRIMESTAR and the
distribution or the payment of such earnings to TSAT in the form of dividends,
loans or other advances.  Moreover, during the term of the  TSAT Merger
Agreement, TSAT will be subject to the covenants provided for therein, including
limitations on TSAT's ability to conduct business activities, incur liabilities,
and acquire or dispose of assets.  The payment of dividends or the making of
loans or advances to TSAT by Tempo and PRIMESTAR may be subject to statutory,
regulatory or contractual restriction, will be contingent upon the earnings of
those subsidiaries and affiliates, and will be subject to various business
considerations.  Moreover, TSAT  will not control PRIMESTAR, and PRIMESTAR will
have no obligation, contingent or otherwise, to make any funds available to
TSAT, whether by dividends, loans or other payments (except for the obligation
of PRIMESTAR to reimburse TSAT for certain financial reporting, legal,
accounting and other obligations of TSAT as a public company, including payment
of directors' fees and expenses and maintenance of directors' and officers'
insurance, as provided in the TSAT Merger Agreement).  In addition, PRIMESTAR is
subject to loan agreements that prohibit or limit the transfer of funds to TSAT
in the form of dividends, loans, or advances and/or require that any
indebtedness of such subsidiaries or affiliates of TSAT be subordinate to the
indebtedness under such loan agreements.

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

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

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

                                      I-22
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1.   Legal Proceedings
-------   -----------------

          There were no new material legal proceedings or material developments
          in previously reported legal proceedings during the quarter ended
          March 31, 1998 to which TSAT or any of its consolidated subsidiaries
          is a party or of which any of its property is the subject except as
          follows:

          On September 30, 1997, a civil action entitled Croce Advertising,
                                                         ------------------
          Inc. v. TCI Digital Satellite Entertainment, Inc., d/b/a PRIMESTAR 
          ------------------------------------------------------------------
          By TCI and The Hibbert Company d/b/a The Hibbert Group was filed in 
          ------------------------------------------------------              
          the U.S. District Court for the District of Colorado, Civil Action No.
          97-S-2130. On October 20, 1997, Croce; the plaintiff filed an amended
          Complaint naming TSAT as a defendant and dropping TCI Digital
          Satellite Entertainment, Inc. d/b/a PRIMESTAR By TCI from the action.
          Service was made upon TSAT on October 20, 1997. Croce alleged
          copyright infringement based on its allegations that after the
          parties' relationship was terminated, TSAT reprinted certain marketing
          materials created by Croce. Croce's claim for damages included alleged
          profits related to the printing of the materials at issue and TSAT's
          profits from the use of these materials. Croce also named The Hibbert
          Company as a defendant on the copyright infringement claim because The
          Hibbert Company printed certain TSAT marketing materials. TSAT agreed
          to indemnify The Hibbert Company for costs and damages arising out of
          the copyright claim. Croce's remaining claims arose out of the
          parties' ongoing dispute concerning unpaid invoices. Croce alleged
          TSAT owed $4,962,560.05 on these invoices, plus interest from March 7,
          1997, until final resolution. PRIMESTAR agreed to indemnify TSAT for
          any potential liability with respect to this matter. In April 1998,
          the parties to the action executed a Mutual Release and Settlement
          Agreement which provided for the settlement of the litigation in
          exchange for the payment of $2.8 million in cash to the plaintiff.
          This represents the final resolution of this matter.

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

          During the three months ended March 31, 1998, TSAT issued 988,776
          shares of Series A Common Stock to TCI for aggregate consideration of
          $988,776. 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.

                                      II-1
<PAGE>
 
              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

Item 4.   Submission of Matters to a Vote of Security Holders.
-------   ----------------------------------------------------

          At a special meeting of stockholders held on March 6, 1998, the
          following matters were voted upon and approved by the stockholders of
          TSAT:

          (a)  A proposal to approve and adopt (i) the Merger and Contribution
               agreement dated as of February 6, 1998 (together with the
               exhibits and schedules thereto, the "Restructuring Agreement"),
               among TSAT, PRIMESTAR, Inc. ("PRIMESTAR"), Time Warner
               Entertainment Company, L.P., Advance/Newhouse Partnership,
               Comcast Corporation, Cox Communications, Inc., MediaOne of
               Delaware, Inc. and GE American Communications, Inc., (ii) the
               Asset Transfer Agreement dated as of February 6, 1998 (together
               with the exhibits and schedules thereto, the "TSAT Asset Transfer
               Agreement"), between TSAT and PRIMESTAR, (iii) the Agreement and
               Plan of Merger dated as of February 6, 1998 (together with the
               exhibits and schedules thereto the "TSAT Merger Agreement"),
               between TSAT and PRIMESTAR, (iv) each of the other agreements
               contemplated by the Restructuring Agreement to which TSAT is a
               party and (v) the transactions contemplated by the Restructuring
               Agreement, the TSAT Asset Transfer Agreement, the TSAT Merger
               Agreement and such other agreements (115,999,235 votes For;
               139,426 votes Against; 81,938 Abstentions; and 14,462,817 Broker
               Non-Votes).

          (b)  A proposal to approve and adopt the TCI Satellite Entertainment,
               Inc. 1997 Nonemployee Director Stock Option Plan, which provides
               for the grant of options to purchase up to 500,000 shares of TSAT
               Series A Common Stock, and to approve all grants thereunder
               (127,320,206 votes For; 2,956,565 votes Against; and 406,645
               Abstentions).

Item 6.   Exhibits and Reports on Form 8-K.
------    -------------------------------- 

               (a)  Exhibits

                    27 - Financial Data Schedule

               (b)  Report on Form 8-K filed during quarter ended March 31, 
                    1998 -

 
                                                                    Financial
                       Date of                Items                 Statements
                       Report                Reported                 Filed
                       -------               --------               ----------
 
                    February 11, 1998    Item 5 and Item 7            None


                                      II-2
<PAGE>
 
                                  SIGNATURES



     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                     TCI SATELLITE ENTERTAINMENT, INC.



Date:  May 15, 1998                  By:  /s/  Gary S. Howard
                                          -----------------------------------
                                               Gary S. Howard
                                               Chief Executive Officer
 
 
 
 
Date:  May 15, 1998                  By:  /s/  Kenneth G. Carroll
                                          -----------------------------------
                                               Kenneth G. Carroll
                                               Senior Vice President and 
                                               Chief Financial Officer
                                               (Principal Financial Officer)
 
 
 
 
Date:  May 15, 1998                  By:  /s/  Scott D. Macdonald
                                          -----------------------------------
                                               Scott D. Macdonald
                                               Vice President and Controller
                                               (Chief Accounting Officer)


                                      II-3