<PAGE>
 

                       SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C.  20549

                                   FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     For the fiscal year ended December 31, 1998

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
     For the transition period from _____ to _____


Commission File Number  000-23883

                                   PRIMESTAR, INC.
                                   ---------------
             (Exact name of Registrant as specified in its charter)

<TABLE>
<CAPTION>
 
<S>                                                                    <C>
             State of Delaware                                                           84-1441684
-----------------------------------------------                                          ----------
        (State or other jurisdiction                                                   (I.R.S. Employer
         of incorporation or organization)                                         Identification Number)
 
 
        8085 South Chester, Suite 300 
           Englewood, Colorado                                                              80112
-----------------------------------------------                                           ----------
   (Address of principal executive offices)                                               (Zip Code)
</TABLE>

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

 Securities registered pursuant to Section 12(b) of the Act:  None

 Securities registered pursuant to Section 12(g) of the Act:
        Class A Common Stock, par value $.01 per share
        Class B Common Stock, par value $.01 per share
        10 7/8% Senior Subordinated Notes Due 2007
        12 1/4% Senior Subordinated Discount Notes Due 2007

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K.    X
                               -----

     None of PRIMESTAR, Inc.'s shares of common stock were publicly traded as of
January 29, 1999.  The number of shares outstanding of PRIMESTAR, Inc.'s common
stock as of January 29, 1999 was:

     Class A Common Stock - 179,143,934 shares;
     Class B Common Stock - 8,465,324 shares; and
     Class C Common Stock - 13,332,365 shares.
<PAGE>
 
                                PRIMESTAR, INC.
                        1998 ANNUAL REPORT ON FORM 10-K

                               Table of Contents

                                                            Page
                                                            ----
                                     PART I
<TABLE>
 
<S>        <C>                                                  <C>

Item 1.    Business...........................................  I-1
 
Item 2.    Properties.........................................  I-24
 
Item 3.    Legal Proceedings..................................  I-24
 
Item 4.    Submission of Matters to a Vote of Security Holders  I-24
 
<CAPTION> 
                                    PART II
<S>        <C>                                                  <C> 
Item 5.     Market for Registrant's Common Equity and
            Related Stockholder Matters.......................  II-1
 
Item 6.     Selected Financial Data...........................  II-1
 
Item 7.     Management's Discussion and Analysis of Financial
            Condition and Results of Operations...............  II-2
 
Item 7A.    Quantitative and Qualitative Disclosures About
            Market Risk.......................................  II-15
 
Item 8.     Financial Statements and Supplementary Data.......  II-15
 
Item 9.     Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure............  II-15
 
<CAPTION> 
                                    PART III
 
<S>         <C>                                                 <C>
Item 10.    Directors and Executive Officers of the Registrant  III-1
 
Item 11.    Executive Compensation............................  III-5
 
Item 12.    Security Ownership of Certain Beneficial Owners
            and Management....................................  III-14
 
Item 13.    Certain Relationships and Related Transactions....  III-16
 
<CAPTION> 
                                    PART IV

Item 14.  Exhibits, Financial Statements and Financial Statement
          Schedules, and Reports on Form 8-K..................  IV-1


</TABLE> 
<PAGE>
 
Item 1.  Business.
------   -------- 

     (a) General Development of Business
         -------------------------------

     PRIMESTAR, Inc. ("PRIMESTAR" or the "Company") is a leading distributor of
digital satellite-based television services in the United States.  The
PRIMESTAR(R) service is broadcast from GE-2 ("GE-2"), a medium power satellite
stationed at the 85 degrees West Longitude ("W.L.") orbital position.

     PRIMESTAR was incorporated in August 1997 as a wholly-owned subsidiary of
TCI Satellite Entertainment, Inc. ("TSAT").  Effective April 1, 1998 (the
"Closing Date') and pursuant to (i) a Merger and Contribution Agreement dated as
of February 6, 1998 (the "Restructuring Agreement"), among the Company, TSAT,
Time Warner Entertainment Company, L.P. ("TWE"), Advance/Newhouse Partnership
("Newhouse"), Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox"),
MediaOne of Delaware, Inc. ("MediaOne") and GE American Communications, Inc.
("GE Americom") and (ii) an Asset Transfer Agreement dated as of February 6,
1998 (the "TSAT Asset Transfer Agreement"), between the Company and TSAT, a
business combination (the "Restructuring") was consummated.

     In connection with the Restructuring, the businesses of TSAT and PRIMESTAR
Partners L.P. (the "Partnership") and the PRIMESTAR(R) distribution businesses
of each of TWE, Newhouse, Comcast, Cox and affiliates of MediaOne (collectively,
the "Non-TSAT Parties") were consolidated into PRIMESTAR.  The Restructuring
Agreement provided for, among other things, the contribution to PRIMESTAR (by
asset transfer or merger) of the respective interests in the Partnership of
TSAT, TWE, Newhouse, Cox, Comcast, MediaOne and GE Americom (the "Partnership
Interests") and the respective PRIMESTAR(R) subscribers and certain other
related assets and liabilities of TSAT, TWE, Newhouse, Cox, Comcast and MediaOne
(the "PRIMESTAR Assets and Liabilities"), in exchange for (i) cash or an
assumption of indebtedness by PRIMESTAR, (ii) shares of Class A Common Stock,
$.01 par value per share, of PRIMESTAR ("Class A Common Stock"), (iii) in the
case of TSAT only, shares of Class B Common Stock, $.01 par value per share, of
PRIMESTAR ("Class B Common Stock"), and (iv) except in the case of TSAT and GE
Americom, shares of Class C Common Stock, $.01 par value per share, of PRIMESTAR
("Class C Common Stock"), in each case in an amount determined pursuant to the
Restructuring Agreement. As a result of such transactions, the Partnership 
became a wholly-owned subsidiary of the Company.

     As a result of the Restructuring, the Company owns and operates the
PRIMESTAR(R) digital satellite business.  The Company currently offers a direct
to home ("DTH") satellite service with over 160 channels of digital video and
audio programming throughout the continental United States.

     As of December 31, 1998, the approximate ownership of PRIMESTAR's common
stock was as follows:

<TABLE>
<CAPTION>
                                                        Ownership
Name of Beneficial Owner                                Percentage
------------------------                                ----------
 
<S>                                                    <C>
     TSAT                                                    37.23%
     TWE and Newhouse (collectively)                         30.02%
     Comcast                                                  9.50%
     MediaOne                                                 9.69%
     Cox                                                      9.43%
     GE Americom                                              4.13%
</TABLE>

                                      I-1
<PAGE>
 
        TSAT, through its wholly-owned subsidiary, Tempo Satellite, Inc.
("Tempo"), holds a construction permit (the "FCC Permit") issued by the Federal
Communications Commission ("FCC"), authorizing construction of a high power
direct broadcast satellite ("DBS") system consisting of two or more satellites
delivering DBS service in 11 frequencies at the 119 degrees W.L. orbital
position. Tempo is a party to a satellite construction agreement (the "Satellite
Construction Agreement") with Space Systems/Loral, Inc. ("Loral") pursuant to
which Tempo arranged for the construction of two high power direct broadcast
satellites (the "Tempo Satellites"). Construction of the Tempo Satellites has
been substantially completed. On March 8, 1997, one of the Tempo Satellites
("Tempo DBS-1") was launched into geosynchronous orbit, to be stationed in
Tempo's high power orbital position 119 degrees W.L. The 119 degrees W.L.
orbital position is one of three such orbital positions available for DBS
service to the U.S. which are "full CONUS", meaning that they have a view of the
entire continental U.S. The other Tempo Satellite ("Tempo DBS-2") presently
serves as a ground spare for Tempo DBS-1. Tempo DBS-1 is currently not
delivering programming to subscribers and is the subject of a contractual
dispute with Loral regarding potential warranty claims by Tempo. Through various
agreements with Tempo, the Company currently has rights to the capacity of the
DBS system being constructed by Tempo at the 119 degrees W.L. orbital location
(the "Tempo Rights").

        On January 22, 1999, the Company announced that it had reached an
agreement (the "Hughes Medium Power Agreement") with Hughes Electronics
Corporation ("Hughes"), a subsidiary of General Motors Corporation, to sell its
DBS medium-power business and assets to Hughes for $1.1 billion in cash and
4.871 million shares of General Motors Class H common stock ("GMH Stock") valued
at approximately $225 million, based upon the closing price of GMH Stock on the
date of the purchase agreement (the "Hughes Medium Power Transaction").  The
foregoing purchase price is subject to adjustments for working capital at the
date of closing. In addition, the Company is responsible for the payment of
certain obligations not assumed by Hughes, satisfaction of its funded
indebtedness and the payment of costs, currently estimated to range from $270
million to $340 million, associated with the termination of its high power
business strategy and sale of its medium power assets. The consummation of the
Hughes Medium Power Transaction is subject to various consents from PRIMESTAR's
lenders; restructuring of certain of the Company's indebtedness, as described
below; and other customary conditions.

        On February 1, 1999 and in connection with the Hughes Medium Power
Transaction, the Company commenced tender offers (the "Tender Offers") to
purchase 100% of the outstanding principal amount of the Company's 10 7/8%
Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes") at a price
of $670 per $1,000 principal amount and 100% of the outstanding principal amount
of the Company's 12 1/4% Senior Subordinated Discount Notes due 2007 (the
"Senior Subordinated Discount Notes," and together with the Senior Subordinated
Notes, the "Notes") at a price of 67% of the accreted value of the Senior
Subordinated Discount Notes as of February 15, 1999. In addition, PRIMESTAR made
commenced a separate offer to lenders under the Company's Senior Subordinated
Credit Agreement, dated as of April 1, 1998 (the "Interim Loan Agreement"), to
purchase 100% of the outstanding principal amount due thereunder at a price of
$670 per $1,000 principal amount (the "Offer to Purchase"). Each of the Tender
Offers and the Offer to Purchase was subject to a minimum tender condition of
90% of the outstanding principal amount of such issue. In conjunction with the
Tender Offers, PRIMESTAR solicited consents to certain proposed amendments to
the indentures governing the Notes and the Interim Loan that would eliminate
substantially all of the restrictive covenants thereunder and would amend
certain other provisions. Consummation of both the Tender Offers and the Offer
to Purchase was conditioned upon the closing of the Hughes Medium Power
Transaction and other conditions.

        Following several extensions, the Tender Offer and the Offer to Purchase
expired on March 25, 1999.  The minimum tender conditions were not satisfied
under the Tender Offer and Offer to Purchase, and no securities or loans were
purchased thereunder.

                                      I-2
<PAGE>
 
        Since the announcement of the Hughes Medium Power Agreement and of the
proposed restructuring of the Company's senior subordinated indebtedness
relating thereto (the "Proposed Debt Restructuring"), the Company has been
engaged in negotiations with the representatives of an informal committee (the
"Bondholders' Committee") of holders of Notes and with representatives of an
informal committee (the "Bridge Lenders' Committee" and, together with the
Bondholders' Committee, the "Committees") of holders of loans under the Interim
Loan Agreement, with respect to the possible terms and conditions of the
Proposed Debt Restructuring. In that connection, the Company has entered into
confidentiality agreements with certain representatives of the Committees and
has agreed to pay certain expenses of the Committees, including certain fees and
expenses of their legal counsel and financial advisor. Based on the progress of
such negotiations to date, the Company believes that the Proposed Debt
Restructuring will be consummated on terms satisfactory to the Company and such
Committees, by means of privately negotiated transactions. However, the Company
has not entered into any agreements to date with respect to the terms and
conditions of any such restructuring, and there can be no assurance that the
Proposed Debt Restructuring will be consummated. In the event the Company is
unable to negotiate certain minimum tender conditions in connection with the
Proposed Debt Restructuring, the Company does not intend to consummate the
Hughes Medium Power Transaction.

        If the Hughes Medium Power Transaction is not consummated for any
reason, PRIMESTAR currently intends to continue operating its medium power
business, which may require the restructuring or refinancing of certain of its
liabilities.  There can be no assurance that such restructuring or refinancing,
if necessary, would be accomplished on terms acceptable to the Company.

        In a separate transaction, the Company announced that TSAT and the
Company had reached an agreement (the "Hughes High Power Agreement") with Hughes
to sell the Tempo Satellites, Tempo's 119 degrees W.L. orbital location license
and the Tempo Rights to Hughes, for aggregate consideration valued at $500
million (the "Hughes High Power Transaction"). Due to the fact that regulatory
approval is required to transfer Tempo DBS-1 and Tempo's FCC authorization for
119 degrees W.L. to Hughes, the Hughes High Power Transaction will be completed
in two steps. Effective March 10, 1999, the first closing of the Hughes High
Power Transaction (the "First Closing") was consummated whereby Hughes acquired
Tempo DBS-2 and PRIMESTAR's option to acquire Tempo DBS-2 (the "Tempo DBS-2
Option") for aggregate consideration of $150 million. Such consideration was
comprised of the following: (i) $9,750,000 paid to PRIMESTAR for the Tempo DBS-2
Option (including any amounts allocable to the Partnership in consideration of
the termination and relinquishment of the Tempo Rights), (ii) $750,000 paid to
TSAT to exercise the Tempo DBS-2 Option and (iii) the assumption by Hughes of
$139,500,000 due to the Partnership from TSAT in exchange for Tempo DBS-2.
Simultaneously with the First Closing, Hughes repaid the liability to the
Partership that Hughes assumed. 

        With regard to the sale of the remaining assets contemplated by the 
Hughes High Power Agreement (the "Second Closing"), Tempo has been notified that
Tempo DBS-I experienced power reductions which occurred on March 29, 1999 and 
April 2, 1999. Although the Company does not believe the extent of such power 
reductions is significant, a definitive assessment of the impact on Tempo DBS-I 
is not yet complete. Notwithstanding the foregoing, the Second Closing, which is
subject to the receipt of appropriate regulatory approvals and other customary 
closings conditions, is expected to be consummated in the second quarter of 
1999.

        Effective February 6, 1998, PRIMESTAR and TSAT entered into an Agreement
and Plan of Merger (the "TSAT Merger Agreement") providing for the merger of
TSAT with and into PRIMESTAR, with PRIMESTAR as the surviving corporation (the
"TSAT Merger"). In connection with the First Closing, the Company and TSAT
terminated the TSAT Merger Agreement.

        In connection with the Restructuring, TSAT has been identified as the
acquiror for accounting purposes and the predecessor for financial reporting
purposes due to the fact that TSAT owns the largest interest in the Company
immediately following the consummation of the Restructuring. Accordingly,
references herein to the Company refer to TSAT and its subsidiaries for the
periods prior to the Restructuring and to PRIMESTAR and its subsidiaries for the
periods subsequent to the Restructuring.

                                      I-3
<PAGE>
 
        TSAT was incorporated in Delaware in November 1996.  Prior to the
Distribution (as defined below), the Company was wholly owned by Tele-
Communications, Inc. ("TCI"), which, through various subsidiaries, was engaged
in the business of distributing PRIMESTAR(R) from December 1990 until the
consummation of the Distribution.  TSAT's predecessor was incorporated in
February 1995 to consolidate TCI's PRIMESTAR(R) distribution business into one
subsidiary, and was merged into TSAT in connection with the Distribution.

        TSAT was formed to own and operate certain businesses of TCI
Communications, Inc. ("TCIC"), a subsidiary of TCI, constituting TCI's
collective interests in the digital satellite business. On December 4, 1996 (the
"Distribution Date") TCI distributed, (the "Distribution"), as a dividend, all
of the issued and outstanding TSAT common stock to the holders of record of
shares of Tele-Communications, Inc., Series A TCI Group Common Stock, $1.00 par
value per share (the "Series A TCI Group Stock"), and Tele-Communications, Inc.,
Series B TCI Group Common Stock, $1.00 par value per share (the "Series B TCI
Group Stock" and, together with the Series A TCI Group Stock, the "TCI Group
Stock"), on the basis of one share of TSAT Series A common stock for each ten
shares of Series A TCI Group Stock, and one share of TSAT Series B common stock
for each ten shares of Series B TCI Group Stock.

        Certain statements in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company, or industry results,
to differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and other factors include, among others: general economic and
business conditions and industry trends; the continued strength of the
multichannel video programming distribution industry and the satellite services
industry and the growth of satellite delivered television programming;
uncertainties inherent in proposed business strategies and development plans,
including uncertainties regarding the Proposed Debt Restructuring; the Hughes
High Power and Medium Power Transactions; future financial performance,
including availability, terms and deployment of capital; the ability of vendors
to deliver required equipment, software and services; availability of qualified
personnel; changes in, or the failure or the inability to comply with,
government regulation, including, without limitation, regulations of the FCC,
and adverse outcomes from regulatory proceedings; changes in the nature of key
strategic relationships with partners and joint venturers; competitor responses
to the Company's products and services, and the overall market acceptance of
such products and services, including acceptance of the pricing of such products
and services; possible interference by satellites in adjacent orbital positions
with the satellite currently being used for the Company's existing medium power
satellite television business; reliance on software programs used by the Company
or its suppliers containing problems related to the Year 2000; and other factors
referenced in this Report. These forward-looking statements speak only as of the
date of this Report. The Company expressly disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.

        (b) Financial Information about Industry Segments
            ---------------------------------------------
  
            Not applicable.

        (c) Narrative Description of Business
            ---------------------------------

                                      I-4
<PAGE>
 
Industry Overview

General
-------

     Digital satellite television services use communications satellites,
broadcasting at Ku-band or higher frequencies, to transmit multichannel video
programming directly to consumers, who receive such signals on home satellite
dishes ("HSDs"). Such satellites operate in geosynchronous orbit above the
equator, from orbital positions or ''slots'' allocated by international
agreement to the U.S. and other national governments and assigned by such
governments in accordance with local law. Orbital slots are designated by their
location east or west of the zero meridian, measured in degrees of longitude,
and comprise both a physical location and an assignment of broadcast spectrum in
the applicable frequency band.  The assigned spectrum is divided into 32
frequency channels. Such frequency channels are sometimes referred to as
''transponders'' because each transponder on a satellite generally transmits on
one of such channels. At standard levels of digital compression technology
currently deployed, each frequency channel can be converted on average into
eight or more analog channels of video programming (depending on the video
density of the programming), thereby enabling the digital satellite service
operator to offer a broader variety of programming choices than analog satellite
systems.  Advanced compression technologies currently being tested are expected
to result in substantially greater compression ratios.  Digital technology
enables subscribers to receive laser disc-quality picture and compact disc-
quality sound from the satellite.

     The operator of a digital satellite television service typically enters
into agreements with programmers, who deliver their programming content to the
digital satellite service operator via commercial satellite, fiber optics or
microwave transmissions. The digital satellite service operator generally
monitors such signals for quality, and may add promotional messages, public
service programming or other system-specific content. The signals are then
digitized, compressed, encrypted and combined with other programming sharing a
given transponder.  Each transponder's signal is then uplinked, or transmitted,
to the transponder owned or leased by the service operator on the service's
satellite, which receives and retransmits the signal to HSDs configured and
authorized to receive it.

     In order to receive programming, a subscriber requires (i) a properly
installed HSD, which includes a dish-shaped antenna, low noise block converter
(''LNB'') and related equipment, (ii) an integrated receiver/decoder (''IRD,''
sometimes referred to herein as the ''satellite receiver'' or ''set-top box''),
which receives the data stream from each broadcasting transponder, separates it
into separate digital programming signals, decrypts and decompresses those
signals that the subscriber is authorized to receive and converts such digital
signals into analog radio frequency signals, and (iii) a television set, to view
and listen to the programming contained in such analog signals. A subscriber's
IRD is generally connected to the digital satellite service operator's
authorization center by telephone, to report the purchase of  pay-per-view
channels.

  The FCC authorizes two types of satellite services for transmission of
television programming: Broadcast Satellite Service (''BSS''), which operates at
high power in the Ku-band, and Fixed Satellite Service (''FSS''), which includes
medium power services transmitting in the Ku-band, as well as low power analog
services transmitting in the C-band. Both high power BSS satellites and medium
power FSS satellites are used for digital satellite television services. High
power signals can generally be received by HSDs of approximately 14 to 18 inches
in diameter (depending on the geographical location of the HSD and wattage per
channel), while medium power signals require HSDs of 27 to 39 inches in diameter
(depending on the geographical location of the HSD and wattage per channel).
Low power signals, such as those used by C-band DTH satellite services, require
still larger HSDs.


                                      I-5
<PAGE>
 
  Generally, both high power and medium power digital satellite services provide
the same high video and audio quality.  However, in certain situations medium
power services may be more susceptible to interference from adjacent satellites
than high power services.  High power services have the benefit of certain
regulatory safeguards instituted by the FCC to protect BSS broadcast signals
from interference from other sources.  Under the FCC's current policy, BSS
orbital locations are spaced at greater intervals than FSS orbital locations.
There are 9 degrees of longitude between adjacent BSS orbital slots, as compared
to 2 degrees between adjacent FSS locations. The smaller interval between FSS
orbital locations, together with their lower power, requires the use of a
relatively large HSD to prevent interference. Newly assigned FSS license holders
are required to coordinate their satellite designs with the satellites
previously existing at adjacent orbital locations. However, such coordination
efforts between FSS license holders may not be sufficient to resolve any
interference that may occur, and an FSS license holder may not have adequate
recourse if the FCC assigns an adjacent location to another user that results in
signal interference.

  In 1982, the FCC allocated a spectrum within the Ku-band for BSS services.
Eight BSS orbital slots, each with 32 frequencies, have been reserved by the FCC
for use by domestic DBS providers. Three of those orbital slots (101 degrees
W.L., 110 degrees W.L. and 119 degrees W.L.) provide full CONUS visibility.
DirecTv, Inc., a Subsidiary of Hughes ("DirecTv"), and United States Satellite
Broadcasting Corporation ("USSB") are the only entities licensed for the 101
degrees W.L. orbital slot, with a total of 32 transponders. MCI
Telecommunications Corporation/WorldCom ("MCI/WorldCom"), in partnership with
The News Corporation Limited ("News Corp."), acquired FCC authorizations to
build and operate a DBS service at the 110 degrees W.L. orbital location, using
28 transponders. EchoStar Communications Corporation ("EchoStar") holds FCC
authorizations with respect to one of the remaining four transponders at 110
degrees W.L. and USSB holds FCC authorizations with respect to the other three
transponders at 110 degrees W.L. EchoStar's DBS service uses 21 transponders at
the 119 degrees W.L. orbital location and Tempo's FCC Permit authorizes it to
build a DBS service using the remaining 11 transponders at 119 degrees W.L.

Digital Satellite Services Business
-----------------------------------

  Digital satellite television has been one of the fastest selling consumer
electronics products in the U.S. history.  As of December 31, 1998, the
installed base for digital satellite services consisted of approximately 8.7
million active subscribers nationwide, as compared to approximately 6.2 million,
4.4 million and 2.2 million subscribers at December 31, 1997, 1996 and 1995,
respectively.

  The following table shows the approximate percentage of digital satellite
television subscribers served by PRIMESTAR, DirecTV (combined with USSB) and
EchoStar:

<TABLE>
<CAPTION>
                                                                   As of December 31,
                                                         -----------------------------------
                                                         1998                           1997
                                                         ----                           ----          
<S>                                                      <C>                            <C>
     PRIMESTAR /1/                                         26%                           32%
     DirecTV                                               52%                           51%
     EchoStar                                              22%                           17%
</TABLE>


---------------------------------------
/1/ 1997 percentage reflects subscribers served by all distributors of
PRIMESTAR(R).

        The Company believes that the following factors will contribute to the
growth of the digital satellite services business.

                                      I-6
<PAGE>
 
  Demand for More Choice in Television Programming, Reliable Service and Better
Quality Picture and Sound. Prior to the growth of cable television services,
television viewers were offered a relatively limited number of channels. As the
number of channels increased, consumer demand for more programming choices also
increased. As a result, the multichannel video industry has experienced
significant growth, both in terms of the number of content producers creating
programming and the number of channels available to viewers. The Company expects
that this trend will continue and consumers will desire even more programming
choices than are available through cable television. The Company believes
consumers are also demanding more reliable service and improved picture quality
compared to what has historically been offered by over-the-air VHF and UHF
broadcasters and by cable. The two most recent consumer surveys of cable and
satellite customers by J.D. Power and Associates found that digital satellite
television providers outranked cable providers in customer satisfaction. In the
surveys, PRIMESTAR(R) ranked number one in customer satisfaction, ahead of both
EchoStar and DirecTv.

  Large Potential Customer Base.  The Company believes that there is significant
unsatisfied demand for high quality, reasonably priced television programming.
According to industry sources, there are approximately 98 million television
households in the U.S., all of which are potential subscribers to satellite
programming services.  Of the estimated 98 million television households in the
U.S., approximately 33 million do not currently subscribe to cable television
services, and the Company believes that many of the 65 million existing cable
television subscribers have a desire for greater variety of programming,
improved video and audio quality, better customer service and fewer transmission
interruptions.  Moreover, the Company believes that cable subscribers, who
typically spend approximately $42 per month on multichannel programming, and,
more generally, cable subscribers who purchase premium or pay-per-view services,
represent a particularly lucrative potential customer base for providers of
satellite programming services.

  Households Unserved or Underserved by Cable.  The Company believes that
households not passed by cable and households served by cable systems with fewer
than 40 channels provide an opportunity for customer growth.  Cable systems with
sufficient channel capacity (generally 54 or more channels) and good quality
cable plant will not require costly upgrades to add bandwidth or incur
significant maintenance costs in order to offer digital programming services.
The Company believes, however, that based on current compression technology, the
number of channels that a cable system would have to remove from its existing
service offerings in order to use them for digital services may, in the case of
cable systems with limited channel capacity, degrade the value of their analog
programming offering and alienate subscribers. Accordingly, pending the
availability of advances in digital compression technology now under
development, such smaller cable systems will be required to incur substantial
costs to upgrade their plant to expand channel capacity before they can
introduce digital services. Due to the substantial capital investment required
for wide scale deployment of fiber-based digital services, several cable
companies have delayed originally-announced deployment schedules.

  Commercial Subscribers.  The Company believes that digital satellite services
are well suited for hotels, motels, bars, multiple dwelling units ("MDUs"),
businesses, schools and other organizations with commercial applications, as
well as for non-residential buildings which are not easily accessible by cable.
The Company expects that some commercial organizations will in the future create
increased demand for educational, foreign language, and other niche video and
audio programming, as well as data services, in addition to the Company's wide
variety of entertainment, sports, news and other general programming.

                                      I-7
<PAGE>
 
The PRIMESTAR(R) Service
-------------------------

  The Company is a leading provider of digital satellite services in the U.S.
The Company owns and operates the PRIMESTAR(R) digital satellite business, which
is the second largest digital satellite business and the eighth largest
multichannel video programming distribution business in the U.S., measured by
the number of subscribers as of December 31, 1998.

  The Company currently offers a medium power satellite service with over 160
channels of digital video and audio programming throughout the continental
United States. The medium power service is transmitted via GE-2, which is owned
by GE Americom and located at the 85 degrees W.L. orbital position. The
PRIMESTAR(R) medium power service served approximately 2.3 million subscribers
as of December 31, 1998.

  PRIMESTAR(R) includes a variety of advertiser-supported networks (sometimes
referred to as ''basic cable'' channels), a broad selection of movie services,
national and regional sports packages and other premium services, and
multiplexed pay-per-view programming.  PRIMESTAR secures its rights to broadcast
such programming via satellite by entering into non-exclusive affiliation
agreements with programming vendors. In addition to video services, PRIMESTAR(R)
includes digital audio services and regional weather services covering ten
regions of the country.

  Digital satellite television service requires that subscribers install HSDs
for a clear line of sight to the transmitting satellite.  GE-2 provides coverage
to the entire continental U.S. with favorable ''look'' angles, meaning that the
satellite is viewable from the entire continental U.S. at angle elevations high
enough to facilitate installation of HSDs in most areas. Additionally, GE-2's
orbital location over the East coast of the U.S. is considered favorable because
the signal travels a shorter path through the relatively moist air of the
Eastern seaboard, minimizing potential interference from bad weather. The
overall PRIMESTAR(R) system is designed for high availability, and operates
consistently without any significant interference approximately 99.8% of the
time.

  As currently in effect, an Amended and Restated Memorandum between GE Americom
and the Company (the "GE-2 Agreement") for the leasing of GE-2 provides for an
initial lease term extending through February 2003, with an option to extend the
term through the end-of-life of GE-2 (the "End-of-Life Option").  The End-of-
Life Option has expired without exercise.  However, the Company remains in
discussions with GE Americom regarding alternatives for extension of the GE-2
Agreement, and the Company will continue to assess other alternatives if the
Hughes Medium Power Transaction is not consummated.  No assurance can be given
that the parties will agree to an extension or that any other alternatives will
be confirmed.

