<PAGE>

                                 UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D. C.  20549

                                  F O R M 10-Q


[ X ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934
       For the quarterly period ended June 30, 1999

                                       OR

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


Commission File Number:  0-21317


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

      State of Delaware                                   84-1299995
-------------------------------               --------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)


    8085 South Chester, Suite 110
         Englewood, Colorado                                80112
----------------------------------------             ------------------
(Address of principal executive offices)                 (Zip Code)


       Registrant's telephone number, including area code: (303) 712-4609


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

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

               Series A common stock  62,869,346 shares; and
                  Series B common stock 8,465,324 shares.
<PAGE>

              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                     Condensed Consolidated Balance Sheets
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                          June 30,             December 31,
                                                                            1999                   1998
                                                                   ----------------------  ---------------------
<S>                                                                <C>                     <C>
                                                                               amounts in thousands
Assets
------

Cash and cash equivalents                                                      $   5,982                     --

Prepaid expenses                                                                     219                     --

Investment in Phoenixstar, Inc. (formerly PRIMESTAR,   Inc.)
 ("Phoenixstar") (notes 3 and 6)                                                      --                     --

Investment in General Motors Corporation ("General   Motors"),
 at fair value (note 2)                                                           79,249                     --

Satellites, at cost (note 2)                                                          --                463,133
                                                                               ---------               --------

                                                                               $  85,450                463,133
                                                                               =========               ========

Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------

Due to Phoenixstar                                                             $      --                469,498

General Motors Corporation share appreciation right   liability
 (note 2)                                                                         13,106                     --
                                                                               ---------               --------

    Total liabilities                                                             13,106                469,498
                                                                               ---------               --------

Stockholders' Equity (Deficit):
 Preferred stock, $.01 par value;
   authorized 5,000,000 shares; none issued                                           --                     --
 Series A common stock, $1 par value;
  authorized 85,000,000 shares; issued
  59,417,466 in 1999 and 59,280,466 in 1998                                       59,417                 59,280
 Series B common stock, $1 par value;
  authorized 10,000,000 shares; issued
  8,465,324 in 1999 and 1998                                                       8,465                  8,465
 Additional paid-in capital                                                      828,916                825,276
 Accumulated deficit                                                            (824,454)              (899,386)
                                                                               ---------               --------

    Total stockholders' equity (deficit)                                          72,344                 (6,365)
                                                                               ---------               --------

                                                                               $  85,450                463,133
                                                                               =========               ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                      I-1
<PAGE>

              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                Condensed Consolidated Statements of Operations
                                  (unaudited)


<TABLE>
<CAPTION>
                                                    Three months ended         Six months ended
                                                         June 30,                  June 30,
                                                --------------------------  ----------------------
                                                    1999          1998        1999        1998
                                                -------------  -----------  ---------  -----------
<S>                                             <C>            <C>          <C>        <C>
                                                 amounts in thousands, except per share amounts

Revenue                                         $         --           --         --      168,500

Operating costs and expenses:
 Charges from PRIMESTAR Partners L.P.
   (note 7)                                               --           --         --       82,235
 Operating                                             1,734           --      4,511        9,847
 Selling, general and administrative                      74           43        117       55,384
 Stock compensation (note 7)                             144           --        325        4,869
 Depreciation                                             --           --         --       65,105
                                                    --------      -------     ------     --------
                                                       1,952           43      4,953      217,440
                                                    --------      -------     ------     --------

    Operating loss                                    (1,952)         (43)    (4,953)     (48,940)

Other income (expense):
 Gain on sale of satellites (note 2)                  97,477           --     13,712           --
 Interest expense                                         --           --         --      (14,177)
 Share of losses of Phoenixstar                           --      (32,536)        --      (32,536)
 Share of losses of PRIMESTAR
   Partners L.P.                                          --           --         --       (5,822)
 Other, net                                           66,171           --     66,173         (621)
                                                    --------      -------     ------     --------
                                                     163,648      (32,536)    79,885      (53,156)
                                                    --------      -------     ------     --------

    Earnings (loss) before income taxes              161,696      (32,579)    74,932     (102,096)

Income tax expense (note 8)                               --           --         --           --
                                                    --------      -------     ------     --------

    Net earnings (loss)                              161,696      (32,579)    74,932      102,096

