<PAGE>

                       Selected Financial and Operating Data
        UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES


<TABLE>
<CAPTION>

                                     FOR THE SIX MONTHS ENDED                FOR THE YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)    DECEMBER 31, 1997     1997          1996         1995          1994        1993
--------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>             <C>          <C>           <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA
Revenues                                     $243,152        $456,619     $ 292,624      $107,926     $   5,132    $    --
Cost of sales                                 154,764         292,917       193,356        70,961         3,362         --
--------------------------------------------------------------------------------------------------------------------------
Gross margin                                   88,388         163,702        99,268        36,965         1,770         --
Operating expenses:
  Selling and marketing                        57,635          99,399       102,715        62,922        17,598        520
  Manufacturer Incentive                       42,759          66,726        18,387            --            --         --
  General and administrative                   23,995          46,935        31,992        17,040        10,539      2,988
  Commissions to retailers                      6,882          14,537        13,909         6,813           307         --
  Engineering and operations                    6,302           9,801        11,644         4,564         3,022        252
  Depreciation and amortization                 8,706          18,426        19,687        21,323        19,775         12
  Management fees (a)                              --              --            --         6,667            --         --
--------------------------------------------------------------------------------------------------------------------------
    Net operating loss                        (57,891)        (92,122)      (99,066)      (82,364)      (49,471)    (3,772)

OTHER (INCOME) EXPENSE:
  Interest expense                                 --              --         2,326         9,081         8,218      1,520
  Interest (income)                            (2,378)         (4,919)       (6,244)       (1,556)       (1,352)        --
  Cost to terminate Credit Agreement               --              --         9,504            --            --         --
  Other                                            60             103           307         1,489           526       (997)
--------------------------------------------------------------------------------------------------------------------------
    Loss before income taxes                  (55,573)        (87,306)     (104,959)      (91,378)      (56,863)    (4,295)
Income tax provision                               --              --            --            --             1          1
--------------------------------------------------------------------------------------------------------------------------
    Net loss                                 $(55,573)       $(87,306)    $(104,959)     $(91,378)     $(56,864)   $(4,296)
--------------------------------------------------------------------------------------------------------------------------
Net loss per share - basic and diluted       $  (0.62)       $  (0.97)    $   (1.17)     $  (1.02)     $  (0.63)   $ (0.05)
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                                                                                    AT DECEMBER 31
--------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)                                                 1997          1996         1995          1994        1993
--------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>           <C>           <C>          <C>          <C>
BALANCE SHEET DATA
Cash and cash equivalents                                    $ 68,646      $ 86,518      $ 19,683     $  1,817     $   212
Working capital (deficit)                                      (8,308)       31,065       (17,786)     (27,353)       (427)
Long-term investments, consisting of
  U.S. Treasury securities                                      3,970         6,941        13,001       15,298          --
Total assets                                                  206,310       217,354       149,571      130,472      66,729
Long-term debt                                                     --            --       128,456       68,775      20,268
Shareholders' equity                                            2,099        89,477       (48,972)      41,728      21,626
</TABLE>

(a)  IN CONNECTION WITH MANAGEMENT SERVICES PERFORMED BY HUBBARD
     BROADCASTING, INC. ("HBI") FOR THE COMPANY DURING 1992 THROUGH 1994, THE
     COMPANY AGREED TO PAY HBI AN AGGREGATE OF $10.0 MILLION, OF WHICH
     $3.3 MILLION WAS ACCRUED IN 1992 AND THE REMAINDER ACCRUED IN THE QUARTER
     ENDED SEPTEMBER 30, 1995, WHEN IT BECAME LIKELY CERTAIN PRECONDITIONS TO
     PAYMENT WOULD BE SATISFIED.

                                                                              7
<PAGE>

  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS


Change in Fiscal Year

On September 4, 1997, the Board of Directors of United States Satellite
Broadcasting Company, Inc. ("USSB" or the "Company") voted to change the
Company's fiscal year end from June 30 to December 31, beginning with a six
month transition period ending on December 31, 1997 (the "Transition
Period"). The following discussion compares the six month period ended
December 31, 1997 to the six month period ended December 31, 1996 and also
compares the calendar years 1997, 1996 and 1995.

Overview

The Company provides subscription television programming via a high-power
direct broadcast satellite ("DBS") to households throughout the continental
United States. The Company broadcasts a high quality digital television
signal using the Digital Satellite System ("DSS-Registered Trademark-"). The
Company's programming is available to customers who have a DSS unit, which
consists of an 18-inch satellite dish, a receiver/decoder and a remote
control. All of the Company's gross revenues and identifiable assets relate
to the Company's activities in this industry.

     The Company commenced commercial operations in June 1994 and has not
generated net earnings to date. Management anticipates that the Company will
achieve positive adjusted cash flow (defined as earnings before interest,
taxes, depreciation and amortization and the non-cash component of the
Manufacturer Incentive program) during at least one quarter in 1998, although
not for the year as a whole, and anticipates that the Company will achieve
positive adjusted cash flow for the full year in 1999. Management expects
that losses will continue into 1999 as the Company continues to incur
substantial marketing expenses (including Manufacturer Incentive program
expenses) in order to build its subscriber base. However, management expects
that the Company will generate net income during the year 2000.

     Although there were several significant competitive developments in
1997, the potential market for the Company's programming continues to grow.
The introduction of DSS units is widely regarded as the most successful
introduction of a major consumer electronics product in United States
history. At December 31, 1997, approximately 3.32 million households were
authorized to receive DSS service ("DSS households"), up from 2.89 million at
September 30, 1997.

      As part of its ongoing strategy to tighten its focus on premium movie
entertainment and to simplify the DSS offering at retail, on January 6, 1998,
the Company and DIRECTV announced an arrangement under which the basic
channels previously carried by USSB were integrated into the DIRECTV channel
line-up, commencing March 10, 1998. The channels involved were the MTV
Networks (MTV, M2, VH1, Nickelodeon and Nick at Nite's TV LAND), Lifetime and
Comedy Central. As a result of this arrangement, consumers can now receive a
full complement of basic channels from DIRECTV, while the biggest selection
of premium movie channels are available from USSB. In furtherance of this
strategy, USSB announced the national premiere of two new commercial-free
premium movie services: Showtime Extreme and fXM: Movies from Fox, which
debuted on USSB on March 10, 1998. As a result of these developments,
management anticipates that the number of subscribers and total revenues will
continue to grow, although at a slower rate during the integration period.
However, since the basic channels generally provided lower margins than the
premium channels, management expects that the Company's gross margins will
improve.

     Forward-looking statements contained in this 1997 Report to Shareholders
(statements which are phrased in terms of anticipation, expectation, belief
or the like or which refer to future events, developments or conditions) are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. There are certain important factors that could
cause results to differ materially from those anticipated by the statements
made herein. Investors are cautioned that all forward-looking statements
involve risks and uncertainty and that the Company faces a number of risks as
it develops its commercial operations. Among the factors that could cause
actual results to differ materially are the following: the uncertain level of
ultimate demand for the DSS system, USSB's programming and the effects of
changes in USSB's programming offerings; unforeseen consumer reaction to the
marketing, packaging and pricing of the Company's new offerings; increases in
costs, including programming costs, in excess

8
<PAGE>

of those anticipated by the Company; competitive issues, including changes by
competitors to their product offerings and pricing strategies, and the effect
of digital cable programming and digital broadcast television service, which
may be used for multichannel programming or high definition television
(HDTV); the entry of new competitors into video programming, such as electric
utilities and regional operating telephone companies; dependence on
third-party programmers, vendors, and upon Hughes Electronics Corporation;
dependence on a single DBS satellite; dependence on continued effectiveness
of the security and signal encryption features of the DSS system; potentially
adverse governmental regulation and actions; and overall economic conditions.
The Company anticipates that other DBS satellites will be launched at the
110DEG west longitude and other orbital locations, increasing the number of
competitors in the satellite broadcasting market. The Telecommunications Act
of 1996 significantly deregulated the telecommunications industry. The effect
of such deregulation on the Company's business, results of operations and
financial condition cannot be predicted. See Part 1, Item 1, "Business -
Competition" of the Company's Report on Form 10-K for the Transition Period
for a further discussion of certain of these risks.

Summary of Subscriber and Revenue Data

Management measures the Company's performance by two key measures: subscriber
base and revenues.

     The number of USSB paying subscribers grew to approximately 1,740,000 at
December 31, 1997 from approximately 1,584,000 at September 30, 1997.
Approximately 215,000 additional households were receiving a free promotional
month of USSB programming as of December 31, 1997.

     In addition to tracking the absolute number of subscribers, management
assesses the Company's penetration of its potential DSS market by comparing
the number of USSB paying subscribers to the total number of households that
have received the free promotional month of USSB programming ("convertible
households"). Since the first month is free, the consumer's decision to
purchase USSB programming is generally made by the consumer only after the
free promotional month has been received. As a result, the category of DSS
households includes households receiving the free promotional month that have
not yet made their subscription decision. As of December 31, 1997, the
Company achieved a penetration of convertible households of approximately 63
percent (i.e., almost two-thirds of DSS households that have received the
free promotional month of USSB programming are currently USSB paying
subscribers).

     The summary immediately below shows, as of the end of each period, USSB
paying subscribers, USSB promotional activations, USSB convertible households
and the percentage of convertible households served by the Company. The
estimated number of DSS households is also shown.

