<PAGE>
 
                                 UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D. C.  20549

                                  F O R M 10-Q


[ X ]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934
          For the quarterly period ended March 31, 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                   (Zip Code)
                offices)
 
 
       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, 1997, was:

                 Series A common stock - 58,161,045 shares; and
                   Series B common stock - 8,466,564 shares.
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)
 
                          Consolidated Balance Sheets
 
                                  (unaudited)

<TABLE> 
<CAPTION> 
 
                                           March 31,             December 31,
                                             1997                   1996
                                           ----------             ---------
                                                 amounts in thousands
   <S>                                    <C>                     <C>
   Assets
   ------
 
   Cash and cash equivalents               $   71,550                 6,560
 
   Accounts receivable                         22,745                24,731
   Less allowance for doubtful accounts         6,181                 4,666
                                           ----------             ---------
                                               16,564                20,065
                                           ----------             ---------
 
   Prepaid expenses                             1,248                   927
 
   Investment in, and related advances
    to, PRIMESTAR Partners L.P. 
   ("PRIMESTAR Partners") (note 6)             29,121                32,240
 
 
   Property and equipment, at cost:
    Satellite reception equipment             589,189               595,249
    Subscriber installation costs             187,601               175,553
    Support equipment                          32,734                28,332
    Cost of satellites under               
     construction (note 7)                    462,084               457,685
                                           ----------             ---------
                                            1,271,608             1,256,819
    Less accumulated depreciation             181,186               149,165
                                           ----------             ---------
                                            1,090,422             1,107,654
                                           ----------             ---------

   Other assets, net of accumulated                                        
    amortization (note 8)                                                  
                                               31,399                12,827
                                           ----------             ---------
                                           $1,240,304             1,180,273
                                           ==========             ========= 
</TABLE> 
                                                                     (continued)

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

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

Liabilities and Stockholders' Equity
------------------------------------

  Accounts payable                         $   11,054           18,860
  Accrued charges from PRIMESTAR
   Partners (note 6)                           38,211           37,943
  Accrued charges from TCI
   Communications, Inc. ("TCIC")                
   (note 10)                                    6,644            8,381
  Accrued interest payable                      2,364               70
  Other accrued expenses                       19,372           15,497
  Subscriber advance payments                  23,337           22,249
  Due to PRIMESTAR Partners (note 7)          462,084          457,685
  Debt (note 9)                               356,669          247,230
                                           ----------        ---------
 
            Total liabilities                 919,735          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 58,161,045 in 1997,          
    and 57,946,044 in 1996                     58,161           57,946
   Series B common stock, $1 par
    value; authorized 10,000,000                                      
    shares; issued 8,466,564 in 1997 
    and 1996                                    8,467            8,467
   Additional paid-in capital                 522,251          521,724
   Accumulated deficit                      (268,310)         (215,779)
                                           ----------        ---------
 
            Total stockholders' equity        320,569          372,358
                                           ----------        ---------
  Commitments and contingencies
   (notes 2, 6, 7, 9, 10 and 11)           
                                           $1,240,304        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
                                               March 31,
                                          ------------------
                                             1997      1996
                                          ---------  -------
                                         amounts in thousands
<S>                                       <C>        <C> 
Revenue:
 Programming and equipment rental          $113,501    76,257
 Installation                                 9,763    19,502
                                           --------   -------
                                            123,264    95,759
                                           --------   -------
Operating costs and expenses:
 Charges from PRIMESTAR Partners (note 6):
  Programming                                39,323    27,397
  Satellite, national marketing and          
   distribution                              19,936    14,065
 
 Other operating:
  TCIC (note 10)                              2,615     5,407
  Other                                       3,642     1,982
 
 Selling, general and administrative:
  TCIC (note 10)                              4,347     4,653
  Other                                      40,041    37,385
 
 Stock compensation (note 10)                   394      (165)
 
 Depreciation (note 3)                       54,623    24,189
                                           --------   -------
                                            164,921   114,913
                                           --------   -------
 
  Operating loss                            (41,657)  (19,154)
 
Other income (expense):
 Interest expense                            (9,383)       --
 Interest income                                751        94
 Share of losses of PRIMESTAR Partners       
  (note 6)                                   (2,161)     (378)
 Other, net                                     (81)       --
                                           --------   -------
                                            (10,874)     (284)
                                           --------   -------
 
  Loss before income taxes                  (52,531)  (19,438)
 
Income tax benefit                               --     5,867
                                           --------   -------
 
  Net loss                                 $(52,531)  (13,571)
                                           ========   =======
 
Net loss per common share (note 4):
 Historical                                   $(.79)       --
                                           ========   =======
 Pro forma                                       --      (.20)
                                           ========   =======
 
</TABLE>
See accompanying notes to financial statements.

