<PAGE>
United States Satellite Broadcasting Company, Inc. and Subsidiaries
SELECTED FINANCIAL AND OPERATING DATA
                        

<TABLE>
<CAPTION>



                                                          For the Years Ended June 30
(In thousands, except per share data)        1997       1996        1995        1994     1993
---------------------------------------------------------------------------------------------
<S>                                      <C>        <C>          <C>         <C>       <C>
STATEMENT OF OPERATIONS DATA
Revenues                                 $384,815   $191,997     $42,337      $   --   $   --
Cost of sales                             250,781    127,183      27,868          --       --
---------------------------------------------------------------------------------------------
Gross margin                              134,034     64,814      14,469          --       --
Operating expenses:
    Selling and marketing                 104,437     80,971      37,542       2,495      119
    Manufacturer incentive                 42,354         --          --          --       --
    Depreciation and amortization          18,510     20,940      23,340       7,723        6
    General and administrative             43,965     20,645      13,623       6,158    2,176
    Engineering and operations             11,882      5,925       3,584       1,497      159
    Commissions to retailers               14,507     11,254       2,923          --       --
    Management fees (a)                        --      6,667          --          --       --
---------------------------------------------------------------------------------------------
         Net operating loss              (101,621)   (81,588)    (66,543)    (17,873)  (2,460)
Other (income) expense:
    Interest expense                           --      7,284       8,567       4,585    1,574
    Interest (income)                      (5,285)    (4,291)     (1,552)       (566)      --
    Cost to terminate Credit Agreement         --      9,504          --          --       --
    Other                                     (46)       994       1,165         309       27
---------------------------------------------------------------------------------------------
         Loss before income taxes         (96,290)   (95,079)    (74,723)    (22,201)  (4,061)
Income tax provision                           --         --          --           2       --
---------------------------------------------------------------------------------------------
         Net loss                        ($96,290)  ($95,079)   ($74,723)   ($22,203) ($4,061)
---------------------------------------------------------------------------------------------
Net loss per share                         ($1.07)    ($1.06)     ($0.83)     ($0.26)  ($0.05)
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Weighted average shares outstanding        89,811     89,862      89,811      84,383   78,965

<CAPTION>



                                                      At June 30


(In  thousands)                        1997       1996       1995       1994      1993

<S>                                 <C>       <C>         <C>        <C>        <C>
Balance Sheet Data
Cash and cash equivalents           $93,364   $114,166    $12,498    $ 7,744       $19
Working capital (deficit)            18,536     75,261     (9,267)     4,708    (7,844)
Long-term investments, consisting 
    of U.S. Treasury securities       3,963      6,836     12,832     19,802        --
Total assets                        222,013    232,143    140,215    181,797    51,718
Long-term debt                           --         --     96,912     93,373    11,933
Shareholders' equity                 57,667    153,672      5,045     78,014    16,660

</TABLE>

(a) In connection with management services performed by Hubbard Broadcasting,
Inc. ("HBI") for the Company during fiscal 1992, fiscal 1993 and fiscal 1994,
the Company agreed to pay HBI an aggregate of $10.0 million, of which $3.3
million was accrued in fiscal 1992 and the remainder accrued in the first
quarter of fiscal 1996, when it became likely certain preconditions to payment
would be satisfied.

                                      19
<PAGE>

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

OVERVIEW

    United States Satellite Broadcasting Company, Inc. ("USSB" or 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 expects that the Company will
experience net losses in fiscal 1998 and that net losses will continue for the
foreseeable future as the Company continues to build its subscriber base.

    Although there were several significant competitive developments in fiscal
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 June 30,
approximately 2.65 million households were authorized to receive DSS service
("DSS households"), up from 2.50 million at March 31, 1997.

    Forward-looking statements in this Annual Report 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 and USSB's programming; 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 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 I, Item 1, "Business - 
Competition" of the Company's Report on Form 10-K for the year ended June 30, 
1997 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 1,455,000 at
June 30, 1997 from approximately 1,378,000 at March 31, 1997.  Approximately
75,000 additional households were receiving a free promotional month of USSB
programming as of June 30, 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's Entertainment Plus 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


                                      20
<PAGE>

subscription decision. As of June 30, 1997, the Company achieved a penetration
of convertible households of approximately 64 percent (i.e., almost two-thirds
of DSS households that have received the free promotional month of USSB
programming are currently paying USSB 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 
                                                      PAYING                              PERCENT OF
                                                    SUBSCRIBERS                              USSB
    FOR THE           USSB            USSB              AND              USSB             CONVERTIBLE         ESTIMATED
    QUARTER          PAYING        PROMOTIONAL      PROMOTIONAL       CONVERTIBLE         HOUSEHOLDS             DSS
     ENDED      SUBSCRIBERS (a)  ACTIVATIONS (b)    ACTIVATIONS      HOUSEHOLDS (c)        SERVED (d)       HOUSEHOLDS (e)
 <S>            <C>              <C>             <C>                 <C>                  <C>               <C>
 June 30,
   1996               918              102              1,020               1,396              66%                  1,701
 Sept. 30,
   1996              1,045             134              1,179               1,560              67%                  1,942
 Dec. 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

</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 Entertainment Plus-Registered Trademark- 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 Entertainment Plus.  The amounts
    shown on and after June 30, 1996 reflect the elimination of certain DSS
    activations.  See note (e).