  Pursuant to the GE-2 Agreement, GE Americom provides the Company with service
on 24 transponders on GE-2.  The Company is currently entitled to non-
preemptible service on 18 of the transponders on GE-2 and preemptible service on
six transponders.  Preemptible transponders are transponders that may be
reassigned to restore service to protected customers if such protected customers
experience transponder or satellite failure.  The Company does not believe that,
during the early stages of GE-2's operational life, the use of preemptible
transponders is likely to interfere in any material respect with the operation
of the PRIMESTAR(R) service.  The Company currently receives "orbital location
protected service" on all 24 of its transponders, meaning that if there is a
failure of GE-2, the Company will be entitled to restore the lost service on
another GE Americom medium power satellite, GE-3, which was successfully
launched on September 4, 1997 into the same 85 degrees W.L. orbital position
used by GE-2. Even in those circumstances, the six preemptible transponders,
although protected, would remain preemptible. Upon the successful launch of
another GE Americom medium power satellite, GE-4 ("GE-4"), the Company's six
preemptible transponders will become non-preemptible.

                                      I-8
<PAGE>
 
  If PRIMESTAR extends the GE-2 Agreement and intends to use more than six of
its transponders for uses other than providing the PRIMESTAR(R) service, GE
Americom may reduce service from orbital location protected service to
nonpreemptible or preemptible service, as the case may be.

  PRIMESTAR currently uses proprietary authorization, encryption and digital
compression technology developed by an affiliate of General Instruments
Corporation ("GI"). The Company believes that the compression technology it uses
produces picture and sound quality comparable to that of other digital satellite
television providers. Uplinking, encoding and compression services are provided
by National Digital Television Center, Inc., a subsidiary of TCI (''NDTC''),
under a Master Digital Transmission Agreement between NDTC and the Company.
Although the satellite receiver used by PRIMESTAR(R) customers is not currently
compatible with certain other compression systems, it can be upgraded to be
compatible through equipment provided by GI, the cost of which equipment is
projected to range from $150 to $200 at commercial volumes.

  Programming.  At December 31, 1998, the Company offered consumers programming
packages as described in the table below, which provide 76 to over 100 channels
of audio and video programming depending upon the package.  Each of the packages
includes a monthly programming guide.  Most of the Company's customers rent
their equipment and pay an additional $3 - $10 monthly charge for equipment
rental, which includes free maintenance and customer service.

<TABLE>
<CAPTION>
Programming Package                                                    Monthly price (1)
-------------------                                                    -----------------
 
<S>                                                                    <C> 
PRIME Value                                                                   $22.99
PRIME Variety                                                                 $27.99
PRIME Entertainment                                                           $34.99
PRIME Entertainment Plus                                                      $42.99
PRIME Hits                                                                    $49.99
PRIME Hits Plus                                                               $55.99
</TABLE>

----------------------------------------
  (1)  Monthly price excludes lease fee.

  As of December 31, 1998, PRIMESTAR(R) also offered 15 channels of pay-per-view
movies and events; a regional sports tier and other sports packages that provide
expanded coverage of regular-season, out-of-market sports events; and niche
services such as PBS and east and west coast feeds of ABC, NBC, CBS and FOX (to
those subscribers unable to receive such networks through local affiliates).
Such offerings were made on an a la carte basis.

  The Company contracts with and bills its residential and commercial
subscribers directly for the PRIMESTAR(R) service. Most residential subscribers
may terminate their service at any time upon notice to the Company.  Commercial
subscribers' service contracts automatically renew for successive terms unless
the commercial subscribers provide 90 days' prior written notice to the Company
of their intent to terminate their service at the end of the current term.  In
addition, a commercial customer may terminate the contract prior to the
expiration of the contractual term by paying a cancellation fee.  Satellite
reception equipment reclaimed from terminating subscribers is tested,
refurbished as necessary and placed back into service.


                                      I-9
<PAGE>
 
  Distribution.  The Company distributes PRIMESTAR(R) services through multiple
distribution channels, including sales agents, full-service providers,
telemarketing agents and consumer retail outlets, such as RadioShack(R).  The
Company has engaged sales agents, (the ''Sales Agents''), each of which has
extensive experience distributing C-band DTH satellite equipment.  Sales Agents
generally do not sell directly to customers, but recruit, train and maintain a
network of sub-agents comprised generally of full-service independent satellite
retailers.  The sub-agents sell PRIMESTAR(R) services on behalf of the Company
and install, service and maintain customer premises equipment for the Company's
subscribers. Authorization of new customers is provided by the Company's call
centers.  Sales Agents are responsible for maintaining their sub-agents'
inventories of HSDs and other customer premises equipment, which are provided by
the Company on consignment.

  The Company has also contracted with independent contractors who have
experience in distributing and servicing DTH satellite equipment ("full-service
providers" or "FSPs") to engage them to sell, install and service their own
accounts. The FSPs solicit potential subscribers by making door-to-door sales
calls, setting up booths at special events and otherwise marketing the
PRIMESTAR(R) service to customers in target markets in its authorized
distribution areas.  FSPs also install and service customers obtained through
retail outlets and call centers.

  The Company pays the Sales Agents and FSPs commissions on equipment leased or
sold, as well as an installation reimbursement to cover the cost of each new
installation.  The Sales Agents and FSPs also receive a residual sales
commission for a contractually determined period of time (generally five years).
Sales Agents are responsible for compensating their sub-agents.

  The Company also distributes its services through certain national consumer
electronics retailers, including Radio Shack.  Pursuant to the Company's
national agreement with Radio Shack, Radio Shack is compensated based on the
number of installations generated.  The Company's distribution network is
further supported by local market retailers, such as hardware stores and
convenience stores, which promote the Company's services and further assist the
Company in its distribution efforts.

  The Company operates a call center, located in Englewood, Colorado to take
subscription orders and provide both sales support and customer service.  In
addition, the Company obtains call center support services from TCI's Boise,
Idaho call center (the "Boise Call Center"), as well as call centers operated on
behalf of the Company by unaffiliated third parties.  The call centers offer
customers around-the-clock telephone support for sales, installation,
authorization and billing, as well as for repair and customer service.

  Equipment and Installation.  Unlike other digital satellite television
services, PRIMESTAR(R) does not require consumers to purchase or finance the
equipment needed to receive its programming. The Company provides the HSD,
satellite receiver and remote control to subscribers for a monthly rental fee
($3 - $10 per month at December 31, 1998), which includes ongoing maintenance
and service at no additional charge.  The monthly equipment rental fee is
included in a service package that includes various levels of basic and premium
programming.  Satellite receivers are manufactured by GI, and packaged by GI
with remote controls, and HSDs are manufactured by multiple vendors.

  In addition to monthly fees for programming and the purchase or lease of
equipment, the Company generally charges new subscribers an installation fee
ranging from $49 to $99.  Certain other direct satellite service providers offer
consumers the option of self-installation of the HSD and other equipment for
their digital satellite systems, with an installation kit that retails for
approximately $70.

                                      I-10
<PAGE>
 
Competition
-----------

  The business of providing video programming to consumers is highly
competitive. The Company faces competition from numerous other companies
offering video, audio and data products and services. The Company's existing and
potential competitors comprise a broad range of companies engaged in
communications and entertainment, including other digital satellite program
providers, cable operators, wireless cable operators, television networks and
local broadcasters and home video products companies, as well as companies
developing new technologies and other purveyors of news, information and
entertainment.  Many of the Company's competitors have greater financial,
marketing and programming resources than the Company. The Company expects that
quality and variety of programming, quality of picture and service and cost will
be the key bases of competition.

  Advances in communications technology, as well as changes in the marketplace
and the regulatory and legislative environment, are constantly occurring.  As a
result, the Company cannot predict the effect that ongoing or future
developments might have on the video programming distribution industry generally
or the Company specifically.

  Other Digital Satellite Service Providers.  In addition to the Company,
several other companies offer digital satellite services and are positioned to
compete with the Company for home satellite subscribers.

  DirecTv successfully launched its first satellite in December 1993, its second
satellite in August 1994 and a third satellite in June 1995 as an in-orbit
spare. The third satellite may also be operated by DirecTv to provide additional
capacity. DirecTv's satellites, which are high power satellites, are located at
101 degrees W.L. DirecTv operates 27 transponders on each of its existing
satellites, enabling it to offer over 175 channels of digital programming.
DirecTv currently has exclusive distribution rights for out-of-market National
Football League telecasts. As of December 31, 1998, according to trade
publications, DirecTv served approximately 4.5 million subscribers.

  DirecTv has filed an application with the FCC to expand its existing satellite
system and, in connection therewith, requested orbital slots located at 96.5
degrees W. L. and 105.5 degrees W.L. To implement this expansion, DirecTv must
secure additional frequencies that are not currently allocated domestically for
DBS use, and DirecTv has also requested an FCC rulemaking to secure such
allocations. In addition, DirecTv recently entered into an agreement with
PanAmSat Corp., pursuant to which DirecTv acquired additional Ku-band
transponder capacity on PanAmSat's full CONUS Galaxy III-R satellite located at
95 degrees W. L. Initially, Galaxy III-R will be used to deliver six channels of
foreign-language programming. Under the agreement, DirecTv will initially lease
four Ku-band transponders and will have the ability to expand transponder
capacity to ultimately offer up to 120 channels dedicated for special interest
programming (such as programming services directed to foreign-language
communities), niche programs, future business-to-business applications and high
definition television transmissions. If DirecTV successfully implements this
business plan, it is expected that DirecTV subscribers could utilize one 30 to
36 inch satellite dish to receive both the DBS programming offered from its 101
degrees W.L. orbital location and the FSS programming which may be offered from
95 degrees W.L.

  Hughes, DirecTv's parent corporation, also has received an FCC authorization
to construct, launch and operate a Ka-band system, including an authorization
for a Ka-band satellite at 101 degrees W.L., which may permit DirecTV to expand
its satellite services.

                                      I-11
<PAGE>
 
  USSB owns and operates five transponders on one of DirecTv's satellites and
offers a programming service separate from DirecTv's service, with over 25
channels of premium video programming not available from DirecTv. USSB's
selection of programming services (and its use of transponders on the same
satellite used by DirecTv, which enables subscribers to receive both DirecTv and
USSB signals with a single HSD) allows it to be marketed as complementary to
DirecTv, partially offsetting the competitive handicap caused by its relatively
limited channel capacity. As of December 31, 1998, approximately 51% of
DirecTv's 4.5 million subscribers also received USSB programming. In addition,
USSB has a construction permit from the FCC that would allow it to build and
launch a high power DBS system at 110 degrees W.L. (with three transponders).
The 110 degrees W.L. orbital location would enable USSB to provide a second high
power DBS service to the continental U.S., although with limited channel
capacity.

  On December 14, 1998, Hughes announced that it had signed a definitive merger
agreement with USSB to acquire the business and assets of USSB. Hughes intends
to combine DirecTv's business with USSB's assets and business at 101 degrees
W.L. The proposed transaction also includes USSB's three frequencies at 110
degrees W.L., which, pending FCC approval, DirecTv intends to use to launch
Spanish-language programming services in 1999. The proposed merger is subject to
USSB shareholder approval and the receipt of appropriate regulatory and
antitrust approvals and is expected to close in mid-1999.

  Bell Atlantic Corp. ("Bell Atlantic") and SBC Communications Inc. ("SBC") have
each entered into a multi-year marketing and distribution agreement with DirecTv
and USSB to sell DirecTv's and USSB's satellite-television services to their
telephone customers.  GTE Corporation ("GTE") has entered into a similar
agreement with DirecTv, and is in negotiations with USSB to similarly market and
distribute USSB's programming service.  The agreements enable Bell Atlantic, SBC
and GTE to offer the satellite equipment for sale, for lease or with a lease-to-
own option.  These agreements provide a significant base of potential customers
for the DirecTv and USSB DBS services and allow Bell Atlantic, SBC, GTE, DirecTv
and USSB to offer customers a package of digital entertainment and
communications services.  As a result, the Company is at a competitive
disadvantage marketing to these customers.

  As of December 31, 1998, EchoStar and its subsidiaries had acquired 11
transponders at 61.5 degrees W.L., one transponder at 110 degrees W.L, 21
transponders at 119 degrees W.L., 24 transponders at 148 degrees W.L. and 22
transponders at 175 degrees W.L.; and had launched one satellite into the 148
degrees W.L. slot, two satellites into the 119 degrees W.L. slot and one
satellite into the 61.5 degrees slot. As of December 31, 1998, EchoStar
distributed approximately 150 channels of video and audio programming to the
entire continental United States from its satellite at 119 degrees W.L., and
served approximately 1.9 million subscribers. In addition, EchoStar has an
agreement with Dominion Video Satellite, Inc. ("Dominion") to use 3 of the 8
transponder frequencies assigned by the FCC to Dominion at 61.5 degrees W.L. The
satellite in the 61.5 degrees W.L. slot is equipped with 32 transponders
operating at 120 watts per channel, and includes programming complementary to
that offered by EchoStar's existing service on EchoStar's first two satellites,
such as educational and business programming, and retransmission of broadcast
television signals.

                                      I-12
<PAGE>
 
  On November 30, 1998, EchoStar and MCI/WorldCom announced an agreement for the
transfer to EchoStar of MCI/WorldCom's license to operate a high power DBS
business at 110 degrees W.L. consisting of 28 frequencies. The agreement also
includes the sale of MCI/WorldCom's two satellites currently under construction.
If consummated as currently contemplated, the transaction would enable EchoStar
to combine the capacity of its existing orbital slots at 119 degrees W.L. with
the capacity of the orbital slots at 110 degrees W.L. and allow EchoStar to
provide in excess of 500 channels of programming.

  In addition, the International Bureau of the FCC (the "International Bureau")
has granted EchoStar a conditional authorization to construct, launch and
operate a Ku-band domestic fixed satellite into the orbital position at 83
degrees W.L., immediately adjacent to that occupied by GE-2. Contrary to
previous FCC policy which would have permitted operation of a satellite at the
83 degrees W.L. orbital position at a power level of only 60-90 watts (subject
to coordination requirements), EchoStar has been authorized to operate at a
power level of 130 watts. If EchoStar were to launch its high power satellite
authorized to 83 degrees W.L. and commence operations at that location at a
power level of 130 watts, it would likely cause harmful interference to the
reception of the PRIMESTAR(R) signal from GE-2 by subscribers to the
PRIMESTAR(R) medium power service.

  EchoStar has also been granted conditional authorization to construct, launch
and operate a Ku-band domestic fixed satellite at the 121 degrees W.L. orbital
position and two Ka-band domestic fixed satellites, including an authorization
for a Ka-band satellite at 121 degrees W.L.

  Foreign satellite systems are also potential providers of digital satellite
services within the United States.  Canada, Mexico and other countries have been
allocated various DBS orbital locations which are capable of providing service
to part or all of the continental U.S.  In general, non-U.S. licensed satellites
are not allowed to provide domestic digital satellite services in the U.S.
However, in April 1996, the United States entered into a bilateral agreement
with Mexico which would allow, subject to certain conditions, the use of
satellites licensed in Mexico to provide digital satellite services to U.S.
consumers.  Pursuant to such agreement, in August 1997, the FCC authorized
Televisa International, LLC ("Televisa") to operate one million receive-only
earth stations in the U.S., subject to certain conditions, to receive direct-to-
home FSS television services from Solidaridad II, a satellite licensed by the
Mexican Government. Televisa owns and operates television broadcast networks and
stations in Mexico, and exports Spanish language programming to broadcast
networks, broadcast stations and cable systems in the U.S. and other countries.
Televisa is presently engaged in the development of direct-to-home FSS
television and related services in Mexico, Latin America, North America and
Europe. Televisa intends to use the Solidaridad II satellite operating in the 
Ku-band and located at 113 degrees W.L. to provide an FSS service of
entertainment, sports, news, educational and informational video programming,
primarily in the Spanish language, to customers in the U.S. All of the
transmissions to Solidaridad II would originate in Mexico.

  The United States has indicated its willingness to enter into similar
agreements with other countries in North, Central and South America.  If the
U.S. government moves forward with these initiatives, or if other countries
authorize digital satellite service providers to use their orbital slots to
serve the U.S. and the U.S. approves of such service, additional competition
could be created.  At this time, the Company is unable to predict the effect of
such existing and future foreign satellite services upon its operations.

                                      I-13
<PAGE>
 
  In addition, as indicated above, the FCC has allocated certain U.S. licensed
DBS frequencies to DirecTv and other parties in addition to the frequencies used
to provide their existing DTH satellite services. These frequencies could
provide additional capacity for existing digital satellite operators thereby
enhancing their competitive position relative to the Company. Alternatively,
such presently unused frequencies could enable new competitors to enter the
digital satellite services business. Further, other potential competitors may
provide television programming at any time by leasing transponders from an
existing satellite operator. However, the number of transponders available for
lease on any one satellite is generally limited, making it difficult to provide
sufficient channels of programming for a viable system.

  To date, the PRIMESTAR(R) medium power service has been competitively
disadvantaged vis-a-vis other satellite programming distributors due to its
relatively larger dish size.  The Company has sought to mitigate this
competitive disadvantage through various programs including its equipment rental
program.  PRIMESTAR(R) is marketed as a service, with programming, equipment
rental, maintenance and customer service included in the monthly price.  In
addition, each of the PRIMESTAR(R) programming packages includes a monthly
programming guide at no additional charge. The up-front costs to new subscribers
of PRIMESTAR(R), who are charged only an installation fee and the first month's
programming and equipment rental fees, have historically been lower than the up-
front costs to new subscribers of other direct satellite service providers, who
typically must purchase and install an HSD, IRD and related equipment. Moreover,
since the Company generally owns, services and installs all home reception
equipment, the Company protects its subscribers from the inconvenience of
equipment failure, maintenance concerns, self-installation and expired
warranties. The Company believes that when the cost of equipment is factored in,
its service is priced competitively, compared to the respective prices of other
current digital satellite service providers.

  C-band Satellite Program Distributors. The Company also competes with C-band
satellite program distributors. C-band systems have been popular (mostly in
rural and semi-rural areas) since the late 1970s, and in the aggregate serve
approximately 2 million subscribers as of December 31, 1998. However, digital
satellite television systems use Ku-band frequencies that can be received by
less expensive systems with significantly smaller dishes than those used with C-
band frequencies. As a result of the smaller dish size, digital satellite
television systems are more widely accepted by consumers than C-band systems,
particularly in urban and suburban areas.

  Over the past few years, the C-band industry has been contracting.  In an
effort to reverse this trend, several C-band companies are currently
contemplating uniting their resources to promote the C-band satellite technology
in a yet undetermined manner.

  Cable Television.  Cable television is currently available for purchase by
more than 97% of the approximate 98 million U.S. television households. The
cable television industry is an established provider of multichannel
programming, with approximately 65 million subscribers or approximately 66% of
total U.S. television households. Cable systems typically offer 30 to 80 analog
channels of programming at an average monthly subscription price of
approximately $42.

                                      I-14
<PAGE>
 
  The Company encounters a number of challenges in competing with cable
television providers. First, cable television providers benefit from a strong
position in the domestic consumer marketplace. Second, satellite television
systems generally have not yet found it efficient to provide any local broadcast
programming and, third the Satellite Home Viewer Act of 1994 (the "SHVA")
prohibits the retransmission by a satellite carrier of a television broadcast
signal of a network television station to households that receive a Grade B
intensity over-the-air signal of a television broadcast station affiliated with
such network or that receive (or within the past 90 days had received) through a
cable system the signal of a television station affiliated with such network.
Accordingly, PRIMESTAR(R) subscribers who are subject to the foregoing SHVA
restrictions are unable to obtain such programming (which is among the most
popular and desirable video programming) from the Company.  Such subscribers
must, instead, receive such programming either through use of a standard
television antenna (traditional rooftop or set-top antenna) or by purchasing
that level of cable service which includes such programming.  Furthermore, since
reception of digital satellite signals requires clear line of sight to the
satellite, it may not be possible for some households served by cable to receive
PRIMESTAR(R) as a result of large adjacent structures or other obstacles. In
addition to households lacking a clear line of sight to the satellite,
PRIMESTAR(R) is not available to households in apartment complexes or other MDUs
that do not facilitate or allow the installation of satellite television
equipment.  Lastly, because IRDs are currently significantly more expensive than
analog cable converters, existing cable operators are able to offer their
subscribers the ability to have fully functional cable on multiple television
sets in a household without significant additional cost to the customer.

  While cable companies currently serve a majority of the U.S. television
market, the Company believes many may not be able to provide the quality and
variety of programming offered by digital satellite service providers until they
significantly upgrade their coaxial systems. Many cable television providers are
in the process of upgrading their systems and other cable operators have
announced intentions to make significant upgrades. Many proposed upgrades, such
as conversion to digital format, fiber optic cabling, advanced compression
technology and other technological improvements, when fully completed, will
permit cable companies to increase channel capacity, thereby increasing
programming alternatives, and to deliver a better quality signal.  In addition,
the expanded capacity may be used to provide interactive and other services.

  Many of the largest cable systems in the U.S. have announced plans to offer
access to telephony services through their existing cable equipment, and have
entered into agreements with major telephony providers to further these efforts.
In some cases, certain cable systems have actually commenced trial offerings of
such services.  If such trials are successful, many consumers may find cable
service to be more attractive than digital satellite service for the reception
of programming. However, although cable systems with adequate available
bandwidth may offer digital service without major rebuilds, the Company believes
that, given the limits of current compression technology, other cable systems
with more limited bandwidth will require major physical plant upgrades to
provide digital service, and that such upgrades will require substantial
investments of capital and time to complete industry-wide. As a result, the
Company believes that there will be a substantial delay before cable systems can
offer programming services equivalent to digital satellite television providers
on a national basis and that some cable systems may never be upgraded, subject
to advances in compression technology.

                                      I-15
<PAGE>
 
  Wireless Cable Systems.  The Company also competes with multi-channel multi-
point distribution systems, which deliver programming services over microwave
channels to subscribers with special antennas, and other so-called ''wireless
cable'' systems. Wireless cable systems operating in the U.S., currently serve
an estimated 1.0 million subscribers, mostly with limited channel, analog
service. Wireless cable systems typically offer 20 to 30 channels of programming
with inferior image and sound quality compared to digital satellite services.
However, wireless cable systems may provide their customers with local
programming, a potential advantage over digital satellite television systems,
and developments in compression technology are expected to significantly
increase the number of channels and video and audio quality of wireless cable
systems.  Nevertheless, in order to upgrade their systems to implement digital
transmission of high quality video and audio signals, wireless cable operators
will be required to install new digital decoders in customers' homes and make
certain modifications to transmission facilities, at a potentially significant
cost. Wireless cable also generally requires direct line of sight from the
receiver to the transmitter tower, which creates the potential for substantial
interference from terrain, buildings and foliage.

  Telephone Companies.  In addition to Bell Atlantic's, SBC's and GTE's
agreements with DirecTv and USSB, certain regional telephone companies and long
distance telephone companies could become significant competitors in the future,
as they have expressed an interest in becoming subscription television and
information providers. Legislation enacted by Congress in 1996 removed barriers
to entry which previously inhibited telephone companies from competing, or made
it more difficult for telephone companies to compete, in the provision of video
programming and information services. Certain telephone companies have received
authorization to test market video and other services in certain geographic
areas using fiber optic cable and digital compression over existing telephone
lines. Estimates for the timing of wide-scale deployment of such multichannel
video service vary, as several telephone companies have delayed originally
announced deployment schedules.  In addition, several large telephone companies
have announced plans to acquire or merge with existing cable and wireless cable
systems.

  As more telephone companies begin to provide subscription television
programming and other information and communications services to their
customers, additional significant competition for subscribers will develop.
Among other things, telephone companies have an existing relationship with
substantially every household in their service area, substantial financial
resources, and an existing infrastructure and may be able to subsidize the
delivery of programming through their position as the sole source of telephone
service to the home.

  VHF/UHF Broadcasters.  Most areas of the U.S. are covered by traditional
territorial over-the-air VHF/UHF broadcasts, which typically include three to
ten channels in most markets.  These stations provide local, network and
syndicated programming free of charge, but each major market is generally
limited in the number of available programming channels. However, the FCC has
recently allocated additional digital spectrum to licensed broadcasters.  During
a transition period ending in 2006, each existing television station will be
able to transmit programming on a digital channel that may permit multiple
programming services per channel.

  Private Cable.  Private cable is a multi-channel subscription television
service where the programming is received by a satellite receiver and then
transmitted via coaxial cable through private property, often MDUs, without
crossing public rights of way.  Private cable generally operates under an
agreement with a private landowner to service a specific MDU, commercial
establishment or hotel.  These agreements are often exclusive arrangements with
lengthy (e.g., ten-year) terms, and private cable systems generally are not
subject to substantial federal, state or local regulations.  The FCC recently
amended its rules to allow the provision of point-to-point delivery of video
programming by private cable operators and other video delivery systems in the
18 gigahertz band.  Private cable operators compete with PRIMESTAR(R) for
customers within the general market of consumers of subscription television
services.


                                      I-16
<PAGE>
 
  Local Multi-Point Distribution Service.  In March 1997, the FCC announced its
intention to offer two local multi-point distribution service ("LMDS") licenses,
one for a block of spectrum 1150 megahertz wide and the other for a 150
megahertz-wide block, in each of 493 Basic Trading Areas pursuant to an auction
in the case of mutually exclusive applications.  Incumbent local exchange
carriers and cable operators will not be allowed to obtain in-region licenses
for the larger spectrum block for three years. The FCC recently completed its
auction of the LMDS licenses.  While 122 licenses were not sold, the FCC stated
that 95% of the population will be covered by those licenses sold.  The FCC
plans to re-auction those licenses not sold.  The broadband 28 and 31 gigahertz
LMDS spectrum allocation may enable LMDS providers to offer subscribers a wide
variety of audio, video and interactive service options.

  Utilities.  In 1996, Congress enacted legislation authorizing utility holding
companies and their subsidiaries to provide video programming services,
notwithstanding the Public Utility Holding Company Act.  Utilities must
establish separate subsidiaries and must apply to the FCC for operating
authority.  Several such utilities have been granted broad authority by the FCC
to engage in activities which could include the provision of video programming.

  Other Providers of News, Information and Entertainment.  The Company also
competes broadly with other providers of news, information and entertainment to
consumers.

Regulatory Matters
------------------

  General.  Pursuant to the Communications Act of 1934, as amended (the
"Communications Act"), the FCC regulates the use of radio spectrum in the United
States.  United States DBS licensees and permittees are subject to the
regulatory authority of the FCC.  Although the non-technical aspects of DBS
operations are generally subject to less regulation than other communications
services, some regulations do apply.  In addition, the FCC has proposed to adopt
regulations that will affect DBS licensees and permittees.

  Currently, a DBS permittee must complete and file with the FCC a satellite
construction contract with respect to its authorized satellite station(s) within
one year of the grant of the construction permit.  DBS permittees who received
their permits prior to January 19, 1996 have six years from the date of permit
grant to begin operating their DBS systems.  New permits and permit extensions
granted after January 19, 1996 provide for a four year construction period.
Upon completion of construction, the FCC authorizes DBS permittees to launch and
operate their satellites.  Those DBS providers which control the video
programming they distribute, and DBS licensees which offer broadcast service,
are subject to equal employment opportunity requirements.  DBS providers
offering non-broadcast service from their DBS satellites are licensed to operate
for ten years, while those offering broadcast services (that is, services
available on a non-subscription basis) are licensed for five years.  FCC
licenses must be renewed at the end of each license term.  FCC licenses are
generally renewed in the ordinary course, absent misconduct by the licensee.

  In 1995, the FCC adopted several new service rules for DBS permittees and
licensees.  The FCC established a requirement that those entities acquiring DBS
permits or licenses after January 19, 1996, must provide service to Alaska and
Hawaii if such service is technically feasible.  It also required that all
existing DBS permittees and licensees provide service to Alaska and Hawaii from
at least one of their currently assigned orbital positions or relinquish their
western orbital location.  In addition, the FCC revised its rules with respect
to licensees' ability to use portions of their satellite capacity for non-DBS
services.  The FCC provided that licensees must principally use their DBS
authorizations for DBS service, but that during their first five years in
operations, licensees may offer non-DBS services.  After five years, licensees
may continue to provide non-DBS services so long as at least half of their total
satellite capacity at a given orbital location is used for DBS service.


                                      I-17
<PAGE>
 
  In December 1996, the International Bureau concluded that foreign ownership
restrictions do not apply to subscription DBS service.  This decision, however,
is subject to a pending review by the FCC, and the current Administration
requested that the FCC reconsider its decision in a general rulemaking
proceeding. As described further below, the FCC has adopted a Notice of Proposed
Rulemaking and sought comments on the applicability of foreign ownership
restrictions to subscription DBS providers and FSS-DTH providers, such as the
Company.  The Notice of Proposed Rulemaking is still pending as described below.

  On February 26, 1998, the FCC released a Notice of Proposed Rulemaking to
consolidate the construction permit and licensing process for DBS providers, to
consolidate the DBS rules with the FCC's other satellite rules, and to update
the  DBS technical rules.  The FCC also requested comments on the application of
foreign ownership limitations to subscription DBS and FSS-DTH providers; whether
any limitations on cable/DBS cross-ownership are warranted and whether the FCC
should have a rule of general applicability restricting cable interests in DBS
licensees; whether there should be a ban on ownership of more than one DBS full
CONUS orbital position; and how the delivery of DBS service can be improved to
Alaska, Hawaii, and the U.S. territories and possessions.

  In December 1998, the FCC adopted a requirement that DBS providers, including
medium power DTH providers, such as the Company, reserve four percent of their
channel capacity for noncommercial programming of an educational and
informational nature.  In addition, the Commission imposed access requirements
for federal political candidates and limited the charges operators could demand
from such candidates for advertising time.