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

                       Three months ended March 31, 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                                     --            --          --      (52,531)        (52,531)
   Recognition of stock compensation
    related to stock options and
    restricted stock awards                     --            --         527           --             527
   Issuance of Series A Common
    Stock upon conversion of
    convertible notes of a TCIC         
    subsidiary                                 215            --          --           --             215
                                          --------  ------------  ----------  -----------         -------
  Balance at March 31, 1997                $58,161         8,467     522,251     (268,310)        320,569
                                          ========  ============  ==========  ===========         =======
 
</TABLE>
See accompanying notes to financial statements.

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

                                  (unaudited)
<TABLE>
<CAPTION>
 
 
<S>                                       <C>         <C>
                                                Three months ended
                                                     March 31,
                                          --------------------------------
                                             1997                   1996
                                          ---------               --------
                                                amounts in thousands
                                                    (see note 5)
<S>                                       <C>                     <C> 
 
Cash flows from operating activities:
 Net loss                                 $ (52,531)               (13,571)
 Adjustments to reconcile net
  loss to net cash provided by operating
  activities:
   Depreciation                              54,623                 24,189
   Share of losses of         
    PRIMESTAR Partners                        2,161                    378
   Accretion of debt discount                 1,993                     --
   Deferred income tax expense                   --                  6,015
   Other non-cash items                       1,035                   (165)
   Changes in operating assets and
    liabilities:
     Change in receivables                    3,501                 11,585
     Change in prepaids                        (321)                  (175)
     Change in accruals and payables          4,740                 10,491
     Change in subscriber advance payments    1,088                  1,508
                                           --------               --------
         Net cash provided by operating                   
          activities                         16,289                 40,255
                                           --------               -------- 

Cash flows from investing activities:
 Capital expended for construction of               
  satellites                                 (4,399)               (22,913)
 Capital expended for property     
  and equipment                             (40,371)               (95,469)
 Additional investments in and
  advances to PRIMESTAR Partners             (6,584)                (5,917)
 Repayment received on advances
  to PRIMESTAR Partners                       7,609                     --
                                           --------               --------
         Net cash used in investing        
          activities                        (43,745)              (124,299)
                                           --------               --------

Cash flows from financing activities:
 Borrowings of debt                         405,061                     --
 Repayments of debt                        (299,068)                    --
 Payment of deferred financing            
  costs                                     (18,161)                    --
 Increase in due to PRIMESTAR        
  Partners                                    4,399                  3,319
 Proceeds from issuance of             
  common stock                                  215                     --
 Increase in due to TCIC                         --                 85,796
                                           --------               --------
 
         Net cash provided by financing      
          activities                         92,446                 89,115
                                           --------               --------
 
         Net increase in cash and cash
          equivalents                        64,990                  5,071
 
         Cash and cash equivalents:
          Beginning of year                   6,560                  1,801
                                          ---------               --------
 
          End of year                     $  71,550                  6,872
                                          =========               ========
</TABLE>
See accompanying notes to financial statements.

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

                        Notes to Financial Statements
 
                                 March 31, 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 2, 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 2. 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 10, 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 March 31, 1997 and the results
     of its operations for the three months ended March 31, 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)  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-7
<PAGE>
                      TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                        Notes to Financial Statements

 
     Subsequent to the Distribution, the Company and TCI have operated
     independently, and neither has any stock ownership, beneficial or
     otherwise, in the other. For the 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 10), the
     "Indemnification Agreements" (see note 11), the "TCIC Credit Facility" (see
     note 9), the "Transition Services Agreement" (see note 10), and an
     amendment to TCI's existing "Tax Sharing Agreement" (see note 10).

     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 9.

     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 7) 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.

                                                                     (continued)

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

                         Notes to Financial Statements
 
(3)  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.