(d) Total USSB Paying Subscribers as of the end of the period as a percent of
    USSB Convertible Households.  The elimination of certain DSS activations
    from the estimate of DSS households described in note (e) has a favorable
    impact on the percentage shown in this column on and after June 30, 1996.

(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 will make periodic reconciliations to
    estimate the number of DSS households as accurately as possible.

    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 which 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.







<TABLE>
<CAPTION>

REVENUES:
(In thousands, except per subscriber data)

FOR THE QUARTER ENDED
---------------------
                                            JUNE 30        MARCH 31       DEC. 31        SEPT. 30       JUNE 30
                                              1997           1997          1996            1996           1996
                                              ----           ----          ----            ----           ----
<S>                                         <C>            <C>            <C>            <C>            <C>
Average monthly subscription revenue
per paying subscriber (a)                   $24.86         $24.86         $24.93         $25.43         $25.10

Total revenues                              $114,236       $99,231        $92,104        $79,244        $64,288


</TABLE>

(a) Excludes pay-per-view event, commercial and TV GUIDE-TM- subscription
    revenues.

    The Company's churn rate was 28.6% for the twelve months ended June 30,
1997. 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.  In fiscal 1997, 2.8% of the Company's churn rate
consisted of subscribers who were attributable to a third-party financing
program which is now terminated.  In addition, 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.  The Company
believes that its churn rate was affected by such promotional efforts in fiscal
1997.

                                     21

<PAGE>

RESULTS OF OPERATIONS

REVENUE OVERVIEW. The Company's total revenues increased to $384.8 million for
the year ended June 30, 1997, compared to $192.0 million for the year ended June
30, 1996, and $42.3 million for fiscal 1995.  The revenue increases between the
three fiscal years were 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 three fiscal years 
was primarily attributable to the increase in the number of paying 
subscribers to approximately 1,455,000 at June 30, 1997, up from 
approximately 918,000 at June 30, 1996, and 321,000 at June 30, 1995.  For a 
substantial portion of the 1995 fiscal year, the Company was in the start-up 
phase of its commercial operations. Average monthly revenue per subscriber 
for the fiscal year ended June 30, 1997 was $24.99, compared to $25.22 in 
fiscal 1996 and $26.29 in fiscal 1995. These decreases resulted primarily 
from promotions 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.  A significant portion of the Company's fiscal 1997
pay-per-view revenues were attributable to heavyweight boxing events.  The
revenues from such events are highly dependent on the particular boxing card
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 $250.8 million for the year ended June 30,
1997, compared to $127.2 million for the year ended June 30, 1996, and $27.9
million for fiscal 1995.  The increase in cost of programming for these fiscal
periods was primarily the result of an increased number of subscribers in each
period. Cost of sales represented 65.2 percent of programming revenues for
fiscal 1997 and 66.2 percent for fiscal 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 per quarter, and the
extent to which volume-based discounts from the Company's programming providers
are realized.

OPERATING EXPENSE OVERVIEW. Total operating expenses increased to $235.7 million
for fiscal 1997, compared to $146.4 million for fiscal 1996 and $81.0 million
for fiscal 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 fiscal
1997, 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. Selling and marketing expenses increased to 
$104.4 million for the year ended June 30, 1997, compared to $81.0 million 
for fiscal 1996 and $37.5 million for fiscal 1995. The increase for all 
periods was primarily attributable to expenditures to increase consumer 
awareness of both the DSS system and USSB programming, as well as customer 
service 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 


                                      22
<PAGE>

the related DSS unit. Manufacturer Incentive program expenses totaled $42.4 
million for the year ended June 30, 1997.  No amounts were incurred in the 
comparable prior year periods.

    DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense 
relates mainly to the Company's transponders on DBS-1 and transmission 
equipment located both at the Company's National Broadcast Center and its 
Auxiliary Broadcast Center. Depreciation and amortization was $18.5 million 
for the year ended June 30, 1997, compared to $20.9 million for fiscal 1996 
and $23.3 million for fiscal 1995.  The decrease in fiscal 1997 as compared 
to fiscal 1996 was primarily attributable to the effects of an accelerated 
method of depreciation for the Company's transponders, which results in 
decreasing periodic depreciation expense over their useful life. Fiscal 1995 
was the first full year in which depreciation was incurred on transponders 
and facilities. Most of the depreciation charge resulted from the Company's 
five-sixteenths ownership of DBS-1, which was launched in December 1993 and 
became operational in March 1994.