Subscriber Base: (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                          TOTAL USSB                    PERCENT
                                                            PAYING                      OF USSB
                                             USSB      SUBSCRIBERS AND      USSB      CONVERTIBLE
                        USSB PAYING      PROMOTIONAL    PROMOTIONAL     CONVERTIBLE    HOUSEHOLDS   ESTIMATED DSS
FOR THE QUARTER ENDED  SUBSCRIBERS (a)  ACTIVATIONS (b)  ACTIVATIONS   HOUSEHOLDS (c)  SERVED (d)   HOUSEHOLDS (e)
-----------------------------------------------------------------------------------------------------------------
<S>                   <C>              <C>              <C>           <C>             <C>          <C>
December 31, 1996         1,220              181            1,401          1,862          65%           2,300
March 31, 1997            1,378               70            1,448          2,133          65%           2,499
June 30, 1997             1,455               75            1,530          2,289          64%           2,651
September 30, 1997        1,584              113            1,697          2,462          64%           2,887
December 31, 1997         1,740              215            1,955          2,757          63%           3,318
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
</TABLE>

(a)  USSB PAYING SUBSCRIBERS AS OF THE END OF SUCH PERIOD.
(b)  USSB HOUSEHOLD ACTIVATIONS THAT WERE RECEIVING A FREE PROMOTIONAL MONTH
     OF USSB PROGRAMMING AS OF THE END OF SUCH PERIOD. THESE ACTIVATIONS ARE
     NOT COUNTED AS USSB CONVERTIBLE HOUSEHOLDS UNTIL THEY HAVE COMPLETED THE
     FREE PROMOTIONAL MONTH.
(c)  TOTAL NUMBER OF USSB HOUSEHOLD ACTIVATIONS SINCE JULY 1994 THAT HAVE
     COMPLETED A FREE PROMOTIONAL MONTH OF USSB PROGRAMMING. THE AMOUNTS
     SHOWN REFLECT THE ELIMINATION OF CERTAIN DSS DEACTIVATIONS. SEE NOTE (e).
(d)  TOTAL USSB PAYING SUBSCRIBERS AS OF THE END OF THE PERIOD AS A PERCENT OF
     USSB CONVERTIBLE HOUSEHOLDS.
(e)  TOTAL ESTIMATED NUMBER OF HOUSEHOLDS WITH ACTIVE DSS UNITS WHICH ARE
     AUTHORIZED TO RECEIVE EITHER USSB OR DIRECTV PROGRAMMING AS OF THE END
     OF THE PERIOD. ESTIMATE BASED ON CUMULATIVE DSS ACTIVATIONS, LESS: (i)
     CUMULATIVE DSS DEACTIVATIONS, (ii) ACTIVATIONS BY DEALERS, MANUFACTURING
     FACILITIES, TECHNICAL FACILITIES AND COMMERCIAL LOCATIONS KNOWN TO THE
     COMPANY, AND (iii) ADDITIONAL RECEIVERS IN A SINGLE HOUSEHOLD, AS OF THE
     END OF SUCH PERIOD. THE COMPANY MAKES PERIODIC RECONCILIATIONS TO
     ESTIMATE THE NUMBER OF DSS HOUSEHOLDS AS ACCURATELY AS POSSIBLE.
                                                                              9
<PAGE>

     The Company's per subscriber and total revenues are shown below for the
periods indicated. From time to time, the Company engages in certain
promotional activities that include special rates for limited periods, which
could result in lower average per subscriber revenues for such periods. In
addition, the Company's programming revenues associated with increased DSS
unit sales are largely reflected in subsequent quarters due to the lag
between the purchase of a DSS unit and its installation and activation, and
the free promotional month of programming offered by the Company.

Revenues: (IN THOUSANDS, EXCEPT PER SUBSCRIBER DATA)

<TABLE>
<CAPTION>
                                                                 DECEMBER 31  SEPTEMBER 30   JUNE 30    MARCH 31  DECEMBER 31
FOR THE QUARTER ENDED                                               1997          1997         1997       1997       1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>           <C>          <C>         <C>        <C>
Average monthly subscription revenue per paying subscriber (a)    $  24.66      $  24.71     $  24.86    $ 24.86    $ 24.93
Total revenues (b)                                                $128,769      $114,383     $114,236    $99,231    $92,104
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a)  EXCLUDES PAY-PER-VIEW EVENT, COMMERCIAL AND TV GUIDE-TM- REVENUES.
(b)  INCLUDES PAY-PER-VIEW EVENT, COMMERCIAL AND TV GUIDE REVENUES.

     The Company's annual churn rate as of December 31, 1997 was 24.7%. Churn
rate represents the number of the Company's paying customers who terminated
their subscriptions or whose subscriptions were terminated by the Company
during such twelve month period, and who did not resubscribe during that
period, expressed as a percentage of the total number of paying subscribers
at the end of such period. Certain of the Company's promotional efforts may
attract a higher percentage of short-term subscribers, thus increasing the
Company's churn rate from time to time.

Results of Operations

TRANSITION PERIOD ENDED DECEMBER 31, 1997 COMPARED TO

SIX MONTHS ENDED DECEMBER 31, 1996.

REVENUE OVERVIEW. The Company's total revenues increased to $243.2 million
for the six months ended December 31, 1997, compared to $171.3 million for
the six months ended December 31, 1996. The revenue increase between the two
six-month periods was primarily attributable to a larger subscriber base.

     REVENUES. The Company derives its revenues principally from monthly fees
from subscribers for television programming. Revenues are a function of the
number of subscribers, the mix of programming packages selected by customers
and the rates charged. The increase in revenues for the six-month periods was
primarily attributable to the increase in the number of paying subscribers to
approximately 1,740,000 at December 31, 1997, up from approximately 1,220,000
at December 31, 1996.

     Pay-per-view revenues, which vary with the number and type of events
provided on a pay-per-view basis in any fiscal period, are included in the
Company's total revenue. The revenues from such events are highly dependent
on the type and number of pay-per-view events offered, and are expected to
vary accordingly.

     COST OF SALES. Cost of sales consists of payments to programmers, which
are based on the number of paying subscribers. Programming costs also include
the purchase of rights to broadcast event programming on a pay-per-view
basis. The cost of programming increased to $154.8 million for the six-month
period ended December 31, 1997, compared to $112.6 million for the six-month
period ended December 31, 1996. The increase in cost of programming was
primarily the result of an increased number of subscribers. Cost of sales
represented 63.7 percent of programming revenues for the six-month period
ended December 31, 1997 and 65.7 percent for

10
<PAGE>

the six-month period ended December 31, 1996. Programming costs as a percent
of programming revenues will vary based on the mix of programming packages
taken by subscribers, the number and type of pay-per-view events, and the
extent to which volume-based discounts from the Company's programming
providers are realized.

OPERATING EXPENSE OVERVIEW. Total operating expenses increased to $146.3
million for the six-month period ended December 31, 1997, compared to $126.1
million for the six-month period ended December 31, 1996. This increase was
primarily attributable to the cost of providing the Company's services to a
growing subscriber base, including increased marketing, customer service,
security and encryption fees. The Manufacturer Incentive program also
contributed to the increase.

     SELLING AND MARKETING. Selling and marketing costs include promotional
and advertising costs, the costs of direct marketing and customer service and
amounts expended pursuant to joint marketing efforts with other DSS
broadcasting system participants. The Company's overall selling and marketing
effort includes the Manufacturer Incentive program, which is discussed below.
Excluding Manufacturer Incentive program expenses, selling and marketing
expenses decreased to $57.6 million for the six months ended December 31,
1997, compared to $62.7 million for the six months ended December 31, 1996.
This decrease was primarily attributable to reduced advertising and marketing
expenditures, offset partially by increased customer service expenditures
associated with the growth of the Company's subscriber base. In addition,
expenses associated with the Company's telemarketing and direct mail
marketing programs, which are directed at purchasers of DSS units who
activate with the Company, have increased as the number of such DSS
activations has increased.

     MANUFACTURER INCENTIVE PROGRAM. Manufacturer Incentive program expense
relates to financial incentive arrangements with certain manufacturers of DSS
equipment. These arrangements have had the effect of contributing to certain
DSS manufacturers lowering the price of DSS units. Such arrangements, which
run for up to four years depending on manufacturer, commit the Company to pay
the manufacturers over a five-year period from the date new DSS households
are authorized to receive programming. The expense and liability for such
future commitments is established and recorded upon activation of the related
DSS unit. Manufacturer Incentive program expenses totaled $42.8 million for
the six months ended December 31, 1997, compared to $18.4 million for the six
months ended December 31, 1996. The Company expects the total expenses under
the Manufacturer Incentive program to continue to be a significant component
of the Company's operating expenses and cash flows.

     GENERAL AND ADMINISTRATIVE. General and administrative costs include
in-orbit and general insurance costs, billing and remittance processing,
staff functions such as finance and information services, and administrative
services provided by HBI. General and administrative expenses increased to
$24.0 million for the six months ended December 31, 1997, compared to $21.0
million for the six months ended December 31, 1996. The increase was
primarily attributable to increased billing and remittance processing costs
resulting from the growth of the Company's subscriber base. Although total
general and administrative costs have increased, elements of general and
administrative expenses have declined as a percent of revenues as certain of
these expenses are fixed.