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

     As described in note 2, 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 months ended March 31, 1996.  The historical
     net loss per common share is based on 66,619,276 weighted average shares
     outstanding during the three months ended March 31, 1997.

     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.

                                                                     (continued)

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

                         Notes to Financial Statements

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

     Cash paid for interest was $4,746,000 during the three months ended
     March 31, 1997, and was not significant during the three months ended March
     31, 1996.  Cash paid for income taxes was not material during the three
     months ended March 31, 1997 and 1996.

     With the exception of certain non-cash stock compensation obligations
     (see note 10), 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.

(6)  Investment in PRIMESTAR Partners
     --------------------------------

     Summarized unaudited operating information for PRIMESTAR Partners is
     as follows (amounts in thousands):

                                            Three months ended
                                                March 31,
                                          ---------------------
                                             1997         1996
                                          ---------    --------
     Results of Operations
     ---------------------

        Revenue                           $ 139,206      91,202
        Operating, selling, general and
           administrative expenses         (141,670)    (92,334)
        Depreciation and amortization          (768)       (798)
                                          ---------     -------

           Operating loss                    (3,232)     (1,930)

        Other income (expense), net          (3,320)        359
                                          ---------     -------

           Net loss                       $  (6,552)     (1,571)
                                          =========     =======

     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 March 31, 1997, PRIMESTAR
     Partners' indebtedness under the PRIMESTAR Credit Facility aggregated
     $533,000,000, including amounts borrowed to pay interest charges. The
     PRIMESTAR Credit Facility matures on June 30, 1997. PRIMESTAR is currently
     seeking to extend the maturity date of, or otherwise refinance the
     PRIMESTAR Credit Facility. See notes 7 and 11.


                                                                     (continued)

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

                         Notes to Financial Statements
 
     Since March 10, 1997, PRIMESTAR Partners has broadcast from a medium
     power satellite ("GE-2") that was launched on January 30, 1997 by GE
     American Communications, Inc. ("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"), it is anticipated that
     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.

     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.

     The Company and other partners in PRIMESTAR Partners are currently
     discussing the possibility of a transaction that would consolidate the
     business of PRIMESTAR Partners and the PRIMESTAR/(R)/ distribution business
     of each of its distributors. Any such transaction would be subject to
     numerous conditions, including the negotiation, execution and delivery of
     definitive documentation, consents from third parties and regulatory
     requirements. No agreement has yet been reached regarding any such
     transaction and there can be no assurance that any such transaction will be
     consummated.

                                                                     (continued)

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

                         Notes to Financial Statements
 
(7)  Satellites under Construction
     -----------------------------

     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 "Cost of satellites
     under construction" 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.

     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 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 operate Tempo DBS-1 as a complementary
     service to basic cable and other channel-constrained analog services,
     providing DBS services to those system operators wishing to avoid the high
     cost of digital plant upgrades, or, subject to future advances in high
     compression digital statistical multiplexing technology, as a stand-alone
     DBS service.

                                                                     (continued)

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

                         Notes to Financial Statements
 
     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 may eventually affect the
     operation of Tempo DBS-1, either alone or together with any 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.

     The Company has had discussions regarding the possible sale of the
     other Company Satellite ("Satellite No. 2"), but has not reached agreement
     regarding any such transaction. Any such transaction would be subject to
     the successful commercial operation of Tempo DBS-1 (for which Satellite No.
     2 serves as ground spare), the prior approval of PRIMESTAR Partners, prior
     regulatory approvals, definitive documentation, and other conditions.
     Pursuant to an option agreement between Tempo and PRIMESTAR Partners (the
     "Tempo Option Agreement"), any proceeds received by the Company from the
     sale of Satellite No. 2 would be paid to PRIMESTAR Partners to satisfy
     certain advances by PRIMESTAR Partners to the Company to fund construction
     of the Company Satellites. There can be no assurance that the Company will
     be able to sell Satellite No. 2 on terms acceptable to the Company.

     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 second quarter of 1997. The Company cannot determine if Tempo
     DBS-1 fully conforms to specifications until further analysis of the
     aforementioned power reduction has been completed. 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.

                                                                     (continued)

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

                         Notes to Financial Statements
 
     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 period from the launch of the
     satellite through an operating period of 180 days. 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.