    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 $44.0 million
for the year ended June 30, 1997, compared to $20.6 million for fiscal 1996 and
$13.6 million for fiscal 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.

    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 increased to $11.9 million for the
year ended June 30, 1997, compared to $5.9 million for fiscal 1996 and $3.6
million for fiscal 1995. The increases were primarily attributable to higher
security and encryption fees, which are paid on a per subscriber basis.  An
upgrade in the conditional access system also contributed to the increase in
1997.

    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. Commissions to retailers increased
to $14.5 million for the year ended June 30, 1997, compared to $11.3 million for
fiscal 1996, and $2.9 million for fiscal 1995.  The increases in all fiscal
periods reflect increased USSB programming subscriptions.

    MANAGEMENT FEES. Management fees due to HBI of $6.7 million were accrued in
fiscal 1996, representing the remainder of fees for contracted management
services rendered to the Company by HBI during fiscal 1993 and fiscal 1994.

NET OPERATING LOSS. The Company recorded a net operating loss for the year ended
June 30, 1997 of $101.6 million, compared to net operating losses of $81.6
million for fiscal 1996 and $66.5 million for fiscal 1995.

    INTEREST EXPENSE. The Company incurred no interest expense for the year
ended June 30, 1997, compared to $7.3 million for fiscal 1996 and $8.6 million
for fiscal 1995. Changes in interest expense reflect changes in the amount and
duration of the Company's borrowings under its credit agreement.

    INTEREST INCOME. Interest income for the year ended June 30, 1997 was $5.3
million, compared to $4.3 million for fiscal 1996 and $1.6 million for fiscal
1995.  Interest income in fiscal 1997 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 the fiscal year ended June 30,
1997 of $96.3 million, compared to $95.1 for fiscal 1996 and $74.7 million for
fiscal 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 


                                      23
<PAGE>

$42.0 million in privately-issued notes and associated warrants. Such 
advances from HBI were converted into equity in fiscal 1990 and fiscal 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 
received proceeds of approximately $206.2 million.

    COMPONENTS OF CASH FLOWS. The significant components of the changes in cash
and cash equivalents for the fiscal years ended June 30, 1997, 1996 and 1995
were as follows (in millions):

                                  Fiscal Year Ended June 30
                                            1997         1996        1995
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Net loss                                   ($96.3)      ($95.1)     ($74.7)
Depreciation and amortization                18.5         20.9        23.3
Changes in working capital                   27.5         22.7        16.6
Net capital expenditures                    (13.9)        (4.4)       (6.3)
Net investment activities                     3.0          6.0        26.0
Manufacturer Incentive program               40.5           --          --
Debt repayment                                 --        (91.9)      (42.4)
Net cash proceeds from sales of stock          --        206.2         0.7
Proceeds from debt borrowings                  --         31.3        60.6
Other, including intercompany charges         (.1)         6.0         1.0
--------------------------------------------------------------------------------
Net increase (decrease) in
  cash and cash equivalents                ($20.8)      $101.7        $4.8
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

    CASH AND CASH EQUIVALENTS. As of June 30, 1997, cash and cash equivalents
totaled $93.4 million, compared to $114.2 at June 30, 1996, and $12.5 million at
June 30, 1995.  The decrease from fiscal 1996 to fiscal 1997 reflects the net
use of cash resulting from the Company's operations during the 1997 fiscal year.
This decrease was offset in part by increased cash received due to a higher
level of prepaid annual subscriptions.  The increase from fiscal 1995 to fiscal
1996 reflects the February 1996 initial public offering.

    WORKING CAPITAL. Working capital at June 30, 1997 was $18.5 million,
compared to $75.3 million at June 30, 1996, and a working capital deficit of
$9.3 million at June 30, 1995.  This decrease in working capital from fiscal
1996 to fiscal 1997 resulted from an increase in accounts payable and accrued
expenses of $23.1 million, due primarily to increased advertising, promotion and
program provider license fee expenses.  Additionally, deferred revenue increased
$22.3 million resulting from greater levels of pre-paid subscriptions.  This
decrease was offset in part by an increase in net trade accounts receivable of
$12.6 million, due to growth in paying subscriber levels.  The increase in
working capital from fiscal 1995 to fiscal 1996 reflects the February 1996
initial public offering.

    LIQUIDITY AND CAPITAL RESOURCES. After completion of the initial public 
offering of the Company's Class A Common Stock, the Company invested the net 
proceeds of the offering in short-term United States Treasury-backed 
securities. In April 1996, the Company elected to repay the entire 
outstanding balance of the term loan under its credit agreement of $90.0 
million and to terminate the credit agreement.



                                      24
<PAGE>

    The Company expects the total expense under the Manufacturer Incentive 
program for fiscal 1998 to range from approximately $40 to $50 million and 
the total cash payments to range from approximately $15 to $20 million.  As 
the levels of retail DSS unit sales increase, the expense and cash flow 
related to this program will increase accordingly.