     COMMISSIONS TO RETAILERS. Commissions to retailers consist of amounts
paid by the Company to eligible DSS retailers whose customers become paying
subscribers, and are intended to encourage retailers to promote the sale of
DSS units and subscriptions to USSB programming. These expenses generally run
for three years at decreasing rates for each subscriber year. Commissions to
retailers were $6.9 million in both six month periods. The effects of an
increased subscriber base were offset by a decreasing per-subscriber rate on
the 1996 subscriber base.

                                                                            11

<PAGE>

     ENGINEERING AND OPERATIONS. Engineering and operations expenses include
the operation of the National Broadcast Center and the Auxiliary Broadcast
Center, fees charged in connection with the operation of the conditional
access system (determined by subscriber levels) and satellite telemetry,
tracking and control expenses. Engineering and operations expenses were $6.3
million for the six months ended December 31, 1997, compared to $8.4 million
for the six months ended December 31, 1996. Such expenses were higher during
the six months ended December 31, 1996 because the Company incurred
significant costs in connection with an upgrade to the conditional access
system. From time to time, the Company will incur additional expenses in
connection with periodic upgrades to the security feature of the conditional
access system.

     DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
relate mainly to the Company's five-sixteenths ownership of DBS-1 and
transmission equipment located both at the Company's National Broadcast
Center and its Auxiliary Broadcast Center. Depreciation and amortization was
$8.7 million for the six months ended December 31, 1997, compared to $8.8
million for the six months ended December 31, 1996.

NET OPERATING LOSS. The Company recorded a net operating loss for the six
months ended December 31, 1997 of $57.9 million, compared to a net operating
loss of $67.4 million for the six months ended December 31, 1996.

     INTEREST INCOME. Interest income for the six months ended December 31,
1997 was $2.4 million, compared to $2.7 million for the six months ended
December 31, 1996.

NET LOSS. The Company recorded a net loss for the six months ended December
31, 1997 of $55.6 million, compared to $64.6 for the six months ended
December 31, 1996.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995.

REVENUE OVERVIEW. The Company's total revenues increased to $456.6 million
for 1997, compared to $292.6 million for 1996, and $107.9 million for 1995.
The revenue increases from year to year were primarily attributable to a
larger subscriber base.

     REVENUES. The increase in revenues for the three years was primarily
attributable to the increase in the number of paying subscribers to
approximately 1,740,000 at December 31, 1997, up from approximately 1,220,000
at December 31, 1996, and 629,000 at December 31, 1995. Average monthly
revenue per subscriber for 1997 was $24.76, compared to $25.10 for 1996 and
$25.81 for 1995. As the Company's penetration of its market increases,
management believes that average monthly revenue per subscriber will trend
downward slightly, reflecting a broader customer base. In addition, in any
given period, decreases may result from promotions offered from time to time
which are designed to increase the Company's penetration of convertible USSB
households.

     Pay-per-view revenues, which vary with the number and type of events
provided on a pay-per-view basis in any fiscal period, are included in the
Company's total revenue. The revenues from such events are highly dependent
on the type and number of pay-per-view events offered, and are expected to
vary accordingly.

     COST OF SALES. The cost of programming increased to $292.9 million for
the year ended December 31, 1997, compared to $193.4 million for 1996, and
$71.0 million for 1995. The increase in cost of programming for these periods
was primarily the result of an increased number of subscribers in each
period. Cost of sales represented 64.1 percent of programming revenues for
1997, 66.1 percent for 1996 and 65.8 percent for 1995. Programming costs as a
percent of programming revenues will vary based on the mix of programming
packages taken by subscribers, the number and type of pay-per-view events,
and the extent to which volume-based discounts from the Company's programming
providers are realized.

OPERATING EXPENSE OVERVIEW. Total operating expenses increased to $255.8
million for 1997, compared to $198.3 million for 1996 and $119.3 million for
1995. The increase for all periods was primarily attributable to the cost of
providing the Company's services to a growing subscriber base, including
increased marketing, customer service, security and encryption fees. For
1997, the Manufacturer Incentive program also contributed to the increase.

12
<PAGE>

     SELLING AND MARKETING. The Company's overall selling and marketing
efforts include the Manufacturer Incentive program, which is discussed below.
Excluding Manufacturer Incentive program expenses, selling and marketing
expenses were $99.4 million for the year ended December 31, 1997, compared to
$102.7 million for 1996 and $62.9 million for 1995. The decrease between 1997
and 1996 was primarily attributable to reduced advertising and marketing
expenditures, offset partially by increased customer service expenditures
associated with the growth of the Company's subscriber base.

     MANUFACTURER INCENTIVE PROGRAM. Manufacturer Incentive program expenses
totaled $66.7 million for the year ended December 31, 1997, compared to $18.4
million for 1996. No amounts were incurred in 1995.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $46.9 million for 1997, compared to $32.0 million for 1996 and
$17.0 million for 1995. The increases for all periods were primarily
attributable to increased billing and remittance processing costs and
increased bad debt expense, both resulting from the growth of the Company's
subscriber base. Although total general and administrative costs have
increased, elements of general and administrative expenses have declined as a
percent of revenues as certain of these expenses are fixed.

     COMMISSIONS TO RETAILERS. Commissions to retailers increased to $14.5
million for 1997, compared to $13.9 million for 1996, and $6.9 million for
1995. The increases in all years reflect increased USSB programming
subscriptions, offset by the effect of lower per-subscriber commission rates
over time.

     ENGINEERING AND OPERATIONS. Engineering and operations expenses were
$9.8 million for 1997, compared to $11.6 million for 1996 and $4.6 million
for 1995. Such expenses were higher during 1996 because the Company incurred
significant costs in connection with an upgrade to the conditional access
system. From time to time, the Company will incur additional expenses in
connection with periodic upgrades to the security feature of the conditional
access system. The increase between 1996 and 1995 was primarily attributable
to higher security and encryption fees, which are paid on a per subscriber
basis.

     DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $18.4
million for 1997, compared to $19.7 million for 1996 and $21.3 million for
1995.

     MANAGEMENT FEES. Management fees due to HBI of $6.7 million were accrued
in 1995, representing the balance of fees for contracted management services
rendered to the Company by HBI from 1992 through 1994.

NET OPERATING LOSS. The Company recorded a net operating loss for 1997 of
$92.1 million, compared to net operating losses of $99.1 million for 1996 and
$82.4 million for 1995.

     INTEREST EXPENSE. The Company incurred no interest expense for 1997,
compared to $2.3 million for 1996 and $9.1 million for 1995. Changes in
interest expense reflect changes in the amount and duration of the Company's
borrowings during these periods.

     INTEREST INCOME. Interest income for 1997 was $4.9 million, compared to
$6.2 million for 1996 and $1.6 million for 1995. Interest income in 1996
increased as a result of the investment of the proceeds of the public
offering of the Company's Class A Common Stock, which closed on February 6,
1996.

NET LOSS. The Company recorded a net loss for 1997 of $87.3 million, compared
to $105.0 million for 1996 and $91.4 million for 1995.

Financial Position, Liquidity and Capital Resources

Prior to February 1996, the Company's operations were financed by equity
contributions from shareholders, approximately $31.2 million of cash advances
from HBI and approximately $42.0 million in privately-issued notes and
associated warrants. Such advances from HBI were converted into equity in
1990 and 1994 and, upon consummation of the recapitalization of the Company
in February 1996, the notes were converted into equity and the warrants were
canceled. In addition, the Company's operations were financed by $90.0
million of borrowings made between January and December 1995 under a credit
agreement with a syndicate of financial institutions. Upon completion of the
public offering of the Company's Class A Common Stock in February 1996, the
Company

                                                                            13
<PAGE>

received proceeds of approximately $206.2 million, repaid all outstanding
bank debt and terminated the credit agreement. The Company incurred a charge
of $9.5 million in connection with the termination of the credit agreement.

     LIQUIDITY AND CAPITAL RESOURCES. The significant components of the
changes in cash and cash equivalents were as follows for the periods
presented (in millions):
<TABLE>
<CAPTION>

                                                   FOR THE SIX MONTHS ENDED     FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------------------
                                                      DECEMBER 31, 1997         1997          1996        1995
---------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                <C>          <C>         <C>
Cash and cash equivalents, beginning of period              $ 93.4             $ 86.5       $  19.7     $   1.8
Net loss                                                     (55.6)             (87.3)       (105.0)      (91.4)
Depreciation and amortization                                  8.7               18.4          19.7        21.3
Changes in operating items                                   (10.3)               4.4          17.0        25.3
Net capital expenditures                                      (4.2)             (14.9)         (5.5)       (7.7)
Manufacturer Incentive program                                37.0               59.1          14.6          --
Other, including stock sales and debt repayment                (.4)               2.4         126.0        70.4
---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                    $ 68.6             $ 68.6        $ 86.5      $ 19.7
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
</TABLE>

     The decrease shown from 1996 to 1997 reflects the net use of cash
resulting from the Company's operations. The increase from 1995 to 1996
reflects the Company's receipt of proceeds from its February 1996 initial
public offering.

     The Company expects the total expense under the Manufacturer Incentive
program to continue to be a significant component of the Company's operating
expenses and cash flows. However, management believes that the Company's
current cash position and cash generated from operations is adequate to meet
the anticipated operating expenses of the business through 1998. Management
further believes that its cash balance will not be less than $35.0-$40.0
million during such period.

     The Company may require external financing for future major capital
expenditures such as the construction of a new satellite, DBS-4, at the
101DEG. west longitude orbital location, or the cost of satellites at the
110DEG. and 148DEG. west longitude locations. Further, the Company may seek
additional debt financing and/or lines of credit to support the expansion of
any business opportunities that may develop at the 110DEG. or 148DEG. west
longitude locations. The Company believes that such financing is available
from a number of sources and is evaluating options which would provide
additional flexibility in satisfying the Company's future financing needs.