  The Company cannot predict how application of the FCC's current or proposed
rules will affect its own operations or the operations of its competitors, or
the applications pending at the FCC as described below in "Required FCC
Approvals."

  The satellite that PRIMESTAR currently uses and the satellites it proposes to
use in the future are geostationary satellites ("GSOs").  At present, no
satellite systems except other GSO systems have been authorized to use the
frequency bands in which the Company's satellites transmit and will transmit in
the future.

  In 1997, an application was filed at the FCC by SkyBridge L.L.C. to construct
and operate a nongeostationary satellite system ("NGSO") that would share
frequencies used by the Company's satellites and other GSO satellites.  In
addition, the FCC initiated a rulemaking proceeding to address potential
regulations for NGSO systems such as the one proposed by SkyBridge L.L.C.  At
the World Radiocommunication Conference ("WRC") in late 1997, the International
Telecommunications Union ("ITU") adopted "provisional" technical rules that
would authorize frequency sharing between GSO and NGSO systems.  These
provisional rules are subject to affirmation and/or modification at a WRC
meeting scheduled for 1999.

  On November 19, 1998, the FCC released a Notice of Proposed Rulemaking whereby
it proposed to implement domestically the allocation made at WRC in late 1997,
to permit NGSO operations in the Ku-band.  The Notice of Proposed Rulemaking
also requested comment on a Petition for Rulemaking filed by Northpoint
Technologies ("Northpoint") to permit the terrestrial retransmission of local
television signals and the provision of data services to DBS service subscribers
operating in the DBS services band.  On January 11, 1999, an application was
filed with the FCC requesting authorizations so that parties could begin using
the Northpoint technology to provide terrestrial services to consumers using the
DBS services band.


                                      I-18
<PAGE>
 
  The Company and many other users and operators of GSO satellite systems have
expressed concerns regarding potential technical interference to GSO satellites
that could be caused by NGSO systems, including those that might operate
pursuant to the 1997 WRC provisional rules.  The Company has participated and
other GSO users and operators are participating in FCC proceedings and in the
preparation process for the WRC meeting in 1999 in an  attempt to assure that
any rules finally adopted by the ITU and the FCC for GSO/NGSO frequency sharing
would not result in unacceptable technical interference to GSO transmissions.
The Company cannot predict the outcome of these various proceedings or what
effect, if any, GSO/NGSO frequency sharing and GSO/terrestrial sharing would
have on its technical  operations or business.

  In addition, regulations promulgated by governmental entities other than the
FCC may affect the distribution of programming by DBS providers.  The SHVA
provides that only "unserved households" are permitted to receive distant
network signals.  In other words, the SHVA prohibits the retransmission by a
satellite carrier of the television broadcast signal of a network television
station to households that receive a Grade B intensity over-the-air signal of a
television broadcast station affiliated with such network and to households that
receive (or within the past 90 days had received) through a cable system the
signal of a television station affiliated with such network.

The Company, the National Association of Broadcasters, certain network-
affiliated television stations and their respective affiliate associations have
entered into a Settlement and Compliance Agreement, which provides for pre-
screening techniques for customers based on zip codes to ensure compliance with
SHVA procedures, the timing for disconnecting any existing non-compliant network
subscribers, and provisions for mutual release for any past or future liability.

  In response to a petition for rulemaking filed by EchoStar and the National
Rural Telecommunications Cooperative as well as two federal court rulings
regarding the delivery of distant network signals to consumers that were not
qualified to receive those signals pursuant to SHVA, the FCC released a Notice
of Proposed Rulemaking on November 17, 1998 seeking comments on the way it
defines, measures, and predicts the strength of television signals.  Television
signal intensity is the key element in determining whether a household is
"unserved" by a broadcast network station and is, therefore, eligible to receive
a distant network signal using a home satellite dish pursuant to SHVA.  As
described above, only those consumers that are "unserved", meaning unable to
receive an over-the-air signal of Grade B intensity of a particular local
network station using rooftop antennae, are eligible to receive that network's
distant signal from a satellite provider pursuant to SHVA.

  On February 2, 1999, the FCC released a Report and Order addressing the  way
it measures and predicts the strength of television signals for the purposes of
the SHVA.  The FCC declined to adopt a definition for "Grade B signal" solely
for the purposes of the SHVA.  However, the FCC adopted a methodology for
measuring signal strength at individual households.  In addition, the FCC
recommended that satellite providers and broadcasters use a predictive model for
determining whether an individual household is "unserved".  Finally, the FCC
encouraged Congress to modify the law and permit satellite providers to offer
local into local retransmissions of broadcast signals.  The FCC's new rule for
measuring signal strength may impact the number of households who qualify as
"unserved households".

                                      I-19
<PAGE>
 
  The Copyright Office reviewed the SHVA and submitted a report to Congress on
August 1, 1997.  Of particular note, the Copyright Office recommended the
adoption of a "red zone/green zone" plan under which satellite carriers
generally would be barred from retransmitting a network-affiliated station to
households located within the local market area (i.e., Area of Dominant
Influence) of another affiliate of the same network, but would be permitted to
retransmit (subject to payment of the applicable SHVA royalty fee) a network-
affiliated station to households located in any Area of Dominant Influence that
is not served by an affiliate of the same network.  The Copyright Office further
proposed that a new royalty fee system be established that would permit
satellite carriers to retransmit a network-affiliated station to households
located in the local market of another affiliate upon the payment of a royalty
fee which would be distributed to network affiliates.  The Copyright Office also
recommended that the Copyright Act be amended to expressly permit satellite
carriers to retransmit a network affiliated station to households located in
that station's own market.  The Copyright Office took no position on whether
there should be a royalty fee payment imposed for such "local into local"
retransmissions.  In response to a petition by EchoStar, the Copyright Office
has initiated a proceeding to consider whether the retransmission of a network's
affiliated station within a station's own market is permissible under the
Copyright Act as presently codified.  That proceeding is still pending.  Lastly,
the Copyright Office recommended that Congress indefinitely extend the satellite
carrier license, similar to the cable compulsory license.  The recommendations
of the Copyright Office do not currently have legal force or effect, and will
not have legal force or effect unless and until they are adopted by Congress and
enacted as legislation.  In 1998, Congress was unsuccessful in passing
legislation that would allow local into local retransmission of broadcast
signals; however, in January 1999, bills were introduced in the Senate (S. 247
and S. 303) and the House (H.R. 89) which, if enacted, would permit the
retransmission of local broadcast signals within their local broadcast areas.

  A Copyright Arbitration Royalty Panel ("CARP"), convened pursuant to the terms
of the SHVA, recommended that the Librarian of Congress adopt an increase in the
royalty fees paid by satellite carriers for the distribution of superstations
and network affiliates directly to homes to a level commensurate with fair
market value. Specifically, the CARP recommended that the rates be increased
from $0.06 per subscriber per month for network signals and $0.175 ($0.14 for
certain "syndex proof" stations) per subscriber per month for superstations, to
a uniform rate of $0.27 per subscriber per month for all signals.  The satellite
carriers filed petitions with the Librarian of Congress to set aside or modify
the report, arguing, inter alia, that the new rate is unfair because it is well
in excess of the effective royalty rates currently paid by cable television
systems, and because the increases were made effective retroactively to July 1,
1997.  The Librarian of Congress released his report on October 27, 1997,
adopting CARP's recommendation.  However the Librarian of Congress rejected
CARP's recommendation to make the new fees retroactive, and instead, made the
new fees effective as of January 1, 1998.  The SBCA, representing the satellite
carriers, filed a petition with the Librarian of Congress requesting a stay of
the effectiveness of the rate increase, pending judicial review or congressional
action.  The Librarian of Congress denied the petition.  The SBCA filed an
unsuccessful petition seeking review of the rate increase with the U.S. Court of
Appeals for the District of Columbia. The satellite carriers also have requested
Congress to override the rate adjustment by legislation. The bills introduced
into Congress last year failed; however, S. 247 currently proposes to decrease
copyright rates by 30% for superstations and 45% for networks.  No assurance can
be given that the carriers will be able to obtain relief from Congress. With the
rate increase, the Company (and all other direct broadcast satellite and DTH
satellite service providers) may be competitively disadvantaged against cable
operators.

                                      I-20
<PAGE>
 
  The Telecommunications Act of 1996.  The Telecommunications Act of 1996 ("1996
Act") clarified that the FCC has exclusive jurisdiction over DTH satellite
services, and that criminal penalties may be imposed for piracy of DTH satellite
services.  The 1996 Act also preempted local (but not state) governments from
imposing taxes or fees on DTH services, including DBS, and directed the FCC to
promulgate regulations prohibiting local (including state) governments from
maintaining zoning or other regulations that impair a viewer's ability to
receive video programming services through the use of DBS receive-only dishes in
residential areas. The FCC has adopted rules that it believes comply with the
statutory requirements. Finally, the 1996 Act requires that multichannel video
programming distributors such as DBS operators scramble or block channels
providing indecent or sexually explicit adult programming.

  Existing FCC Permits and Licenses. The Company has exercised its option under
an option agreement between the Company and Tempo (the "Tempo Capacity Option
Agreement") to purchase or lease 100% of the capacity of the DBS system being
constructed by Tempo pursuant to the FCC Permit. As the holder of a DBS permit,
Tempo is subject to FCC jurisdiction and review primarily for: (i) authorization
of individual satellites (i.e. meeting minimum financial, legal, and technical
standards) and earth stations, (ii) avoiding interference with other radio
frequency transmitters, (iii) complying with the rules the FCC has established
specifically for holders of U.S. DBS authorizations and (iv) complying with
applicable provisions of the Communications Act.

  Under the FCC Permit, the time by which the Tempo Satellites must be
operational was due to expire in May 1998.  On April 3, 1998, Tempo filed a
request with the FCC for an extension of that deadline pending FCC review of (i)
TSAT's request for consent to the transfer of control of Tempo to PRIMESTAR (the
"Transfer Application") and (ii) PRIMESTAR's application for consent to the
assignment to PRIMESTAR of the high power DBS authorizations and certain assets
owned by MCI (the "Assignment Application"). 

  On April 30, 1998, the FCC determined that Tempo's satellite at 119 degrees
W.L. was not operational. It did find, however, that an extension of time was
warranted for that orbital location and granted an extension to Tempo for 119
degrees W.L. Such extension was granted until six months after the FCC
determination on the Transfer Application and Assignment Application, with the
condition that Tempo not enter into a lease agreement with PRIMESTAR or any
similar lease arrangement prior to the FCC's decision on the Transfer
Application and the Assignment Application. In addition, Tempo voluntarily
surrendered its permit for 166 degrees W.L. Effective November 19, 1998, the
Company voluntarily withdrew the Assignment Application.

  In an order released February 24, 1997, the International Bureau granted,
subject to certain conditions, Tempo's request to launch and operate the Tempo
DBS-1 satellite at 119 degrees W.L. and to test its satellite at 109.8 degrees
W.L. for eight weeks. In addition, the International Bureau required Tempo to
submit to the FCC information required to initiate advance publication and
notification of Tempo's operations in accordance with the Radio Regulations of
the International Telecommunications Union. The International Bureau also
granted Tempo authority to modify its satellite design, as requested in a July
1993 application, and denied oppositions which had been filed by numerous
existing and potential DBS competitors. Tempo DBS-1 was launched on March 8,
1997, and is now stationed in its authorized location at 119 degrees W.L. Tempo
may need to file an application with the FCC for a license to operate the
satellite in orbit. Tempo expects that the FCC would approve any such request,
but cannot assure the ultimate outcome.

  There can be no assurance that Tempo will succeed in obtaining all requisite
regulatory approvals for its operations without the imposition of restrictions
on or other adverse consequences to Tempo, TSAT or PRIMESTAR.


                                      I-21
<PAGE>
 
  Required FCC Approvals.  On July 18, 1997, TSAT and the Partnership filed the
Transfer Application.  The FCC released a Public Notice of the Transfer
Application on July 23, 1997, establishing procedural dates for petitions to
deny and responsive pleadings.  EchoStar, CAI Wireless Systems, Inc., the Small
Cable Business Association and Media Access Project filed petitions to deny the
Transfer Application, while DirecTv and the Wireless Cable Association
International filed comments on the Transfer Application.  These petitions and
comments request that the FCC deny or dismiss the Transfer Application on a
variety of procedural and substantive grounds or that the FCC condition its
approval of the Transfer Application upon PRIMESTAR's compliance with
restrictions designed to ensure access to programming and protect against cross-
subsidization, among other requests.  TSAT and the Partnership filed a joint
opposition to these petitions and comments, and the National Rural
Telecommunications Cooperative filed a reply comment in support of DirecTv's
comments.  The petitioners and commenters filed replies to TSAT's and the
Partnership's opposition on September 9, 1997.  There can be no assurance that
the FCC's review of these documents or the Transfer Application will be
favorable, or that the FCC will not impose conditions unacceptable to TSAT, the
Company, or the other Restructuring Parties in connection with its review.

  In support of the Transfer Application, the Partnership filed two ex parte
                                                                    --------
filings. The first filing was an economic study prepared by outside economic
consultants which demonstrated that (1) an analysis of the Partnership's
penetration in cabled areas served by a PRIMESTAR Partner and those areas served
by a non-affiliated cable operator does not indicate a systematic strategy by
the Partnership to compete selectively and (2) PRIMESTAR's incentives to compete
are comparable to those of a stand-alone DBS operator.  The second filing was an
analysis of the Transfer Application proceedings using the framework established
in the FCC's Bell Atlantic/NYNEX decision, as well as a summary of the
             --------------------                                     
Partnership's responses to the arguments and requested conditions raised by
parties during the proceedings.  The FCC requested responses to those filings
from interested parties.  EchoStar and DirecTV argued that the Transfer
Application should be denied, while BellSouth and the Wireless Cable Association
requested conditions regarding the availability of programming affiliated with
PRIMESTAR's owners. EchoStar also filed a motion seeking access to the
underlying data used by the economic consultants or, in the alternative,
deletion of the economic filing from the records.  The Partnership filed a
response to all of these filings on  February 20, 1998, rejecting the arguments
raised by the parties, and the Partnership requested expedited approval of the
Transfer Application.

  On March 2, 1998, the Chief of the International Bureau submitted to the
Company a letter request for the submission of certain documents previously
submitted to the Department of Justice as well as certain information regarding
the economic study described above and information regarding the programming
interests of the Company's cable owners.  These documents have been submitted
pursuant to a suitable protective order.  Several parties filed comments
regarding the Company's response, reiterating their objections to the Transfer
Application.  The Company filed a reply denying their arguments.


                                      I-22
<PAGE>
 
  On November 25, 1998, Tempo and the Company requested expedited action by the
FCC on the application to transfer control of Tempo to the Company.  Several
parties filed responses to that request, objecting to the proposed transfer.
The Company and Tempo filed a join reply to those objections.  On January 27,
1999, Tempo filed a joint application with DIRECTV Enterprises, Inc. seeking FCC
approval to assign Tempo's DBS authorization to DIRECTV ("DIRECTV Application").
In addition, Tempo and the Company jointly filed a letter seeking to maintain
the status quo with respect to the Transfer Application until the FCC decides
the DIRECTV Application; therefore, Tempo and the Company requested that the
Transfer Application be held in abeyance and, subject to and contemporaneously
with approval of the DIRECTV Application, that the FCC dismiss the Transfer
Application.  EchoStar filed a petition to deny the DIRECTV Application on March
5, 1999, on the basis that DirecTv should not be allowed to control high power
DBS spectrum at three full-CONUS orbital locations and that EchoStar has offered
to purchase the Tempo high power DBS assets.  On the same date, the Small Cable
Business Association submitted a request that any grant of the DIRECTV
Application be conditioned on DirecTV providing a digital add-on service that
small cable systems can self-brand, and Media Access Project filed a petition to
deny the application to the extent the FCC did not apply and DirecTV did not
accept application of Section 310(b) of the Communications Act.  DirecTV and
Tempo each filed oppositions to these petitions on March 19, 1999.  Responses to
the DirecTV and Tempo submissions are due April 2, 1999.

  Antitrust Decree.  The Partnership and the parties named in the action
described below are subject to the jurisdiction of the U.S. District Court for
the Southern District of New York to ensure compliance with an antitrust consent
decree. In United States v. PRIMESTAR Partners L.P., et al., 93 Civ. 3919 (SDNY
1993) (the ''Federal Decree''), the Partnership and such parties agreed to
refrain from (i) enforcing any provisions of the PRIMESTAR Partnership Agreement
that affect the availability, price, terms or conditions of sale of programming
to any provider of multichannel subscription television, or (ii) entering into
certain other agreements restricting the availability of programming services.
The Federal Decree expires in April 1999 and continues to apply to the Company
since consummation of the Restructuring.  The Company believes that it is
currently in compliance with the Federal Decree in all material respects and
that the Federal Decree does not currently have a material adverse effect on the
Company or its operations.

Other
-----

  Legislative, administrative and/or judicial action may change all or portions
of the foregoing statements relating to competition and regulation.

  The Company has not expended material amounts during the last three fiscal
years on research and development activities.

  There is no one customer or affiliated group of customers to whom sales are
made in an amount which exceeds 10% of the Company's revenue.

  Compliance with federal, state and local provisions which have been enacted or
adopted regulating the discharge of material into the environment or otherwise
relating to the protection of the environment has had no material effect upon
the capital expenditures, results of operations or competitive position of the
Company.

  The Company had approximately 1,100 employees as of December 31, 1998. None of
the Company's employees are represented by a union and the Company believes its
employee relations are good.

  (d)  Financial Information about Foreign and Domestic Operations and Export
       -----------------------------------------------------------------------  
       Sales
       -----

       Not applicable.


                                      I-23
<PAGE>
 
Item 2.  Properties.
------   ---------- 

  The Company owns no real estate. The Company has entered into noncancellable
operating leases for all of its facilities, including its corporate headquarters
and call center, both of which are located in Englewood, Colorado.  All of such
operating leases expire at various times through 2008. The Company believes that
such facilities are in good condition and are suitable and adequate for its
business operations for the foreseeable future.

Item 3.  Legal Proceedings.
------   ----------------- 

  There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject, except as follows:

  In a civil action entitled Jerry Wayne Self v. PRIMESTAR By TCI, el al., filed
in the Circuit Court of Jefferson County, Alabama, Civil Action No. 96-831, an
Order of Judgment was entered against PRIMESTAR by TCI on November 12, 1997, in
the amount of $4,257,242, consisting of medical expenses of $15,242, lost wages
of $52,000, future lost wages of $1,040,000, physical and mental pain and
suffering in an amount of $150,000 and punitive damages of $3,000,000.  The
judgment arises out of a case in which the plaintiff alleges that on September
19, 1995, he was riding in the front seat of a car that was struck head-on by a
car driven by William Francis Hinton, causing the plaintiff to suffer injuries.
The plaintiff alleges that Hinton was intoxicated and was "acting within the
line and scope of his employment" for PRIMESTAR By TCI when the accident
occurred.  "PRIMESTAR By TCI" is a trade name currently or formerly used in
certain jurisdictions by TSAT and/or its predecessors.  On December 3, 1997,
TSAT filed an Answer and Affirmative Defenses and a Motion to Set Aside Entry of
Default and Default Judgment or in the Alternative for Relief from Judgment or
in the Alternative a Motion to Reconsider or for a New Trial.  On December 12,
1997, the Court entered an order setting aside the Entry of Default and Default
Judgment. PRIMESTAR has agreed to indemnify TSAT for any potential liability
with respect to this matter, to the extent not covered by insurance or other
third party indemnification obligations.  The parties settled this matter for a
nominal amount, and the Court dismissed the defendant with prejudice on October
29, 1998.  Such settlement represents the final resolution of this mater, and
accordingly, it will not be reported in future filings.

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

         None

                                      I-24
<PAGE>
 
                                    PART II


Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.
------   --------------------------------------------------------------------- 

     None of the Company's shares of common stock are currently publicly traded.

     The Company has not paid cash dividends on its common stock and has no
present intention of so doing.  Payment of cash dividends, if any, in the future
will be determined by the Company's Board of Directors in light of its earnings,
financial condition and other relevant considerations. In addition, the Company
is subject to loan and other agreements that prohibit or limit the ability of
the Company to pay dividends on its common equity.  For further discussion of
such restrictions, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Item 6.  Selected Financial Data.
------   ----------------------- 

     Selected financial data related to the Company's financial condition and
results of operations for the five years ended December 31, 1998 are summarized
as follows (such information should be read in conjunction with the accompanying
consolidated financial statements of the Company):

<TABLE>
<CAPTION>
                                                               Years ended December 31,
                                              ----------------------------------------------------------
                                                1998 (1)        1997        1996       1995       1994
                                              -------------  ----------  ----------  ---------  --------
                                                                amounts in thousands,
                                                              except per share amounts
<S>                                           <C>            <C>         <C>         <C>        <C>
Summary Statement of Operations Data:
-------------------------------------
Revenue                                        $ 1,289,666     561,990     417,461    208,903    30,279
Operating, selling, general and
 administrative expenses                       $(1,133,420)   (481,855)   (410,836)  (214,117)  (25,106)
Impairment of long-lived assets (2)            $  (950,289)         --          --         --        --
Operating loss                                 $(1,337,544)   (171,599)   (184,284)   (60,702)   (9,144)
Interest expense (3)                           $  (145,939)    (47,992)     (2,023)        --        --
Net loss                                       $(1,343,704)   (238,341)   (140,004)   (47,507)  (13,688)
 
Basic and diluted loss per common share (4)         $(8.02)      (3.58)      (2.11)      (.72)
 
</TABLE> 

<TABLE> 
<CAPTION> 
 

 
                                                               Years ended December 31,
                                              ----------------------------------------------------------
                                                1998 (1)        1997        1996       1995       1994
                                              -------------  ----------  ----------  ---------  --------
                                                                amounts in thousands
<S>                                           <C>            <C>         <C>         <C>        <C>
Summary Balance Sheet Data:
---------------------------
Property and equipment, net                    $ 1,148,590   1,121,937   1,107,654    889,220   397,798
Total assets                                   $ 2,112,087   1,204,856   1,180,273    933,443   410,105
Due to the Partnership                         $        --     463,133     457,685    382,900   278,772
Debt (3)                                       $ 1,833,195     418,729     247,230         --        --
Equity (Deficit)                               $  (284,774)    136,269     372,358    483,584   120,526
</TABLE>


                                      II-1
<PAGE>
 
----------------------
(1)  In connection with the Restructuring, TSAT has been identified as the
     acquiror for accounting purposes and the predecessor for financial
     reporting purposes.  Accordingly, the periods prior to the Closing Date
     represent the financial condition and results of operations of TSAT, and
     the periods subsequent to the Closing Date represent the financial
     condition and results of operations of TSAT, the Partnership and the Non-
     TSAT Parties.

(2)  In 1998, the Company recognized an impairment loss which represents the
     difference between the carrying amount and the estimated fair value of its
     long-lived assets.

(3)  Effective December 31, 1996, the Company entered into a bank credit
     facility with initial commitments of $350,000,000.  In addition, on
     February 20, 1997, the Company issued the Notes with aggregate principal
     amounts at maturity of $475,000,000.

(4)  In connection with the December 4, 1996 consummation of the Distribution,
     the Company issued 66,408,000 shares of Company Common Stock.  The basic
     and diluted loss per common share amounts for the years ended December 31,
     1996 and 1995 assume that the shares issued pursuant to the Distribution
     were issued and outstanding since January 1, 1995.  Accordingly the
     calculation of the net loss per share assumes weighted average shares
     outstanding of 66,408,000 for each of the years ended December 31, 1996 and
     1995.

Item 7.   Management's Discussion and Analysis of Financial Condition
------    -----------------------------------------------------------
          and Results of Operations
          -------------------------

Summary of Operations
---------------------

          Pursuant to the Restructuring Agreement and the TSAT Asset Transfer
Agreement, the Restructuring was consummated effective April 1, 1998.  In
connection with the Restructuring, (a) TSAT contributed and transferred to
PRIMESTAR all of TSAT's assets and liabilities except (I) the capital stock of
Tempo, (II) the consideration received by TSAT in the Restructuring and (III)
the rights and obligations under certain agreements with PRIMESTAR and others
and (b) the business of the Partnership and the business of distributing the
PRIMESTAR(R) programming service of each of TWE, Newhouse, Comcast, Cox and
affiliates of MediaOne were consolidated into PRIMESTAR.

          Prior to the Closing Date, the PRIMESTAR(R) service was owned and
operated by the Partnership and separately distributed and serviced by
affiliates of the partners of the Partnership (the "Distributors").  As a result
of the Restructuring, the Company owns and operates the PRIMESTAR(R) business.
The Company currently offers a direct to home satellite service with over 160
channels of digital video and audio programming throughout the continental
United States.

          The TSAT Asset Transfer was recorded at TSAT's historical cost due to
the fact that, prior to the Restructuring, PRIMESTAR was a wholly-owned
subsidiary of TSAT.  The remaining elements of the Restructuring, as set forth
above, were treated as the acquisition by PRIMESTAR of the Partnership Interests
and PRIMESTAR Assets and Liabilities, of the Non-TSAT Parties, and such
acquisition was accounted for using the purchase method of accounting.  The fair
value of the consideration issued to the Non-TSAT Parties has been allocated to
the assets and liabilities acquired based upon the estimated fair values of such
assets and liabilities.


                                      II-2
<PAGE>
 
          TSAT has been identified as the acquiror for accounting purposes and
the predecessor for financial reporting purposes due to the fact that TSAT owns
the largest interest in the Company immediately following the consummation of
the Restructuring.  Accordingly, the periods prior to the Restructuring
represent the results of operations of TSAT, and the periods subsequent to the
Restructuring include the results of operations of TSAT, the Partnership and the
Non-TSAT Parties.  To the extent not otherwise described, increases in the
Company's revenue and operating, selling, general and administrative expenses in
1998, as detailed below, are primarily related to the Restructuring.

          The Company reported net losses of $1,343,704,000, $238,341,000 and
$140,004,000 during the years ended December 31, 1998, 1997 and 1996,
respectively. Improvements in the Company's results of operations are largely
dependent upon its ability to increase its customer base while maintaining its
pricing structure, reducing subscriber churn and effectively managing its costs.
No assurance can be given that any such improvements will occur. In addition,
the Company incurs significant sales commission and installation costs when its
customers initially subscribe to the service.  Management expects that the costs
of acquiring subscribers will continue to be significant. The high cost of
obtaining new subscribers also magnifies the negative effects of subscriber
churn.

          Primarily as a result of the Restructuring, the Company's number of
customers increased from 914,000 at March 31, 1998 to 2,296,000 at December 31,
1998.  Exclusive of the effects of the Restructuring, the Company added 223,000
net customers during the period from April 1, 1998 to December 31, 1998,
including 130,000 net customers during the fourth quarter of 1998.  During the
years ended December 31, 1998, 1997 and 1996, (i) the Company's annualized
subscriber churn rate (which represents the annualized number of subscriber
terminations divided by the weighted average number of subscribers during the
period) was 33.2%, 30.1% and 38.5%, respectively and (ii) the average subscriber
life implied by such subscriber churn rate was 3.0 years, 3.3 years and 2.6
years, respectively.  The Company believes that the churn rate in 1998 is due in
part to subscribers acquired in the Restructuring that did not meet the
Company's current credit standards or customer delinquency policies.  In
addition, the Company has been subject to increased competitive pressures in
1998.  Although the Company has initiated certain programs intended to reduce
the Company's churn rate, no assurance can be given that churn rates for future
periods will be lower than the current rate.  If such programs are not
successful and the Company's churn rate fails to improve, the financial
condition and results of operations of the Company could be adversely affected.