    Management believes that the Company's current cash position is adequate to
meet the operating expenses of the business during fiscal 1998.  However, the
Company may require external financing for future major capital expenditures
such as the construction of the DBS-4 satellite at the 101DEG.  west longitude
orbital location, or the cost of satellites at the 110DEG.  and 148DEG.
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 would be available from a number of sources and is
evaluating options which would provide additional flexibility in satisfying the
Company's future financing needs.

    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.

    CAPITAL EXPENDITURES. Capital expenditures for the year ended June 30, 
1997 totaled $13.9 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 110DEG. 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 4 to the consolidated financial 
statements contains additional information on this matter.

    NET OPERATING LOSS CARRYFORWARD. At June 30, 1997, the Company's net
operating loss carryforward was $282.5 million for federal tax purposes and
$317.2 million for financial reporting purposes. The difference in loss
carryforward amounts primarily represents differing amounts of depreciation
reported by the Company for tax and for financial reporting purposes.

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.



                                      25
<PAGE>

United States Satellite Broadcasting Company, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS


                                            For the Years Ended June 30
(In thousands, except per share data)      1997        1996         1995
--------------------------------------------------------------------------------
REVENUES                               $384,815    $191,997      $42,337
COST OF SALES                           250,781     127,183       27,868
--------------------------------------------------------------------------------
GROSS MARGIN                            134,034      64,814       14,469

OPERATING EXPENSES
Selling and marketing                   104,437      80,971       37,542
Manufacturer Incentive                   42,354          --           --
Depreciation and amortization            18,510      20,940       23,340
General and administrative               43,965      20,645       13,623
Engineering and operations               11,882       5,925        3,584
Commissions to retailers                 14,507      11,254        2,923
Management fees due to HBI                   --       6,667           --
--------------------------------------------------------------------------------
    Net operating loss                 (101,621)    (81,588)     (66,543)

OTHER (INCOME) EXPENSE
Interest expense                             --       7,284        8,567
Interest (income)                        (5,285)     (4,291)      (1,552)
Cost to terminate Credit Agreement           --       9,504           --
Other                                       (46)        994        1,165
--------------------------------------------------------------------------------
    Net loss                           ($96,290)   ($95,079)    ($74,723)
--------------------------------------------------------------------------------
    Net loss per share                   ($1.07)     ($1.06)      ($0.83)
--------------------------------------------------------------------------------
    Weighted average shares outstanding  89,811      89,862       89,811
--------------------------------------------------------------------------------


The accompanying notes are an integral part of these consolidated financial
statements.


                                      26
<PAGE>


United States Satellite Broadcasting Company, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)                1997       1996
--------------------------------------------------------------------------------
Assets
CURRENT ASSETS
Cash and cash equivalents                                   $93,364   $114,166
Trade accounts receivable, less allowance of
    $5,892 and $634 at June 30, 1997 and
    1996, respectively                                       38,846     26,271
Prepaid expenses and other                                    8,283      2,865
--------------------------------------------------------------------------------
         Total current assets                               140,493    143,302
--------------------------------------------------------------------------------

PROPERTY AND EQUIPMENT
Land                                                            351        351
Buildings and improvements                                    5,790      4,785
Equipment                                                   134,760    127,366
--------------------------------------------------------------------------------
                                                            140,901    132,502
Less - Accumulated depreciation                             (70,529)   (52,019)
--------------------------------------------------------------------------------
         Total property and equipment, net                   70,372     80,483
--------------------------------------------------------------------------------

OTHER ASSETS
Satellite deposits                                            6,930      1,380
Long-term investments, consisting of U.S.
    Treasury securities                                       3,963      6,836
Other                                                           255        142
--------------------------------------------------------------------------------
         Total other assets                                  11,148      8,358
--------------------------------------------------------------------------------
                                                                              
                                                           $222,013   $232,143

Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Accounts payable                                            $50,574    $28,554
Deferred revenue                                             52,240     29,894
Manufacturer Incentive obligation                             8,446         --
Accrued expenses -
    Retailer commissions                                      7,308      5,835
    Other                                                     3,389      3,758
--------------------------------------------------------------------------------
         Total current liabilities                          121,957     68,041
--------------------------------------------------------------------------------

MANUFACTURER INCENTIVE OBLIGATION                            32,007         --
DUE TO HBI                                                   10,382     10,430
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, 15,588,851
         shares issued and outstanding at June 30, 1997
         and 12,601,250 at June 30, 1996                          2          1
Common Stock -
    Participating, voting, $.0001 par value,
    100 million shares authorized, 74,221,924
         shares issued and outstanding at June 30, 1997
         and 77,209,525 at June 30, 1996                          7          8
Additional paid-in capital                                  378,114    378,114
Accumulated deficit                                        (317,204)  (220,914)
Unrealized loss on investments                                  (12)      (105)
--------------------------------------------------------------------------------
                                                             60,907    157,104
Unused media credits                                         (3,240)    (3,432)
--------------------------------------------------------------------------------
     Total shareholders' equity                              57,667    153,672
--------------------------------------------------------------------------------
                                                           $222,013   $232,143
--------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated balance
sheets.