     WORKING CAPITAL. Negative working capital of $8.3 million existed at
December 31, 1997, compared to a positive working capital of $31.1 million at
December 31, 1996. This decrease in working capital in 1997 from 1996
resulted primarily from the Company's net loss and the increase in the
current portion of the Manufacturer Incentive program obligation. Management
expects that working capital will remain negative through 1998

14
<PAGE>

as the Manufacturer Incentive program obligation increases with the growth of
DSS households. The Company's working capital at December 31, 1995 was a
negative $17.8 million. As a result of the completion of the public offering
of the Company's Class A Common Stock in February 1996, the Company's working
capital increased by approximately $206.2 million.

     LITIGATION. Personalized Media Communications, L.L.C. ("PMC") has
commenced two legal proceedings against Hughes Network Systems, Thomson
Consumer Electronics and other DSS manufacturers, DIRECTV, Inc., and the
Company. The ultimate outcome of these matters and the resulting effect on
the liquidity and financial position of the Company cannot be determined with
certainty.

     IPPV Enterprises, a Georgia partnership, has commenced a legal
proceeding against Thomson Consumer Electronics, Hughes Network Systems,
other DSS manufacturers, DIRECTV, Inc., and the Company. The ultimate outcome
of this matter and the resulting effect on the liquidity and financial
position of the Company cannot be determined with certainty.

     Note 5 to the Consolidated Financial Statements contains additional
information on these matters.

     CAPITAL EXPENDITURES. Capital expenditures for the year ended December
31, 1997 totaled $14.9 million, consisting primarily of satellite deposits
and purchased computer software. The Company is required to make progress
payments under its contract with Lockheed Martin for satellite construction
at the 110_ west longitude orbital location. If DBS-4 is built and put into
operation at 101DEG.  west longitude, the Company will also incur additional
capital expenditures. Note 5 to the consolidated financial statements
contains additional information on this matter.

     NET OPERATING LOSS CARRYFORWARD. At December 31, 1997, the Company's net
operating loss carryforward was $304.5 million for federal tax purposes. Such
carryforwards expire in the years 2000 through 2013. Management expects to
utilize this amount when taxable income is achieved.

Year 2000

During 1997, the Company analyzed year 2000 compliance issues related to its
computer systems. To be year 2000 compliant, computer systems that have time
sensitive software must recognize a date using "00" as the year 2000 rather
than the year 1900. Certain systems were determined to be year 2000 compliant
during 1997. The Company is executing an implementation plan whereby all
systems critical to managing the business will be made year 2000 compliant,
and is working with its customer service and billing vendor to assure that
the vendor's systems will be year 2000 compliant. The cost incurred in 1997
relating to year 2000 issues was immaterial. The Company does not expect the
cost to be incurred over the next two years to have a material effect on its
results of operations.

Seasonality

Sales of DSS units may be subject to seasonal sales patterns experienced by
the consumer electronics industry. As the Company's subscriber base has
increased, it does not appear that seasonality has had a material effect on
the Company's revenues to date, although seasonality may affect the rate of
subscriber growth in any given quarter.

                                                                            15

<PAGE>

                       Consolidated Statements of Operations
        UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>

                                          FOR THE SIX MONTHS ENDED      FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)         DECEMBER 31, 1997          1997          1996        1995
---------------------------------------------------------------------------------------------------------
<S>                                               <C>                 <C>         <C>           <C>
REVENUES                                           $243,152            $456,619    $  292,624    $107,926
COST OF SALES                                       154,764             292,917       193,356      70,961
---------------------------------------------------------------------------------------------------------
GROSS MARGIN                                         88,388             163,702        99,268      36,965

OPERATING EXPENSES
Selling and marketing                                57,635              99,399       102,715      62,922
Manufacturer Incentive                               42,759              66,726        18,387          --
General and administrative                           23,995              46,935        31,992      17,040
Commissions to retailers                              6,882              14,537        13,909       6,813
Engineering and operations                            6,302               9,801        11,644       4,564
Depreciation and amortization                         8,706              18,426        19,687      21,323
Management fees due to HBI                               --                  --            --       6,667
---------------------------------------------------------------------------------------------------------
  Net operating loss                                (57,891)            (92,122)      (99,066)    (82,364)
---------------------------------------------------------------------------------------------------------

OTHER (INCOME) EXPENSE
Interest expense                                         --                  --        2,326        9,081
Interest (income)                                    (2,378)             (4,919)      (6,244)      (1,556)
Cost to terminate Credit Agreement                       --                  --        9,504           --
Other                                                    60                 103          307        1,489
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------

  Net loss                                         $(55,573)           $(87,306)   $(104,959)    $(91,378)
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
  Net loss per share - basic and diluted           $  (0.62)           $  (0.97)   $   (1.17)    $  (1.02)
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

16

<PAGE>

                            Consolidated Balance Sheets
        UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                                     AS OF DECEMBER 31
-----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)                                                      1997        1996
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                                               <C>         <C>
Assets
CURRENT ASSETS
Cash and cash equivalents                                                                          $ 68,646    $ 86,518
Trade accounts receivable, less allowance of $6,074 and $2,388 at December 31, 1997
  and 1996, respectively                                                                             44,992      42,402
Prepaid expenses and other                                                                           11,832       4,863
-----------------------------------------------------------------------------------------------------------------------
   Total current assets                                                                             125,470     133,783
-----------------------------------------------------------------------------------------------------------------------

PROPERTY AND EQUIPMENT
Land                                                                                                    351         351
Buildings and improvements                                                                            5,075       4,875
Equipment                                                                                           138,264     130,610
-----------------------------------------------------------------------------------------------------------------------
                                                                                                    143,690     135,836
Less - Accumulated depreciation                                                                     (79,235)    (60,809)
-----------------------------------------------------------------------------------------------------------------------
   Total property and equipment, net                                                                 64,455      75,027
-----------------------------------------------------------------------------------------------------------------------

OTHER ASSETS
Satellite deposits                                                                                    8,380       1,441
Long-term investments, consisting of U.S. Treasury securities                                         3,970       6,941
Other                                                                                                 4,035         162
-----------------------------------------------------------------------------------------------------------------------
   Total other assets                                                                                16,385       8,544
-----------------------------------------------------------------------------------------------------------------------
                                                                                                   $206,310    $217,354
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Accounts payable and accrued expenses                                                              $ 60,599    $ 51,921
Deferred revenue                                                                                     56,156      47,120
Manufacturer Incentive obligation                                                                    17,023       3,677

-----------------------------------------------------------------------------------------------------------------------
   Total current liabilities                                                                        133,778     102,718
-----------------------------------------------------------------------------------------------------------------------

MANUFACTURER INCENTIVE OBLIGATION                                                                    60,433      14,632
DUE TO HBI                                                                                           10,000      10,527
COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value, 50 million shares authorized; none issued or outstanding                --          --
Class A Common Stock -
  Participating, voting, $.0001 par value, 500 million shares authorized,16,172,601 and
  15,114,676 shares issued and outstanding at December 31, 1997 and 1996, respectively                    2           2
Common Stock -
  Participating, voting, $.0001 par value, 100 million shares authorized, 73,638,174 and
  74,696,099 shares issued and outstanding at December 31, 1997 and 1996, respectively                    7           7
Additional paid-in capital                                                                          374,877     378,114
Accumulated deficit                                                                                (372,777)   (285,471)
Unrealized loss on investments                                                                          (10)        (22)
-----------------------------------------------------------------------------------------------------------------------
                                                                                                      2,099      92,630
Unused media credits                                                                                     --      (3,153)
-----------------------------------------------------------------------------------------------------------------------
            Total shareholders' equity                                                                2,099      89,477
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
                                                                                                  $ 206,310   $ 217,354
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
 </TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.

                                                                            17
<PAGE>


                  Consolidated Statements of Shareholders' Equity
        UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>

                                                CLASS A
                                              COMMON STOCK      COMMON STOCK
                                             --------------    --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)        SHARES  AMOUNT    SHARES  AMOUNT    WARRANTS
-------------------------------------------------------------------------------------------
<S>                                          <C>     <C>       <C>     <C>       <C>
SHAREHOLDERS' EQUITY AT DECEMBER 31 1994     16,876   $2       72,935   $ 7       $7,350
Unrealized gain on investments                    -    -            -     -            -
Media credits utilized                            -    -            -     -            -
Net loss                                          -    -            -     -            -
-------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31, 1995    16,876    2       72,935     7        7,350
Conversion of shares
  pursuant to Recapitalization              (16,876)  (2)      16,876     2            -
Conversion of notes and
  cancellation of warrants                        -    -        7,412     1       (7,350)
Conversion of shares available
  for overallotment                           1,245    -       (1,245)    -            -
Transfer of common stock from HBI                 -    -      (15,712)   (2)           -
Sale of Class A common stock
  for $27 per share, net                      8,300    1            -     -            -
Conversion of shares pursuant
  to certain shareholder rights               5,570    1       (5,570)    1            -
Media credits utilized                            -    -            -     -            -
Unrealized loss on investments                    -    -            -     -            -
Net loss                                          -    -            -     -            -
-------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31 1996     15,115    2       74,696     7            -
Conversion of shares pursuant
  to certain shareholder rights               1,058    -       (1,058)    -            -
Media credits utilized                            -    -            -     -            -
Media credits cancelled                           -    -            -     -            -
Unrealized gain on investments                    -    -            -     -            -
Net loss                                          -    -            -     -            -
-------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31, 1997    16,173  $ 2       73,638   $ 7       $    -
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------