Other comprehensive income:
 Unrealized holding gain on
  available for sale securities                        4,662           --      4,662           --
 Unrealized loss on share
  appreciation rights                                 (4,662)          --     (4,662)          --
                                                    --------      -------     ------     --------
                                                          --           --         --           --
                                                    --------      -------     ------     --------
Comprehensive income (loss)                         $161,696      (32,579)    74,932     (102,096)
                                                    ========      =======     ======     ========
Basic and diluted earnings (loss) per
 common share (note 4)                                 $2.38         (.48)      1.11        (1.51)
                                                    ========      =======     ======     ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                      I-2
<PAGE>

              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

       Condensed Consolidated Statement of Stockholders' Equity (Deficit)

                         Six months ended June 30, 1999
                                  (unaudited)


<TABLE>
<CAPTION>

                                                       Common stock      Additional                        Total
                                                ----------------------    paid-in      Accumulated     stockholders'
                                                  Series A    Series B    capital        deficit      equity (deficit)
                                                ------------  --------  ------------  --------------  ----------------
<S>                                             <C>           <C>       <C>           <C>             <C>
                                                                        amounts in thousands

Balance at January 1, 1999                           $59,280     8,465      825,276        (899,386)           (6,365)

 Net earnings                                             --        --           --          74,932            74,932
 Contribution for common stock to
  be issued                                               --        --        3,452              --             3,452

 Recognition of stock compensation
  related to stock options and
  restricted stock awards                                 --        --          325              --               325

 Issuance of Series A Common Stock
  related to restricted stock awards                     137        --         (137)             --                --
                                                     -------  --------      -------        --------            ------

Balance at June 30, 1999                             $59,417     8,465      828,916        (824,454)           72,344
                                                     =======  ========      =======        ========            ======
</TABLE>


See accompanying notes to condensed consolidated  financial statements.

                                      I-3
<PAGE>

              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                Condensed Consolidated Statements of Cash Flows
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                   Six months ended
                                                                                       June 30,
                                                                      ------------------------------------------
                                                                              1999                  1998
                                                                      --------------------  --------------------
<S>                                                                   <C>                   <C>
                                                                                amounts in thousands
                                                                                    (see note 5)

Cash flows from operating activities:
 Net earnings (loss)                                                             $ 74,932              (102,096)
 Adjustments to reconcile net earnings (loss) to net
  cash provided (used) by operating activities:
    Gain on sale of satellites                                                    (13,712)                   --
    Depreciation                                                                       --                65,105
    Share of losses of Phoenixstar                                                     --                32,536
    Share of losses of PRIMESTAR Partners L.P.                                         --                 5,822
    Accretion of debt discount                                                         --                 4,682
    Stock compensation                                                                325                 4,869
    Receipt of General Motors common stock recorded
     as other income                                                              (66,143)                   --
    Other non-cash charges                                                             --                 7,999
    Changes in operating assets and liabilities, net
     of the effects of the Restructuring:
       Change in receivables                                                           --                10,845
       Change in other assets                                                          --                  (736)
       Change in accruals and payables                                                 --               (10,209)
       Change in subscriber advance payments                                           --                (3,114)
                                                                                 --------              --------

         Net cash provided (used) by operating
          activities                                                               (4,598)               15,703
                                                                                 --------              --------

Cash flows from investing activities:
 Proceeds from sale of satellites                                                   2,500                    --
 Capital expended for property and equipment                                           --               (73,966)
 Additional investments in and advances to
   PRIMESTAR Partners L.P.                                                             --                   (75)
                                                                                 --------              --------

         Net cash provided (used) by investing
          activities                                                                2,500               (74,041)
                                                                                 --------              --------

Cash flows from financing activities:
 Borrowings of debt                                                                    --               113,000
 Repayments of debt                                                                    --               (61,735)
 Increase in due to Phoenixstar                                                     4,628                    --
 Contribution for common stock to be issued                                         3,452                   989
                                                                                 --------              --------

         Net cash provided by financing activities                                  8,080                52,254
                                                                                 --------              --------
         Net increase (decrease) in cash and cash
          equivalents                                                               5,982                (6,084)

         Cash and cash equivalents:
          Beginning of period                                                          --                 6,084
                                                                                 --------              --------

          End of period                                                          $  5,982                    --
                                                                                 ========              ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                      I-4
<PAGE>

              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

             Notes to Condensed Consolidated Financial Statements

                                 June 30, 1999
                                  (unaudited)


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

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

     As a result of the Hughes Transaction described in note 2 and the TSAT
     Asset Transfer described in note 3, TSAT is currently a holding company,
     with no substantial assets or liabilities other than (i) cash, (ii) its
     ownership interest in General Motors, (iii) its ownership interest in
     Phoenixstar, and (iv) its rights and obligations under certain agreements
     with Phoenixstar and others.