                                      27
<PAGE>

United States Satellite Broadcasting Company, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                              Class A                                                 
                                             --------           Common Stock                Additional 
                                           Common Stock        --------------                Paid-In   
(In thousands, except per share data)   Shares     Amount    Shares     Amount   Warrants    Capital   
------------------------------------------------------------------------------------------------------
<S>                                     <C>        <C>       <C>        <C>      <C>        <C>
SHAREHOLDERS' EQUITY AT JUNE 30, 1994    16,749        $2    73,062         $7     $7,350   $126,691
Common stock contributed to 
      the Company                            --        --      (127)        --         --         --
Sale of Class A common stock for 
      $5.66 per share, net                  127        --        --         --         --        732

Media credits utilized                       --        --        --         --         --         --
Net loss                                     --        --        --         --         --         --
------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1995    16,876         2    72,935          7      7,350    127,423
Conversion of shares pursuant 
      to Recapitalization               (16,876)       (2)   16,876          2         --         --

Conversion of notes and cancellation 
      of warrants                            --        --     7,412          1     (7,350)    44,491
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        --         --         --    206,200
Conversion of shares pursuant to 
      certain shareholder rights          3,056        --    (3,056)        --         --         --
Media credits utilized                       --        --        --         --         --         --

Unrealized gain (loss) on investments        --        --        --         --         --         --
Net loss                                     --        --        --         --         --         --
------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1996    12,601         1    77,210          8         --    378,114
Conversion of shares pursuant to 
      certain shareholder rights          2,988         1    (2,988)        (1)        --         --
Media credits utilized                       --        --        --         --         --         --
Unrealized gain (loss) on investments        --        --        --         --         --         --
Net loss                                     --        --        --         --         --         --
------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1997    15,589        $2    74,222         $7        $--   $378,114
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------

<CAPTION>

                                                                                                     
                                                       Unrealized Gain    Unused
                                         Accumulated      (Loss) on       Media
(In thousands, except per share data)      Deficit      Investments      Credits        Total
-----------------------------------------------------------------------------------------------------
<S>                                      <C>           <C>              <C>           <C>
SHAREHOLDERS' EQUITY AT JUNE 30, 1994       ($51,112)            --    ($4,924)      $78,014 
Common stock contributed to 
      the Company                                 --             --         --             --
Sale of Class A common stock for 
      $5.66 per share, net                        --             --         --            732

Media credits utilized                            --             --      1,022          1,022
Net loss                                     (74,723)            --         --        (74,723)
-----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1995       (125,835)            --     (3,902)         5,045
Conversion of shares pursuant 
      to Recapitalization                         --             --         --             --

Conversion of notes and cancellation 
      of warrants                                 --             --         --         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                          --             --         --        206,201
Conversion of shares pursuant to 
      certain shareholder rights                  --             --         --             --
Media credits utilized                            --             --        470            470

Unrealized gain (loss) on investments             --           (105)        --           (105)
Net loss                                     (95,079)            --         --        (95,079)
----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1996       (220,914)          (105)    (3,432)       153,672
Conversion of shares pursuant to 
      certain shareholder rights                  --             --         --             --
Media credits utilized                            --             --        192            192
Unrealized gain (loss) on investments             --             93         --             93
Net loss                                     (96,290)            --         --        (96,290)
---------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1997      ($317,204)          ($12)   ($3,240)       $57,667
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------


</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                      28
<PAGE>


United States Satellite Broadcasting Company, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                For the Years Ended June 30
(In thousands)                                  1997        1996         1995
--------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Loss                                    ($96,290)   ($95,079)    ($74,723)
Adjustments to reconcile net loss to net
   cash used in operating activities -
    Depreciation and amortization             18,510      20,940       23,340
    Interest accretion, net                       --         844        1,400
    Deferred loan origination fees
       charged to expense in 
       connection with termination 
       of Credit Agreement                        --       5,465           --
    Unrealized loss on investments                93        (105)          --
    Media credits utilized                       192         470        1,022
    Change in operating items:
       Trade accounts receivable             (12,575)    (19,097)      (7,174)
       Prepaid expenses and other 
          current assets                      (5,418)      1,994       (1,335)
       Accounts payable                       22,020      15,824        8,981
       Accrued expenses                        1,104       1,935        4,475
       Deferred revenue                       22,346      16,484       13,410
       Manufacturer Incentive                 40,453          --           --
       Other                                    (240)     (1,135)      (4,250)
--------------------------------------------------------------------------------
          Net cash used in operating 
             activities                       (9,805)    (51,460)     (34,854)
--------------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of and deposits on equipment        (13,949)     (4,423)      (6,270)
Proceeds from sales of short-term 
  investments                                     --          --       19,424
Proceeds from sale of long-term 
  available-for-sale investments               3,000       5,996        6,600
--------------------------------------------------------------------------------
          Net cash provided by (used in) 
             investing activities            (10,949)      1,573       19,754
--------------------------------------------------------------------------------