FOR THE SIX MONTHS ENDED DECEMBER 31, 1997:
-------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1997        15,589   $2       74,222   $ 7        $   -
Conversion of shares pursuant
  to certain shareholder rights                 584    -         (584)    -            -
Media credits utilized                            -    -            -     -            -
Media credits cancelled                           -    -            -     -            -
Unrealized gain on investments                    -    -            -     -            -
Net loss                                          -    -            -     -            -
-------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31, 1997    16,173  $ 2       73,638    $7        $    -
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------
<CAPTION>
                                                                       UNREALIZED
                                           ADDITIONAL                    GAIN          UNUSED
                                            PAID-IN    ACCUMULATED     (LOSS) ON       MEDIA
                                            CAPITAL      DEFICIT      INVESTMENTS     CREDITS       TOTAL
------------------------------------------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>            <C>          <C>
SHAREHOLDERS' EQUITY AT DECEMBER 31 1994    $127,423    $ (89,134)    $       -      $(4,330) $    41,318
Unrealized gain on investments                     -            -           154            -          154
Media credits utilized                             -            -             -          934          934
Net loss                                           -      (91,378)            -            -      (91,378)
------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31, 1995    127,423     (180,512)          154       (3,396)     (48,972)
Conversion of shares
  pursuant to Recapitalization                     -            -             -            -           -
Conversion of notes and
  cancellation of warrants                    44,491            -             -            -       37,142
Conversion of shares available
  for overallotment                                -            -             -            -            -
Transfer of common stock from HBI                  -            -             -            -           (2)
Sale of Class A common stock
  for $27 per share, net                     206,200            -             -            -      206,201
Conversion of shares pursuant
  to certain shareholder rights                    -            -             -            -            -
Media credits utilized                             -            -             -          243          243
Unrealized loss on investments                     -            -          (176)           -         (176)
Net loss                                           -     (104,959)            -            -     (104,959)
------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31 1996      378,114    (285,471)          (22)      (3,153)      89,477
Conversion of shares pursuant
  to certain shareholder rights                    -            -             -            -            -
Media credits utilized                             -            -             -          (84)         (84)
Media credits cancelled                       (3,237)           -             -        3,237            -
Unrealized gain on investments                     -            -            12            -           12
Net loss                                           -      (87,306)            -            -      (87,306)
------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31, 1997   $374,877    $(372,777)         $(10)     $     -     $  2,099
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------

FOR THE SIX MONTHS ENDED DECEMBER 31, 1997:
------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1997       $378,114    $(317,204)         $(12)     $(3,240)     $57,667
Conversion of shares pursuant
  to certain shareholder rights                    -            -             -            -            -
Media credits utilized                             -            -             -            3            3
Media credits cancelled                       (3,237)           -             -        3,237            -
Unrealized gain on investments                     -            -             2            -            2
Net loss                                           -      (55,573)            -            -      (55,573)
------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31, 1997   $374,877    $(372,777)         $(10)     $     -    $   2,099
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
</TABLE>


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

18

<PAGE>


                       Consolidated Statements of Cash Flows
        UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES

<TABLE>

                                                      FOR THE SIX MONTHS ENDED   FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)                                            DECEMBER 31, 1997       1997      1996     1995
-----------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                     <C>        <C>         <C>
OPERATING ACTIVITIES
Net Loss                                                    $(55,573)         $ (87,306) $(104,959)  $(91,378)
Adjustments to reconcile net loss to
       net cash used in operating activities-
  Depreciation and amortization                                8,706             18,426     19,687     21,323
  Interest accretion, net                                          -                  -        122      1,428
  Deferred loan origination fees charged to
       expense in connection with termination
       of Credit Agreement                                         -                  -      5,465          -
  Media credits utilized                                           3                (84)       243        934
  Change in operating items:
       Trade accounts receivable                              (6,146)            (2,590)   (25,532)   (12,539)
       Prepaid expenses and other current assets              (3,549)            (6,969)      (278)      (577)
       Accounts payable and accrued expenses                    (672)             8,679     19,851     25,740
       Deferred revenue                                        3,916              9,036     23,943     16,728
       Manufacturer Incentive                                 37,003             59,146     14,632          -
       Other                                                  (3,785)            (3,829)      (974)    (4,057)
-----------------------------------------------------------------------------------------------------------------
         Net cash used in operating activities               (20,097)            (5,491)   (47,800)   (42,398)
-----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of and deposits on equipment                         (4,239)           (14,854)    (5,487)    (7,697)
Proceeds from sales of short-term investments                      -                  -          -        367
Proceeds from sale of long-term
  available-for-sale investments                                   -              3,000      5,996      2,100
-----------------------------------------------------------------------------------------------------------------
         Net cash provided by (used in)
           investing activities                               (4,239)           (11,854)       509     (5,230)
-----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Advances from (repayments to) affiliated companies              (382)              (527)      (637)     7,242
Proceeds from debt borrowings                                      -                  -        485     91,436
Repayment of debt                                                  -                  -    (91,922)   (33,184)
Proceeds from sale of common stock                                 -                  -    206,200          -
-----------------------------------------------------------------------------------------------------------------
         Net cash provided by (used in) financing
           activities                                           (382)              (527)   114,126     65,494
-----------------------------------------------------------------------------------------------------------------
         Increase (decrease) in cash and cash
           equivalents                                       (24,718)           (17,872)    66,835     17,866
CASH AND CASH EQUIVALENTS, beginning of period                93,364             86,518     19,683      1,817
-----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period                    $ 68,646          $  68,646  $  86,518   $ 19,683
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
NONCASH TRANSACTIONS
Conversion of notes and cancellation of warrants            $      -          $      -     $44,491   $      -
-----------------------------------------------------------------------------------------------------------------
Expiration of unused media credits                          $ (3,237)         $ (3,237)    $     -   $      -
-----------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid during the period for -
   Interest                                                 $      -          $      -     $     -   $  6,739
   Income taxes                                             $      -          $      -     $     -   $      -
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
                                                                              19



<PAGE>

                     Notes to Consolidated Financial Statements

NOTE 1   Organization and Summary of Significant Accounting Principles

United States Satellite Broadcasting Company, Inc. and Subsidiaries ("USSB"
or the "Company") provide subscription television programming via a
high-power direct broadcast satellite ("DBS") to households throughout the
continental United States. The Company broadcasts a high quality digital
television signal using the Digital Satellite System ("DSS-Registered
Trademark-"). The Company's programming is available to customers who have a
DSS unit, which consists of an 18-inch satellite dish, a receiver/decoder and
a remote control. All of the Company's gross revenues and identifiable assets
relate to the Company's activities in this industry.

  Hubbard Broadcasting, Inc. ("HBI") beneficially owned 51.8% of the Company as
of December 31, 1997 and 1996, and had approximately 61.8% of the combined
voting power with respect to all matters submitted for the vote of all
shareholders at December 31, 1997.

  Until July 1, 1994, the Company was a development stage company. The
Company has incurred losses since its inception and had an accumulated
deficit of approximately $372.8 million as of December 31, 1997. Management
anticipates that losses will continue into 1999 because the Company plans to
continue to incur substantial selling and marketing expenses (including
Manufacturer Incentive program expenses) to expand its subscriber base. The
Company's future success will be dependent on continued growth of the
Company's subscriber base and attaining profitability.

  Existing contractual obligations (see Note 5) may require capital resources
in excess of cash balances plus anticipated operating cash flows during 1998
and beyond. The Company may consider debt financing alternatives to augment
those resources. The Company believes that such financing would be available
from a number of sources. However, if such financing is not available on
terms satisfactory to the Company, management has the ability to reduce its
planned consumer and trade marketing expenditures. Such reductions could have
the effect of slowing the rate of subscriber growth in 1998 and beyond.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly owned Subsidiaries, including USSB II, Inc. ("USSB II"). USSB II
owns the Company's satellite transponders and holds the Company's FCC
licenses and permits (see Note 5). All significant intercompany accounts and
transactions have been eliminated in consolidation.

USE OF ESTIMATES

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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents, which consist primarily of short-term United
States Treasury-backed securities with original maturities of less than 90
days, are stated at cost, which approximates fair value.

INVESTMENTS

Long-term investments at December 31, 1997, consist of a U.S. Treasury
security maturing in 1999, which the Company classifies as
available-for-sale. The security bears interest at 5.5% and its aggregate
amortized cost approximated its market value of $3,970,000 at December 31,
1997. During 1997 the Company sold $3.0 million of U.S. Treasury securities.
The securities held on December 31, 1996, had an aggregate amortized cost
that approximated their market value of $6,941,000. Unrealized gains and
losses are reported as a separate component of shareholders' equity.

MANUFACTURER INCENTIVE PROGRAM

The Company's costs under its financial incentive arrangements with
manufacturers of DSS equipment are charged to expense as incurred. See Note 5
for additional disclosure regarding these arrangements.