     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 ($462,084,000 at
     March 31, 1997) is reflected in "Due to PRIMESTAR Partners" in the
     accompanying balance sheets. At March 31, 1997, the amount borrowed by
     PRIMESTAR Partners under the PRIMESTAR Credit Facility was $533,000,000,
     including amounts borrowed to pay interest charges. See notes 6 and 11.

                                                                     (continued)

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

                         Notes to Financial Statements
 
     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.

     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 Company currently intends to pursue its high power strategy
     through PRIMESTAR Partners, consistent with such resolution.  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, and there can be no
     assurances that potential disagreements will not arise as such agreements
     are negotiated, the Company does not currently believe that any such
     potential disagreement is reasonably likely to have a material adverse
     effect on 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.
     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.

                                                                     (continued)

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

                         Notes to Financial Statements
 
(8)    Other Assets
       ------------
       The components of other assets are as follows (amounts in thousands):
<TABLE>
<CAPTION>
 
 
                                           March 31,            December 31,
                                             1997                  1996
                                           ---------            -----------
       <S>                                 <C>                  <C> 
 
       Deferred financing costs, net
        of accumulated amortization         $24,810                  7,000
       Investment in, and advances to,
        ResNet Communications, Inc.           6,589                  5,827
                                            -------                 ------
                                            $31,399                 12,827
                                            =======                 ======
</TABLE>

(9)    Debt
       ----

       The components of debt are as follows (amounts in thousands):
<TABLE>
<CAPTION>
 
                                               March 31,         December 31,
                                                  1997                1996
                                               ---------         ------------
       <S>                                     <C>                 <C>  
       Bank Credit Facility (a)                $      --            246,000
       Senior Subordinated Notes (b)             200,000                 --
       Senior Subordinated Discount Notes (b)    154,055                 --
       TCIC Credit Facility (c)                       --                 --
       Other                                       2,614              1,230
                                                --------            -------
                                               $ 356,669            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 March 31, 1997,
            $720,000,000 of such maximum commitments were unused. The
            availablility 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.

                                                                     (continued)

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

                         Notes to Financial Statements

 
          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 $396,000 during the three months ended
          March 31, 1997.

          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 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.

          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 11.


                                                                     (continued)

                                      I-17

<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)
                         Notes to Financial Statements
 
     (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 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 of 1933,
          as amended (the "Securities Act") and the Company may incur interest
          penalties in the event that the Notes are not exchanged by July 5,
          1997 for similar securities that are registered under the Securities
          Act, and under certain other circumstances relating to such exchange.

                                                                     (continued)

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

                         Notes to Financial Statements
 
     (c)  TCIC Credit Facility

          In connection with the Distribution, the Company and TCIC entered into
          the TCIC Credit Facility to provide for the terms of the Company Note
          and to provide for a revolving credit facility (the "TCIC Revolving
          Loans"). The TCIC Credit Facility required the Company to use its best
          efforts to obtain external debt or equity financing after the
          Distribution Date and provided for mandatory prepayment of the TCIC
          Revolving Loans and the Company Note from the proceeds thereof. As
          described in (a) above, the initial borrowings under the Bank Credit
          Facility were used to repay the Company Note in full. In connection
          with the February 1997 issuance of the Notes (see below) and the March
          1997 determination that GE-2 was commercially operational, borrowing
          availability pursuant to the TCIC Credit Facility was terminated.

     With the exception of the Notes, which had an aggregate fair value of
     $300,715,000 at March 31, 1997, the Company believes that the fair value
     and the carrying value of the Company's debt were approximately equal at
     March 31, 1997.

(10) 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 2, 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
     all transactions (other than those related to the TCIC Credit Facility)
     will be reflected in a non-interest bearing account between the Company and
     TCIC to be settled periodically in cash.

     TCIC provides certain installation, maintenance, retrieval and other
     customer fulfillment services to the Company.  During the three months
     ended March 31, 1997 and 1996, the Company's capitalized installation costs
     included amounts charged by TCIC to the Company of $15,358,000 and
     $10,991,000, respectively.  Maintenance, retrieval and other operating
     expenses charged by TCIC to the Company aggregated $2,615,000 and
     $5,407,000 during the three months ended March 31, 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 TCI.