FINANCING ACTIVITIES
Advances from (repayments to) affiliated
  companies                                      (48)      5,970          984
Proceeds from debt borrowings                     --      31,306       60,613
Repayment of debt                                 --     (91,922)     (42,475)
Proceeds from sale of common stock                --     206,201          732
--------------------------------------------------------------------------------
          Net cash provided by (used in) 
             financing activities                (48)    151,555       19,854
--------------------------------------------------------------------------------
          Increase (decrease) in cash and 
             cash equivalents                (20,802)    101,668        4,754

CASH AND CASH EQUIVALENTS, beginning of 
  period                                     114,166      12,498        7,744
--------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS, end of period   $  93,364  $  114,166    $  12,498
--------------------------------------------------------------------------------

NONCASH TRANSACTIONS
Transponder purchase price adjustment and 
  reduction of related debt balance            $  --       $  --    $  16,000
--------------------------------------------------------------------------------
Conversion of notes and cancellation of 
  warrants                                     $  --   $  44,491        $  --
--------------------------------------------------------------------------------

SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid during the period for -
    Interest                                   $  --    $  6,755     $  7,336
    Income taxes                               $  --       $  --        $  --
--------------------------------------------------------------------------------


The accompanying notes are an integral part of these consolidated financial
statements.



                                      29
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 June 30, 1997 and 1996, and had approximately 61.4% of the combined voting
power with respect to all matters submitted for the vote of all shareholders at
June 30, 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 $317 million as of June 30, 1997. Management anticipates that
net losses will continue for the foreseeable future because the Company plans to
continue to incur substantial selling and marketing expenses to expand its
subscriber base. In addition, existing contractual obligations (see Note 4) may
require capital resources in excess of cash balances plus anticipated operating
cash flows during fiscal 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 fiscal 1998 and beyond.

    In addition to the capital needs described above, the success of future
operations will be dependent on further development of the Company's subscriber
base from which to generate revenues and continued growth of the market for
Digital Satellite Systems.

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 4). All significant intercompany accounts and transactions
have been eliminated in consolidation.

FISCAL YEAR

All references to years in the consolidated financial statements and
accompanying notes refer to the Company's respective fiscal years ended June 30.

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 consist of a U.S. Treasury security maturing in 1999,
which the Company classifies as available-for-sale. At June 30, 1997, the
security's aggregate amortized cost approximated its market value of $3,963,000.
During fiscal 1997 the Company sold $3.0 million of U.S. Treasury securities.
At June 30, 1996, the securities held on that date had an aggregate amortized
cost basis of $6,941,000 and an aggregate market value of approximately
$6,836,000. The security held at June 30, 1997 bears interest at 5.5%.
Unrealized gains and losses are reported as a separate component of
shareholders' equity.
                                      30
<PAGE>


MANUFACTURER INCENTIVE PROGRAM

The Company's costs under its financial incentive arrangements with certain
manufacturers of DSS equipment are charged to expense as incurred.  See Note 4
for additional disclosure regarding these arrangements.

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 $1,781,500 at
June 30, 1997 and $1,401,000 at June 30, 1996 and are included with prepaid
expenses and other current assets in the accompanying consolidated balance
sheets. Accrued retailer commissions totaled $7,308,000 at June 30, 1997 and
$5,835,000 at June 30, 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:

                    Satellite Transponders        10 years
                    Other Equipment               5-10 years
                    Buildings & Improvements      31 years

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.

NET LOSS PER SHARE

Net loss per share is computed based on weighted average shares outstanding,
which have been retroactively restated for the 75-for-one stock split effected
in fiscal 1996 as a component of the Company's recapitalization (see Note 2).

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," (SFAS 128), which
changes the way companies calculate their earnings per share (EPS).  SFAS 128
replaces primary EPS with basic EPS.  Basic EPS is computed by dividing reported
earnings by weighted average shares outstanding, excluding potentially dilutive
securities.  Fully diluted EPS, termed diluted EPS under SFAS 128, is also to be
disclosed.  The Company is required to adopt SFAS 128 in the second quarter of
fiscal 1998, at which time all prior year EPS amounts will be restated in
accordance with SFAS 128.

    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.



                                      31
<PAGE>

2.             SHAREHOLDERS' EQUITY

RECAPITALIZATION AND INITIAL PUBLIC OFFERING

In the first quarter of fiscal 1996, 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.  During fiscal
1997, approximately 3.0 million shares of Common Stock were converted into Class
A Common Stock.