                                      II-3
<PAGE>
 
          Certain financial information concerning the Company's operations is
presented below (dollar amounts in thousands):

<TABLE>
<CAPTION>
                                                                 Years ended December 31,
                                      ------------------------------------------------------------------------------
                                                 1998                       1997                      1996
                                      --------------------------  ------------------------  ------------------------
                                                     Percentage                Percentage                Percentage
                                                      of total                  of total                  of total
                                         Amount        revenue      Amount       revenue      Amount       revenue
                                      -------------  -----------  -----------  -----------  -----------  -----------
<S>                                   <C>            <C>          <C>          <C>          <C>          <C> 
Revenue:
 Programming and equipment
  rental                               $ 1,227,270           95%   $ 512,894           91%   $ 351,548           84%
 Installation                               62,396            5       49,096            9       65,913           16
                                       -----------        -----    ---------         ----    ---------         ----
   Total revenue                         1,289,666          100      561,990          100      417,461          100
                                       -----------        -----    ---------         ----    ---------         ----
 
Operating costs and expenses:
 Charges from the Partnership              (82,235)          (6)    (259,600)         (46)    (188,724)         (45)
 Operating                                (565,510)         (44)     (23,992)          (4)     (28,546)          (7)
 Selling and marketing                    (321,611)         (25)    (138,021)         (25)    (132,972)         (32)
 General and administrative               (117,184)          (9)     (60,242)         (11)     (60,594)         (14)
 Transition                                (20,855)          (2)          --           --           --           --
 Restructuring charges                     (26,025)          (2)          --           --           --           --
                                       -----------        -----    ---------         ----    ---------         ----
                                        (1,133,420)         (88)    (481,855)         (86)    (410,836)         (98)
                                       -----------        -----    ---------         ----    ---------         ----
 
   Operating Cash Flow(1)                  156,246           12       80,135           14        6,625            2
 
Impairment of long-lived assets           (950,289)         (74)          --           --           --           --
Stock compensation                            (414)          --       (8,092)          (2)         446           --
Depreciation and amortization             (543,087)         (42)    (243,642)         (43)    (191,355)         (46)
                                       -----------        -----    ---------         ----    ---------         ----
 
   Operating loss                      $(1,337,544)       (104)%   $(171,599)        (31)%   $(184,284)        (44)%
                                       ===========        =====    =========         ====    =========         ====
</TABLE>

-----------------------------------
(1)  Operating Cash Flow, which represents operating income before depreciation,
     amortization, stock compensation and impairment charges, is a commonly used
     measure of value and borrowing capacity.  Operating Cash Flow is not
     intended to be a substitute for a measure of performance in accordance with
     generally accepted accounting principles and should not be relied upon as
     such.  Furthermore, Operating Cash Flow may not be comparable to similarly
     titled measures reported by other companies.  Operating Cash Flow should be
     viewed together with cash flows measured in accordance with generally
     accepted accounting principles.  For information concerning such cash
     flows, see the statements of cash flows included in the accompanying
     consolidated financial statements.

     During 1998, in an effort to remain competitive, attract new customers and
retain existing customers, the Company implemented various new service offerings
and changed the pricing of certain of its existing offerings.  For example, the
Company implemented a national pricing and programming package structure
effective July 1, 1998, whereby customers would receive the same programming
packages for the same price throughout the country.  Such national pricing
structure had the effect of lowering certain rates for certain packages in
certain areas of the country.  In addition, the Company initiated promotional
offers including installation rebates and packages with reduced rental fees.
Although there can be no assurance, the Company believes that such new service
offerings, pricing changes and promotional offers may attract new customers and
help retain existing customers, but will have a negative impact on the Company's
recurring revenue per customer and installation revenue per new customer
installed.

                                      II-4
<PAGE>
 
     Revenue increased $727,676,000 or 129% and $144,529,000 or 35% during 1998
and 1997, respectively, as compared to the corresponding prior year.  The
Company's average monthly programming and equipment rental revenue per customer
increased from $55 during 1997 to $56 during 1998.  The average installation
revenue from each customer installed decreased from $128 in 1997 to $70 in 1998.
Such decrease is primarily due to a $50 rebate offer that was initiated by the
Company in April 1998 and increased to $100 in September 1998.

     The 1997 increase in revenue represents the net effect of a $161,346,000 or
46% increase in programming and equipment rental revenue and a $16,817,000 or
26% decrease in installation revenue.  The increase in programming and equipment
rental revenue is primarily the result of an increase in the number of
customers.  Additionally, the Company's average monthly programming and
equipment rental revenue per customer increased from $50 during 1996 to $55
during 1997.  Such increase was primarily the result of rate increases
implemented in May 1997 in conjunction with the launch of approximately 55
additional channels.  The decrease in installation revenue is primarily
attributable to a reduction in 1997 in the number of installations performed and
a decrease from $145 during 1996 to $128 during 1997 in the average installation
revenue derived from each customer installed.

     Through the Closing Date, the Partnership provided programming services to
the Company and the other authorized Distributors in exchange for a fee based
upon the number of customers receiving programming services.  The Partnership
also arranged for satellite capacity and uplink services, and provided national
marketing and administrative support services, in exchange for a separate
authorization fee from each Distributor, including the Company, based on each
such Distributor's total number of authorized satellite receivers.

     Subsequent to the Closing Date, operating expenses are primarily comprised
of programming, satellite capacity and uplink costs (costs, which prior to the
Restructuring were included in charges from the Partnership) and amounts related
to customer fulfillment activities.  Such expenses represented 50% of revenue
for the period from April 1, 1998 through December 31, 1998.

     Operating expenses decreased $4,554,000 or 16% during 1997, as compared to
1996.  Such decrease is primarily attributable to the fact that the Company's
other operating costs and expenses for the year ended December 31, 1996 included
$9,292,000 of installation fees paid to TCIC that were not capitalized.  Other
operating costs and expenses for the year ended December 31, 1997 do not include
a similar amount since the Company capitalized the full amount of installation
fees paid to TCIC subsequent to the Distribution Date.

     Through December 31, 1996, TCIC provided the Company with certain customer
fulfillment services.  Charges for such services were allocated to the Company
by TCIC based on scheduled rates.  Such services, which included installation,
maintenance, retrieval, inventory management and other customer fulfillment
services, were to be performed in accordance with specified performance
standards.  Effective January 1, 1997, charges for customer fulfillment services
provided by TCI were made pursuant to a fulfillment agreement (the "Fulfillment
Agreement") entered into by the Company and TCIC in connection with the
Distribution.  Pursuant to the Fulfillment Agreement, TCIC continued to provide
fulfillment services on an exclusive basis to the Company following the
Distribution with respect to customers of the PRIMESTAR(R) medium power service.
Such services were required to be performed in accordance with specified
performance standards.  The Fulfillment Agreement terminated on December 31,
1997.  In September and October 1997, TSAT entered into agreements with regional
fulfillment companies to perform the services no longer performed by TCIC.

                                      II-5
<PAGE>
 
     Installation charges from TCIC included direct and indirect costs of
performing installations.  Through the Distribution Date, the Company
capitalized a portion of such charges as subscriber installation costs based
upon amounts charged by unaffiliated third parties to perform similar services.
Subsequent to the Distribution Date, the Company capitalized the full amount of
installation fees paid to TCIC.  Additionally, the scheduled rates for the
services provided by TCIC under the Fulfillment Agreement exceeded the scheduled
rates upon which charges, historically, were allocated to the Company for such
services.  In this regard, installation charges allocated to the Company by TCIC
aggregated $62,461,000 during the year ended December 31, 1996.  If the
Fulfillment Agreement had been in effect during 1996, the estimated installation
fees incurred by the Company would have been $86,186,000.

     Selling and marketing expenses, which represented 25% of revenue during the
year ended December 31, 1998, include sales salaries and commissions, marketing
and advertising expenses, and costs associated with the operation of customer
service call centers.  General and administrative expenses represented 9% and
11% of revenue during the years ended December 31, 1998 and 1997, respectively.
The decrease in such percentage is primarily attributable to the relatively
fixed nature of certain components of the Company's general and administrative
expenses.

     The Company's selling and marketing expenses and general and administrative
expenses decreased as a percentage of revenue in 1997 primarily due to (i) lower
sales commissions due to a 15% decrease in installations in 1997 as compared to
1996, and (ii) the relatively fixed nature of certain components of TSAT's
selling, general and administrative expenses.

     During the second half of 1997, the Company began offering a marketing
program that allows subscribers to purchase the Company's proprietary satellite
reception equipment at a price that is less than the Company's cost. Losses
incurred by the Company on such sales of satellite reception equipment are
included in selling expense in the period such sales are consummated and
aggregated $16,057,000 and $3,538,000 during the years ended December 31, 1998
and 1997, respectively.  As the Company stopped aggressively marketing this
program in the fourth quarter of 1998, primarily all of the 1998 loss was
recognized during the period from January 1, 1998 through September 30, 1998.

     In connection with the Distribution, the Company and TCI also entered into
the "Transition Services Agreement", and certain other agreements. Pursuant to
the Transition Services Agreement, TCIC provided certain general and
administrative services to TSAT for a fee of $1.50 per subscriber per month.
Amounts charged by TCIC pursuant to the Transition Services Agreement aggregated
$3,174,000 and $11,579,000 during the years ended December 31, 1998 and 1997,
respectively. The Transition Services Agreement was terminated in connection
with the Restructuring. Through the Distribution Date, general and
administrative allocations from TCIC were based upon the estimated cost of such
services provided to TSAT. The amounts charged to TSAT pursuant to the
Transition Services Agreement were in excess of the amounts that would have been
allocated by TCIC to TSAT under the arrangement that was in effect through the
Distribution Date. If the Transition Services Agreement had been effective as of
January 1, 1996, selling, general and administrative expenses would have been
approximately $198,200,000 for the year ended December 31, 1996.

     As part of the compensation paid to the Company's sales agents and FSPs,
the Company pays certain residual sales commissions during specified periods
following the initiation of service (generally five years). During the years
ended December 31, 1998, 1997, and 1996, residual payments aggregated
$25,639,000, $15,364,000 and $11,848,000, respectively, and were charged to
expense as incurred.

                                      II-6
<PAGE>
 
  Subsequent to the Restructuring, the Non-TSAT Parties continued to operate
certain non-strategic local offices (the "Transition Offices") for approximately
three months (the "Transition Period") while the responsibilities of such
offices were transferred to other PRIMESTAR offices.  By the end of the
Transition Period, all of the Transition Offices had been closed.  Transition
expenses include costs incurred through December 31, 1998 and charged to the
Company by the Non-TSAT Parties to operate the Transition Offices during the
Transition Period.

  During 1998, the Company reorganized its operations.  In connection therewith,
the Company closed certain of its local offices and reduced it corporate
workforce.  As a result, the Company terminated approximately 700 employees.  In
connection with such reorganization, the Company recognized restructuring
charges of $26,025,000.  Such restructuring charges related to (i) severance
costs for terminated employees ($18,828,000), (ii) lease cancellation fees and
other office shutdown costs ($3,617,000) and (iii) the net book value of
abandoned equipment ($3,580,000).  As of December 31, 1998, the Company had paid
approximately $6,388,000 of the restructuring charges and had a remaining
accrual of $16,057,000.  The Company anticipates that the majority of such
accrual will be paid during the first six months of 1999 with the balance to be
paid by the end of 1999.

  In connection with the Hughes Medium Power Transaction, the Company concluded
that it would be unable to recover the carrying value of its assets over their
expected remaining useful life.  Accordingly, the Company recorded an impairment
loss (the "Impairment Loss") calculated as follows (amounts in thousands):

<TABLE>
<S>                                                                        <C>
Cash proceeds and working capital adjustments                                         $1,225,466
GMH Stock                                                                                225,000
                                                                                      ----------
Total consideration                                                                    1,450,466
Carrying value of related long-lived assets                                            2,400,755
                                                                                      ----------
Impairment loss                                                                       $ (950,289)
                                                                                      ==========
</TABLE>


         The reduction in carrying amount of assets included in the Impairment
Loss is as follows (amount is thousands):

<TABLE>
<CAPTION>
<S>                                                                        <C>
Property and equipment:
 Satellite reception equipment                                                          $103,898
 Subscriber installation costs                                                           223,541
Intangible assets:
 Excess purchase price over acquired net assets                                          401,475
 Tradename                                                                               221,375
                                                                                        --------
 
                                                                                        $950,289
                                                                                        ========
</TABLE>

         Depreciation expense increased $202,269,000 or 83% and $52,287,000 or
27% during 1998 and 1997, respectively, as compared to the corresponding prior
year.  The 1998 increase is due primarily to an increase in the Company's
depreciable assets due primarily to the Restructuring.  The 1997 increase is
primarily the result of an increase in TSAT's depreciable assets due to capital
expenditures.  Changes in the Company's depreciation policies also contributed
to the increase.  Effective October 1, 1996, TSAT changed the method used to
depreciate its subscriber installation costs, and reduced the estimated useful
life of certain satellite reception equipment.  The inception-to-date effect on
depreciation expense of the change in depreciation method aggregated
$55,304,000, and was recorded during the fourth quarter of 1996.  The effect of
the reduction in estimated useful life was accounted for on a prospective basis.

         The Company recognized amortization expense of $97,176,000 during 1998.
Such amortization expense relates to intangible assets recorded in connection
with the Restructuring.


                                      II-7
<PAGE>
 
     The Company incurred interest expense of $145,939,000 and $47,992,000
during the years ended December 31, 1998 and 1997, respectively.  The increase
in interest expense is due to interest incurred on the Interim Loan and the
credit facility assumed from the Partnership (the "Partnership Credit Facility")
as well as additional borrowings under the Company's bank credit facility (the
"Bank Credit Facility").  The Company expects that it will continue to incur
significant levels of interest expense in future periods.

     The Company's share of losses of the Partnership for 1998 represent three
months of losses.  In connection with the Restructuring, the Partnership became
a wholly-owned subsidiary of the Company.  The Company's share of the
Partnership's net losses increased $17,198,000 during 1997, as compared to the
corresponding prior year.  The 1997 increase is primarily attributable to
increases in the Partnership's interest expense and operating loss.  The
increase in interest expense is attributable to interest incurred on borrowings
under the Partnership Credit Facility that were used to fund the construction of
Tempo DBS-2.  Prior to the January 1, 1997 determination that construction of
Tempo DBS-2 was substantially complete, interest incurred on the applicable
borrowings under the Partnership Credit Facility had been capitalized.  The
increase in the Partnership's operating loss occurred primarily because the
increase in the Partnership's revenue did not fully offset increases in selling,
marketing and certain other expenses.

     The Company recognized no income tax benefit during the year ended December
31, 1997 and an income tax benefit of $147,528,000 and $45,937,000 during 1998
and 1996, respectively.  The income tax benefit recognized in 1998 relates to
the reversal of temporary differences established in connection with the
Restructuring.

Recent Accounting Pronouncements
--------------------------------

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
                                         -------------------------------------
and Hedging Activities" ("Statement No. 133").  Statement No. 133 is effective
----------------------                                                        
for fiscal quarters beginning after June 15, 1999.  As the Company currently has
no derivative instruments and does not participate in hedging activities, the
Company does not anticipate that Statement No. 133 will have any effect on its
results of operations or financial position.

Liquidity and Capital Resources
-------------------------------

     In connection with the consummation of the Restructuring, the Company paid
cash to, or assumed debt of, the Non-TSAT Parties in the aggregate amount of
approximately $479 million.  The Company financed such cash payments and debt
assumption with the proceeds from the Interim Loan and through borrowings under
the Bank Credit Facility.  In addition, the Company assumed indebtedness of the
Partnership aggregating approximately $575 million, including $571 million
outstanding under the Partnership Credit Facility and $4 million of capital
lease obligations.

     On the Closing Date, the Company entered into the Interim Loan Agreement
with certain financial institutions.  The Interim Loan Agreement provided for
commitments of $350 million which were used to fund the cash payments and debt
assumption under the Restructuring.  The commitments were fully funded to the
Company on the Closing Date.  The obligations under the Interim Loan Agreement
were due in full one year from the Closing Date.  However, the Company had the
option to convert any outstanding principal amount of the Interim Loan 
on such date (the "Conversion Date") into a term loan maturing April 1, 2008. 
The Company gave notice of such conversion on March 29, 1999, in accordance with
the term of the Interim Loan Agreement.


                                      II-8
<PAGE>
 
     In addition, on the Conversion Date, the Company became obligated to enter
into a stock warrant agreement with the Lenders providing for the issuance of
warrants to purchase common stock of the Company equal to 2% of the Company's
outstanding common stock on the Conversion Date. The warrants are to be
exercisable over a ten-year period at a nominal exercise price.

     Interest was payable at variable rates monthly in arrears on the last day
of each month until the Conversion Date. Thereafter, interest is payable
quarterly in arrears, except for any term loan converted to a fixed rate loan,
in which event interest is payable on March 31 and September 30 of each year. If
interest payable by the Company exceeds 15%, the Company may elect to pay all or
a portion of the interest in excess of 15% by issuance of notes in an aggregate
principal amount equal to such excess amount.

     Prior to the Conversion Date, the Company could prepay the Interim Loan
without penalty.  After the Conversion Date, certain limited prepayments are
permitted until April 1, 2001 out of the proceeds of certain equity offerings.
Otherwise, prepayment is not permitted until on or after April 1, 2003.
Prepayment penalties apply to any prepayment prior to April 1, 2006, which
penalties are calculated with reference to the interest rate in effect at the
time of prepayment.  The Interim Loan Agreement provides for mandatory
prepayments of the Interim Loan upon the occurrence of certain asset sales,
capital contributions, securities issuances and a change of control (as defined
in the Interim Loan Agreement) of the Company.

     In connection with the Restructuring, the Company amended and restated the
Bank Credit Facility.  As amended, the Bank Credit Facility provides for maximum
commitments of up to $700 million, comprising $550 million of revolving loan
commitments and $150 million of term commitments.  As of December 31, 1998,
$513.2 million in loans were outstanding under the Bank Credit Facility, and an
additional $30 million of availability had been utilized to obtain two
outstanding letters of credit.  The Company was in compliance with the
restrictive covenants contained in the Bank Credit Facility at December 31,
1998.  Additional borrowings under the Bank Credit Facility are subject to the
Company's continuing compliance with such restrictive covenants, which relate
primarily to the maintenance of certain ratios of cash flow to debt and cash
flow to debt service, as defined.

     Commencing March 31, 2001, the revolving loan commitments are to be reduced
quarterly, and outstanding borrowings under the term loan commitments will be
payable in quarterly installments, in each case in accordance with a schedule,
until final maturity at June 30, 2005.

     The Bank Credit Facility contains covenants regarding debt service coverage
and leverage, as well as negative covenants restricting, among other things
indebtedness, liens and other encumbrances, mergers or consolidation
transactions, transactions with affiliates, investments, capital expenditures,
and payment of dividends and other distributions.

                                      II-9
<PAGE>
 
     The Partnership obtained the Partnership Credit Facility, which currently
allows for borrowings up to $585 million, to finance advances to Tempo for
payments due in respect of the construction and launch of two high power
communications satellites.  Borrowings under the Partnership Credit Facility are
collateralized by letters of credit (the "Partnership Letters of Credit"), which
were arranged for by affiliates of the Partners (or, in the case of TSAT,
affiliates of TCI) other than GE Americom.  In connection with the
Restructuring, the Partnership became an indirect, wholly-owned subsidiary of
the Company.  In addition, the Partners and TCI agreed to maintain their
respective Partnership Letters of Credit through June 1999, and the Company
entered into Reimbursement Agreements with respect to such letters of credit,
whereby the Company agreed to indemnify the parties arranging for such letters
of credit from and against all obligations thereunder and under the existing
reimbursement agreements and/or other existing documentation relating thereto,
including all existing and future payment obligations.  The obligations of the
Company under such Reimbursement Agreements are subordinated in right of
payment, in the manner set forth in the Reimbursement Agreement, to all
indebtedness of the Company under the Bank Credit Facility, the Interim Loan
Agreement and the Notes.  At December 31, 1998, the balance due under the
Partnership Credit Facility was $575 million, including amounts borrowed to pay
interest charges.

     The maturity date of the Partnership Credit Facility, as amended, is June
30, 1999.  The Company currently anticipates that it will use the proceeds from
the Hughes High Power Transaction to repay the Partnership Credit Facility.  To
the extent such proceeds are not sufficient to repay all amounts due under the
Partnership Credit Facility, the stockholders of the Company have committed to
make capital contributions in agreed-upon percentages to fund such deficiency.

     At December 31, 1998, the Company had outstanding $200 million aggregate
principal amount of 10 7/8% Senior Subordinated Notes and $275 million aggregate
principal amount at maturity of 12 1/4% Senior Subordinated Discount Notes.

     Cash interest on the Senior Subordinated Notes accrues at a rate of 10 7/8%
per annum and is payable semi-annually in arrears each February 15 and August
15.  Cash interest will not accrue or be payable on the Senior Subordinated
Discount Notes prior to February 15, 2002.  Thereafter, cash interest on the
Senior Subordinated Discount Notes will accrue at a rate of 12 1/4% per annum
and will be payable semi-annually in arrears on each February 15 and August 15,
commencing August 15, 2002; provided, however, that at any time prior to
February 15, 2002, the Company may make a Cash Interest Election (as defined in
the applicable Indenture) on any interest payment date to commence the accrual
of cash interest from and after the Cash Interest Date (as defined in the
applicable Indenture), in which case the outstanding principal amount at
maturity of each Senior Subordinated Discount Note will on such interest payment
date be reduced to the Accreted Value (as defined in the applicable Indenture)
of such Senior Subordinated Discount Note as of such interest payment date, and
cash interest (accruing at a rate of 12 1/4% per annum from the Cash Interest
Election Date) shall be payable with respect to such Senior Subordinated
Discount Note on each interest payment date thereafter.  The Notes mature on
February 15, 2007.


                                      II-10
<PAGE>
 
     Pursuant to the Hughes Medium Power Agreement, it is contemplated that the
Company will sell its DBS medium-power business and assets to Hughes for $1.1
billion in cash and 4.871 million shares of GMH Stock valued at approximately
$225 million, based upon the closing price of GMH Stock on the date of the
purchase agreement. The foregoing purchase price is subject to adjustments for
working capital at the date of closing. The Company is responsible for the
payment of certain obligations not assumed by Hughes, satisfaction of its funded
indebtedness and the payment of costs, currently estimated to range from $270
million to $340 million, associated with the termination of certain vendor and
service contracts and lease agreements related to the Company's medium power
business and proposed high power business strategy (the "Shutdown Liabilities").
The consummation of the Hughes Medium Power Transaction is subject to various
consents from PRIMESTAR's lenders; restructuring of certain of the Company's
indebtedness, as described below; and other customary conditions.

     On February 1, 1999 and in connection with the Hughes Medium Power
Transaction, the Company commenced the Tender Offers to purchase 100% of the
outstanding principal amount of the Company's 10 7/8% Senior Subordinated Notes
due 2007 at a price of $670 per $1,000 principal amount and 100% of the
outstanding principal amount of the Company's 12 1/4% Senior Subordinated
Discount Notes due 2007 at a price of 67% of the accreted value of the Senior
Subordinated Discount Notes as of February 15, 1999. In addition, PRIMESTAR made
a separate offer to lenders under the Interim Loan Agreement, to purchase 100%
of the outstanding principal amount due thereunder at a price of $670 per $1,000
principal amount. Each of the Tender Offers and the Offer to Purchase was
subject to a minimum tender condition of 90% of the outstanding principal amount
of such issue. In conjunction with the Tender Offers, PRIMESTAR solicited
consents to certain proposed amendments to the indentures governing the Notes
and the Interim Loan that would eliminate substantially all of the restrictive
covenants thereunder and would amend certain other provisions. Consummation of
both the Tender Offers and the Offer to Purchase was conditioned upon the
closing of the Hughes Medium Power Transaction and other conditions.


     Following several extensions, the Tender Offer and Offer to Purchase
expired on March 25 1999.  The minimum tender conditions were not satisfied
under the Tender Offer and Offer to Purchase, and no securities or loans were
purchased thereunder.

     Since the announcement of the Hughes Medium Power Agreement and of the
proposed restructuring of the Company's senior subordinated indebtedness
relating thereto, the Company has been engaged in negotiations with the
Bondholders' Committee and the Bridge Lenders' Committee with respect to the
possible terms and conditions of the Proposed Debt Restructuring. In that
connection, the Company has entered into confidentiality agreements with certain
representatives of the Committees and has agreed to pay certain expenses of the
Committees, including certain fees and expenses of their legal counsel and
financial advisor. Based on the progress of such negotiations to date, the
Company believes that the Proposed Debt Restructuring will be consummated on
terms satisfactory to the Company and such Committees, by means of privately
negotiated transactions. However, the Company has not entered into any
agreements to date with respect to the terms and conditions of any such
restructuring, and there can be no assurance that the Proposed Debt
Restructuring will be consummated. In the event the Company is unable to
negotiate certain minimum tender conditions in connection with the Proposed Debt
Restructuring, the Company does not intend to consummate the Hughes Medium Power
Transaction.

     The Hughes High Power Agreement provides for the sale to Hughes of the
Tempo Satellites, Tempo's 119 degrees W.L. orbital slot license and the Tempo
Rights for aggregate consideration valued at $500 million. Pursuant to the
Hughes High Power Agreement, Hughes would assume $465 million of TSAT's
liability to the Partnership, pay TSAT $2.5 million in cash, and pay PRIMESTAR
and the Partnership $32.5 million in cash in consideration for PRIMESTAR's
rights to acquire Tempo's assets and the termination and relinquishment by the
Partnership of the Tempo Rights. In addition, the Partnership has agreed to
forgive amounts due from TSAT in excess of the $465 million to be assumed by
Hughes ($4,498,000 at December 31, 1998).

                                      II-11
<PAGE>
 
     Effective March 10, 1999, the First Closing was consummated whereby Hughes
acquired Tempo DBS-2 and PRIMESTAR's option to acquire Tempo DBS-2 (the "Tempo
DBS-2 Option") for aggregate consideration of $150 million. Such consideration
was comprised of the following: (i) $9,750,000 paid to PRIMESTAR and the
Partnership for the Tempo DBS-2 Option and the termination of the Tempo Rights,
(ii) $750,000 paid to TSAT to exercise the Tempo DBS-2 Option and (iii) the
assumption by Hughes of $139,500,000 due to the Partnership from TSAT in
exchange for Tempo DBS-2. Simultaneously with the First Closing, Hughes repaid
the liability to the Partnership that Hughes assumed. 

     With regard to the sale of the remaining assets contemplated by the Hughes 
High Power Agreement, Tempo has been notified that Tempo DBS-I experienced power
reductions which occurred on March 29, 1999 and April 2, 1999. Although the 
Company does not believe the extent of such power reductions is significant, a 
definitive assessment of the impact on Tempo DBS-I is not yet complete. 
Notwithstanding the foregoing, the Second Closing, which is subject to the 
receipt of appropriate regulatory approvals and other customary closing 
conditions, is expected to be consummated in the second quarter of 1999. In the 
event the Second Closing is not consummated and the Hughes High Power Agreement 
is abandoned, there can be no assurance that the Company will be able to recover
the carrying amount of its satellite rights.

     As noted above, the consideration to be received by the Company in the
Hughes High Power Transaction is to be comprised of $1.1 billion in cash and
4.871 million shares of GMH Stock.  Pursuant to the terms of the Hughes Medium
Power Agreement, PRIMESTAR will not be able to dispose of the GMH Stock for a
period of one year from the closing of the Hughes Medium Power Transaction
except for certain transfers to affiliates. PRIMESTAR is considering its options
with respect to the GMH Stock, but has not yet made any decisions as to the
ultimate disposition of such stock.

     Upon consummation of the Hughes Medium Power Transaction, the Company
anticipates that is would use the proceeds it receives to (i) repay amounts due
under the Bank Credit Facility ($513 million at December 31, 1998), (ii) fund
the retirement or purchase and cancellation of the Notes and borrowings under
the Interim Loan Agreement pursuant to the Proposed Debt Restructuring
(estimated at less than $656 million) and (iii) fund the Shutdown Liabilities.
The Company currently estimates the total Shutdown Liabilities to range from
$270 million to $340 million, comprised of employee severance, lease
cancellation fees and vendor purchase commitments. In addition, the stockholders
of PRIMESTAR have approved the payment to TSAT of consideration (the "PRIMESTAR
Payment") in the amount of $65 million, payable in shares of GMH Stock, valued
at $46.1875 (the closing price of such stock on the date of the purchase
agreements with Hughes), subject to the terms and conditions set forth in an
agreement dated as of January 22, 1999 (the "PRIMESTAR Payment Agreement"). In
consideration of the PRIMESTAR Payment, TSAT agreed to approve the Hughes Medium
Power Transaction and Hughes High Power Transaction as a stockholder of
PRIMESTAR, to modify certain agreements to facilitate the Hughes High Power
Transaction, and to issue the Company a share appreciation right with respect to
the shares of GMH Stock received as the PRIMESTAR Payment, granting the Company
the right to any appreciation in such GMH Stock over the one year period
following the date of issuance, over an agreed strike price of $47.00. Pursuant
to the PRIMESTAR Payment Agreement, TSAT has also agreed to forego any
liquidating distribution or other payment that may be made in respect of the
outstanding shares of PRIMESTAR upon any dissolution and winding-up of
PRIMESTAR, or otherwise in respect of PRIMESTAR'S existing equity. Such payment
is conditioned upon the closing of the Hughes Medium Power Transaction.

     The Company has a history of operating losses and reported an accumulated
deficit at December 31, 1998. In connection with the Hughes Medium Power
Transaction, affiliates of the stockholders of the Company, other than TSAT, and
an affiliate of TCI have committed to make funds available to the Company,
either in the form of capital contributions or loans, up to an aggregate of
$1,013 million. Management of the Company believes, but cannot assure, that when
such funds are combined with the proceeds from the Hughes Medium Power and High
Power Transactions and the Company's existing sources of liquidity, that the
Company will be able to meet its obligations as they become due and payable.

     In the event the Hughes Medium Power Transaction is not consummated and is
abandoned, the Company currently intends to continue operating its medium power
business. Under such scenario, the Company anticipates that it would curtail
marketing and sales activities, reduce the number of new installations and
otherwise reduce expenditures to the extent possible. The Company believes, but
cannot assure, that in such event, the Company's cash flow from continuing
operations, commitments from the Company's stockholders to make certain funds
available to the Company and proceeds from the Hughes High Power Transaction
would provide the necessary funds for the Company to meet its obligations as
they become due and payable through December 31, 1999. In the event the Company
is unable to meet its obligations as they become due and payable, the Company
may be required to restructure or refinance certain of its liabilities. There
can be no assurance that such restructuring or refinancing, if necessary, would
be accomplished on terms acceptable to the Company.