                                                                     (continued)

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

                         Notes to Financial Statements
 
     Since January 1, 1997, charges for customer fulfillment services
     provided by TCIC have been made pursuant to the Fulfillment Agreement
     entered into by the Company and TCIC in connection with the Distribution.
     Pursuant to the Fulfillment Agreement, TCIC has continued to provide
     fulfillment services on an exclusive basis to the Company following the
     Distribution with respect to customers of the PRIMESTAR/(R)/ medium power
     service. Such services, which include installation, maintenance, retrieval,
     inventory management and other customer fulfillment services, are to be
     performed in accordance with specified performance standards.  The
     Fulfillment Agreement has an initial term of two years and is terminable,
     on 180 days notice to TCIC, by the Company at any time during the first six
     months following the Distribution Date.  The cost to the Company of the
     services provided by TCIC under the Fulfillment Agreement, as currently
     executed, exceeds the standard charges allocated to the Company for such
     services through December 31, 1996.  The Company and TCIC are currently
     discussing certain proposed changes to the Fulfillment Agreement, but there
     can be no assurance that any such changes will be agreed to or that the
     Company will not exercise its right to terminate the Fulfillment Agreement
     if an acceptable amendment is not agreed to prior to the end of the
     Company's six-month termination window.  There can be no assurance that the
     terms of the Fulfillment Agreement are not more or less favorable than
     those which could be obtained by the Company from third parties, or that
     comparable services could be obtained by the Company from third parties on
     any terms if the Fulfillment Agreement is terminated.

     TCIC also provides corporate administrative services to the Company.
     The charges for such administrative services aggregated $4,347,000 and
     $4,653,000 during the three months ended March 31, 1997 and 1996,
     respectively.  Prior to the Distribution, such administrative expenses,
     were allocated from TCIC to the Company based primarily on the estimated
     cost of providing the service.

                                                                     (continued)

                                      I-20
<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.

     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 decreases to the Company's share of TCI's
     estimated stock compensation liability, aggregated $38,000 and $165,000
     during the three months ended March 31, 1997 and 1996, respectively.

                                                                     (continued)

                                      I-21
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements
 
     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 three months ended March 31, 1996 has been calculated in
     accordance with the Tax Sharing Agreement.

(11) Commitments and Contingencies
     -----------------------------

     At March 31, 1997, the Company's future minimum commitments to
     purchase satellite reception equipment aggregated approximately
     $35,000,000.

     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 three months ended March 31,
     1997 and 1996, respectively, residual sales commissions to such master
     sales agents aggregated $4,216,000 and $2,414,000, respectively, and were
     charged to expense in the accompanying statements of operations.

                                                                     (continued)

                                      I-22
<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 6.

     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 6 and 9.

     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 March
     31, 1997.  See notes 6 and 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 PRIMESTAR Credit Facility. The drawable
     amount of this letter of credit is $5,000,000. See notes 6 and 9.

     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 9.

                                                                     (continued)

                                      I-23
<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.  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 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 6, 7 and 9.

     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 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-24
<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-25
<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.

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

          As described in greater detail below, the Company reported net losses
of $52,531,000 and $13,571,000 during the three months ended March 31, 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 three months ended March 31, 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
27.2%, 48.0%, 38.5%, 24.7% and 16.1%, respectively, and (ii) the average
subscriber life implied by such subscriber churn rate was 3.7 years, 2.1 years,
2.6 years, 4.1 years and 6.2 years, respectively.

          As set forth above, the Company experienced a higher rate of
subscriber churn in 1996, as compared to the first quarter 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.

                                                                     (continued)

                                      I-26
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)

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

          Although no assurance can be given, the Company expects that churn
rates for the remainder of 1997 and future periods will continue to show
improvement from the levels experienced in 1996. If the Company's churn rates
were to return to the 1996 levels or to increase, 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 842,000
and 584,000 at March 31, 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.