     In addition, the Company has no operations subsequent to the TSAT Asset
     Transfer other than (i) expenses associated with the operation and
     maintenance of the Tempo Satellites, as defined below, prior to the sale to
     Hughes effective June 4, 1999 and (ii) general and administrative expenses
     incurred to maintain the Company's status as a publicly traded company.

     The accompanying interim consolidated financial statements of TSAT are
     unaudited.  In the opinion of management, all adjustments (consisting only
     of normal recurring accruals) have been made which are necessary to present
     fairly the financial position of TSAT as of June 30, 1999 and the results
     of its operations for the periods ended June 30, 1999 and 1998.  The
     results of operations for any interim period are not necessarily indicative
     of the results for the entire year.  These financial statements should be
     read in conjunction with the financial statements and related notes thereto
     included in TSAT's December 31, 1998 Annual Report on Form 10-K.

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

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

                                      I-5
<PAGE>

              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

             Notes to Condensed Consolidated Financial Statements


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

     Effective June 4, 1999, the Company completed the sale of its high power
     direct broadcast satellite ("DBS") assets to Hughes Electronics Corporation
     ("Hughes"), pursuant to an asset purchase agreement dated as of January 22,
     1999 (the "Hughes High Power Agreement"), among Tempo Satellite, Inc., a
     wholly-owned subsidiary of the Company ("Tempo"), Phoenixstar, Inc., a
     Delaware corporation formerly known as PRIMESTAR, Inc. ("Phoenixstar"),
     Phoenixstar Partners L.P., a Delaware limited partnership and wholly-owned
     subsidiary of Phoenixstar formerly known as PRIMESTAR Partners L.P.
     ("PRIMESTAR Partners"), and Hughes, a subsidiary of General Motors.  The
     assets transferred by the Company pursuant to the Hughes High Power
     Agreement consisted of Tempo's two high-power DBS satellites (the "Tempo
     Satellites), one of which was in orbit at 119 degrees West Longitude (the
     "In-Orbit Satellite") and one of which was used as a ground spare (the
     "Ground Satellite"), its FCC authorizations with respect to the 119 degrees
     West Longitude orbital location (the "FCC License"), and certain related
     assets (collectively, the "Tempo High Power Assets").

     The Company had previously granted Phoenixstar the transferable right and
     option (the "Tempo Purchase Option") to purchase 100% of the Tempo High
     Power Assets for aggregate consideration of $2.5 million in cash and the
     assumption of all liabilities.  In addition, Tempo had previously granted
     to PRIMESTAR Partners the right to purchase or lease 100% of the capacity
     of the DBS system being constructed by Tempo (the "Tempo Capacity Rights),
     and PRIMESTAR Partners had made advances to Tempo to fund the construction
     of Tempo's DBS system in the aggregate amount of $465 million (the "Tempo
     Reimbursement Obligation").

     Accordingly, the Hughes High Power Agreement provided for (i) the sale by
     Phoenixstar to Hughes of the Tempo Purchase Option, (ii) the exercise of
     the Tempo Purchase Option by Hughes, and (iii) the termination of the Tempo
     Capacity Rights (collectively, the "Hughes High Power Transaction").  The
     aggregate consideration payable by Hughes in the Hughes High Power
     Transaction was $500 million, payable as described below.

     As regulatory approval was required to transfer the In-Orbit Satellite and
     the FCC License, the Hughes High Power Agreement provided for the Hughes
     High Power Transaction to be completed in two steps.  To facilitate the
     transaction, the Tempo Purchase Option was amended to provide for a two-
     stage exercise process.  The parties allocated 70% of the total
     consideration under the Hughes High Power Agreement to the In-Orbit
     Satellite and related assets and 30% of the total consideration thereunder
     to the Ground Satellite and related assets.