                                      II-12
<PAGE>
 
     The Company is highly leveraged.  The degree to which the Company is
leveraged may adversely affect the Company's ability to compete effectively
against better capitalized competitors and to withstand downturns in its
business or the economy generally, and could limit its ability to pursue
business opportunities that may be in the interests of the Company and its
stockholders.  The Company's ability to repay or refinance its debt will require
the company to increase its operating cash flow or to obtain additional debt or
equity financing.  There can be no assurance that the Company will be successful
in increasing its operating cash flow by a sufficient magnitude or in a timely
manner or in raising sufficient additional debt or equity financing to enable it
to repay or refinance its debt.

     During the years ended December 31, 1998, 1997, and 1996, the Company's
operating activities provided cash of $137,175,000, $91,637,000 and
$115,201,000, respectively.  For the foreseeable future, the Company believes
that its operating activities will represent a reliable source of liquidity.

     During the years ended December 31, 1998, 1997, and 1996, the Company used
cash of $563,334,000, $227,327,000, and $326,621,000, respectively, to fund (i)
the acquisition and installation of satellite reception equipment, and (ii)
certain other capital expenditures. Based upon current business plans, assuming
the Hughes Medium Power Transaction is not consummated, the Company estimates
that its aggregate capital expenditures will be approximately $200 million
during the year ended December 31, 1999.  The Company expects that the majority
of such estimated capital expenditures will be used to fund the acquisition and
installation of satellite reception equipment. The actual amount of capital to
be required will be primarily a function of (i) subscriber growth and churn
rates, and (ii) the actual cost of purchasing and installing satellite reception
equipment. Accordingly, no assurance can be given that the Company's actual
capital expenditures during the year ended December 31, 1999 will not exceed the
estimated capital expenditures set forth above.

     At December 31, 1998, PRIMESTAR's future minimum commitments to purchase
satellite reception equipment aggregated approximately $44 million.

     As part of the compensation paid to the Company's various sales agents, the
Company has agreed to pay certain residual sales commissions during specified
periods following the initiation of service (generally five years).  During the
year ended December 31, 1998, residual sales commissions to such sales agents
aggregated $25,639,000.

     The Company is in the process of identifying and addressing issues
surrounding the Year 2000 ("Y2K") and its impact on the Company's operations.
The issue surrounding the Year 2000 is whether the Company's operations and
financial systems, or the systems used by the companies with whom the Company
conducts business, will properly recognize and process date sensitive
information before and after January 1, 2000.  The following discussion is based
on information currently available to the Company.

     The Company completed an initial assessment in October of 1998 which
identified areas of risk associated with the Year 2000.  The Year 2000 Program
Office was established in the fourth quarter of 1998 to oversee the Company's
Year 2000 project.  Detailed inventories have been gathered and cost estimates
have been finalized.  For each functional area of the project, detailed work
plans have been developed and put into place.  Separate test environments
completed construction and testing was initiated in the first quarter of 1999.

                                      II-13
<PAGE>
 
     A detail assessment of applications has been performed which identified
applications requiring remediation.  The assessment findings for applications
showed minimal remediation, and the effort is expected to be finalized by the
end of the second quarter of 1999.  Testing efforts running parallel to
remediation are expected to be completed by the first part of the third quarter
of 1999.  The exception to this is the area of network operations where the
detail assessment, remediation  and testing is expected to be on-going through
the third quarter of 1999.

     The Company has identified business partners that are critical to the
Company's ability to continue providing service to its customers - operations
and availability of IRDs and related software; ability to deliver programming to
customers; and ability to authorize, service and bill customers.  The Company's
Y2K plan includes the continual review and possible integrated testing of
critical business functions supplied by these business partners.  An event of
failure by a critical business partner could have a material adverse effect on
the Company's results of operations.  The Company intends to monitor the Y2K
efforts of such business partners, and will devise contingency plans in the
event that Year 2000 failures occur.

     The Company has identified vendors that supply products and services and
has established an on-going process to evaluate and track their Y2K readiness.
Based upon responses and research with these vendors, the Company will make
decisions whether to remain in the partnership or choose alternative sources.
For those vendors that supply a product or service to the Company which could
adversely impact daily operations in the event of a Year 2000 failure, the
research and subsequent decision will be made in the second quarter of 1999.

     The Company has analyzed and continues to analyze its internal IT and non-
IT systems.  The Company believes that most of such systems are currently
capable of functioning without substantial Y2K compliance problems, and that
those which are not currently Y2K compliant, will be Y2K capable in a time frame
that will avoid any material adverse effect on the Company.  The Company intends
to initiate contingency planning in the first quarter of 1999 and expects to
continue to refine and test contingency plans through the fourth quarter of
1999.

     Through December 1998, the Company has spent approximately $250,000 for Y2K
issues.  The Company has completed a budget for Y2K costs, and currently
estimates the cost to remediate Y2K issues will be $11,800,000, comprised
primarily of $4.8 million for technical remediation and testing, $2.8 million
for project management, $1.5 million for software upgrades and $1.3 million for
replacement of personal computers.  Additional costs could be identified during
the life of the project.

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

     TCI and the Non-TSAT parties, other than GE Americom, have arranged for
letter of credit (the "GE-2 Letters of Credit") to support the Company's
obligations under the GE-2 Agreement.  Pursuant to the Restructuring Agreement,
the Company reimburses TCI and the Non-TSAT Parties for fees related to the
Partnership Letters of Credit and the GE-2 Letters of Credit.  Such
reimbursements aggregated $10,004,000 during the year ended December 31, 1998
and are included in interest expense in the accompanying consolidated statements
of operations.

                                      II-14
<PAGE>
 
     The International Bureau has granted a subsidiary of EchoStar a conditional
authorization to construct, launch and operate a Ku-band domestic fixed
satellite into the orbital position at 83 degrees W.L., immediately adjacent to
that occupied by GE-2, the medium power satellite now used to provide the
PRIMESTAR(R) service. Contrary to previous FCC policy, which would have
permitted operation of a satellite at the 83 degrees W.L. orbital position at a
power level of only 60 to 90 watts (subject to coordination requirements)
EchoStar has been authorized to operate at a power level of 130 watts. If
EchoStar were to launch its high power satellite authorized to 83 degrees W.L.
and commence operations at that location at a power level of 130 watts, it would
likely cause harmful interference to the reception of the PRIMESTAR(R) signal
from GE-2 by subscribers to the PRIMESTAR(R) medium power service.

     GE Americom and PRIMESTAR have each requested reconsideration of the
International Bureau's authorization for EchoStar to operate at 83 degrees W.L.
These requests, which were opposed by EchoStar and others, currently are pending
at the International Bureau. There can be no assurance that the International
Bureau will change slot assignments, or power levels, in a fashion that
eliminates the potential for harmful interference. Accordingly, the ultimate
outcome of this matter cannot presently be predicted.

     GE Americom and PRIMESTAR have attempted to resolve potential coordination
problems directly with EchoStar, and the Company has advanced a
counter proposition to resolve this matter. This proposition is currently under
examination. It is uncertain whether any agreement in respect of such
coordination between the Partnership and EchoStar will be reached, or that if
such agreement is reached that coordination will resolve such interference.

Item 7A.          Qualitative and Quantitative Disclosures About Market Risk
--------          ----------------------------------------------------------

     At December 31, 1998, the Company had $394,995,000 (or 22%) of fixed-rate
debt with a weighted average interest rate of 11.43% and $1,438,200,000 (or 78%)
of variable-rate debt with a weighted average interest rate of 7.3%.
Accordingly, the Company is sensitive to market rate risk.  To date, the Company
has not entered into any derivative instruments to manage its interest rate
exposure.  The table below provides principal cash flows and related weighted
average interest rates for the Company's debt obligations.

<TABLE>
<CAPTION>
                                                                      Expected Maturity Date
                                                                      ----------------------

                                            1999           2000           2001           2002           2003     Thereafter
                                            ----           ----           ----           ----           ----     ----------
                                                                   dollar amounts in thousands
<S>                                <C>             <C>            <C>            <C>            <C>            <C>
December 31, 1998
-----------------
 Long-term Debt
   Fixed-rate                           $    921          1,013            342            368            396           391,955
   Average interest rate                    7.50%          7.50%          7.50%          7.50%          7.50%            11.46%
 
   Variable-rate                        $575,000             --         15,000         30,000        153,200           665,000
   Average interest rate                    5.60%            --           6.68%          6.68%          6.68%             9.23%
</TABLE>



Item 8.  Financial Statements and Supplementary Data.
------   -------------------------------------------
 
      The financial statements of the Company are filed under this item
      beginning on page II-16.
 

Item 9.  Changes in and Disagreements with Accountants on Accounting and
------   ---------------------------------------------------------------
         Financial Disclosure.
         -------------------- 

      None.

                                      II-15
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT



The Board of Directors and Stockholders
PRIMESTAR, Inc.:


     We have audited the accompanying consolidated balance sheets of PRIMESTAR,
Inc. and subsidiaries (as defined in note 1) as of December 31, 1998 and 1997
and the related consolidated statements of operations, equity (deficit), and
cash flows for each of the years in the three-year period ended December 31,
1998. In connection with our audit of the consolidated financial statements, we
have also audited the financial statement schedule listed in the index at Item
14(a). These consolidated financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and the
financial statement schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PRIMESTAR,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.



                                             KPMG LLP
                
Denver, Colorado
April 15, 1999

                                      II-16
<PAGE>
 
                        PRIMESTAR INC. AND SUBSIDIARIES

                          Consolidated Balance Sheets

                           December 31, 1998 and 1997


<TABLE>
<CAPTION>
                                                                         1998                 1997
                                                                  -------------------  -------------------
                                                                            amounts in thousands
Assets
------
 
<S>                                                               <C>                  <C>
Cash and cash equivalents                                                  $       --                6,084
 
Trade accounts receivable                                                     117,655               40,386
Other receivables                                                              29,387                   --
                                                                           ----------            ---------
                                                                              147,042               40,386
Less allowance for doubtful accounts                                            7,442                5,307
                                                                           ----------            ---------
                                                                              139,600               35,079
                                                                           ----------            ---------
 
Prepaid expenses                                                                3,967                1,262
 
Investment in PRIMESTAR Partners L.P. (the   "Partnership")
 (note 3)                                                                          --               11,093
 
 
Property and equipment, at cost:
 Satellites                                                                        --              463,133
 Satellite reception equipment                                              1,198,376              674,387
 Subscriber installation costs                                                270,384              227,131
 Support equipment                                                             93,698               34,389
                                                                           ----------            ---------
                                                                            1,562,458            1,399,040
 Less accumulated depreciation                                                413,868              277,103
                                                                           ----------            ---------
                                                                            1,148,590            1,121,937
                                                                           ----------            ---------
 
Intangible assets, net of accumulated amortization (note 6)                   786,373                   --
 
Deferred financing costs and other assets, net of accumulated                       
 amortization                                                                  33,557               29,401
                                                                           ----------            ---------
                                                                                      
 
                                                                           $2,112,087            1,204,856
                                                                           ==========            =========
</TABLE>

                                                                     (continued)

                                     II-17
<PAGE>
 
                        PRIMESTAR INC. AND SUBSIDIARIES

                     Consolidated Balance Sheets, continued

                           December 31, 1998 and 1997


<TABLE>
<CAPTION>
                                                                          1998                   1997
                                                                  ---------------------  ---------------------
                                                                              amounts in thousands
Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------
 
<S>                                                               <C>                    <C>
Accounts payable                                                           $   195,873                 50,755
Accrued charges from related parties (note 12)                                  14,792                 62,816
Accrued commissions                                                             16,296                 10,435
Accrued interest payable                                                        16,142                  8,658
Other accrued expenses                                                         104,463                 17,712
Deferred revenue                                                               100,948                 29,675
Due to the Partnership (note 13)                                                    --                463,133
Debt (note 8)                                                                1,833,195                418,729
Deferred income taxes (note 11)                                                 75,057                     --
Other liabilities                                                               40,095                  6,674
                                                                           -----------              ---------
 
    Total liabilities                                                        2,396,861              1,068,587
                                                                           -----------              ---------
 
 
Stockholders' Equity (Deficit) (note 9):
 PRIMESTAR, Inc. ("PRIMESTAR") preferred stock, $.01 par
  value; authorized 350,000,000 shares; none issue                                  --                     --
 PRIMESTAR Class A common stock, $.01 par value;
  authorized 850,000,000 shares; issued 179,143,934 in
  1998                                                                           1,791                     --
 PRIMESTAR Class B common stock, $.01 par value;
  authorized 50,000,000 shares; issued 8,465,324 in 1998                            85                     --
 PRIMESTAR Class C common stock, $.01 par value;
  authorized 30,000,000 shares; issued 13,332,365 in 1998                          133                     --
 PRIMESTAR Class D common stock, $.01 par value;
  authorized 150,000,000 shares; none issued                                        --                     --
 TCI Satellite Entertainment, Inc. ("TSAT") preferred
  stock, $.01 per value; authorized 5,000,000 shares;
  none issued                                                                       --                     --
 TSAT Series A common stock; $1 par value; authorized
  185,000,000 shares; issued 58,239,136 shares in 1997                              --                 58,239
 TSAT Series B common stock, $1 par value; authorized
  10,000,000 shares; issued 8,465,324 shares in 1997                                --                  8,465
 Additional paid-in capital                                                  1,511,041                523,685
 Accumulated deficit                                                        (1,797,824)              (454,120)
                                                                           -----------              ---------
 
   Total stockholders' equity (deficit)                                       (284,774)               136,269
                                                                           -----------              ---------
Commitments and contingencies (note 13)                                    $ 2,112,087              1,204,856
                                                                           ===========              =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                     II-18
<PAGE>
 
                        PRIMESTAR INC. AND SUBSIDIARIES

                     Consolidated Statements of Operations

                  Years ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                                       1998                 1997                 1996
                                                -------------------  -------------------  -------------------
                                                                    amounts in thousands,
                                                                  except per share amounts
<S>                                             <C>                  <C>                  <C>
Revenue:
 Programming and equipment rental                      $ 1,227,270              512,894              351,548
 Installation                                               62,396               49,096               65,913
                                                       -----------             --------             --------
                                                         1,289,666              561,990              417,461
                                                       -----------             --------             --------
Operating costs and expenses:
 Charges from the Partnership
   (note 12)                                                82,235              259,600              188,724
 Operating (note 12)                                       565,510               23,992               28,546
 Selling, general and administrative
  (note 12)                                                438,795              198,263              193,566
 Transition (note 12)                                       20,855                   --                   --
 Restructuring charges (note 10)                            26,025                   --                   --
 Impairment of long-lived assets (note 2)                  950,289                   --                   --
 Stock compensation                                            414                8,092                 (446)
 Depreciation (note 5)                                     445,911              243,642              191,355
 Amortization                                               97,176                   --                   --
                                                       -----------             --------             --------
                                                         2,627,210              733,589              601,745
                                                       -----------             --------             --------
 
    Operating loss                                      (1,337,544)            (171,599)            (184,284)
                                                       -----------             --------             --------
 
Other income (expense):
 Interest expense                                         (145,939)             (47,992)              (2,023)
 Share of losses of the Partnership                         (5,822)             (20,473)              (3,275)
 Other, net                                                 (1,927)               1,723                3,641
                                                       -----------             --------             --------
                                                          (153,688)             (66,742)              (1,657)
                                                       -----------             --------             --------
 
    Loss before income taxes                            (1,491,232)            (238,341)            (185,941)
 
Income tax benefit (note 11)                               147,528                   --               45,937
                                                       -----------             --------             --------
 
    Net loss                                           $(1,343,704)            (238,341)            (140,004)
                                                       ===========             ========             ========
 
Basic and diluted loss per common share
 (note 6)                                              $     (8.02)               (3.58)               (2.11)
                                                       ===========             ========             ========

</TABLE>

See accompanying notes to consolidated financial statements.

                                     II-19
<PAGE>
 
                        PRIMESTAR INC. AND SUBSIDIARIES

           Consolidated Statements of Stockholders' Equity (Deficit)

                  Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                                                                                    
                                                                                                                    
                                                          PRIMESTAR Common Stock               TSAT Common Stock  
                                            ----------------------------------------------  -----------------------
                                                 Class A             Class B       Class C    Series A    Series B  
                                            ------------------  -----------------  -------  ------------  --------- 
                                                                          amounts in thousands                     
<S>                                         <C>                 <C>                <C>      <C>           <C>       
Balance at January 1, 1996                  $               --                 --       --           --         --  
 Net loss                                                   --                 --       --           --         --  
 TCIC intercompany allocations                              --                 --       --           --         --  
 Net cash transfers from TCIC                               --                 --       --           --         --  
 Recognition of deferred tax assets                                                                                
  upon transfer of PRIMESTAR                                                                                       
  Partners investment in connection                                                                                
  with Distribution (note 4)                                --                 --       --           --         --  
 Adjustment to reflect consummation                                                                                
  of Distribution (note 4)                                  --                 --       --       57,941      8,467  
 Issuance of TSAT Series A Common                                                                                  
  Stock upon conversion of notes of         
  Tele-Communications, Inc.                                 --                 --       --            5         --  
                                            ------------------  -----------------  -------      -------   --------  
Balance at December 31, 1996                                --                 --       --       57,946      8,467  
 Net loss                                                   --                 --       --           --         --  
 Recognition of stock compensation                                                                                 
  related to stock options and                                                                                     
  restricted stock awards                                   --                 --       --           --         --  
 Issuance of TSAT Series A Common                                                                                  
  Stock related to restricted stock awards                  --                 --       --           33         --  
 Issuance of TSAT Series A Common                                                                                  
  Stock upon conversion of convertible                                                                             
  securities of Tele-Communications, Inc.                   --                 --       --          258         --  
 Conversion of TSAT Series B to TSAT                                                                               
  Series A                                                  --                 --       --            2         (2) 
                                            ------------------  -----------------  -------      -------   --------  
Balance at December 31, 1997                                --                 --       --       58,239      8,465  
 Net loss                                                   --                 --       --           --         --  
 Recognition of stock compensation                                                                                 
  related to stock options and                                                                                     
  restricted stock awards                                   --                 --       --           --         --  
 Issuance of TSAT Series A Common                                                                                  
  Stock related to restricted stock awards                  --                 --       --           50         --  
 Issuance of TSAT Series A Common                                                                                  
  Stock upon conversion of convertible                                                                             
  securities of Tele-Communications, Inc.                   --                 --       --          989         --  
 Issuance of PRIMESTAR common stock                                                                          
  in Restructuring (note 3)                              1,791                 85      133      (59,278)    (8,465) 
 Reimbursement of TSAT expenses (note                                                                          
  12)                                                       --                 --       --           --         --  
                                            ------------------  -----------------  -------      -------   --------  
Balance at December 31, 1998                            $1,791                 85      133           --         --  
                                            ==================  =================  =======      =======   ========  


<CAPTION> 

                                                                           Due to TCI
                                             Additional                  Communications,        Total
                                               paid-in      Accumulated        Inc.          stockholders'   
                                               capital        deficit        ("TCIC")      equity (deficit)
                                            --------------  -----------  ----------------  ----------------
                                                                       amounts in thousands
                                            <C>             <C>          <C>               <C>
Balance at January 1, 1996                              --      (75,775)          559,359           483,584
 Net loss                                               --     (140,004)               --          (140,004)
 TCIC intercompany allocations                          --           --            21,009            21,009
 Net cash transfers from TCIC                           --           --           228,622           228,622
 Recognition of deferred tax assets         
  upon transfer of PRIMESTAR                
  Partners investment in connection         
  with Distribution (note 4)                            --           --            29,142            29,142 
 Adjustment to reflect consummation         
  of Distribution (note 4)                         521,724           --          (838,132)         (250,000) 
 Issuance of TSAT Series A Common           
  Stock upon conversion of notes of 
  Tele-Communications, Inc.                             --           --                --                 5
                                            --------------  -----------  ----------------  ----------------
Balance at December 31, 1996                       521,724     (215,779)               --           372,358
 Net loss                                               --     (238,341)               --          (238,341)
 Recognition of stock compensation          
  related to stock options and              
  restricted stock awards                            1,781           --                --             1,781
 Issuance of TSAT Series A Common           
  Stock related to restricted stock awards             180           --                --               213
 Issuance of TSAT Series A Common           
  Stock upon conversion of convertible      
  securities of Tele-Communications, Inc.               --           --                --               258
 Conversion of TSAT Series B to TSAT        
  Series A                                              --           --                --                --
                                            --------------  -----------  ----------------  ----------------
Balance at December 31, 1997                       523,685     (454,120)               --           136,269
 Net loss                                               --   (1,343,704)               --        (1,343,704)
 Recognition of stock compensation          
  related to stock options and              
  restricted stock awards                            2,596           --                --             2,596
 Issuance of TSAT Series A Common           
  Stock related to restricted stock awards             (50)          --                --                --
 Issuance of TSAT Series A Common           
  Stock upon conversion of convertible      
  securities of Tele-Communications, Inc.               --           --                --               989
 Issuance of PRIMESTAR common stock   
  in Restructuring (note 3)                        984,962           --                --           919,228
 Reimbursement of TSAT expenses (note   
  12)                                                 (152)          --                --              (152)
                                            --------------  -----------  ----------------  ----------------
Balance at December 31, 1998                     1,511,041   (1,797,824)               --          (284,774)
                                            ==============  ===========  ================  ================
</TABLE>

See accompanying notes to consolidated financial statements.


                                     II-20
<PAGE>
 
                        PRIMESTAR INC. AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

                  Years ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                                                             1998         1997       1996
                                                                         -------------  ---------  ---------
                                                                                amounts in thousands
                                                                                    (see note 7)
<S>                                                                      <C>            <C>        <C>
Cash flows from operating activities:
 Net loss                                                                 $(1,343,704)  (238,341)  (140,004)
 Adjustments to reconcile net loss to net cash provided by
  operating activities:
    Depreciation and amortization                                             543,087    243,642    191,355
    Share of losses of the Partnership                                          5,822     20,473      3,275
    Accretion of debt discount                                                 20,941     16,719         --
    Restructuring charges                                                      26,025         --         --
    Payments related to restructuring charges                                  (6,388)        --         --
    Impairment of long-lived assets                                           950,289         --         --
    Stock compensation                                                            414      8,092       (446)
    Payments related to stock appreciation rights                              (2,479)        --         --
    Deferred income tax expense (benefit)                                    (147,528)        --     24,708
    Other non-cash charges (credits)                                            3,940      6,919       (311)
    Changes in operating assets and liabilities, net of the
     effect of the Restructuring:
       Change in receivables                                                  (79,838)   (15,014)     4,364
       Change in prepaids                                                       3,417       (335)      (841)
       Change in accruals, payables and other
        liabilities                                                           132,375     42,056     24,096
       Change in deferred revenue                                              30,802      7,426      9,005
                                                                          -----------   --------   --------
         Net cash provided by operating activities                            137,175     91,637    115,201
                                                                          -----------   --------   --------
 
Cash flows from investing activities:
 Cash paid in Restructuring                                                   (54,894)        --         --
 Capital expended for property and equipment                                 (563,334)  (227,327)  (326,621)
 Capital expended for construction of satellites                                   --     (5,448)   (74,785)
 Additional investments in, and related advances to, the
  Partnership                                                                     (75)    (7,073)   (17,552)
 Repayments of advances to the Partnership                                         --      7,815         --
 Other investing activities                                                    (6,365)    (1,581)    (5,458)
                                                                          -----------   --------   --------
         Net cash used in investing activities                               (624,668)  (233,614)  (424,416)
                                                                          -----------   --------   --------
 
Cash flows from financing activities:
 Borrowings of debt                                                           959,761    498,061    259,000
 Repayments of debt                                                          (469,858)  (344,699)  (263,000)
 Payment of deferred financing costs                                           (9,483)   (17,780)    (7,000)
 Proceeds from issuance of common stock                                           989        471         --
 Increase in due to the Partnership                                                --      5,448     74,785
 Increase in due to TCIC                                                           --         --    250,189
                                                                          -----------   --------   --------
         Net cash provided by financing activities                            481,409    141,501    313,974
                                                                          -----------   --------   --------
 
         Net increase (decrease) in cash and cash
          equivalents                                                          (6,084)      (476)     4,759
 
 
         Cash and cash equivalents:
          Beginning of year                                                     6,084      6,560      1,801
                                                                          -----------   --------   --------
 
          End of year                                                    $         --      6,084      6,560
                                                                         ============   ========   ========
</TABLE>

See accompanying notes to financial statements.

                                     II-21
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


                        December 31, 1998, 1997 and 1996


(1)  Organization and Basis of Presentation
     --------------------------------------

     The accompanying consolidated financial statements of PRIMESTAR, Inc.
     ("PRIMESTAR" or the "Company") include the historical financial information
     of (i) certain satellite television assets (collectively, "TCI SATCO") of
     TCIC, a subsidiary of Tele-Communications, Inc. ("TCI") for periods prior
     to the December 4, 1996 consummation of the distribution transaction
     described in note 4, (ii) TSAT and its consolidated subsidiaries for the
     period from December 5, 1996 through March 31, 1998 and (iii) PRIMESTAR and
     its consolidated subsidiaries for the period subsequent to March 31, 1998.
     PRIMESTAR was incorporated on August 27, 1997, and subsequently, ten shares
     of the Company's common stock were issued to TSAT for a capital
     contribution of $10.  All significant inter-entity and intercompany
     transactions have been eliminated.

     The Company owns and operates the PRIMESTAR(R) direct to home satellite
     service throughout the continental U.S.  The PRIMESTAR(R) service is
     transmitted via a satellite ("GE-2") owned and operated by GE American
     Communications ("GE Americom") at the 85 West Longitude ("W.L.") orbital
     position.

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

     On January 22, 1999, PRIMESTAR announced that it had reached an agreement
     with Hughes Electronics Corporation ("Hughes"), a subsidiary of General
     Motors Corporation, to sell its medium-power direct broadcast satellite
     ("DBS") business and assets to Hughes for $1.1 billion in cash and 4.871
     million shares of General Motors Class H common stock ("GMH Stock") valued
     at approximately $225 million, based on the closing price of GMH Stock on
     the date of the purchase agreement (the "Hughes Medium Power Transaction").
     The foregoing purchase price is subject to adjustments for working capital
     at the date of closing. The Company is responsible for the payment of
     certain obligations not assumed by Hughes, satisfaction of its funded
     indebtedness and the payment of costs, currently estimated to range from
     $270 million to $340 million, associated with the termination of certain
     vendor and service contracts and lease agreements related to the Company's
     medium power business and proposed high power business strategy. The
     consummation of the Hughes Medium Power Transaction is subject to various
     consents from PRIMESTAR's lenders; restructuring of certain of the
     Company's indebtedness, as described below; and other customary conditions.

     On February 1, 1999 and in connection with the Hughes Medium Power
     Transaction, the Company commenced tender offers (the "Tender Offers") to
     purchase 100% of the outstanding principal amount of the Company's 10 7/8%
     Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes") at a
     price of $670 per $1,000 principal amount and 100% of the outstanding
     principal amount of the Company's 12 1/4% Senior Subordinated Discount
     Notes due 2007 (the "Senior Subordinated Discount Notes", and together with
     the Senior Subordinated Notes, the "Notes") at a price of 67% of the
     accreted value of the Senior Subordinated Discount Notes as of February 15,
     1999.

                                                                     (continued)
                                     II-22
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

     In addition, PRIMESTAR made a separate offer to lenders under the
     Company's Senior Subordinated Credit Agreement, dated as of April 1, 1998
     (the "Interim Loan Agreement"), to purchase 100% of the outstanding
     principal amount due thereunder at a price of $670 per $1,000 principal
     amount (the "Offer to Purchase"). Each of the Tender Offers and the Offer
     to Purchase was subject to a minimum tender condition of 90% of the
     outstanding principal amount of such issue. In conjunction with the Tender
     Offers, PRIMESTAR solicited consents to certain proposed amendments to the
     indentures governing the Notes and the Interim Loan that would eliminate
     substantially all of the restrictive covenants thereunder and would amend
     certain other provisions. Consummation of both the Tender Offers and the
     Offer to Purchase was conditioned upon the closing of the Hughes Medium
     Power Transaction and other conditions.

     Following several extensions, the Tender Offer and the Offer to Purchase
     expired on March 25, 1999.  The minimum tender conditions were not
     satisfied under the Tender Offer and Offer to Purchase, and no securities
     or loans were purchased thereunder.