20
<PAGE>

RETAILER COMMISSIONS

The Company generally pays commissions to eligible retailers for their
customers who are paying subscribers. Commissions paid are charged to expense
over the related subscription period. Deferred retailer commissions totaled
$546,000 and $1,790,000 at December 31, 1997 and December 31, 1996,
respectively, and are included with prepaid expenses and other current assets
in the accompanying consolidated balance sheets. Accrued retailer commissions
totaled $5,996,000 at December 31, 1997 and $6,543,000 at December 31, 1996.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation is provided using
accelerated and straight-line methods based on estimated useful lives as
follows:

<TABLE>

<S>                        <C>
Satellite Transponders       10 years
Other Equipment            5-10 years
Buildings & Improvements     31 years

</TABLE>

FINANCIAL INSTRUMENTS

Unless otherwise indicated, the recorded value of the Company's financial
instruments approximates their fair value.

REVENUE RECOGNITION

Programming revenues are recorded as income when the respective services are
rendered. Subscriptions received in advance of the delivery of the related
programming are recorded as deferred revenue.

ADVERTISING AND PROMOTIONS

Costs for advertising and promotional materials and activities (including the
cost, if any, of programming provided to current or prospective customers
free of charge) are charged to expense as incurred.

RESEARCH AND DEVELOPMENT

Costs related to the Company's research and development efforts are charged
to expense as incurred.

INCOME TAXES

Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities. These differences will result in taxable or deductible amounts
in the future based on enacted tax laws and are applicable to the periods in
which the differences are expected to affect taxable income.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

During June 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130), effective for fiscal years beginning after December 15, 1997. SFAS No.
130 will require the Company to report and display comprehensive income and its
components. Comprehensive income is defined as changes in equity of a business
enterprise during a period except those resulting from investments by owners and
distributions to owners. The changes required by SFAS No. 130 will not affect
net income or shareholders' equity.

NOTE 2    Change in Fiscal Year

On September 4, 1997, the Board of Directors of the Company voted to change
the Company's fiscal year end from June 30 to December 31, beginning with a
six month transition period ending on December 31, 1997. The accompanying
financial statements have been recast to conform to the new calendar year
presentation.

  Summarized financial data for the six month period ended December 31, 1996 is
presented for purposes of comparison
as follows:

<TABLE>

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                       <C>
Revenue                                   $  171,348
Cost of Sales                                112,628
----------------------------------------------------
Gross Margin                                  58,720
Operating Expenses                           126,110
----------------------------------------------------
Net Operating Loss                           (67,390)
Other (income) expense, net                   (2,833)
----------------------------------------------------
Net Loss                                     (64,557)
----------------------------------------------------
----------------------------------------------------
Net Loss per share - basic and diluted    $    (0.72)
----------------------------------------------------
----------------------------------------------------

</TABLE>

                                                                            21
<PAGE>

NOTE 3    Shareholders' Equity

RECAPITALIZATION AND INITIAL PUBLIC OFFERING

In the third quarter of 1995, the Company decided to proceed with an initial
public offering of its Class A Common Stock. In connection with the offering,
on January 31, 1996, the Company effected a recapitalization of the Company's
capital structure.

  Prior to the recapitalization, the Company's capitalization consisted of two
classes of common stock (referred to herein as "old common stock" and "old class
A common stock"). Terms of the recapitalization included (i) a change in the
authorized capital of the Company to consist of 100,000,000 shares of Common
Stock, 500,000,000 shares of Class A Common Stock and 50,000,000 shares of
undesignated Preferred Stock; (ii) the conversion of the Company's old common
stock and old class A common stock into shares of Common Stock; (iii) the
conversion of certain convertible subordinated promissory notes into shares of
Common Stock and the cancellation of warrants issued to the holders of those
notes; (iv) a 75-for-one split of the new capital stock; and (v) the
contribution by HBI of 8,300,000 shares of Common Stock in connection with the
public offering and 7,411,950 shares of Common Stock in connection with
conversion of the convertible subordinated promissory notes, pursuant to HBI's
agreements with certain current shareholders, in order to prevent those
shareholders from experiencing dilution in their ownership of the Company. The
Company's consolidated financial statements are presented as if the above
changes in authorized capital and the 75-for-one split of new capital stock had
been effective for all periods presented.

  The offering (which closed on February 6, 1996) consisted of the sale by the
Company of 8,300,000 shares of Class A Common Stock at $27.00 per share,
generating proceeds of approximately $206.2 million, net of underwriting
commissions and other expenses incurred in connection with the offering.

  Pursuant to the overallotment provisions in the underwriting agreement,
certain shareholders who had purchased shares of the Company's capital stock in
previous private placements sold 1,245,000 shares of newly converted Class A
Common Stock in connection with the offering. The Company did not receive any of
the proceeds of such sales.

CONVERSION RIGHTS

On May 1, 1996, approximately 3.1 million shares of the Company's Common Stock,
with 10 votes per share, automatically converted into Class A Common Stock, with
one vote per share, at a conversion ratio of 1:1. On July 30, 1996, the
remainder of the Company's Common Stock, with 10 votes per share, became
eligible, at the option of the holders thereof, to convert into Class A Common
Stock, with one vote per share, at a conversion ratio of 1:1.

  In accordance with certain shareholder agreements, prior to the Company's
initial public offering, the ownership percentages of certain shareholders,
other than HBI, were protected from dilution, based on total outstanding shares
of 89,810,775, until the ownership of HBI was reduced to 51%. In connection with
the Company's initial public offering, 15,711,950 shares of old common stock
were contributed by HBI to the Company for no consideration in 1996. In
addition, certain shareholders holding 22,645,350 shares of Common Stock have
certain "piggy-back" rights to participate in certain public offerings of the
Company's stock and certain "co-sale" rights to include all or a portion of
their shares in certain sales by HBI of its stock of the Company.

UNUSED MEDIA CREDITS

In connection with a sale of old class A common stock in 1994, the Company
received a $5.0 million media credit. The unused balance of the media credit at
December 31, 1997 ($3.2 million) was canceled by the Company. Such cancellation
was recorded as a reduction of additional paid-in capital to reflect the actual
net proceeds realized from the original stock sale.

STOCK-BASED COMPENSATION

In December 1995, the Company's shareholders approved a stock option plan
(the "1995 Plan") and, in November 1996, the Company's shareholders approved
a Non-Employee Director Stock Option Plan (the "1996 Non-Employee Director
Plan") (together, the "Option Plans"). The Option Plans authorize the
granting of options to purchase up to an aggregate of 2,150,000 shares of
Class A Common Stock. The 1995 Plan provides for employees, officers and
consultants of the Company

22
<PAGE>

to be granted options to purchase Class A Common Stock of two types: (i)
those that qualify as incentive stock options ("Incentive Options") within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended,
and (ii) those that do not qualify as Incentive Options ("Nonstatutory
Options"). All options granted under the 1996 Non-Employee Director Plan are
Nonstatutory Options. The Option Plans are administered by the Compensation
Committee. Under the 1995 Plan, the Compensation Committee determines the
persons who are to receive options, the terms and the number of shares
subject to each option and whether the option is to be an Incentive Option or
a Nonstatutory Option. The 1996 Non-Employee Director Plan provides for the
automatic, non-discretionary, grant of options. Information regarding the
Option Plans is as follows:

<TABLE>
<CAPTION>

YEARS ENDED DECEMBER 31                                  1997                                              1996
---------------------------------------------------------------------------------------------------------------------------------
                                  SHARES UNDER                 WEIGHTED AVERAGE   SHARES UNDER                    WEIGHTED AVERAGE
                                  OPTION PLAN  EXERCISE PRICE   EXERCISE PRICE     OPTION PLAN   EXERCISE PRICE   EXERCISE PRICE
---------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>          <C>             <C>                <C>            <C>              <C>
Outstanding at beginning of year    439,700    $11.50  - $36.00          $26.55              -                 -               -
Granted                             260,300    $ 7.50  - $12.00           $8.04        475,300   $11.50  - $36.00         $26.62
Exercised                                 -                   -               -              -                 -               -
Forfeited                           (10,000)   $11.50  - $27.00          $24.45        (35,600)  $27.00  - $28.50         $27.45
---------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year          690,000    $ 7.75  - $36.00          $19.58        439,700   $11.50  - $36.00         $26.55
Exercisable at end of year          103,946    $ 7.75  - $36.00          $23.64         11,000             $11.50         $11.50
Weighted average fair value
     of options granted               $5.24                                             $17.72
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------

SIX MONTHS ENDED DECEMBER 31                                                                               1997
---------------------------------------------------------------------------------------------------------------------------------
                                                                                  SHARES UNDER                    WEIGHTED AVERAGE
                                                                                  OPTION PLAN    EXERCISE PRICE    EXERCISE PRICE
---------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year                                                      444,700    $11.50  - $36.00         $27.16
Granted                                                                               250,300    $ 7.75  - $ 9.25         $ 7.88
Exercised                                                                                   -                   -             -
Forfeited                                                                              (5,000)   $11.50  - $27.00         $23.90
---------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year                                                            690,000    $  7.75  - $36.00        $19.58
Exercisable at end of year                                                            103,940    $  7.75  - $36.00        $23.64
Weighted average fair value of options granted                                          $5.11
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------

</TABLE>

  As of December 31, 1997, the outstanding stock options granted in 1996 have a
remaining contractual life of approximately 8.1 years and the outstanding stock
options granted in 1997 have a remaining contractual life of approximately 9.8
years.