                                                                     (continued)

                                      I-27
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)

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

          TCIC has historically provided the Company with certain fulfillment
services with respect to customers of the PRIMESTAR/(R)/ programming service.
Prior to the Distribution, charges for such services were allocated to the
Company by TCIC based on scheduled rates.  Since January 1, 1997, TCIC has
continued to provide such fulfillment services on an exclusive basis to the
Company pursuant to the Fulfillment Agreement. Such services, which include
installation, maintenance, retrieval, inventory management and other customer
fulfillment services, are to be performed in accordance with specified
performance standards.  The Fulfillment Agreement has an initial term of two
years, and is terminable, on 180 days notice to TCIC, by the Company at any time
during the first six months following the Distribution Date.  The Company and
TCIC are currently discussing certain proposed changes to the Fulfillment
Agreement, but there can be no assurance that any such changes will be agreed to
or that the Company will not exercise its right to terminate the Fulfillment
Agreement if an acceptable amendment is not agreed to prior to the end of the
Company's six-month termination window.  There can be no assurance that the
terms of the Fulfillment Agreement are not more or less favorable than those
which could be obtained from unaffiliated third parties, or that comparable
services could be obtained by the Company from third parties on any terms if the
Fulfillment Agreement is terminated.

          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.  Additionally, the scheduled rates for the
services provided by TCIC under the Fulfillment Agreement, as currently
executed, exceed the scheduled rates upon which charges, historically, were
allocated to the Company for such services.  In this regard, installation
charges allocated to the Company by TCIC aggregated $13,303,000 during the three
months ended March 31, 1996.  If the Fulfillment Agreement had been in effect on
January 1, 1996, the estimated installation fees payable by the Company to TCIC
would have been $18,188,000 for the three months ended March 31, 1996.  The
amounts payable in future periods by the Company to TCIC under the Fulfillment
Agreement will be dependent upon the level of fulfillment services provided by
TCIC to the Company.


                                                                     (continued)

                                      I-28
<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>
 
 

                                                          T hree months ended March 31, 
                                               -----------------------------------------------
                                                         1997                    1996
                                               ----------------------     --------------------
                                                           Percentage               Percentage
                                                           of total                 of total
                                                Amount     revenue        Amount    revenue
                                               ---------   ----------     -------   ----------
<S>                                            <C>         <C>            <C>       <C> 
 Revenue:
   Programming and equipment rental             $113,501           92%    $76,257           80%
   Installation                                    9,763            8      19,502           20
                                                --------          ---     -------         ----
      Total revenue                              123,264          100      95,759          100
                                                --------          ---     -------         ----
 
 Operating costs and expenses:
   Charges from PRIMESTAR Partners:
      Programming                                (39,323)         (32)    (27,397)         (29)
      Satellite, national
       marketing and distribution                (19,936)         (16)    (14,065)         (14)
                                                --------          ---     -------         ----
                                                 (59,259)         (48)    (41,462)         (43)
   Other operating:
     Allocations from TCIC                        (2,615)          (2)     (5,407)          (6)
     Other                                        (3,642)          (3)     (1,982)          (2)
                                                --------          ---     -------         ----
                                                  (6,257)          (5)     (7,389)          (8)
                                                --------          ---     -------         ----
 
   Selling, general and administrative:
     Selling and regional marketing              (21,408)         (17)    (23,417)         (24)
     Bad debt                                     (4,927)          (4)     (5,628)          (6)
     Allocations from TCIC                        (4,347)          (4)     (4,653)          (5)
     Other general and administrative            (13,706)         (11)     (8,340)          (9)
                                                --------          ---     -------         ----
                                                 (44,388)         (36)    (42,038)         (44)
                                                --------          ---     -------         ----
 
     Operating Cash Flow (1)                      13,360           11       4,870            5
 
   Stock compensation                               (394)          --         165           --
 
   Depreciation                                  (54,623)         (45)    (24,189)         (25)
                                                --------          ---     -------         ----
 
     Operating loss                             $(41,657)         (34)%  $(19,154)         (20)%
                                                ========          ===    ========         ====
</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.

                                                                     (continued)

                                      I-29
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)

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

          Revenue increased $27,505,000 or 29% during the three months ended
March 31, 1997, as compared to the corresponding prior year period.  Such
increase represents the net effect of a $37,244,000 or 49% increase in
programming and equipment rental revenue and a $9,739,000 or 50% 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 $45 during the 1997 period.  Such increase
was primarily the result of an increase in the average monthly revenue derived
from premium and 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 $170 during the 1996
period to $107 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 $17,797,000 or 43% during the three months ended March 31,
1997, as compared to the corresponding prior year period.  The average aggregate
monthly amount per Authorized Unit charged by PRIMESTAR Partners was $23 and $24
during the three months ended March 31, 1997 and 1996, respectively.  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 $1,132,000 or 15%
during the three months ended March 31, 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 three months ended March
31, 1996 included $2,312,000 of installation fees paid to TCIC that were not
capitalized.  Other operating costs and expenses for the three months ended
March 31, 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.