    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 fiscal
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 fiscal 1994, the
Company received a $5.0 million media credit. The media credit, as amended, can
be utilized towards a portion of the cost of advertising purchased from
subsidiaries of this shareholder through January 1998. The unused media credit
balance ($3.2 million at June 30, 1997 and $3.4 million at June 30, 1996) has
been recorded as a reduction of shareholders' equity.



                                      32
<PAGE>

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 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 June 30,
                                               1997                                              1996
                               -------------------------------------------------------------------------------------

                              Shares                        Weighted       Shares                        Weighted
                              Under                         Average        Under                          Average
                              Option                        Exercise       Option                        Exercise
                              Plan         Exercise Price   Price           Plan         Exercise Price   Price
                               -------------------------------------------------------------------------------------
<S>                           <C>      <C>                  <C>             <C>       <C>                <C>
Outstanding at beginning
 of year                       449,300      $27.00-$36.00      $27.16            --              --              --
Granted                         31,000      $11.50-$18.75      $14.00       454,300   $27.00-$36.00          $27.15
Exercised                           --                 --          --            --              --              --
Forfeited                       35,600      $27.00-$28.50      $27.45         5,000          $27.00          $27.00
                               -------                                      --------
Outstanding at end of year     444,700      $11.50-$36.00      $26.21       449,300   $27.00-$36.00          $27.16
Exercisable at end of year      93,740      $11.50-$36.00      $25.30            --              --              --
Weighted average fair value
 of options granted              $9.86                                       $16.66
                                 -----                                       ------
                                 -----                                       ------


</TABLE>

As of June 30, 1997, the outstanding stock options granted in fiscal 1996 have a
remaining contractual life of approximately 8.5 years and the outstanding stock
options granted in fiscal 1997 have a remaining contractual life of
approximately 9.5 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):


<PAGE>

                                                 Years Ended June 30,

                                                 1997           1996
Net loss applicable to common shareholders
    As Reported                               $(96,290)      $(95,079)
    Pro Forma                                 $(96,596)     $(102,648)
Net loss per common and common equivalent share
    As Reported                                 $(1.07)        $(1.06)
    Pro Forma                                   $(1.08)        $(1.14)



                                      33
<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 6.4% in 
1997; expected life of 10 years for 1997 and 1996; expected volatility of 45% 
in 1996 and 33.0% in 1997.

3.  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 $5.4 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 2 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.

4.  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 


                                      34
<PAGE>

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 June 1, 1997, the 
Company is required to pay $73.6 million for satellite construction, of which 
$5.5 million has been paid through June 30, 1997.  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 until December 
31, 1997.  The Company has previously paid $1.4 million under a predecessor 
contract for satellites at both 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 scheduled in the fiscal years as follows: $22.3 million in 
1998, $41.9 million in 1999 and $3.9 million in 2000.

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 June 30, 1997, such commitments totaled $22.3 million due in fiscal
1998, with the noncancellable portion of such commitments totaling $18.9
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.

LITIGATION

In November 1996, Personalized Media Communications, L.L.C. ("PMC") initiated a
legal proceeding before the United States International Trade Commission
("ITC"), and a separate proceeding in the United States District Court for the
Northern District of California, against Digital Satellite System developers,
manufacturers and programmers, including, among others, Hughes Network Systems,
Thomson Consumer Electronics and other DSS manufacturers, DIRECTV, Inc., and the
Company, alleging that these defendants have infringed, or contributed to the
infringement of, patents owned by PMC.  The Company has denied all material
allegations in both complaints.  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.

    In June 1997, IPPV Enterprises, a Georgia partnership ("IPPV") initiated 
a legal proceeding in the United States District Court for the District of 
Delaware against Digital Satellite System developers, manufacturers and 
programmers, including, among others, Hughes Network Systems, Thomson 
Consumer Electronics and other DSS manufacturers, DIRECTV, Inc., and the 
Company, alleging that these defendants have infringed several IPPV patents 
relating to parental control and pay-per-view features used in the DSS 
system.  The Company has denied all material allegations in the complaint.  
It is not possible to estimate the probable outcome of this matter at this 
time.  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.



                                      35
<PAGE>

    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.  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 fiscal 1997, the Company charged to expense $42.4 million, representing the
full amount of those future obligations for the Manufacturer Incentive program
incurred during the period for the sale of DSS units to new households.  Net of
cash paid in fiscal 1997 totaling $1.9 million, such future obligations totaled
$40.5 million at June 30, 1997, payable in the fiscal years as follows:

                              (in thousands)
                             1998        $  8,446
                             1999           8,446
                             2000           8,446
                             2001           8,446
                             2002           6,669
                                            -----
                                          $40,453

    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 June 30, 1997 is approximately
$33.5 million and has been calculated by discounting the future cash flows at
the Company's estimated incremental borrowing rate.

5.  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 fiscal years 1992
through 1994 under an agreement which expired June 30, 1994. The balance does
not bear interest. The Company was contingently obligated to 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 first quarter
of fiscal 1996, 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.