  The Company accounts for the Option Plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for the
Option Plans been determined consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the
Company's pro forma net loss and pro forma loss per share would have been as
follows (in thousands):


<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------
                                                       FOR THE SIX MONTHS ENDED    YEARS ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------------------
                                                          DECEMBER 31, 1997          1997       1996
-----------------------------------------------------------------------------------------------------------
<S>                                        <C>            <C>                      <C>         <C>
Net loss                                   As Reported        $(55,573)            $(87,306)   $(104,959)
                                             Pro Forma        $(56,851)            $(88,670)   $(112,750)
Net loss per share - basic and diluted     As Reported        $  (0.62)            $  (0.97)   $   (1.17)
                                             Pro Forma        $  (0.63)            $  (0.99)   $   (1.26)

</TABLE>

                                                                              23
<PAGE>

  The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumptions: risk-free interest rates of 6.2% in 1996 and 6.3% in
1997; expected life of 10 years for 1997 and 1996; expected volatility of 45%
in 1996 and 39.5% in 1997.

LOSS PER SHARE

The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings and loss per Share" (SFAS No. 128) effective December 31, 1997. As
a result, all prior periods presented have been restated to conform to the
provisions of SFAS No. 128, which requires the presentation of basic and
diluted earnings and loss per share. Basic loss per share is computed by
dividing net loss by the weighted average number of common shares outstanding
during each year. Diluted loss per share is computed under the treasury stock
method and is calculated to include the dilutive effect of outstanding stock
options. A reconciliation of these amounts is as follows (in thousands,
except per share data):

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------
                                      FOR THE SIX MONTHS ENDED          YEARS ENDED DECEMBER 31
----------------------------------------------------------------------------------------------------
                                             DECEMBER 31, 1997        1997      1996        1995
----------------------------------------------------------------------------------------------------
<S>                                   <C>                           <C>        <C>         <C>
Net loss                                              $(55,573)     $(87,306)  $(104,959)  $(91,378)
Weighted average number of common
  shares outstanding - basic                            89,811        89,811      89,811     89,811
Dilutive effect of option plans                              5             5           -          -
----------------------------------------------------------------------------------------------------
Common and common equivalent shares
  outstanding - diluted                                 89,816        89,816      89,811     89,811
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Net loss per share - basic and
  diluted                                            $    (.62)      $  (.97)  $   (1.17)   $(1.02)
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------

</TABLE>


NOTE 4   Long-Term Debt

CREDIT AGREEMENT

In December 1994, the Company entered into a credit agreement with a syndicate
of financial institutions (the "Credit Agreement"), which provided for
borrowings up to $90.0 million, $60.0 million of which was borrowed at closing
in January 1995. During August 1995, the Company borrowed another $20.0 million
under the Credit Agreement and, in December 1995, borrowed an additional $10.0
million. Borrowings under the Credit Agreement bore interest at LIBOR plus 4.5%
per annum.

  In April 1996, the Company elected to repay the entire outstanding balance of
the term loan under the Credit Agreement of $90.0 million and to terminate the
Credit Agreement. In connection with the termination, the Company paid
previously deferred interest of $1.9 million and a prepayment fee of
approximately $4.0 million. The Company also charged to expense deferred loan
origination fees of approximately $5.5 million which were previously being
amortized over the life of the Credit Agreement.

CONVERTIBLE SUBORDINATED PROMISSORY NOTES

During 1994, the Company issued and sold unsecured convertible subordinated
promissory notes (the "Notes") for $34.5 million. The Notes were scheduled to
mature in March 1999 at a face value of $42 million and interest accreted at an
imputed rate of 3.94%. The Notes were subject to mandatory conversion into
shares of old class A common stock equal to the face amount of the Notes divided
by $5.66 if the gross proceeds of an initial public offering of the Company were
to exceed $50 million at an offering price of at least $7.00 per share. Such
conversion occurred as part of the recapitalization described in Note 3 at which
time the Notes (including cumulative accretion) had a recorded balance of $37.1
million. The conversion did not result in the issuance of additional shares of
the Company, as HBI simultaneously contributed to USSB an equivalent number of
shares. Issued with the convertible subordinated promissory notes were warrants
valued at $7.5 million, which were canceled as a part of the recapitalization.

24

<PAGE>

NOTE 5  Commitments and Contingencies

REGULATORY MATTERS

USSB II, Inc. (a wholly owned subsidiary of the Company) holds a license from
the Federal Communications Commission (the "FCC") to broadcast from five
transponders at 101DEG.  west longitude (the "License"). The Company must
continue to maintain the License to operate its business. The License expires in
June 1999 and is renewable at ten-year intervals. Although the Company expects
to obtain such renewals in the ordinary course, there can be no assurance that
such renewals will be granted.

  The construction and launch of broadcasting satellites and the operation of
satellite broadcasting systems are subject to substantial regulation by the FCC.
Under the License, the Company is subject to FCC review primarily for the
following: (i) standards regarding individual satellites (e.g., meeting minimum
financial, legal and technical standards); (ii) avoiding interference with other
satellites; and (iii) complying with rules the FCC has established specifically
for high-power DBS satellite licenses. In addition, uplink facilities are
separately licensed by the FCC. The Company's National Broadcast Center and the
Auxiliary Broadcast Center have each received its FCC license. FCC rules are
subject to change in response to industry developments, new technology and
political considerations.

  The FCC has also granted the Company a Construction Permit and Launch
Authority (the "Permit"), held by USSB II, for satellites with three
transponders at 110DEG.  west longitude and eight transponders at 148DEG.  west
longitude. The Permit requires the Company to comply with specified construction
and launch schedules. The FCC has the authority to revoke the Permit if the
Company fails to comply with the FCC schedule for construction and launch. In
connection therewith, the Company has entered into satellite construction
contracts with Lockheed Martin Astro Space Corp. ("Lockheed Martin") for the
construction of the two satellites (see below).

  While the Company has generally been successful to date with respect to
compliance with regulatory matters, there can be no assurance that the Company
will succeed in obtaining and maintaining all requisite regulatory approvals for
its operations.

LOCKHEED MARTIN ASTRO SPACE AGREEMENT

The Company has entered into contracts with Lockheed Martin for the construction
of direct broadcast satellites at the 110DEG.  orbital location (the "110DEG.
Contract") and at the 148DEG.  orbital location (the "148DEG.  Contract").

  Under the 110DEG.  Contract, as amended effective December 31, 1997, the
Company is required to pay $74.6 million for satellite construction, of which
$7.0 million has been paid to date. The contract also provides for payments
for ongoing operations services and in-orbit performance incentive payments
during the life of the satellite. In addition, substantial costs would be
incurred to launch and insure the satellite. No material payments are
anticipated under the 148DEG.  Contract, as amended effective December 31,
1997, earlier than December 31, 1998. The Company has previously paid $1.4
million under a predecessor contract for the construction of satellites at
the 110DEG.  and 148DEG.  orbital locations.

  While these agreements are cancelable in whole or in part at the option of the
Company, such cancellation would require forfeiture of any deposits and progress
payments made, plus additional penalties. If satellite construction proceeds as
scheduled under the 110DEG Contract, aggregate amounts due are as follows: $22.5
million through December 31, 1998 and $45.1 million in the year ended December
31, 1999.

ADVERTISING AND PROMOTIONS

The Company has entered into commitments to purchase or participate in joint
purchases of broadcast, print and other media for advertising and promotional
purposes. At December 31, 1997, such commitments totaled $5.9 million due
through December 31, 1998, with the non-cancellable portion of such
commitments totaling $3.6 million.

INSURANCE

The Company maintains business interruption and in-orbit insurance coverages at
levels management considers necessary to address the normal risks of operating
via communications satellite, including damage, destruction or failure of the
satellite or its transponders. Additionally, the Company maintains general
liability and directors' and officers' insurance coverages.

                                                                            25
<PAGE>

LITIGATION

In November 1996, Personalized Media Communications, L.L.C. ("PMC") initiated
legal proceedings against the Company and others before the United States
International Trade Commission ("ITC"), and in the United States District
Court for the Northern District of California. The Company does not believe
that PMC is entitled to damages or any remedies from the Company, and
management intends to vigorously defend both actions. See Part I, Item 3 of
this Report on Form 10-K for a description of this matter.

  In June 1997, IPPV Enterprises, a Georgia partnership ("IPPV") initiated a
legal proceeding against the Company and others in the United States District
Court for the District of Delaware. The Company does not believe that IPPV is
entitled to damages or any remedies from the Company, and management intends
to vigorously defend the action. See Part I, Item 3 of this Report on Form
10-K for a description of this matter.

  The Company is also exposed to other litigation encountered in the normal
course of business. In the opinion of management, the resolution of these other
litigation matters of which the Company is aware will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.

MANUFACTURER INCENTIVE PROGRAM

On August 26, 1996, the Company, together with DIRECTV, Inc. (the Company's DSS
partner), announced that it had entered into financial incentive arrangements
with certain manufacturers of DSS equipment to assist these manufacturers in
lowering the price of DSS units. Such arrangements, which run for up to four
years depending on manufacturer, commit the Company to pay the manufacturers
over a five-year period from the date new DSS households are authorized to
receive programming. The expense and liability for such future commitments is
established and recorded upon activation of the related DSS unit. In the six
months ended December 31, 1997, the Company charged to expense $42.8 million,
representing the full amount of those future obligations for the Manufacturer
Incentive program incurred during the six months ended December 31, 1997 for the
sale of DSS units to new households. For the year ended December 31, 1997, the
Company charged to expense $66.7 million, and $18.4 million for the year ended
December 31, 1996. Net of cash paid in 1997 totaling $7.6 million, such future
obligations totaled $77.5 million at December 31, 1997, payable in the following
years:

<TABLE>
<CAPTION>
               (IN THOUSANDS)
----------------------------
<S>            <C>
1998                $17,023
1999                 17,023
2000                 17,023
2001                 16,655
2002                  9,732
----------------------------
                    $77,456
----------------------------
----------------------------
</TABLE>


  While the amounts to be incurred in the future by the Company under these
arrangements cannot be precisely estimated, the company expects that as the
level of retail DSS unit sales increase, the expense and cash flow related to
these arrangements will increase accordingly.