                                                                     (continued)

                                      I-30
<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 $2,350,000 or
6% during the three months ended March 31, 1997, as compared to the
corresponding prior year period.  Selling and marketing expenses, which
represented 17% of revenue during the 1997 period, include sales commissions,
marketing and advertising expenses, and costs associated with the operation of a
customer service call center.  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 three months ended March 31, 1997
and 1996, respectively.  The decrease in such percentage is primarily
attributable to the relatively fixed nature of certain components of the
Company's selling, general and administrative expenses.

          Through the Distribution Date, general and administrative allocations
from TCIC were generally based upon the estimated cost of the general and
administrative services provided to the Company. Since the Distribution Date,
charges for administrative services provided by TCIC have been made pursuant to
the Transition Services Agreement.  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 $5,746,000 for the three months ended March
31, 1996.

          The $30,434,000 or 126% increase in depreciation during the three
months ended March 31, 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.  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 3 to the accompanying
financial statements of the Company.

          The Company incurred interest expense of $9,383,000 during the three
months ended March 31, 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.

                                                                     (continued)
                                      I-31


<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
$1,783,000 or 472% during the three months ended March 31, 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 three months
ended March 31, 1997 and an income tax benefit of $5,867,000 during the three
months ended March 31, 1996.  The effective tax rate associated with the 1996
benefit was 30%.  The Company's income tax benefit for the three months ended
March 31, 1996 includes intercompany allocations from TCI of current income tax
benefits of $11,882,000.  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 March 31, 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 10 to the accompanying financial statements of
the Company.

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

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

          Prior to the Distribution Date, the Company relied upon non-interest
bearing advances from TCI 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.

          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.

                                                                     (continued)

                                      I-33
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.
             (See note 1 to the accompanying financial statements)
 
Material Changes in Financial Position (continued)
--------------------------------------------------

          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 and the Company will incur interest penalties if the Notes are
not exchanged by July 5, 1997 for similar securities that are registered under
the Securities Act, and under certain other circumstances relating to such
exchange.

          At March 31, 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 March 31, 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. For additional information
concerning the Bank Credit Facility, see note 9 to the accompanying financial
statements of the Company.

          The Company also has relied upon advances from PRIMESTAR Partners to
finance the cost of constructing the Company Satellites. Such advances, which
aggregated $462,084,000 at March 31, 1997, are reflected as a liability in the
balance sheets in the accompanying financial statements of the Company.  See
related discussion below.

          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 to provide 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 made by TCIC.

                                                                     (continued)

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


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

          During the three months ended March 31, 1997 and 1996, the Company's
operating activities provided cash of $16,289,000, and $40,255,000,
respectively. A significant portion of the cash provided by the Company's
operating activities during the 1996 period is attributable to the $11,882,000
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 $9,008,000 and $23,409,000 of the cash provided by the Company's
operating activities during the three months ended March 31, 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 $7,281,000 and $4,964,000 during
the three months ended March 31, 1997 and 1996, respectively. For the first
several years following the Distribution, the Company believes that its
operating activities will represent a reliable source of liquidity only to the
extent that the Company is able to generate Operating Cash Flow.

          During the three months ended March 31, 1997 and 1996, the Company
used cash of $4,399,000 and $22,913,000, respectively, to fund the cost of
constructing the Company Satellites and $40,371,000 and $95,469,000,
respectively, to fund (i) the acquisition and installation of satellite
reception equipment, and (ii) certain other capital expenditures. Based upon
current business plans, the Company estimates that its aggregate capital
expenditures will range from $630,000,000 to $670,000,000 for its medium power
satellite business during the two-year period ended December 31, 1998. The
Company expects that the majority of such estimated capital expenditures 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. Accordingly, no assurance can be given
that the Company's actual capital expenditures during the two-year period ended
December 31, 1998 will not exceed the estimated capital expenditures set forth
above.  As described above, the scheduled rates for the services to be provided
by TCIC pursuant to the Fulfillment Agreement exceed the scheduled rates upon
which charges were allocated to the Company for such services through December
31, 1996.