     Since the announcement of the Hughes Medium Power Agreement and of the
     proposed restructuring of the Company's senior subordinated indebtedness
     relating thereto (the "Proposed Debt Restructuring"), the Company has been
     engaged in negotiations with the representatives of an informal committee
     (the "Bondholders' Committee") of holders of Notes and with representatives
     of an informal committee (the "Bridge Lenders' Committee" and, together
     with the Bondholders' Committee, the "Committees") of holders of loans
     under the Interim Loan Agreement, with respect to the possible terms and
     conditions of the Proposed Debt Restructuring.  In that connection, the
     Company has entered into confidentiality agreements with certain
     representatives of the Committees and has agreed to pay certain expenses of
     the Committees, including certain fees and expenses of their legal counsel
     and financial advisor.  Based on the progress of such negotiations to date,
     the Company believes that the Proposed Debt Restructuring will be
     consummated on terms satisfactory to the Company and such Committees, by
     means of privately negotiated transactions. However, the Company has not
     entered into any agreements to date with respect to the terms and
     conditions of any such restructuring, and there can be no assurance that
     the Proposed Debt Restructuring will be consummated. In the event the
     Company is unable to negotiate certain minimum tender conditions in
     connection with the Proposed Debt Restructuring, the Company does not
     intend to consummate the Hughes Medium Power Transaction.

     In connection with their approval of the Hughes Medium Power Transaction,
     the stockholders of PRIMESTAR also approved the payment to TSAT of
     consideration (the "PRIMESTAR Payment") in the amount of $65 million,
     payable in shares of GMH Stock, valued at $46.1875 (the closing price of
     such stock on the date of the purchase agreements with Hughes), subject to
     the terms and conditions set forth in an agreement dated as of January 22,
     1999 (the "PRIMESTAR Payment Agreement"). In consideration of the PRIMESTAR
     Payment, TSAT agreed to approve the Hughes Medium Power Transaction and
     Hughes High Power Transaction as a stockholder of PRIMESTAR, to modify
     certain agreements to facilitate the Hughes High Power Transaction, and to
     issue the Company a share appreciation right with respect to the shares of
     GMH Stock received as the PRIMESTAR Payment, granting the Company the right
     to any appreciation in such GMH Stock over the one year period following
     the date of issuance, over an agreed strike price of $47.00. Pursuant to
     the PRIMESTAR Payment Agreement, TSAT has also agreed to forego any
     liquidating distribution or other payment that may be made in respect of
     the outstanding shares of PRIMESTAR upon any dissolution and winding-up of
     PRIMESTAR, or otherwise in respect of PRIMESTAR'S existing equity. Such
     payment is conditioned upon the closing of the Hughes Medium Power
     Transaction.

                                                                     (continued)

                                     II-23
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

     In connection with the Hughes Medium Power Transaction, the Company
     concluded that it would be unable to recover the carrying value of its
     assets over their expected remaining useful life.  Accordingly, the Company
     has recorded an impairment loss of $950,289,000 (the "Impairment Loss"),
     which represents the difference between the carrying value of the Company's
     assets and their estimated fair value.  Such fair value was based upon the
     estimated consideration to be received by the Company in the Hughes Medium
     Power Transaction.

     The reduction in carrying amount of assets included in the Impairment Loss
     is as follows (amounts in thousands):
<TABLE>
<CAPTION>
<S>                                                         <C> 
Property and equipment: 
 Satellite reception equipment                              $103,898
 Subscriber installation costs                               223,541
Intangible assets:
 Excess purchase price over acquired net assets              401,475
 Tradename                                                   221,375
                                                            --------
 
                                                            $950,289
                                                            ========
</TABLE>
     In a separate transaction, the Company announced that TSAT and the Company
     had reached an agreement with Hughes to sell (i) TSAT's authorizations
     granted by the Federal Communications Commission (the "FCC") and other
     assets and liabilities relating to a proposed DBS system being constructed
     by Tempo Satellite, Inc. ("Tempo"), a subsidiary of TSAT, at 119 degrees
     W.L. (collectively, the "Tempo DBS Assets") and (ii) PRIMESTAR's rights
     relating to the Tempo DBS Assets (see note 13) to Hughes, for aggregate
     consideration valued at $500 million (the "Hughes High Power Transaction").
     Pursuant to the agreement, Hughes would assume $465 million of TSAT's
     liability to the Partnership, pay TSAT $2.5 million in cash and pay
     PRIMESTAR and the Partnership $32.5 million in cash. In addition, the
     Partnership has agreed to forgive amounts due from TSAT in excess of the
     $465 million to be assumed by Hughes ($4,498,000 at December 31, 1998). To
     facilitate such transaction, the Partnership would terminate and relinquish
     the Tempo Capacity Option, as defined in note 13.

     Due to the fact that regulatory approval is required to transfer certain of
the Tempo DBS Assets to Hughes, the Hughes High Power Transaction will be
completed in two steps. Effective March 10, 1999, the first closing of the
Hughes High Power Transaction (the "First Closing") was consummated whereby
Hughes acquired one of Tempo's high power satellites ("Tempo DBS-2") and
PRIMESTAR's option to acquire Tempo DBS-2 (the "Tempo DBS-2 Option") for
aggregate consideration of $150 million. Such consideration was comprised of the
following: (i) $9,750,000 paid to PRIMESTAR and the Partnership for the Tempo
DBS-2 Option and the termination of the Partnership's rights under the Tempo
Capacity Option, (ii) $750,000 paid to TSAT to exercise the Tempo DBS-2 Option
and (iii) the assumption by Hughes of $139,500,000 due to the Partnership from
TSAT in exchange for Tempo DBS-2. Simultaneously with the First Closing, Hughes
repaid the liability to the Partnership that Hughes assumed. 

With regard to the sale of the remaining assets contemplated by the Hughes High 
Power Agreement (the "Second Closing"), Tempo has been notified that its 
in-orbit satellite ("Tempo DBS-I") experienced power reductions which occurred 
on March 29, 1999 and April 2, 1999. Although the Company does not believe the 
extent of such power reductions is significant, a definitive assessment of the 
impact on Tempo DBS-I is not yet complete. Notwithstanding the foregoing, the 
Second Closing, which is subject to the receipt of appropriate regulatory 
approvals and other customary closing conditions, is expected to be consummated 
in the second quarter of 1999. In the event the Second Closing is not 
consummated and the Hughes High Power Agreement is abandoned, there can be no 
assurance that the Company will be able to recover the carrying amount of its 
satellite rights.

In addition, consummation of the Hughes Medium Power Transaction is not
dependent on completion of the Hughes High Power Transaction, and completion of
the Hughes High Power Transaction is not dependent on consummation of the Hughes
Medium Power Transaction.

     The Company has a history of operating losses and reported an accumulated 
deficit at December 31, 1998.  In connection with the Hughes Medium Power 
Transaction, affiliates of the stockholders of the Company, other than TSAT, and
an affiliate of TCI have committed to make funds available to the Company,
either in the form of capital contributions or loans, up to an aggregate of
$1,013 million. Management of the Company believes, but cannot assure, that when
such funds are combined with the proceeds from the Hughes Medium Power and High
Power Transactions and the Company's existing sources of liquidity, that the
Company will be able to meet its obligations as they become due and payable.

     In the event the Hughes Medium Power Transaction is not consummated and is
abandoned, the Company currently intends to continue operating its medium power
business. Under such scenario, the Company anticipates that it would curtail
marketing and sales activities, reduce the number of new installations and
otherwise reduce expenditures to the extent possible. The Company believes, but
cannot assure, that in such event, the Company's cash flow from continuing
operations, commitments from the Company's stockholders to make certain funds
available to the Company and proceeds from the Hughes High Power Transaction
would provide the necessary funds for the Company to meets its obligations as
they become due and payable through December 31, 1999. In the event the Company
is unable to meet its obligations as they become due and payable, the Company
may be required to restructure or refinance certain of its liabilities. There
can be no assurance that such restructuring or refinancing, if necessary, would
be accomplished on terms acceptable to the Company.

                                                                     (continued)

                                     II-24
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

(3)  The Restructuring and the TSAT Merger
     -------------------------------------

     The Restructuring
     -----------------

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

     In connection with the Restructuring, each of TSAT, Comcast, Cox, MediaOne,
     Newhouse, TWE and GE Americom received from the Company (i) cash or an
     assumption of indebtedness, (ii) shares of Class A Common Stock, $.01 par
     value per share, of the Company, ("Class A Common Stock"), (iii) in the
     case of TSAT only, shares of Class B Common Stock, $.01 par value per
     share, of the Company ("Class B Common Stock"), and (iv) except in the case
     of TSAT and GE Americom, shares of Class C Common Stock, $.01 par value per
     share, of the Company ("Class C Common Stock"), in each case in an amount
     determined pursuant to the Restructuring Agreement.  The total
     consideration paid by PRIMESTAR to the Non-TSAT Parties (including assumed
     liabilities) aggregated approximately $2.2 billion comprising $1.3 billion
     of cash and assumed liabilities and $900 million of common stock.

     As of December 31, 1998, the approximate ownership of PRIMESTAR's common
     stock was as follows:

<TABLE>
<CAPTION>
                                                                    Ownership
               Name of Beneficial Owner                             Percentage
               ------------------------                             ----------
 
               <S>                                                  <C>
               TSAT                                                   37.23%
               TWE and Newhouse (collectively)                        30.02%
               Comcast                                                9.50%
               MediaOne                                               9.69%
               Cox                                                    9.43%
               GE Americom                                            4.13%
</TABLE>

                                                                     (continued)
                                     II-25
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

     The TSAT Asset Transfer has been recorded at TSAT's historical cost, and
     the remaining elements of the Restructuring, as set forth above, have been
     accounted for using the purchase method of accounting.  The fair value of
     the consideration issued to the Non-TSAT Parties has been allocated to the
     assets and liabilities acquired based upon the estimated fair values of
     such assets and liabilities.

     TSAT has been identified as the acquirer for accounting purposes and the
     predecessor for financial reporting purposes due to the fact that TSAT owns
     the largest interest in the Company immediately following consummation of
     the Restructuring.

     The following pro forma operating results for the Company assume the
     Restructuring had been consummated on January 1, 1997.  Such unaudited pro
     forma financial information is based upon historical results of operations
     adjusted for acquisition costs and, in the opinion of management, is not
     necessarily indicative of the results had the Restructuring been
     consummated on January 1, 1997.

<TABLE>
<CAPTION>
                                                                                Year ended
                                                                               December 31,
                                                           ----------------------------------------------------
                                                                     1998                       1997
                                                           -------------------------  -------------------------
 
<S>                                                        <C>                        <C>
Revenue                                                                 $ 1,493,729                  1,272,274
Net loss                                                                $(1,434,214)                  (509,620)
Loss per common share                                                   $     (7.14)                     (2.54)
</TABLE>

     The TSAT Merger
     ---------------

     Effective February 6, 1998, PRIMESTAR and TSAT entered into an Agreement
     and Plan of Merger (the "TSAT Merger Agreement"), providing for the merger
     of TSAT with and into PRIMESTAR, with PRIMESTAR as the surviving
     corporation (the "TSAT Merger"). In connection with the First Closing, the
     Company and TSAT terminated the TSAT Merger Agreement.

(4)  Distribution Transaction
     ------------------------

     On December 4, 1996 (the "Distribution Date"), TCI distributed (the
     "Distribution") all the capital stock of the Company to the holders of
     Tele-Communications, Inc. Series A TCI Group Common Stock (the "Series A
     TCI Group Stock") and Tele-Communications, Inc. Series B TCI Group Common
     Stock (the "Series B TCI Group Stock" and, together with the Series A TCI
     Group Stock, the "TCI Group Stock").  Holders of TCI Group Stock received
     one share of TSAT Series A Common Stock for each ten shares of Series A TCI
     Group Stock owned and one share of TSAT Series B Common Stock for each ten
     shares of Series B TCI Group Stock owned.

     In connection with the Distribution, the Company and TCI entered into
     various agreements, including the "Reorganization Agreement" (see below),
     the "Fulfillment Agreement" and the "Transition Services Agreement" (see
     note 12), and an amendment to TCI's existing "Tax Sharing Agreement" (see
     note 11).

                                                                     (continued)
                                     II-26
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


     Pursuant to the Reorganization Agreement, on the Distribution Date, the
     Company issued to TCIC a promissory note (the "Company Note"), in the
     principal amount of $250,000,000, representing a portion of the Company's
     intercompany balance owed to TCIC on such date.  The remainder of the
     Company's intercompany balance owed to TCIC on the Distribution Date (other
     than certain advances made to the Company by TCIC in 1996 to fund certain
     construction and related costs associated with the Tempo Satellites, as
     described in note 13) was assumed by TCI in the form of a capital
     contribution to the Company.  On December 31, 1996, the Company entered
     into a bank credit agreement (the "Bank Credit Facility") and used a
     portion of the borrowing availability thereunder to repay in full all
     principal and interest due to TCIC pursuant to the Company Note.

(5)  Changes in Accounting
     ---------------------

     During the fourth quarter of 1996, the Company changed its depreciation
     policy for subscriber installation costs. Such change was adopted effective
     October 1, 1996 and was treated as a change in accounting policy that was
     inseparable from a change in estimate. Accordingly, the cumulative effect
     of such change for periods prior to October 1, 1996, together with the
     fourth quarter 1996 effect of such change, was included in the Company's
     depreciation expense for the fourth quarter of 1996.  Consequently, this
     change in policy resulted in increases to the Company's depreciation
     expense, net loss and net loss per share for the year ended December 31,
     1996 of $55,304,000 ($8,754,000 of which relates to periods prior to
     January 1, 1996), $41,478,000 ($6,566,000 of which relates to periods prior
     to January 1, 1996) and $.62 ($.10 of which relates to periods prior to
     January 1, 1996), respectively.

     The Company also revised the estimated useful life of certain satellite
     reception equipment on a prospective basis as of October 1, 1996.  Such
     change in estimate resulted in increases to the Company's depreciation
     expense, net loss and net loss per share for the year ended December 31,
     1996 of $7,796,000, $5,847,000 and $.09, respectively.

(6)  Summary of Significant Accounting Policies
     ------------------------------------------
 
     Cash and Cash Equivalents

     The Company considers all highly liquid investments with a maturity of
     three months or less at the date of acquisition to be cash equivalents.

     Investment in PRIMESTAR Partners L.P.

     Prior to the Restructuring, the Company used the equity method to account
     for its investment in the Partnership.  Under this method, the investment,
     originally recorded at cost, was adjusted to recognize the Company's share
     of the net earnings or losses of the Partnership as they occurred, rather
     than as dividends or other distributions were received, limited to the
     extent of the Company's investment in, and advances and commitments to, the
     Partnership.  The Company's share of net earnings or losses of the
     Partnership included the amortization of the difference between the
     Company's investment and its share of the net assets of the Partnership.
     As part of the Restructuring, the Partnership became a wholly-owned
     subsidiary of the Company.

                                                                     (continued)

                                     II-27
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

     Property and Equipment

     Property and equipment is stated at cost. Depreciation is computed on a
     straight-line basis using estimated useful lives of 4 to 6 years (4 to 8
     years through September 30, 1996) for satellite reception equipment and 3
     to 10 years for support equipment. Subscriber installation costs are
     depreciated over the estimated average life of a subscriber (4 years).  Any
     subscriber installation costs that have not been fully depreciated at the
     time service to a subscriber is terminated are charged to depreciation
     expense during the period in which such termination occurs.

     Repairs and maintenance are charged to operations, and betterments and
     additions are capitalized. At the time of ordinary retirements of satellite
     reception equipment, sales or other dispositions of property, the original
     cost and cost of removal of such property are charged to accumulated
     depreciation, and salvage, if any, is credited thereto.

     The Company periodically reviews the carrying amount of its long-lived
     assets to determine whether current events or circumstances warrant
     adjustments to such carrying amounts. The Company considers historical and
     expected future net operating losses to be its primary indicators of
     potential impairment. Assets are grouped and evaluated for impairment at
     the lowest level for which there are identifiable cash flows that are
     largely independent of the cash flows of other groups of assets ("Assets").
     The Company deems Assets to be impaired if the Company is unable to recover
     the carrying value of its Assets over their expected remaining useful life
     through a forecast of undiscounted future operating cash flows directly
     related to the Assets. If Assets are deemed to be impaired, the loss is
     measured as the amount by which the carrying amount of the Assets exceeds
     their fair values. PRIMESTAR generally measures fair value by considering
     sales prices for similar assets or by discounting estimated future cash
     flows. Considerable management judgment is necessary to estimate discounted
     future cash flows. Accordingly, actual results could vary significantly
     from such estimates.

     Intangible Assets

     Intangible assets at December 31, 1998 are comprised of the following
     (amounts in thousands):

<TABLE>
<S>                                         <C>
  Customer relationships                    $390,000
  Satellite rights                           469,498
                                            --------
                                             859,498
  Accumulated amortization                   (73,125)
                                            --------
                                            $786,373
                                            ========
</TABLE>

     Customer relationships are amortized using the straight-line method over
     their estimated useful life of 4 years.  Satellite rights represent
     PRIMESTAR's right to use Tempo's two high power communications satellites
     (the "Tempo Satellites") as described in note 13.  The Company is not
     amortizing such rights as the Company has not launched a high power service
     utilizing the Tempo Satellites.

                                                                     (continued)

                                     II-28
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

     In connection with the Restructuring, the Company recorded tradenames of
     $230,000,000 and excess cost over acquired net assets of $416,901,000.
     Such intangible assets were amortized using the straight-line method over
     20 years.  As of December 31, 1998, such intangible assets were written
     down to their estimated fair value of zero.  Such writedown has been
     included in the Impairment Loss described in note 2.

     Deferred Financing Costs

     Deferred financing costs are amortized over the term of the related loan
     facility.

     Revenue Recognition
 
     Programming and equipment rental revenue is recognized in the period that
     services are delivered. Installation revenue is recognized in the period
     the installation services are provided to the extent of direct selling
     costs. To date, direct selling costs have exceeded installation revenue.
     Payments received from customers at the time of installation to reduce
     future monthly rental fees are deferred and recognized as revenue over the
     average life of a customer.

     Programming Carriage Fees

     Payments received from programmers at the time of launch for which future
     carriage by the Company is required are deferred and recognized as a
     reduction of programming expense over the term of the programming contract.

     Advertising Costs

     Advertising costs are generally expensed as incurred.  Amounts expensed for
     advertising aggregated $51,859,000, $23,062,000 and $25,622,000 during
     1998, 1997 and 1996, respectively.

     Marketing and Direct Selling Costs

     Marketing and direct selling costs are expensed as incurred. The excess
     cost of customer premises equipment over proceeds received upon sale of
     such equipment is recognized at the time of sale and is included in selling
     expense.

     Residual Sales Commissions

     Residual sales commissions, which become payable upon the collection of
     programming revenue from certain subscribers, are expensed during the
     period in which such commissions become payable.

     Stock Based Compensation

     The Company accounts for stock-based employee compensation using the
     intrinsic value method pursuant to Accounting Principles Board Opinion No.
     25.

                                                                     (continued)

                                     II-29
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

     Income Taxes

     The Company accounts for its income taxes using the asset and liability
     method. Under the asset and liability method, deferred tax assets and
     liabilities are recognized for the estimated future tax consequences
     attributable to differences between the financial statement carrying
     amounts of existing assets and liabilities and their respective tax bases.
     Deferred tax assets and liabilities are measured using enacted tax rates in
     effect for the year in which those temporary differences are expected to be
     recovered or settled. The effect on deferred tax assets and liabilities of
     a change in tax rates is recognized in income in the period that includes
     the enactment date.

     Loss Per Common Share

     The loss per common share for the years ended December 31, 1998 and 1997 is
     based on 167,615,000 and 66,658,000 weighted average shares outstanding
     respectively.  TSAT issued 66,408,000 shares of TSAT common stock pursuant
     to the Distribution.  The loss per share amounts set forth in the
     accompanying consolidated statements of operations assume that the shares
     issued pursuant to the Distribution were issued and outstanding since
     January 1, 1996.  Accordingly, the calculation of the loss per share
     assumes weighted average shares outstanding of 66,408,000 for the year
     ended December 31, 1996.  Excluded from the computation of diluted EPS for
     the years ended December 31, 1998, 1997 and 1996 are options to acquire
     5,395,000, 7,894,000 and 591,000 weighted average shares of common stock,
     respectively, because inclusion of such options would be anti-dilutive.

     Comprehensive Income (Loss)

     The Company's total comprehensive loss for all periods presented herein did
     not differ from those amounts reported as net loss.

     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 at
     the date of the financial statements and the reported amounts of revenue
     and expenses during the reporting period. Actual results could differ from
     those estimates.

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

     Cash paid for interest was $116,193,000, $20,224,000 and $1,946,000 during
     the years ended December 31, 1998, 1997 and 1996, respectively.  Cash paid
     for income taxes was not material during the years ended December 31, 1998,
     1997, and 1996.

                                                                     (continued)

                                     II-30
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


     Significant non-cash investing and financing activities for the year ended
     December 31, 1998 are reflected in the following table (amounts in
     thousands):



<TABLE>
<CAPTION>
        <S>                                            <C> 
        Cash paid in Restructuring:
        Property and equipment acquired                $  716,821
        Intangible assets                               1,500,034
        Current liabilities assumed, net of
        current assets                                   (116,849)
        Debt assumed                                     (903,299)
        Deferred tax liability                           (222,585)
        Common stock issued                              (919,228)
                                                       ----------
                                                       $   54,894
                                                       ==========
</TABLE>

     Transactions effected through the intercompany account with TCIC for
     periods prior to the Distribution have been considered to be constructive
     cash receipts and payments for purposes of the accompanying statements of
     cash flows.

     The non-cash effects of the Distribution are set forth in the accompanying
     statements of equity.

     Accounts payable includes accrued capital expenditures of $26,593,000,
     $35,645,000 and $7,713,000 at December 31, 1998, 1997 and 1996,
     respectively, which have been excluded from the accompanying statements of
     cash flows.


(8)    Debt
       ----

     The components of debt are as follows:

<TABLE>
<CAPTION>
                                                                        December 31,
                                                                 1998                 1997
                                                                 ----                 ----
                                                                    amounts in thousands
        <S>                                                        <C>                 <C>  
        Bank Credit Facility (a)                                   $  513,200               48,000
        Interim Loan Agreement (b)                                    350,000                   --
        Partnership Credit Facility (c)                               575,000                   --
        Senior Subordinated Notes (d)                                 200,000              200,000
        Senior Subordinated Discount Notes (d)                        189,722              168,781
        Other                                                           5,273                1,948
                                                                   ----------              -------
 
                                                                   $1,833,195              418,729
                                                                   ==========              =======
</TABLE>

                                                                     (continued)

                                     II-31
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


(a)  In connection with the Restructuring, the Company amended and restated the
     Bank Credit Facility.  As amended, the Bank Credit Facility provides for
     maximum commitments of up to $700 million, comprising $550 million of
     revolving loan commitments and $150 million of term commitments, subject to
     the Company's compliance with operating and financial covenants and other
     customary conditions. In addition to the outstanding borrowings at December
     31, 1998, $30 million of availability under the Bank Credit Facility had
     been utilized to obtain two outstanding letters of credit.  Commencing
     March 31, 2001, the revolving loan commitments will be reduced quarterly,
     and outstanding borrowings under the term loan commitments will be payable
     in quarterly installments, in each case in accordance with a schedule,
     until final maturity at June 30, 2005.

     Borrowings under the Bank Credit Facility bear interest at variable rates
     (6.7% at December 31, 1998). In addition, the Company must pay a commitment
     fee equal to 0.375% on the average daily unused portion of the available
     commitments, payable quarterly in arrears and at maturity. Such commitment
     fees were not significant during any of the years presented.

     Borrowings under the Bank Credit Facility are guaranteed by all restricted
     subsidiaries of the Company (defined under the Bank Credit Facility to mean
     each of the Company's domestic subsidiaries of which the Company owns
     directly or indirectly at least 80% of the outstanding capital stock), and
     secured by collateral assignments or other security interests. The Bank
     Credit Facility contains covenants regarding debt service coverage and
     leverage, as well as negative covenants restricting, among other things
     indebtedness, liens and other encumbrances, mergers or consolidation
     transactions, transactions with affiliates, investments, capital
     expenditures, and payment of dividends and other distributions.

     At April 1, 1999, the Company was not in compliance with one of the
     covenants in the Bank Credit Facility regarding the provision of audited
     financial statements to the lenders under the Bank Credit Facility (the
     "Banks") within 90 days of the Company's fiscal year-end. The Company will
     remedy such event of noncompliance in accordance with the terms of the Bank
     Credit Facility by providing its audited financial statements to the Banks
     prior to April 30, 1999.

(b)  On the Closing Date, the Company entered into the Interim Loan Agreement
     with certain financial institutions (the "Lenders") with respect to a $350
     million unsecured senior subordinated interim loan (the "Interim Loan").
     The Interim Loan Agreement provided for commitments of $350 million.  The
     commitments were fully funded to the Company on the Closing Date.

     The obligations under the Interim Loan Agreement were due in full one year
     from the Closing Date. However, the Company had the option to convert any
     outstanding principal amount of the Interim Loan on such date (the
     "Conversion Date") into a term loan maturing on April 1, 2008. The 
     Company gave notice of such conversion on March 29, 1999, in accordance
     with the terms of the Interim Loan Agreement.

     In addition, on the Conversion Date, the Company became obligated to enter
     into a stock warrant agreement with the Lenders providing for the issuance
     of warrants to purchase common stock of the Company equal to 2% of the
     Company's outstanding common stock on the Conversion Date. The warrants are
     to be exercisable over a ten-year period at a nominal exercise price.


                                                                     (continued)

                                     II-32
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


          The outstanding principal under the Interim Loan Agreement bears
          interest at a rate per annum equal to the greater of 10% or, at the
          election of the Lenders, (i) a rate per annum that is equal to the
          corporate base rate, as provided for in the Interim Loan Agreement,
          (ii) the Federal Funds effective rate, plus 0.50%, or (iii) the London
          interbank offered rate ("LIBOR") for such period, plus in each case
          the Applicable Spread (as defined in the Interim Loan Agreement).  The
          interest rate on the Interim Loan in effect at December 31, 1998 was
          11.5% which included the Applicable Spread of 650 basis points.  The
          Applicable Spread increases monthly thereafter, with a final increase
          to 750 basis points from and after April 1, 1999.

          At any time after the Conversion Date, the applicable spread is to be
          850 basis points.  In addition, at the request of any Lender, the
          interest rate on all or any portion of the term loan owing to such
          Lender will be converted to a fixed rate equal to the rate in effect
          as of the date such Lender gave notice to the Company.

          Interest was payable monthly in arrears on the last day of each month
          until the Conversion Date.  Thereafter, interest is payable quarterly
          in arrears, except for any term loan converted to a fixed rate loan,
          in which event interest is payable on March 31 and September 30 of
          each year.  If interest payable by the Company exceeds 15%, the
          Company may elect to pay all or a portion of the interest in excess of
          15% by issuance of notes in an aggregate principal amount equal to
          such excess amount.

          Prior to the Conversion Date, the Company could prepay the Interim
          Loan without penalty. After the Conversion Date, certain limited
          prepayments are permitted until April 1, 2001 out of the proceeds of
          certain equity offerings. Otherwise, prepayment is not permitted until
          on or after April 1, 2003. Prepayment penalties apply to any
          prepayment prior to April 1, 2006, which penalties are calculated with
          reference to the interest rate in effect at the time of prepayment.
          The Interim Loan Agreement provides for mandatory prepayments of the
          Interim Loan upon the occurrence of certain asset sales, capital
          contributions, securities issuances and a change of control (as
          defined in the Interim Loan Agreement) of the Company.

                                                                     (continued)

                                     II-33
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


(c)  The Partnership Credit Facility, as amended, allows for borrowings up to
     $585 million, and borrowings thereunder are collateralized by letters of
     credit (the "Partnership Letters of Credit"), which were arranged for by
     affiliates of the partners of the Partnership (the "Partners") (or, in the
     case of TSAT, affiliates of TCI) other than GE Americom.  In connection
     with the Restructuring, the Partnership became an indirect, wholly-owned
     subsidiary of the Company.  In addition, the Partners and TCI agreed to
     maintain their respective Partnership Letters of Credit through June 1999,
     and the Company entered into Reimbursement Agreements with respect to such
     letters of credit, whereby the Company agreed to indemnify the parties
     arranging for such letters of credit from and against all obligations
     thereunder and/or other existing documentation relating thereto, including
     all existing and future payment obligations.  The obligations of the
     Company under such Reimbursement Agreements are subordinated in right of
     payment, in the manner set forth in the Reimbursement Agreement, to all
     indebtedness of the Company under the Bank Credit Facility, the Interim
     Loan Agreement and the Notes.

     Borrowings under the Partnership Credit Facility bear interest at variable
     rates (5.6% at December 31, 1998). In addition, the Company must pay
     quarterly, in arrears, a commitment fee of 3/16% per annum on the daily
     unused portion of the facility. Such commitment fees were not significant
     during the year ended December 31, 1998.

     The maturity date of the Partnership Credit Facility is June 30, 1999.

(d)  On February 20, 1997, the Company issued the Senior Subordinated Notes
     having an aggregate principal amount of $200,000,000 and the Senior
     Subordinated Discount Notes having an aggregate principal amount at
     maturity of $275,000,000.