                                                                     (continued)

                                      I-6
<PAGE>

              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

             Notes to Condensed Consolidated Financial Statements


     The first closing under the Hughes High Power Agreement was consummated
     effective March 10, 1999.  In the first closing, Hughes acquired the Ground
     Satellite and related assets for aggregate consideration of $150 million,
     comprised of (i) $9,750,000 paid by Hughes to Phoenixstar and PRIMESTAR
     Partners for the transfer to Hughes of that portion of the Tempo Purchase
     Option allocable to the Ground Satellite and the termination of that
     portion of the Tempo Capacity Rights allocable to the Ground Satellite,
     (ii) $750,000 paid by Hughes to Tempo to exercise that portion of the Tempo
     Purchase Option allocable to the Ground Satellite; and (iii) the assumption
     and payment by Hughes of a portion of the Tempo Reimbursement Obligation in
     the amount of $139,500,000.

     At the time of the first closing, the carrying value of the Ground
     Satellite was $224 million.  In addition, as required by the Hughes High
     Power Agreement, the Company and Phoenixstar agreed to terminate the
     previously announced merger of the Company with and into Phoenixstar,
     effective as of such first closing.

     The FCC approved the transfer of the FCC License to Hughes on May 28, 1999,
     and the second closing under the Hughes High Power Agreement was
     consummated effective June 4, 1999.  In the second closing, Hughes acquired
     the In-Orbit Satellite and related assets, including all rights of Tempo
     with respect to the FCC License, for aggregate consideration for $350
     million comprised of (i) $22,750,000 paid by Hughes to Phoenixstar and
     PRIMESTAR Partners for the transfer to Hughes of that portion of the Tempo
     Purchase Option allocable to the In-Orbit Satellite and the termination of
     that portion of the Tempo Capacity Rights allocable to the In-Orbit
     Satellite, (ii) $1,750,000 paid by Hughes to Tempo to exercise that portion
     of the Tempo Purchase Option allocable to the In-Orbit Satellite; and (iii)
     the assumption and payment by Hughes of the remainder of the Tempo
     Reimbursement Obligation, in the amount of $325,500,000.

     The carrying value of the In-Orbit Satellite was approximately $239 million
     at the time of the second closing.  In addition, Phoenixstar agreed to
     forgive amounts due from Tempo not assumed by Hughes in the amount of
     $9,346,000.

     In a separate transaction (the "Hughes Medium Power Transaction") completed
     on April 28, 1999 (the "Hughes Closing Date"), Phoenixstar sold to Hughes
     Phoenixstar's medium-power DBS business and assets for $1.1 billion in cash
     and 4.871 million shares of General Motors Class H common stock ("GMH
     Stock") valued at approximately $258 million on the date of closing.  At
     June 30, 1999, Phoenixstar is responsible for the payment of certain
     obligations not assumed by Hughes, and the payment of costs, estimated to
     range from $180 million to $200 million, associated with the termination of
     certain vendor and service contracts and lease agreements not assumed by
     Hughes.  Affiliates of stockholders of Phoenixstar, other than the Company,
     and an affiliate of Tele-Communications, Inc. ("TCI") have committed to
     make funds available to Phoenixstar, up to an aggregate of $1,013.3 million
     to fund such payments.  Through June 30, 1999, approximately $456.4 million
     of such commitments have been funded to Phoenixstar, and $382.6 million of
     such commitments expired.

                                                                     (continued)

                                      I-7
<PAGE>

              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

             Notes to Condensed Consolidated Financial Statements


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

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

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

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

                                                                     (continued)

                                      I-8
<PAGE>

              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

             Notes to Condensed Consolidated Financial Statements

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

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

     The basic and diluted earnings (loss) per common share is based on the
     weighted average number of shares outstanding during the period (67,836,000
     and 67,746,000 shares for the three months ended June 30, 1999 and 1998,
     respectively; and 67,808,000 and 67,690,000 for the six months ended June
     30, 1999 and 1998, respectively).  Excluded from the computation of diluted
     earnings (loss) per common share for the three and six months ended June
     30, 1999 and 1998 are options and convertible securities to acquire
     8,515,000 and 8,690,000 shares of Series A Common Stock, respectively,
     because inclusion of such options would be anti-dilutive.

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

     Cash paid for interest was $0 and $13,844,000 during the six months ended
     June 30, 1999 and 1998, respectively.  Cash paid for income taxes was not
     significant during either of such periods.