                                                                     (continued)

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

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

          Pursuant to the Company's Cable Plus Strategy, the Company currently
intends to operate Tempo DBS-1, either directly or through PRIMESTAR Partners,
as a complementary service to basic cable and other channel constrained analog
services, providing DBS services on a wholesale basis to those system operators
wishing to avoid the high cost of digital plant upgrades. Additionally, subject
to future advances in high compression digital statistical multiplexing
technology, the Company may elect to operate Tempo DBS-1 as a stand-alone DBS
offering. The aforementioned estimated capital expenditure amounts do not
include any amounts that would be required (i) in connection with the pursuit of
any strategy with respect to the high power segment of the digital satellite
industry, (ii) to complete any significant acquisitions, or (iii) to enter into
any other business activities. The Company presently is unable to reasonably
estimate the amount of capital expenditures that would be required in connection
with any such high power satellite strategy, acquisitions or other business
activities that might be pursued by the Company.

          At March 31, 1997, the Company's future minimum commitments to
purchase satellite reception equipment aggregated approximately $35,000,000.

          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 three months ended March 31, 1997 and 1996,
residual sales commissions to such master sales agents aggregated $4,216,000 and
$2,414,000, 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 March 31, 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.

                                                                     (continued)

                                      I-36
<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 ($462,084,000 at March 31, 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 March 31,
1997, PRIMESTAR Partners' indebtedness under the PRIMESTAR Credit Facility
aggregated $533,000,000, including amounts borrowed to pay interest charges.
The PRIMESTAR Credit Facility matures on June 30, 1997 and the Company and
PRIMESTAR Partners are currently evaluating long-term refinancing alternatives
with respect to the Company Satellites.  In the interim, it is anticipated that
PRIMESTAR Partners will seek to extend the maturity date of the PRIMESTAR Credit
Facility.  No assurance can be given that the maturity date of the PRIMESTAR
Credit Facility will be extended on terms that are acceptable to PRIMESTAR
Partners or that the Company and PRIMESTAR Partners will be successful in
obtaining long-term financing for the Company Satellites.

          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.

                                                                     (continued)

                                      I-37
<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 6 and 11 to the
accompanying financial statements of the Company.

          The Company and other partners in PRIMESTAR Parnters are currently
discussing the possibility of a transaction that would consolidate the business
of PRIMESTAR Partners and the PRIMESTAR/(R)/ distribution business of each of
its distributors. Any such transaction would be subject to numerous conditions,
including the negotiation, execution and delivery of definitive documentation,
consents from third parties and regulatory requirements. No agreement has yet
been reached regarding any such transaction and there can be no assurance that
any such transaction will be consummated.

          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 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 March 31, 1997, approximately 9,898,000 shares of Series A Common
Stock were reserved for issuance pursuant to certain option and restricted stock
agreements, and certain arrangements with TCIC.

                                                                     (continued)

                                      I-38
<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 March 31, 1997, the Company held aggregate cash and cash
equivalents of $71,550,000.  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.

                                                                     (continued)

                                      I-39
<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.

                                      I-40
<PAGE>
                       TCI SATELLITE ENTERTAINMENT, INC.

 
PART II - OTHER INFORMATION


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

          Pursuant to a "Share Purchase Agreement" between TSAT and TCI, TSAT
          issued, during the first quarter of 1997, 215,001 shares of Series A
          Common Stock to TCI for aggregate consideration of $215,001.  Such
          shares were issued to allow TCI to meet its obligations under the
          conversion features of certain convertible securities of TCI.  The
          issuance was made in reliance on the exemption from registration
          afforded by Section 4(2) of the Securities Act.

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

          (a)  Exhibits

               27 - Financial Data Schedule

          (b)  Reports on Form 8-K filed during quarter ended March 31, 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:  May 9, 1997                       By: /s/ Gary S. Howard
                                              ----------------------------------
                                                  Gary S. Howard
                                                  President and
                                                    Chief Executive Officer
  
 
 
 
Date:  May 9, 1997                       By: /s/ Kenneth G. Carroll
                                              ----------------------------------
                                                  Kenneth G. Carroll
                                                  Senior Vice President and
                                                   Chief Financial Officer
                                                   (Principal Financial Officer
                                                   and Chief Accounting Officer)
 

                                      II-2