    Concurrent with the growth of the Company's revenue in 1995, HBI began to 
provide certain general and administrative services to the Company under a 
two-year agreement which ended June 30, 1996.  Effective July 1, 1996, the 
Company and HBI entered into a similar agreement for services to be rendered 
in fiscal 1997.  This agreement can be renewed by the Company for fiscal 1998 
and subsequent years.  Under these agreements, the Company incurred a charge 
of $996,000 in fiscal 1997, $960,000 in fiscal 1996 and $844,000 in fiscal 
1995.  
                                      36
<PAGE>

The Company expects to incur a charge to HBI under the agreement for general 
and administrative services totaling $1,252,000 in fiscal 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
$1.8 million in fiscal 1997, $1.5 million in fiscal 1996, and $1.0 million in
fiscal 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, under an
agreement which runs through December 1997. Certain programming is purchased
from a joint venture in which such partnership is a partner, under an agreement
which runs through 1999. Amounts included in the accompanying consolidated
statements of operations which were purchased from these affiliated entities are
as follows (in thousands):

                                       For the Years Ended June 30
                                       1997        1996       1995
----------------------------------------------------------------------
Cost of programming                  $4,378      $2,348        $607
Engineering and operations              213         205         853
Selling and marketing                    --          --          35
----------------------------------------------------------------------
                                     $4,591      $2,553      $1,495
----------------------------------------------------------------------

    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 (which were reimbursed by the
Company) to the plan of $131,000 on behalf of the Company's employees during
fiscal 1997, $88,000 during fiscal 1996, and $15,000 during fiscal 1995.



                                      37
<PAGE>

6.  INCOME TAXES

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

                           Deferred Tax Asset (Liability)
----------------------------------------------------------------------
As of June 30                                      1997        1996
----------------------------------------------------------------------
Deferred tax assets:
Manufacturer Incentive                        $  16,181        $  -
Preoperating capitalized costs                    3,144       5,031
Capitalized interest                                362         725
Management services                               4,337       4,337
Other                                             4,046       1,571
Net operating loss carryforward                 112,973      90,729
Total deferred tax assets                       141,043     102,393
Deferred tax liabilities:
Depreciation                                    (14,881)    (14,719)
Total deferred tax liability                    (14,881)    (14,719)
----------------------------------------------------------------------
Valuation allowance                            (126,162)    (87,674)
----------------------------------------------------------------------
Net deferred tax balance                          $  --       $  --
----------------------------------------------------------------------


    The Company has net operating losses for federal tax reporting purposes
totaling $282.4 million available for carryover to subsequent years as of June
30, 1997, expiring in years 2000 through 2013. The valuation allowance applied
against the Company's net deferred tax assets increased by $38.6 million in
fiscal 1997, by $37.8 million in fiscal 1996, and by $29.7 million in fiscal
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 $.8 million in 
fiscal 1997, $1.2 million in fiscal 1996, and $1.5 million in fiscal 1995. 
This unitary relationship has reduced the Company's Minnesota net operating 
loss carryforward. Benefits realized by HBI in fiscal 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.



                                      38
<PAGE>

7.  QUARTERLY CONDENSED FINANCIAL INFORMATION (UNAUDITED)

Summarized unaudited quarterly data for fiscal 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                   $79,244             $92,104             $99,231            $114,236            $384,815
Cost of sales               52,246              60,382              64,930              73,223             250,781
Gross margin                26,998              31,722              34,301              41,013             134,034
Operating expenses          51,969              74,141              57,925              51,620             235,655
Net operating loss         (24,971)            (42,419)            (23,624)            (10,607)           (101,621)
Other (income) expense, net (1,489)             (1,344)             (1,174)             (1,324)             (5,331)
Net loss                   (23,482)            (41,075)            (22,450)             (9,283)            (96,290)
Weighted average shares 
 outstanding                89,841              89,811              89,812              89,811              89,811
Loss per share              $(0.26)             $(0.46)             $(0.25)             $(0.10)             $(1.07)

1996
Revenues                   $30,720             $40,001             $56,988             $64,288            $191,997
Cost of sales               20,064              26,391              37,579              43,149             127,183
Gross margin                10,656              13,610              19,409              21,139              64,814
Operating expenses          35,547              38,631              39,801              32,423             146,402
Net operating loss         (24,891)            (25,021)            (20,392)            (11,284)            (81,588)
Other (income) expense, net  2,268               2,497               1,066               7,660              13,491
Net loss                   (27,159)            (27,518)            (21,458)            (18,944)            (95,079)
Weighted average shares 
 outstanding                89,811              89,811              89,860              89,937              89,862
Loss per share              $(0.30)             $(0.31)             $(0.24)             $(0.21)             $(1.06)

</TABLE>

                                      39
<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 June
30, 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 June 30, 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 June 30, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1997, in conformity with generally accepted
accounting principles.


/s/ Arthur Andersen LLP

Minneapolis, Minnesota,
July 31, 1997


                                      40