     Significant non-cash investing and financing activities for the six months
     ended June 30, 1999 are as follows (amounts in thousands):


   Assumption of amounts due to Phoenixstar
     in exchange for the Tempo Satellites          $465,000
                                                   ========

   Receipt of GMH Stock, net of TSAT GMH
     SAR                                           $ 66,143
                                                   ========

                                                                     (continued)

                                      I-9
<PAGE>

              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

             Notes to Condensed Consolidated Financial Statements

(6)  Investment in Phoenixstar
     -------------------------

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

(7)  Transactions Related Parties
     ----------------------------

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

     Prior to the Restructuring, certain key employees of TSAT held stock
     options in tandem with stock appreciation rights with respect to certain
     common stock of TCI.  Estimates of the compensation related to the options
     and/or stock appreciation rights granted to employees of TSAT have been
     recorded in the accompanying consolidated financial statements.
     Compensation expense recognized by TSAT related to such options aggregated
     $3,814,000 during the six months ended June 30, 1998.

(8)  Income Taxes
     ------------

     TSAT recognized no income tax benefit or expense during of the six months
     ended June 30, 1998.  TSAT is only able to realize income tax benefits for
     financial reporting purposes to the extent that such benefits offset TSAT's
     income tax liabilities or TSAT generates taxable income.  For financial
     reporting purposes, all of TSAT's income tax liabilities had been fully
     offset by income tax benefits at June 30, 1999 and December 31, 1998.
     Additionally, during the foreseeable future, TSAT believes that it will
     incur net losses for income tax purposes, and accordingly, will not be in a
     position to realize income tax benefits on a current basis.

                                      I-10
<PAGE>

              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

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

General
-------

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

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

   See note 2 to the accompanying condensed consolidated financial statements
for a discussion of the transactions with Hughes.

   See note 3 to the accompanying condensed consolidated financial statements
for a description of the Restructuring Transaction.

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

        As a result of the consummation of the Restructuring, TSAT's operations
consist of (i) expenses incurred to maintain TSAT as a public company, including
accounting and legal fees ($117,000 during the six months ended June 30, 1999),
(ii) expenses associated with the operation and maintenance of the Tempo
Satellites prior to the sale to Hughes effective June 4, 1999 ($4,511,000 during
the six months ended June 30, 1999) and (iii) TSAT's share of PRIMESTAR's
earnings or losses (zero during the six months ended June 30, 1999).

     TSAT recognized a nonrecurring gain of $13,712,000 during the six months
ended June 30, 1999 in connection with the Hughes High Power Transaction.  In
addition, TSAT recognized other income of $66,143,000 upon receipt of the
Phoenixstar Payment.

                                     I-11
<PAGE>

              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

Material Changes in Results of Operations, continued
----------------------------------------------------

     TSAT recognized no income tax benefit or expense during either of the six
month periods ended June 30, 1999 and 1998.  TSAT is only able to realize income
tax benefits for financial reporting purposes to the extent that such benefits
offset TSAT's income tax liabilities or TSAT generates taxable income.  For
financial reporting purposes, all of TSAT's income tax liabilities had been
fully offset by income tax benefits at June 30, 1999 and December 31, 1998.
Additionally, TSAT believes that it will incur net losses for income tax
purposes during the foreseeable future, and accordingly, will not be in a
position to realize income tax benefits on a current basis.

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

   As a result of the consummation of the Hughes transactions, the Company
currently has no operating income or cash flow.  The Company's current sources
of liquidity are its available cash and any proceeds from the monetization or
liquidation of the GMH Stock (subject to a one-year holding period).


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

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



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

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

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


                                     I-12
<PAGE>

              TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES


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

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

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


                                     I-13
<PAGE>

PART II - OTHER INFORMATION

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

        (a)  Exhibit

             27 -    Financial Data Schedule

        (b)  Report on Form 8-K filed during quarter ended June 30, 1999:


             Date of Report   Items Reported    Financial Statements Filed
             --------------   --------------    --------------------------
             June 18, 1999    Items 2 and 7     TCI Satellite Entertainment,
                                                Inc. Condensed Pro Forma
                                                Combined Balance Sheet as of
                                                March 31, 1999.


                                      II-1
<PAGE>

                                   SIGNATURES



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

                                        TCI SATELLITE ENTERTAINMENT, INC.



Date:    August 11, 1999                 By:   /s/  Gary S. Howard
                                               --------------------------------
                                                    Gary S. Howard
                                                    Chief Executive Officer




Date:    August 11, 1999                 By:   /s/  Kenneth G. Carroll
                                               --------------------------------
                                                    Kenneth G. Carroll
                                                    Senior Vice President and
                                                      Chief Financial Officer
                                                      (Principal Financial
                                                      Officer and Chief
                                                      Accounting Officer)

                                      II-2