  The fair value of the future obligation at December 31, 1997 is approximately
$64.3 million and has been calculated by discounting the future cash flows at
the Company's estimated incremental borrowing rate.

NOTE 6   Related-Party Transactions

Certain officers and directors of the Company are also employed by, and spend a
significant portion of their time on, the businesses of HBI and its affiliates
other than the Company. Each of such persons who is a director has indicated to
the Company that, should a conflict of interest arise, he will promptly disclose
such conflict to the Company's Board of Directors and refrain from voting on
such matter as a director.

DUE TO HBI

Debt due to HBI consists principally of amounts accrued for management services
valued at $10.0 million provided to the Company by HBI during the years 1992
through 1994 under an agreement which expired June 30, 1994. The balance does
not bear interest. The Company was contingently obligated to

26

<PAGE>

pay these amounts and they will not become due until, in Company management's
opinion, adequate working capital exists. As a result of certain significant
financial performance thresholds, USSB management discontinued accruing the $3.3
million annual charge after 1992 and did not intend to accrue any additional
charges until and unless it was determined payment could be considered probable.
When the Company decided to proceed with its initial public stock offering,
management determined that it became likely that certain preconditions would
ultimately be satisfied, and therefore made this obligation probable, although
the timing of the cash payment of the $10.0 million has not been determined.
Accordingly, during the quarter ended September 30, 1995, the Company accrued as
an operating expense the remaining $6.7 million of its management fee
obligation. The Company intends to defer payment of these charges for the
foreseeable future.

  HBI provides certain general and administrative services to the Company under
an agreement that is renewed annually. The Company incurred a charge of $625,900
for such services for the six months ended December 31, 1997, $1,123,900 for
1997, $978,000 for 1996 and $902,000 for 1995. The Company expects to incur a
charge to HBI for general and administrative services of $1.3 million in 1998,
to be paid on a monthly basis.

  The Company's general and administrative expenses also include consulting
fees paid to entities related to directors and officers of the Company
totaling $0.4 million for the six months ended December 31, 1997, $0.9
million for 1997, $0.9 million for 1996, and $0.5 million for 1995.

  In connection with the Company's initial public offering, the Company paid
aggregate commissions of $13.9 million to the underwriters of its offering.
Certain directors of the Company are employed by or affiliated with certain of
these underwriters.

  The Company purchases programming, engineering services and other services
from other entities affiliated with HBI. Certain engineering and other services
are purchased from a partnership in which HBI is a general partner. Certain
programming is purchased from a joint venture in which such partnership is a
partner. Management believes that the parties will review the current agreement
during 1998 in light of the integration of the basic channels previously carried
by USSB into the DIRECTV channel line-up. Amounts included in the accompanying
consolidated statements of operations which were purchased from these affiliated
entities are as follows (in thousands):

<TABLE>
<CAPTION>
                             FOR THE SIX MONTHS ENDED          YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------------------
                                    DECEMBER 31, 1997             1997   1996   1995
---------------------------------------------------------------------------------------
<S>                          <C>                               <C>      <C>     <C>
Cost of programming                            $2,765           $5,212  $3,599  $1,524
Engineering and operations                         82              203     165     554
Selling and marketing                               -                -       -      45
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
                                               $2,847           $5,415  $3,764  $2,123
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------

</TABLE>

  The Company believes that the services provided between the Company and HBI
and its subsidiaries and affiliates, and by entities with which certain
directors are affiliated, are on terms comparable to those available from third
parties and that such terms are reasonable.

OTHER

The Company's employees participate in a 401(k) plan sponsored by HBI. Under the
terms of the plan, the Company may make annual base contributions and can match
participant contributions for each year. An employee becomes eligible to
participate in the plan after 12 months of service during which the employee has
worked 1,000 hours. HBI made contributions to the plan on behalf of the
Company's employees (which amounts were reimbursed by the Company) of $90,000
during the six months ended December 31, 1997, $157,000 during 1997, $116,000
during 1996, and $47,000 during 1995.

                                                                             27

<PAGE>

NOTE 7  Income Taxes

The Company's deferred tax assets and liabilities, all of which are long-term,
are summarized as follows (in thousands):

<TABLE>
<CAPTION>

DEFERRED TAX ASSET (LIABILITY) AS OF DECEMBER 31               1997      1996
---------------------------------------------------------------------------------
<S>                                                     <C>             <C>
Deferred tax assets:
     Manufacturer incentive                              $  30,983             -
     Preoperating capitalized costs                          2,201         4,087
     Capitalized interest                                      181           544
     Management services                                     4,337         4,338
     Other                                                   3,995         9,541
     Net operating loss carryforward                       121,825       107,170
---------------------------------------------------------------------------------
          Total deferred tax assets                        163,522       125,680
Deferred tax liabilities:
     Depreciation                                          (15,149)      (14,800)
          Total deferred tax liability                     (15,149)      (14,800)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Valuation allowance                                       (148,373)     (110,880)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
          Net deferred tax balance                       $      -       $      -
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>


  The Company has net operating losses for federal tax reporting purposes
totaling $304.5 million available for carryover to subsequent years as of
December 31, 1997, expiring in years 2000 through 2013. The valuation allowance
applied against the Company's net deferred tax assets increased by $22.2 million
for the six months ended December 31, 1997, $37.5 million for 1997, by $39.3
million for 1996, and by $21.4 million for 1995.

  The Company and HBI file separate federal tax returns and a combined state
tax return in Minnesota and New Mexico. HBI has benefited from this unitary
relationship as it has utilized USSB losses to reduce its combined income
subject to apportionment in Minnesota and New Mexico through December 31,
1996. The benefit that HBI realized was approximately $0.1 million for the
six months ended December 31, 1997, $0.2 million for 1997, $1.4 million for
1996, and $1.4 million for 1995. This unitary relationship has reduced the
Company's Minnesota net operating loss carryforward. Benefits realized by HBI
in years preceding 1994 were not significant. Under a tax sharing agreement,
HBI will reimburse the Company for such benefits in the year they would
otherwise have been realized by the Company.

28

<PAGE>

NOTE 8   Quarterly Condensed Financial Information (Unaudited)

Summarized unaudited quarterly data for 1997 and 1996 is as follows (in
thousands, except per share amounts):

<TABLE>
<CAPTION>

                                        FIRST QUARTER    SECOND QUARTER   THIRD QUARTER  FOURTH QUARTER  FULL YEAR
------------------------------------------------------------------------------------------------------------------
<S>                                     <C>              <C>              <C>            <C>             <C>
1997
Revenues                                     $ 99,231      $114,236          $114,383    $128,769        $ 456,619
Cost of sales                                  64,930        73,223            73,557      81,207          292,917
------------------------------------------------------------------------------------------------------------------
Gross Margin                                   34,301        41,013            40,826      47,562          163,702
Operating expenses                             57,925        51,620            70,082      76,197          255,824
------------------------------------------------------------------------------------------------------------------
Net operating loss                            (23,624)      (10,607)          (29,256)    (28,635)         (92,122)
Other (income) expense, net                    (1,174)       (1,324)           (1,109)     (1,209)          (4,816)
------------------------------------------------------------------------------------------------------------------
Net loss                                      (22,450)       (9,283)          (28,147)    (27,426)         (87,306)
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding            89,812        89,811            89,811      89,821           89,816
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Net loss per share - basic and diluted       $  (0.25)     $  (0.10)         $  (0.31)   $  (0.31)        $  (0.97)
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------

1996
Revenues                                     $ 56,988      $ 64,288          $ 79,244    $ 92,104        $ 292,624
Cost of sales                                  37,579        43,149            52,246      60,382          193,356
------------------------------------------------------------------------------------------------------------------
Gross margin                                   19,409        21,139            26,998      31,722           99,268
Operating expenses                             39,801        32,423            51,969      74,141          198,334
------------------------------------------------------------------------------------------------------------------
Net operating loss                            (20,392)      (11,284)          (24,971)    (42,419)         (99,066)
Other (income) expense, net                     1,066         7,660            (1,489)     (1,344)           5,893
------------------------------------------------------------------------------------------------------------------
Net loss                                      (21,458)      (18,944)          (23,482)    (41,075)        (104,959)
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding            89,860        89,937            89,841      89,811           89,811
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Net loss per share - basic and diluted       $  (0.24)     $  (0.21)         $  (0.26)   $  (0.46)        $  (1.17)
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------

</TABLE>

                                                                             29

<PAGE>


                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To United States Satellite Broadcasting Company, Inc.

We have audited the consolidated balance sheets of United States Satellite
Broadcasting Company, Inc. (a Minnesota corporation) and Subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1997 and for the six month period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United States Satellite
Broadcasting Company, Inc. and Subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 and for the six month
period ended December 31, 1997, in conformity with generally accepted
accounting principles.


/s/ Arthur Andersen LLP

MINNEAPOLIS MINNESOTA
JANUARY 30, 1997