     Cash interest on the Senior Subordinated Notes is payable semi-annually in
     arrears on February 15 and August 15. Cash interest will not accrue or be
     payable on the Senior Subordinated Discount Notes prior to February 15,
     2002. Thereafter cash interest will accrue at a rate of 12-1/4% per annum
     and will be payable semi-annually in arrears on February 15 and August 15,
     commencing August 15, 2002, provided however, that at any time prior to
     February 15, 2002, the Company may make a Cash Interest Election (as
     defined) on any interest payment date to commence the accrual of cash
     interest from and after the Cash Election Date (as defined). The Notes will
     be redeemable at the option of the Company, in whole or in part, at any
     time after February 15, 2002 at specified redemption prices. In addition,
     prior to February 15, 2000, the Company may use the net cash proceeds from
     certain specified equity transactions to redeem up to 35% of the Notes at
     specified redemption prices.

                                                                     (continued)


                                     II-34
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

     The fair value of the Company's debt is estimated based upon the quoted
     market prices for the same or similar issuances or on the current rates
     offered to the Company for debt of the same remaining maturities.  With the
     exception of the Notes, which had an aggregate fair value of $158,090,000
     at December 31, 1998, PRIMESTAR believes that the fair value and the
     carrying value of its debt were approximately equal at December 31, 1998.

     As of December 31, 1998, annual maturities of the Company's debt for each
     of the next five years were as follows (amounts in thousands):

<TABLE>
               <S>                          <C>
               1999                         $575,921
               2000                            1,013
               2001                           15,342
               2002                           30,368
               2003                          153,596
</TABLE>


(9)  Stockholders' Equity
     -------------------------
 
     PRIMESTAR Preferred Stock
     -------------------------

     The Restated Certificate of Incorporation of the Company authorizes the
     PRIMESTAR Board of Directors (the "Board") to provide for the issuance of
     all or any shares of preferred stock of the Company in one or more series
     and to fix for each series the number of shares constituting such series
     and such voting powers, full or limited, or no voting powers, and such
     designations, preferences and relative, participating, optional or other
     special rights and such qualifications, limitations or restrictions thereof
     as shall be stated and expressed in the resolution or resolutions adopted
     by the Board providing for the issuance of such series.  As of December 31,
     1998, no series of preferred stock have been designated.

     PRIMESTAR Common Stock
     ----------------------

     Holders of Class A Common Stock are entitled to one vote for each share of
     such stock held, holders of Class B Common Stock are entitled to ten votes
     for each share of such stock held and holders of Class C Common Stock are
     entitled to ten votes for each share of such stock held.  Holders of Class
     D Common Stock are not entitled to any voting rights with respect to such
     shares, except as may be required by law.

     Each share of Class B Common Stock is convertible, at the option of the
     holder, into one share of Class A Common Stock.  Each share of Class C
     Common Stock is convertible, at the option of the holder, into one share of
     Class B Common Stock, and will be mandatorily and automatically so
     converted upon the tenth anniversary of the Closing Date.

     TSAT Preferred Stock
     --------------------

     Prior to the Restructuring, TSAT was authorized to issue 5,000,000 shares
     of Preferred Stock.

                                                                     (continued)

                                     II-35
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

     TSAT Common Stock
     -----------------

     Prior to the Restructuring, the TSAT Series A Common Stock had one vote per
     share and the TSAT Series B Common Stock had ten votes per share.  Each
     share of TSAT Series B Common Stock was convertible, at the option of the
     holder, into one share of TSAT Series A Common Stock.

     Employee Retirement Plan
     ------------------------

     Prior to the Restructuring, TSAT maintained an employee stock purchase plan
     (the "TSAT Plan") pursuant to which employees could contribute up to 10% of
     their compensation.  TSAT, by annual resolution of the TSAT Board of
     Directors (the "TSAT Board"), could elect to contribute up to 100% of the
     amount contributed by employees.  In connection with the Restructuring and
     effective June 30, 1998, the TSAT Plan was merged with and into the
     Partnership's amended and restated retirement plan, which has been renamed
     the PRIMESTAR, Inc. 401(k) Savings Plan.

     Stock Options
     -------------

     In June 1996, the Board of Directors of TCI (the "TCI Board") authorized
     TCI to permit certain of its executive officers to acquire equity interests
     in certain of TCI's subsidiaries.  In connection therewith, the TCI Board
     approved the acquisition by each of two executive officers of TCI who were
     not employees of TSAT (the "TCI Officers"), of 1.0% of the net equity of
     TSAT.  The TCI Board also approved the acquisition by the chief executive
     officer and a director of TSAT (the "TSAT Officer"), of 1.0% of the net
     equity of TSAT and the acquisition by an executive officer of certain TCI
     subsidiaries who is also a director, but not an employee, of TSAT (the "TCI
     Subsidiary Officer"), of 0.5% of the net equity of TSAT.  The TCI Board
     determined to structure such transactions as grants by TSAT to such persons
     of options to purchase shares of TSAT Series A Common Stock representing
     1.0% (in the case of each of the TCI Officers and the TSAT Officer) and
     0.5% (in the case of the TCI Subsidiary Officer) of the shares of TSAT
     Series A Common Stock and TSAT Series B Common Stock issued and outstanding
     on the Distribution Date, determined immediately after giving effect to the
     Distribution, but before giving effect to any exercise of such options (the
     "Distribution Date Options").

     Pursuant to the Reorganization Agreement, and (in the case of the TCI
     Officers and the TCI Subsidiary Officer) in partial consideration for the
     capital contribution made by TCI to TSAT in connection with the
     Distribution, TSAT agreed, effective as of the Distribution Date, to bear
     all obligations under such options and to enter into stock option
     agreements with respect to such options with each of the TCI Officers, the
     TSAT Officer and the TCI Subsidiary Officer

     Distribution Date Options to purchase 2,324,266 shares of TSAT Series A
     Common Stock at a per share price of $8.86 were granted on the Distribution
     Date.  The market price of the TSAT Series A Common Stock on such date was
     $12.63.  As originally granted, the Distribution Date Options vest in 20%
     cumulative increments on each of the first five anniversaries of February
     1, 1996, and will be exercisable for up to ten years following February 1,
     1996.  Compensation expense with respect to the Distribution Date Options
     held by the TSAT Officer aggregated $1,026,000, $1,101,000 and $95,000
     during the years ended December 31, 1998, 1997 and 1996, respectively.

                                                                     (continued)

                                     II-36
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

     On the Distribution Date, the TSAT Board adopted, and TCI as the sole
     stockholder of TSAT prior to the Distribution, approved, the TCI Satellite
     Entertainment, Inc. 1996 Stock Incentive Plan (the "TSAT 1996 Plan").  The
     TSAT 1996 Plan provides for awards to be made in respect of a maximum of
     3,200,000 shares of TSAT Series A Common Stock (subject to certain anti-
     dilution adjustments).  Awards may be made as grants of stock options,
     stock appreciation rights ("SARs"), restricted shares, stock units,
     performance awards or any combination thereof.  As originally granted,
     options granted pursuant to the TSAT 1996 Plan vest evenly over five years
     from the date of grant and expire 10 years from the date of grant.

     In March 1998, stockholders of TSAT approved the TCI Satellite
     Entertainment, Inc. 1997 Nonemployee Director Stock Option Plan (the "TSAT
     DSOP") including the grant, effective as of February 3, 1997, to each
     person that as of that date was a member of the TSAT Board and was not an
     employee of TSAT or any of its subsidiaries, of options to purchase 50,000
     shares of TSAT Series A Common Stock.  Pursuant to the TSAT DSOP, options
     to purchase 200,000 shares of TSAT Series A Common Stock were granted at an
     exercise price of $8.00 per share.  As originally granted, options issued
     pursuant to the TSAT DSOP vest and become exercisable over a five-year
     period from the date of grant and expire 10 years from the date of grant.
     In November 1997, the TSAT Board voted to increase the number of directors
     by one, and the director named to fill such newly created directorship
     received options to purchase 50,000 shares of TSAT Series A Common Stock at
     an exercise price of $6.50.

     In February 1997, certain key employees of TSAT were granted, pursuant to
     the TSAT 1996 Plan, an aggregate of 325,000 restricted shares of TSAT
     Series A Common Stock.  Such restricted shares had a grant-date fair value
     of $8.00.  As originally granted, such restricted shares vest as to 50% on
     January 1, 2001 and as to the remaining 50% on January 1, 2002.
     Compensation expense with respect to the restricted shares aggregated
     $1,570,000 and $585,000 during the years ended December 31, 1998 and 1997,
     respectively.

     In November 1997, the TSAT Board and the compensation committee of the TSAT
     Board approved modifications to the vesting provisions of all options and
     restricted stock awards issued pursuant to the TSAT 1996 Plan, (i)
     accelerating the vesting schedules under such options, to provide for
     vesting in three equal annual installments, commencing February 1998, and
     (ii) accelerating the vesting schedules under such restricted stock awards
     to provide for vesting of 50% on each of the second and third anniversaries
     of the date of granting.  Options granted prior to the Distribution, which
     were 40% vested in February 1998, will become two-thirds vested in February
     1999 and fully vested in February 2000.

     On April 2, 1998, the PRIMESTAR Board of Directors approved the PRIMESTAR,
     Inc. 1998 Incentive Plan (the "1998 PRIMESTAR Plan").  The 1998 PRIMESTAR
     Plan provides for awards to be made in respect of a maximum of 7,000,000
     shares of Class A Common Stock.  Awards may be made as grants of stock
     options, SARs, restricted shares, stock units, performance awards or any
     combination thereof.  Options granted pursuant to the 1998 PRIMESTAR Plan
     vest evenly over three years from the date of grant and expire 10 years
     from the date of grant.

                                                                     (continued)

                                     II-37
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


     The Company applies Accounting Principles Board Opinion No. 25 in
     accounting for its stock options, and accordingly, compensation expense has
     been recognized for its stock options in the accompanying financial
     statements using the intrinsic value method.  Had the Company determined
     compensation expense based on the grant-date fair value method pursuant to
     Statement of Financial Accounting Standards No. 123, the Company's net loss
     and loss per share would have been $240,384,000 and $3.61 for 1997 and
     would not have been significantly different than the amounts reported for
     1998 or 1996.

     The following table presents the number, weighted-average exercise price
     and weighted-average grant-date fair value of options to buy TSAT Series A
     Common Stock and Class A Common Stock.

<TABLE>
<CAPTION>
                                                                                                            
                                                  Number of options               Weighted-       Weighted- 
                                       ---------------------------------------     average         average  
                                              TSAT              PRIMESTAR          exercise       grant-date
                                            Series A             Class A            price         fair value
                                       -------------------  ------------------  --------------  --------------
 
<S>                                    <C>                  <C>                 <C>             <C>
                                                       
Granted in connection with                     ----------
 Distribution                                   2,324,266                                $8.86           $8.74
                                               ----------  
                                                         
 
Outstanding at December 31, 1996                2,324,266                                 8.86 
                                                
 
 Granted                                        1,070,000                                 7.93            4.77
                                               ----------
 
Outstanding at December 31, 1997                3,394,266                                 8.57 
                                                
 
 Options not assumed by
  PRIMESTAR (1)                                (3,394,266)
 
 Granted                                               --           4,934,993             7.69            5.95
 Canceled                                              --            (242,285)            7.69
                                               ----------   -----------------
 
Outstanding at December 31, 1998                       --           4,692,708             7.69 
                                               ==========   =================                  
                                                                               
 
Exercisable at December 31, 1996                       -- 
                                               ==========
                                               

Exercisable at December 31, 1997                  464,853                                 8.86 
                                               ==========                                 
                                               

Exercisable at December 31, 1998                                           --
                                                            =================                 
                                                  
</TABLE>
 ________________

     (1) At the time of the Restructuring, none of the outstanding options to
         acquire TSAT common stock were converted into options to acquire
         PRIMESTAR common stock.  However, PRIMESTAR assumed TSAT's liability
         with respect to any future cash payment to be made upon exercise by any
         PRIMESTAR employee of an option or SAR issued by TSAT prior to the
         Restructuring.

                                                                     (continued)

                                     II-38
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

     Options outstanding at December 31, 1998 have an exercise price of $7.69
     and a weighted-average remaining contractual life of approximately nine
     years.

     The respective estimated grant-date fair values of the options noted above
     are based on the Black-Scholes model and are stated in current annualized
     dollars on a present value basis. The key assumptions used in the model for
     purposes of these calculations include the following: (a) a discount rate
     equal to the 10-year Treasury rate on the date of grant; (b) a 65%
     volatility rate; (c) the 10-year option term; (d) the closing price of the
     TSAT Series A Common Stock on the date of grant; and (e) an expected
     dividend rate of zero.

     Pursuant to the Reorganization Agreement, TSAT granted to TCI an option to
     purchase up to 4,765,000 shares of TSAT Series A Common Stock, at an
     exercise price of $1.00 per share, as required by TCI from time to time to
     meet its obligations under the conversion features of certain convertible
     securities of TCI as such conversion features were adjusted as a result of
     the Distribution. During 1998, 1997 and 1996, TCI purchased 989,000 shares,
     258,000 shares and 5,000 shares, respectively, of TSAT Series A Common
     Stock pursuant to such option.

     In connection with the Distribution, TCI and the Company also entered into
     a "Share Purchase Agreement" to sell to each other from time to time, at
     the then current market price, shares of Series A TCI Group Stock and TSAT
     Series A Common Stock, respectively, as necessary to satisfy their
     respective obligations after the Distribution Date under certain stock
     options and SARs held by their respective employees and non-employee
     directors.

     Other
     -----

     At December 31, 1998, a total of 4,692,708 shares of Class A Common Stock
     were reserved for issuance pursuant to the 1998 PRIMESTAR Plan. In
     addition, one share of Class A Common Stock is reserved for each
     outstanding share of Class B Common Stock and Class C Common Stock.

(10) Restructuring Charges
     ---------------------

     During 1998, the Company reorganized its operations. In connection
     therewith, the Company closed certain of its local offices and reduced its
     corporate work force.  As a result, the Company terminated approximately
     700 employees.  In connection with such reorganization, the Company
     recognized restructuring charges of $26,025,000.  Such restructuring
     charges related to (i) severance costs for terminated employees
     ($18,828,000), (ii) lease cancellation fees and other office shutdown costs
     ($3,617,000) and (iii) the net book value of abandoned equipment
     ($3,580,000).  As of December 31, 1998, the Company had paid approximately
     $6,388,000 of the restructuring charges and has a remaining accrual of
     $16,057,000.

                                                                     (continued)


                                     II-39
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

(11) Income Taxes
     ------------

     Through the Distribution Date, TSAT's results of operations were included
     in TCI's consolidated U.S. Federal income tax returns, in accordance with
     the existing tax sharing arrangements among TCI and its consolidated
     subsidiaries.  Effective July 1, 1995,  TCI, TCIC and certain other
     subsidiaries of TCI entered into a tax sharing agreement (the "Tax Sharing
     Agreement"), which formalized such pre-existing tax sharing arrangements
     and implemented additional provisions regarding the allocation of certain
     consolidated income tax attributes and the settlement procedures with
     respect to the intercompany allocation of current tax attributes.  In
     connection with the Distribution, the Tax Sharing Agreement was amended to
     provide that TSAT be treated as if it had been a party to the Tax Sharing
     Agreement, effective July 1, 1995. TSAT's intercompany income tax
     allocation through the Distribution Date has been calculated in accordance
     with the Tax Sharing Agreement.  Subsequent to the Distribution Date, the
     Company files separate U.S. Federal and state income tax returns.

     Income tax benefit (expense) for the years ended December 31, 1998, 1997
     and 1996 consists of:

<TABLE>
<CAPTION>
                                                            Current           Deferred             Total
                                                        ----------------  -----------------  -----------------
                                                                         amounts in thousands
<S>                                                     <C>               <C>                 <C> 
     Year ended December 31, 1998:
       Federal                                          $             --           128,243            128,243
       State and local                                                --            19,285             19,285
                                                        ----------------           -------            -------
                                                        $             --           147,528            147,528
                                                        ================           =======            =======
 
     Year ended December 31, 1997:
       Federal                                          $             --                --                 --
       State and local                                                --                --                 --
                                                        ----------------           -------            -------
                                                        $             --                --                 --
                                                        ================           =======            =======
 
     Year ended December 31, 1996:
       Intercompany allocation                                   $70,645                --             70,645
       Federal                                                        --           (17,699)           (17,699)
       State and local                                                --            (7,009)            (7,009)
                                                        ----------------           -------            -------
                                                                 $70,645           (24,708)            45,937
                                                        ================           =======            =======
</TABLE>

     Income tax benefit (expense) differs from the amounts computed by applying
     the Federal income tax rate of 35% as a result of the following:

<TABLE>
<CAPTION>
                                                                       Years ended December 31
                                                       -------------------------------------------------------
                                                             1998               1997               1996
                                                       -----------------  -----------------  -----------------
                                                                        amounts in thousands
<S>                                                    <C>                <C>                <C> 
     Computed "expected" tax benefit                          $ 521,931             83,419             65,079
     State and local income taxes, net
       of Federal income tax benefit                             12,535             13,009             (2,672)
     Change in valuation allowance                             (238,739)           (98,521)           (16,371)
     Amortization of goodwill                                  (145,915)                --                 --
     Other                                                       (2,284)             2,093                (99)
                                                              ---------            -------            -------
                                                              $ 147,528                 --             45,937
                                                              =========            =======            =======
</TABLE>
                                                                     (continued)

                                     II-40
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


     The tax effects of temporary differences that give rise to significant
     portions of the deferred tax assets and deferred tax liabilities at
     December 31, 1998 and 1997 are presented below:

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                 ------------------------------------------
                                                                         1998                  1997
                                                                 --------------------  --------------------
                                                                           amounts in thousands
<S>                                                              <C>                   <C>  
Deferred tax assets:
 Net operating loss carry forwards                                         $ 226,823               133,024
 Investment in the Partnership:
   Due to an increase in tax basis upon transfer from
    TCIC to the Company                                                       29,305                29,305
   Due principally to losses recognized for financial
    statement purposes in excess of losses recognized
    for tax purposes                                                              57                 2,671
 Property and equipment principally due to impairment
  write-offs for financial statement purposes                                 11,801                    --
 Future deductible amounts principally due to accruals
  deductible in later periods                                                 12,310                 5,028
                                                                           ---------              --------
 Total deferred tax assets                                                   280,296               170,028
   Less-valuation allowance                                                 (238,739)             (114,892)
                                                                           ---------              --------
 Net deferred tax assets                                                      41,557                55,136
Deferred tax liabilities:
 Intangible assets recorded in purchase accounting for
  financial statement purposes                                               116,614                    --
 Property and equipment, principally due to differences
  in depreciation                                                                 --                55,136
                                                                           ---------              --------
Net deferred tax liability                                                 $  75,057                    --
                                                                           =========              ========
</TABLE>

     The valuation allowance for deferred tax assets as of December 31, 1998 was
     $238,739,000.  Such balance increased $123,847,000 from December 31, 1997.
     The valuation allowance at December 31, 1997 related to TSAT's net
     operating loss carryforwards which were not contributed to PRIMESTAR in the
     Restructuring.

     The Company has analyzed the sources and expected reversal periods of its
     deferred tax assets. The Company believes that the tax benefits
     attributable to deductible temporary differences will be realized to the
     extent of future reversals of existing taxable temporary differences.

     At December 31, 1998, the Company had net operating loss carry forwards for
     income tax purposes aggregating approximately $593,001,000 of which, if not
     utilized to reduce taxable income in future periods, $900,000 expire in
     2005, $1,200,000 expire in 2006, $2,170,000 expire in 2008, $2,003,000
     expire in 2011, $6,200,000 expire in 2012 and $580,528,000 expire in 2018.

                                                                     (continued)

                                     II-41
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


(12) Transactions with Related Parties
     ---------------------------------

     Pursuant to the terms of the TSAT Merger Agreement, PRIMESTAR reimbursed
     TSAT for all reasonable costs and expenses incurred by TSAT (i) to comply
     with its tax and financial reporting obligations, (ii) to maintain certain
     insurance coverage and (iii) to maintain its status as a publicly traded
     company.  During the year ended December 31, 1998, such reimbursements
     aggregated $152,000, and have been reflected as a reduction of PRIMESTAR's
     equity.

     In addition, PRIMESTAR makes advances to TSAT for the payment of certain
     costs related to the Tempo Satellites and the proposed high power strategy.
     Such advances aggregated $6,365,000 during 1998 and have been included in
     intangible assets in the accompanying consolidated balance sheet. PRIMESTAR
     anticipates that it will recover the advances upon the sale of the Tempo
     Satellites to Hughes.

     The Company is a party to a satellite transponder service agreement, as
     amended (the "GE-2 Agreement") with an affiliate of GE Americom for
     satellite service on GE-2. As originally executed, the GE-2 Agreement had
     an initial term extending through February 2003 at an annual rate of
     $86,340,000, with an option to extend the term through the end-of-life of
     GE-2.  The option to extend has expired without exercise.  However, the
     Company remains in discussions with GE Americom regarding other
     alternatives for extension of the GE-2 Agreement, and the Company will
     continue to assess other alternatives if the Hughes Medium Power
     Transaction is not consummated.  No assurance can be given that the parties
     will agree to any such extension, if necessary, or that any other
     alternatives will be confirmed.  Charges to the Company for the use of GE-2
     and other services provided by GE Americom aggregated $64,755,000 for the
     period from April 1, 1998 through December 31, 1998, and are included in
     operating expenses in the accompanying consolidated statement of
     operations.

     Pursuant to the GE-2 Agreement, GE Americom provides the Company with
     service on 24 transponders on GE-2.  The Company is currently entitled to
     non-preemptible service on 18 of the transponders on GE-2 and preemptible
     service on six transponders.  Preemptible transponders are transponders
     that may be reassigned to restore service to protected customers if such
     protected customers experience transponder or satellite failure.  The
     Company does not believe that, during the early stages of GE-2's
     operational life, the use of preemptible transponders is likely to
     interfere in any material respect with the operation of the PRIMESTAR(R)
     service.  The Company currently receives "orbital location protected
     service" on all 24 of its transponders, meaning that if there is a failure
     of GE-2, the Company will be entitled to restore the lost service on
     another GE Americom medium power satellite, GE-3, which was successfully
     launched on September 4, 1997, into the same 85 W.L. orbital position used
     by GE-2.  Even in those circumstances, the six preemptible transponders,
     although protected, would remain preemptible.  Upon the successful launch
     of another GE Americom medium power satellite, GE-4, the Company's six
     preemptible transponders will become non-preemptible.

                                                                     (continued)

                                     II-42
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


     TCI and the Non-TSAT Parties, other than GE Americom, have arranged for
     letters of credit (the "GE-2 Letters of Credit") to support the Company's
     obligations under the GE-2 Agreement.  Pursuant to the Restructuring
     Agreement, the Company reimburses TCI and the Non-TSAT Parties for fees
     related to the Partnership Letters of Credit and the GE-2 Letters of
     Credit.  Such reimbursements aggregated $10,004,000 during the year ended
     December 31, 1998 and are included in interest expense in the accompanying
     consolidated statements of operations.

     Since April 1, 1998, a subsidiary of TCI has provided satellite uplink
     services to the Company.  Charges for such services aggregated $10,659,000
     during 1998 and are included in operating expenses in the accompanying
     consolidated statement of operations.

     Since March 1997, TCI has provided the Company with customer support
     services from TCI's Boise, Idaho call center.  Amounts charged by TCI to
     the Company for such services aggregated $24,938,000 and $12,173,000 during
     the years ended December 31, 1998 and 1997, respectively, and are included
     in selling, general and administrative expenses in the accompanying
     consolidated statements of operations.

     Subsequent to the Restructuring, the Non-TSAT Parties continued to operate
     certain non-strategic local offices (the "Transition Offices") for
     approximately three months (the "Transition Period") while the
     responsibilities of such offices were transferred to other PRIMESTAR
     offices.  By the end of the Transition Period, all of the Transition
     Offices had been closed.  Transition expenses include costs incurred
     through December 31, 1998 and charged to the Company by the Non-TSAT
     Parties to operate the Transition Offices during the Transition Period.

     Certain key employees of the Company hold stock options in tandem with
     stock appreciation rights with respect to certain common stock of TCI.
     Estimates of the compensation related to the options and/or stock
     appreciation rights granted to employees of the Company have been recorded
     in the accompanying consolidated financial statements, but are subject to
     future adjustment based upon the market value of the underlying common
     stock of TCI and, ultimately, on the final determination of market value
     when the rights are exercised.  Stock compensation recognized by the
     Company related to such options aggregated ($2,182,000), $6,134,000 and
     $(541,000) during the years ended December 31, 1998, 1997 and 1996,
     respectively.

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

                                                                     (continued)

                                     II-43
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


     TCI also provided corporate administrative services to the Company pursuant
     to a transition services agreement (the "Transition Services Agreement").
     Pursuant to the Transition Services Agreement, the Company was required to
     pay TCI a monthly fee of $1.50 per qualified subscriber up to a maximum of
     $3,000,000 per month, and to reimburse TCI quarterly for direct, out-of-
     pocket expenses incurred by TCI to third parties in providing the services.
     Charges under the Transition Services Agreement aggregated $3,174,000 and
     $11,579,000 during the years ended December 31, 1998 and 1997,
     respectively, and are included in selling, general and administrative
     expenses in the accompanying consolidated statements of operations.  The
     Transition Services Agreement was terminated in connection with the
     consummation of the Restructuring.

     Through the Distribution Date, the effects of all transactions between the
     Company and TCI were reflected as adjustments to a non-interest bearing
     intercompany account.  As described in note 4, all but $250,000,000 of this
     intercompany account was forgiven in connection with the Distribution.
     Subsequent to the Distribution Date, the effects of all transactions (other
     than those related to the TCIC Credit Facility) have been reflected in a
     non-interest bearing account between the Company and TCIC and are settled
     periodically in cash.

     Through December 31, 1996, TCI provided certain installation, maintenance,
     retrieval and other customer fulfillment services to the Company. The costs
     associated with such services were allocated to the Company based upon a
     standard charge for each of the various customer fulfillment activities
     performed by TCI.  During the year ended December 31, 1996, the Company's
     capitalized installation costs included amounts allocated from TCI of
     $53,169,000.  Maintenance, retrieval and other operating expenses allocated
     from TCI to the Company aggregated $20,365,000 during the year ended
     December 31, 1996.

     Effective January 1, 1997, charges for customer fulfillment services
     provided by TCI were made pursuant to the Fulfillment Agreement entered
     into by the Company and TCI in connection with the Distribution.  Pursuant
     to the Fulfillment Agreement, TCI continued to provide fulfillment services
     on an exclusive basis to the Company following the Distribution with
     respect to customers of the PRIMESTAR(R) medium power service. Such
     services were performed in accordance with specified performance standards.
     Charges to TSAT pursuant to the Fulfillment Agreement aggregated
     $54,823,000 during 1997, of which $46,498,000 were capitalized installation
     costs.  The Fulfillment Agreement terminated on December 31, 1997.

(13) Commitments and Contingencies
     -----------------------------

     At December 31, 1998, the Company's future minimum commitments to purchase
     satellite reception equipment aggregated approximately $44 million The
     Company currently purchases all of its integrated receiver/decoders
     ("IRDs") from one supplier and all of its home satellite dishes ("HSDs")
     from a different supplier.  Each supplier has certain disaster recovery
     plans.  However, a break in production of either IRDs or HSDs could result
     in a slow down in the addition of new customers and a corresponding
     reduction in the Company's revenue.

                                                                     (continued)

                                     II-44
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


     As part of the compensation paid to the Company's various sales agents, the
     Company has agreed to pay certain residual sales commissions during
     specified periods following the initiation of service (generally five
     years). Residual payments to sales agents aggregated $25,639,000,
     $15,364,000, and $11,848,000 during  1998, 1997 and 1996, respectively and
     were charged to expense in the accompanying consolidated statements of
     operations.

     In addition to leasing transponder capacity on GE-2, the Company leases
     business offices and uses certain equipment under lease arrangements.
     Rental expense under such arrangements amounted to $9,847,000, $2,237,000,
     and $2,095,000 in 1998, 1997 and 1996, respectively. Included in the 1998
     amount is $2,013,000 related to lease cancellation fees. It is expected
     that, in the normal course of business, expiring leases will be renewed or
     replaced by leases on other properties; thus, it is anticipated that future
     minimum lease commitments will not be less than the rental expense incurred
     during 1998, exclusive of the amounts for lease cancellations. 

     In February 1990, Tempo entered into an option agreement with the
     Partnership granting the Partnership the right and option (the "Tempo
     Capacity Option"), upon exercise, to purchase or lease 100% of the capacity
     of the DBS system to be built, launched and operated by Tempo with the
     purchase price (or aggregate lease payments) being sufficient to cover the
     costs of constructing, launching and operating such DBS system. In
     connection with the Tempo Capacity Option and certain related matters,
     Tempo and the Partnership subsequently entered into two letter agreements
     (the "Tempo Letter Agreements") which provided for, among other things, the
     funding by the Partnership of milestone and other payments due under a
     satellite construction agreement, and certain related costs, through
     advances by the Partnership to Tempo. The Tempo Letter Agreements permit
     the Partnership to apply its advances to Tempo against any payments due
     under the Tempo Capacity Option with respect to its purchase or lease of
     satellite capacity. The aggregate funding provided to Tempo by the
     Partnership ($469,498,000 at December 31, 1998) is reflected as satellite
     rights in the accompanying consolidated balance sheet. On February 7, 1997,
     the Partnership exercised the Tempo Capacity Option, but no capacity lease
     or purchase agreement has been entered into in connection therewith. In
     connection with the Hughes High Power Transaction, Hughes has agreed to
     assume, and to satisfy and discharge, $465 million of Tempo's obligation to
     the Partnership for such advances, and the Partnership has agreed to
     forgive the remaining balance. In addition, the Partnership has agreed to
     terminate and relinquish its rights under the Tempo Capacity Option.

     Pursuant to the Restructuring Agreement, the Company has indemnified each
     of the Non-TSAT Parties against (i) any and all losses and liabilities,
     suffered or incurred by any such indemnified party resulting from any
     liabilities of such party assumed by the Company in the Restructuring, (ii)
     any and all losses and liabilities resulting from the operation by the
     Company of the digital satellite business, whether before, on or after the
     Closing Date and (iii) any and all losses and liabilities resulting from
     the business, affairs, assets or liabilities of the Company whether arising
     before, on or after the Closing Date.

                                                                     (continued)

                                     II-45
<PAGE>
 
                       PRIMESTAR, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


     In addition, the Company is required to indemnify each of the Non-TSAT
     Parties against (i) all liability for taxes, other than transfer taxes,
     incurred as a result of the Restructuring ("Covered Taxes") of PRIMESTAR
     for the taxable period that begins after the Closing Date or the portion
     that begins after the Closing Date of any taxable period that begins before
     and ends after the Closing Date, (ii) all liability for Covered Taxes
     failing to qualify under Section 368(a) of the Code if such failure is
     attributable to any action taken after the Closing by the Company (other
     than any such action expressly required or contemplated by the
     Restructuring Agreement) and (iii) all liability for any reasonable legal,
     accounting, appraisal, consulting or similar fees and expenses relating to
     the foregoing.

     The International Bureau of the FCC has granted a subsidiary of EchoStar
     Communications Corporation ("EchoStar") a conditional authorization to
     construct, launch and operate a Ku-band domestic fixed satellite into the
     orbital position at 83 degrees W.L., immediately adjacent to that occupied
     by GE-2, the medium power satellite now used to provide the PRIMESTAR(R)
     service. Contrary to previous FCC policy, which would have permitted
     operation of a satellite at the 83 degrees W.L. orbital position at a power
     level of only 60 to 90 watts (subject to coordination requirements),
     EchoStar has been authorized to operate at a power level of 130 watts. If
     EchoStar were to launch its high power satellite authorized to 83 degrees
     W.L. and commence operations at that location at a power level of 130
     watts, it would likely cause harmful interference to the reception of the
     PRIMESTAR(R) signal from GE-2 by subscribers to the PRIMESTAR(R) medium
     power service.

     GE Americom and PRIMESTAR have each requested reconsideration of the
     International Bureau's authorization for EchoStar to operate at 83 degrees
     W.L. These requests, which were opposed by EchoStar and others, currently
     are pending at the International Bureau. There can be no assurance that the
     International Bureau will change slot assignments, or power levels, in a
     fashion that eliminates the potential for harmful interference.
     Accordingly, the ultimate outcome of this matter cannot presently be
     predicted.

     GE Americom and PRIMESTAR have attempted to resolve potential coordination
     problems directly with EchoStar, and EchoStar has advanced a proposition to
     resolve this matter.  PRIMESTAR is currently evaluating such proposition.
     It is uncertain whether any agreement in respect of such coordination
     between the Partnership and EchoStar will be reached, or that if such
     agreement is reached that coordination will resolve such interference.

     The Company has contingent liabilities related to legal proceedings and
     other matters arising in the ordinary course of business.  Although it is
     reasonably possible the Company may incur losses upon conclusion of such
     matters, an estimate of any loss or range of loss cannot be made.  In the
     opinion of management, it is expected that amounts, if any, which may be
     required to satisfy such contingencies will not be material in relation to
     the accompanying financial statements.


                                     II-46
<PAGE>
 
                                   PART III

Item 10.  Directors and Executive Officers of the Registrant.
--------  -------------------------------------------------- 

     The following lists the directors and executive officers of the Company,
their birth dates, a description of their business experience and positions held
with the Company, as of February 1, 1999.

<TABLE>
<CAPTION>
               Name                                              Position
               ----                                              --------
 
<S>                                  <C>
Carl E. Vogel                        Has served as Chief Executive Officer of the Company since June
                                     1998. Served as Chief Executive Officer of Star Choice Communications,
                                     Inc. ("Star Choice") from October 1997 to June 1998. Prior to joining
                                     Star Choice, Mr. Vogel served as President of EchoStar Communications 
                                     Corporation ("EchoStar") since September 1996 and Executive Vice 
                                     President and Chief Operating Officer of EchoStar from April 1994 to
                                     September 1996. From 1983 to 1994, Mr. Vogel held various senior
                                     executive positions with Jones Intercable, Inc., a major cable
                                     television operator.
                                      
John C. Malone                       Has served as a director of the Company since the
Born March 7, 1941                   Restructuring.  Dr. Malone has served as Chief Executive
                                     Officer of TCI since January 1994, and as Chairman of the Board
                                     of TCI since November 1996 and as Chairman of the Board and a
                                     director of TSAT since December 1996.  Dr. Malone served as
                                     President of TCI from January 1994 to March 1997, as Chief
                                     Executive Officer of TCIC from March 1992 to October 1994 and
                                     as President of TCIC from 1973 to October 1994.  Dr. Malone has
                                     also served as Chairman of the Board and as a director of
                                     Tele-Communications International, Inc. since May 1995. Dr.
                                     Malone is also a director of TCI, TCIC, TCI Pacific
                                     Communications, Inc., The Bank of New York, At Home
                                     Corporation, Lenfest Communications, Inc. and Cablevision
                                     Systems Corporation.
 
 
Gary S. Howard                       Has served as a director of the Company since the
Born February 22, 1951               Restructuring.  Mr. Howard has served as Chief Executive
                                     Officer of TSAT since December 1996 and a director of TSAT
                                     since November 1996.  From February 1995 through August 1997,
                                     Mr. Howard also served as President of TSAT.  Mr. Howard is
                                     also currently an executive officer of TCI and various
                                     subsidiaries of TCI.  Mr. Howard served as Senior Vice
                                     President of TCIC from October 1994 to December 1996, and as
                                     Vice President of TCIC from December 1991 through October 1994.
                                     Mr. Howard is also a director of United Video Satellite Group,
                                     Inc. and Telewest Communications plc.
 
 
</TABLE>

                                     III-1
<PAGE>
 
<TABLE>
<CAPTION>
               Name                                              Position
               ----                                              --------
 
<S>                                  <C>
John W. Goddard                      Has served as a director of the Company since the
Born May 4, 1941                     Restructuring.  Mr. Goddard has served as a director of TSAT
                                     since December 1996.  Mr. Goddard served as President and Chief
                                     Executive Officer of the cable division of Viacom
                                     International, Inc. from 1980 until his retirement in July
                                     1996. Mr. Goddard is also a director of Diva Systems
                                     Corporation.
 
 
Leo J. Hindery, Jr.                  Has served as a director of the Company since the
Born October 31, 1947                Restructuring.  Mr. Hindery has served as a director of TSAT
                                     since November 1997.  Mr. Hindery has served a President and
                                     Chief Operating Officer of TCI, and as President and a director
                                     of TCIC, since March 1997.  Prior to joining TCI, Mr. Hindery
                                     was the founder, Managing General Partner and Chief Executive
                                     Officer of InterMedia Partners and its affiliated entities
                                     since 1988.  Mr. Hindery is also a director of Cablevision
                                     Systems Corporation and USA Networks.
 
 
Joseph J. Collins                    Has served as a director of the Company since the
Born July 27,1944                    Restructuring.  Mr. Collins has also served as Chairman of the
                                     Board and Chief Executive Officer of Time Warner Cable, a
                                     division of TWE, since September 1989.
 
 
Daniel P. Cavallo                    Has served as a director of the Company since November 6, 1998.
Born April 7, 1942                   Mr. Cavallo has been an independent consultant in the cable
                                     television and satellite industries since April 1995.  Prior to
                                     such time, Mr. Cavallo was Senior Vice President of New
                                     Channels Corp., a subsidiary of Newhouse Broadcasting
                                     Corporation.
 
 
Robert J. Miron                      Has served as a director of the Company since the
Born July 7, 1937                    Restructuring.  Mr. Miron has also served as the president of
                                     Advance/Newhouse Communications since April 1, 1995.  Mr. Miron
                                     served as President of Newhouse Broadcasting from 1986 to April
                                     1995.
 
 
Miles L. Davenport                   Has served as a director of the Company since December 23,
Born June 12, 1945                   1998.  Mr. Davenport has also served as Vice President of New
                                     Business Development of MediaOne Group since July 1998.  From
                                     June 1996 to December 1998, Mr. Davenport served as President
                                     and Chief Executive Officer of Russian Telecommunications
                                     Development Corporation, a subsidiary of MediaOne Group that
                                     invests in Russian telecommunications ventures.  Prior to June
                                     1996, Mr. Davenport held various positions and was responsible
                                     for identifying, developing and managing international
                                     opportunities and investments for US WEST International.

</TABLE> 
 
                                     III-2 
<PAGE>
 
<TABLE> 
<CAPTION> 
 
           Name                                              Position
           ----                                              --------
<S>                                  <C>    
Brian L. Roberts                     Has served as a director of the Company since December 23,
Born June 28, 1959                   1998.  Mr. Roberts has served as President of Comcast
                                     Corporation since 1990.  Mr. Roberts is also a director of At
                                     Home Corporation.
 
 
Ajit M. Dalvi                        Has served as a director of the Company since the
Born May 27, 1942                    Restructuring.  Mr. Dalvi has also served as Senior Vice
                                     President of Programming and Strategy for Cox since 1987.
 
 
John F. Connelly                     Has served as a director of the Company since the
Born July 3, 1943                    Restructuring.  Mr. Connelly has also served as Chairman of the
                                     Board, President and Chief Executive Officer of GE Americom, a
                                     subsidiary of GE, since 1991.  Mr. Connelly is also a director
                                     of Gilat Satellite Networks, Ltd.
 
 
Daniel J. O'Brien                    Has served as President and Chief Operating Officer of the
Born December 23, 1958               Company since the Restructuring.  Mr. O'Brien served as
                                     President of the Partnership from June 1997 to the
                                     Restructuring and as President of Time Warner Programming Co.
                                     d/b/a Time Warner Satellite Services Group from October 1993 to
                                     June 1997.
 
 
Christopher Sophinos                 Has served as Senior Vice President, Sales and Distribution of
Born January 26, 1952                the Company since the Restructuring.  Has served as President
                                     of TSAT since September 1997, and was previously Senior Vice
                                     President of TSAT from February 1996. Mr. Sophinos served
                                     as the President of Boats Unlimited from November 1993 to
                                     September 1998 and has served as a director of Sophinos &
                                     Sons, Inc. since November 1993.
 
 
Kenneth G. Carroll                   Has served as Senior Vice President, Finance, and Chief
Born April 21, 1955                  Financial Officer of the Company since the Restructuring.  Has
                                     served as Senior Vice President and Chief Financial Officer of
                                     TSAT since February 1995. From December 1994 to May 1997, Mr.
                                     Carroll served as Vice President of TCI K-1, Inc. and as Vice
                                     President of United Artists K-1 Investments, Inc. From April
                                     1994 through January 1995, Mr. Carroll served as Vice President
                                     of Business Operations and Chief Financial Officer of Netlink
                                     USA, a subsidiary of TCI; and from July 1992 to May 1994, Mr.
                                     Carroll served as Senior Director of Finance and Business
                                     Operations of Netlink.
 
 
Marcus O. Evans                      Has served as Senior Vice President, General Counsel, and
Born December 15, 1949               Secretary of the Company since the Restructuring.  Mr. Evans
                                     served as Senior Vice President and General Counsel of the
                                     Partnership from November 1991 to the Restructuring.
 
                                     Effective March 5, 1999, Mr. Evans terminated his
                                     employment with the Company and is currently engaged as an
                                     independent consultant.
</TABLE>

                                     III-3
<PAGE>
 
     The directors of the Company will hold office until their successors are
duly elected and qualified. The executive officers named above will be elected
to serve in such capacities until their respective successors have been duly
elected and have been qualified, or until their earlier death, resignation,
disqualification or removal from office.

     The Charter and the Bylaws provide that, subject to any rights of the
holders of any series of preferred stock of the Company ("PRIMESTAR Preferred
Stock") outstanding at any time to elect additional directors to the PRIMESTAR
Board of Directors (the "Board,") the Board will consist of eleven members, and
will be comprised of Class B Directors, Class C Directors and Common Directors
(each as defined below) until the Class C Termination Date. The Bylaws provide
that, on and after the Class C termination Date, the Board will consist of not
less than three members, the exact number of which will from time to time be
determined by resolution of the Board.

     Currently, of the eleven members of the Board, three (the "Class B
Directors") are elected by the holders of Class B Common Stock (all of which is
currently held by TSAT) and six (the "Class C Directors") are elected by the
holders of Class C Common Stock, in each case voting as a separate class.
Pursuant to the Stockholders Agreement, currently, of the six Class C Directors,
three are nominated by TWE (and TWE has agreed with Newhouse pursuant to the
TWE/Newhouse Voting Agreement that of such three, one is nominated by Newhouse)
and one is nominated by each of Cox, Comcast and MediaOne. The remaining two
members of the Board (the "Common Directors") are nominated by a super-majority
vote of the Class B Directors and Class C Directors and elected by the holders
of PRIMESTAR Voting Common Stock, voting together as a single class. The number
of Class B Directors will decrease as the number of shares of Class B Common
Stock outstanding decreases, and the number of Class C Directors will decrease
as the number of shares of Class C Common Stock outstanding decreases, in each
case in accordance with a schedule set forth in the Charter. The special class
rights of the holders of Class B Common Stock and the holders of Class C Common
Stock, each voting as a separate class, to elect the Class B Directors and Class
C Directors, respectively, will automatically terminate on the Class C
Termination Date, at which time the Board will consist exclusively of Common
Directors. At any time prior to the Class C Termination Date that the maximum
number of Class B Directors or Class Directors is decreased, the number of
Common Directors will be correspondingly increased, so that the total number of
directors constituting the entire Board remains at eleven. On and after the
Class C Termination Date, all members of the Board will be elected by the
holders of PRIMESTAR Voting Common Stock, voting together as a single class.

     There are no family relations by blood, marriage or adoption, of first
cousin or closer, among the above named individuals.

     During the past five years, none of the persons named above has had any
involvement in such legal proceedings as would be material to an evaluation of
his ability or integrity.

     Section 16(a) of the Security Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Security and Exchange Commission
("SEC").  Officers, directors and greater-than-ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.

                                     III-4
<PAGE>
 
     Based solely on review of the copies of Forms 3, 4 and 5 and amendments
thereto furnished to the Company with respect to its most recent fiscal year, or
written representations that no Forms 5 were required, the Company believes
that, during the year ended December 31, 1998, its officers, directors and
greater-than-ten-percent beneficial owners complied with all Section 16(a)
filing requirements.

Item 11. Executive Compensation.
         ---------------------- 

     (a) Summary Compensation Table.  Certain directors, officers and employees
         --------------------------                                            
of TCI and its subsidiaries (including the Company, prior to the Distribution)
were granted options to purchase shares of Series A TCI Group Common Stock ("TCI
Options") and stock appreciation rights with respect to shares of Series A TCI
Group Common Stock ("TCI SARs") granted pursuant to various stock plans of TCI
(the "TCI Plans").

     Immediately prior to the Distribution, each TCI Option was divided into two
separately exercisable options: (i) an option to purchase TSAT Series A Common
Stock (an "Add-on TSAT Option"), exercisable for the number of shares of TSAT
Series A Common Stock that would have been issued in the Distribution in respect
of the shares of Series A TCI Group Stock subject to the applicable TCI Option,
if such TCI Option had been exercised in full immediately prior to the
Distribution Date, and containing substantially equivalent terms as the existing
TCI Option, and (ii) an option to purchase Series A TCI Group Stock (an
"Adjusted TCI Option"), exercisable for the same number of shares of Series A
TCI Group Stock as the corresponding TCI Option had been.  The aggregate
exercise price of each TCI Option was allocated between the Add-on TSAT Option
and the Adjusted TCI Option into which it was divided, and all other terms of
the Add-on TSAT Option and Adjusted TCI Option are in all material respects the
same as the terms of such TCI Option.  Similar adjustments were made to the
outstanding TCI SARs, resulting in the holders thereof holding Adjusted TCI SARs
and Add-on TSAT SARs instead of TCI SARs, and to outstanding restricted share
awards, resulting in the holders thereof holding restricted shares of TSAT
Series A Common Stock in addition to restricted shares of Series A TCI Group
Stock, effective immediately prior to the Distribution.

     As a result of the foregoing and as a result of the Restructuring, certain
persons who remained TCI employees or non-employee directors after the
Distribution and certain persons who were TCI employees prior to the
Distribution but became TSAT employees after the Distribution and PRIMESTAR
employees after the Restructuring hold both Adjusted TCI Options and separate
Add-on TSAT Options and/or hold both Adjusted TCI SARs and separate Add-on TSAT
SARs.  The obligations with respect to the Adjusted TCI Options, Add-on TSAT
Options, Adjusted TCI SARs and Add-on TSAT SARs held by TCI employees and non-
employee directors are obligations solely of TCI.  The obligations with respect
to the Adjusted TCI Options, Add-on TSAT Options, Adjusted TCI SARs and Add-on
TSAT SARs held by persons who were Company employees at the time of the
Distribution and PRIMESTAR employees after the Restructuring ("Company
Employees") are obligations solely of the Company.  Prior to the Distribution,
TCI and the TSAT entered into an agreement to sell to each other from time to
time at the then current market price shares of Series A TCI Group Common Stock
and Series A Common Stock, respectively, as necessary to satisfy their
respective obligations under such securities.

                                     III-5
<PAGE>
 
     The following table is a summary of all forms of compensation paid by
PRIMESTAR (or by TSAT) to the officers named therein for services rendered in
all capacities to PRIMESTAR (and, prior to the Restructuring, TSAT) for the
fiscal years ended December 31, 1998, 1997 and 1996 (total of five persons).

<TABLE>
<CAPTION>
                                               Annual Compensation                 Long-Term Compensation
                                   -------------------------------------------  ----------------------------
                                                                                               Securities
                                                               Other Annual     Restricted     Underlying       All Other
Name and Principal Position                                    Compensation     Stock Award     Options/       Compensation
    with the Company         Year  Salary ($)    Bonus ($)          ($)(5)           ($)            SARs            ($)(9)
---------------------------  ----  ---------   ------------         ------      ------------   ------------        -------
<S>                          <C>   <C>         <C>            <C>               <C>            <C>              <C> 
Carl E. Vogel (1)            1998   $242,308    $   118,125         $4,393      $     --           2,000,000 (7)   $  3,283
 (Chief Executive          
  Officer)                 
                           
Daniel J. O'Brien (2)        1998   $272,115    $   310,217         $3,602      $     --             400,000 (7)   $  4,474
 (President)               
                           
Christopher Sophinos (3)     1998   $223,105    $    82,885         $5,792      $     --             152,146 (7)   $  6,954
 (Senior Vice President)     1997   $174,538    $    70,000   $         --      $400,000 (6)         100,000 (8)   $ 10,240
                             1996   $ 96,865    $    10,750   $         --      $     --                  --       $     --
                           
Kenneth G. Carroll           1998   $233,327    $    85,619         $3,546      $     --             160,923 (7)   $  6,994
 (Senior Vice President      1997   $174,538    $    78,846         $2,182      $400,000 (6)         100,000 (8)   $  9,934
  and                      
 Chief Financial Officer)    1996   $119,423    $    33,150   $         --      $      --                 --       $  9,500
                           
Marcus O. Evens (2)          1998   $164,711    $    45,563         $4,271      $      --            146,294 (7)   $  7,860
 (Senior Vice President)                        $   194,685(4)
</TABLE>


-----------------------------------------

(1)  Mr. Vogel commenced employment with PRIMESTAR on June 11, 1998.
     Accordingly, the 1998 compensation information included in the table
     reflects approximately seven months of employment.

(2)  Messrs. O'Brien and Evans commenced employment with PRIMESTAR on April 1,
     1998.  Accordingly, the 1998 compensation information included in the table
     reflects nine months of employment.

(3)  Mr. Sophinos commenced employment with TSAT on February 27, 1996, and
     accordingly, the 1996 compensation information included in the table
     reflects ten months of employment.

(4)  This amount reflects the payment of obligations under the Partnership's
     Long-Term Management Incentive Plan, which obligations were assumed by
     PRIMESTAR in connection with the Restructuring.

(5)  Consists of amounts reimbursed during the year for the payment of taxes.

                                     III-6
<PAGE>
 
(6)  Pursuant to the TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan
     (the "TSAT 1996 Plan"), Messrs. Sophinos and Carroll were each granted
     50,000 restricted shares of TSAT Series A Common Stock in 1997.  As
     originally granted, such restricted shares vested as to 50% on each of
     January 1, 2001 and January 1, 2002.  On November 10, 1997, the TSAT Board
     and the Compensation Committee of the TSAT Board approved modifications to
     the terms of such awards, accelerating the vesting provisions to provide
     for vesting of 50% on February 3, 1999 and as to the remaining 50% on
     February 3, 2000.   The value of each Messrs. Sophinos' and Carroll's
     restricted shares at the end of 1998 was $71,900.  TSAT has not paid cash
     dividends on the TSAT Series A Common Stock and does not anticipate paying
     cash dividends on the TSAT Series A Common Stock at any time in the
     foreseeable future.

(7)  Pursuant to the PRIMESTAR, Inc. 1998 Incentive Plan (the "PRIMESTAR 1998
     Plan"), certain executive officers and key employees of the Company were
     granted stock options with tandem SARS to purchase shares of Class A Common
     Stock at a purchase price of $7.69.  Each such grant of options vests
     evenly over three years from the date of grant, with such vesting period
     beginning April 2, 1998, first become exercisable on April 2, 1999 and
     expire on April 1, 2008.

(8)  Pursuant to the TSAT 1996 Plan, Messrs. Sophinos and Carroll were each
     granted options with tandem SARs to purchase 100,000 shares of TSAT Series
     A Common Stock at a purchase price of $8.00.  As originally granted, each
     such grant of options vested evenly over five years with such vesting
     period beginning January 1, 1997, first became exercisable on January 1,
     1998 and expired on December 31, 2006.  On November 10, 1997, the TSAT
     Board and the TSAT compensation committee approved modifications to the
     vesting of all options issued pursuant to the TSAT 1996 Plan, accelerating
     the vesting schedules under such options from five to three years,
     commencing February 1998.

(9)  Includes dollar value of annual employer contributions to the TCI Employee
     Stock Purchase Plan (''TCI ESPP'') prior to the Distribution, TSAT
     contributions to the TSAT Employee Stock Purchase Plan (the "TSAT ESPP")
     from January 1, 1997 to March 31, 1998 and PRIMESTAR contributions to the
     TSAT ESPP and the PRIMESTAR, Inc. 401(k) Savings Plan (the "PRIMESTAR
     Savings Plan") beginning April 1, 1998. All named executives are fully
     vested in such plans, except Mr. Vogel. Directors who are not employees of
     TSAT are ineligible to participate in the TSAT ESPP, and directors who are
     not employees of PRIMESTAR are ineligible to participate in the PRIMESTAR
     Savings Plan. Also includes insurance premiums paid by (i) PRIMESTAR in
     1998 for the benefit of Messrs. Vogel, O'Brien, Sophinos, Carroll and Evans
     in the amount of $687, $772, $766, $479 and $731, respectively and (ii)
     TSAT in 1997 for the benefit of Messrs. Sophinos and Carroll in the amount
     of $740 and $434, respectively.

     (b) Option and SARs Grants in Last Fiscal Year.  Effective April 2, 1998,
         -------------------------------------------                          
the Board approved and adopted the PRIMESTAR 1998 Plan. The PRIMESTAR 1998 Plan
provides for awards to be made in respect of a maximum of 7,000,000 shares of
Class A Common Stock (subject to certain anti-dilution adjustments). Awards may
be made as grants of stock options, SARs, restricted shares, stock units,
performance awards or any combination thereof (collectively, "Awards"). Awards
may be made to employees and to consultants and advisors to the Company who are
not employees.

                                     III-7
<PAGE>
 
     The following table discloses information regarding stock options granted
in tandem with SARs during the year ended December 31, 1998 to each of the named
executive officers of the Company in respect of shares of Class A Common Stock
under the PRIMESTAR 1998 Plan.

<TABLE>
<CAPTION>
                                No. of      % of Total
                              Securities      Options      Exercise        Market
                              Underlying    Granted to        or           Price                       Grant Date
                                Options    Employees in   Base Price      on Grant      Expiration       Present
Name                          Granted (1)      1998         ($/Sh)     Date($/Sh) (2)      Date        Value $ (3)
----                          -----------  -------------  -----------  --------------  -------------  -------------
<S>                           <C>          <C>            <C>          <C>             <C>            <C>
Carl E. Vogel                  2,000,000           44.6%       $7.69           $7.69   April 2, 2008   $11,900,000
Daniel J. O'Brien                400,000            8.1%       $7.69           $7.69   April 2, 2008   $ 2,380,000
Christopher Sophinos             152,146            3.1%       $7.69           $7.69   April 2, 2008   $   905,269
Kenneth G. Carroll               160,923            3.2%       $7.69           $7.69   April 2, 2008   $   957,492
Marcus O. Evans                  146,294            3.0%       $7.69           $7.69   April 2, 2008   $   870,449
</TABLE>
 

(1)  Effective April 2, 1998, certain key employees of PRIMESTAR were granted,
     pursuant to the PRIMESTAR 1998 Plan, an aggregate of 4,934,993 options in
     tandem with SARs to acquire shares of Class A Common Stock at a per share
     exercise price of $7.69 per share. (the "1998 Grant").  Each such grant of
     options with tandem SARs vests evenly over three years with such vesting
     period beginning April 3, 1998, first becomes exercisable on April 3, 1999
     and expires on April 2, 2008.

(2)  Represents the closing market price per share of TSAT Series A Common Stock
     on April 2, 1998, the date of grant.  The TSAT Series A Common Stock price
     has been used as an estimate of the market price of Class A Common Stock
     due to the terms and conditions of the TSAT Merger Agreement.

(3)  The value shown is based on the Black-Scholes model and is stated in
     current annualized dollars on a present value basis. The key assumptions
     used in the model for purposes of this calculation include the following:
     (a) a 5.5% discount rate; (b) a 65% volatility factor; (c) the 10-year
     option term; (d) the closing price of TSAT Series A Common Stock on April
     2, 1998; and (e) a per share exercise price of $7.69.  The actual value an
     executive may realize will depend upon the extent to which the stock price
     exceeds the exercise price on the date the option is exercised.
     Accordingly, the value, if any, realized by an executive will not
     necessarily be the value determined by the model.

                                     III-8
<PAGE>
 
     (c) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Values.
         ---------------------------------------------------------------------  
The following table provides, for the executives named in the Summary
Compensation Table, information on (i) the exercise during the year ended
December 31, 1998, of options to purchase Class A Common Stock, (ii) the number
of shares of Class A Common Stock, represented by unexercised options owned by
them at December 31, 1998, and (iii) the value of those options as of the same
date.

<TABLE>
<CAPTION>
                                                                       Number of
                                                                      Securities
                                                                      Underlying
                                                                      Unexercised        Value of
                                                                     Options/SARs     Unexercised In-
                                                                          at             the-Money
                                                                     December 31,     Options/SARs at
                                        Shares                             1998 (#)  December 31, 1998
                                      Acquired on   Value Realized   Exercisable/    ($)Excercisable/
Name                                  Exercise (#)       ($)         Unexercisable     Unexercisable
----                                  -----------   --------------   -------------   -----------------
<S>                                   <C>           <C>              <C>             <C> 
Carl E. Vogel
 Exercisable                                   --   $           --              --   $              --
 Unexercisable                                 --   $           --       2,000,000   $              --
 
Daniel J. O'Brien
 Exercisable                                   --   $           --              --   $              --
 Unexercisable                                 --   $           --         400,000   $              --
 
Christopher Sophinos
 Exercisable                                   --   $           --              --   $              --
 Unexercisable                                 --   $           --         152,146   $              --
 
Kenneth G. Carroll
 PRIMESTAR Class A
  Exercisable                                  --   $           --              --   $              --
  Unexercisable                                --   $           --         160,923   $              --
 TCI Common Stock (1)
  TCI Group Stock
   Exercisable                                 --   $           --          15,050   $         613,589
   Unexercisable                               --   $           --              --   $              --
  Liberty Media Group Stock
   Exercisable                                 --   $           --           2,250   $          81,630
   Unexercisable                               --   $           --              --   $              --
  TCI Ventures Group Stock
   Exercisable                                 --   $           --          12,900   $         210,129
   Unexercisable                               --   $           --              --   $              --
 
Marcus O. Evans
 Exercisable                                   --   $           --              --   $              --
 Unexercisable                                 --   $           --         146,294   $              --
</TABLE>


----------------------------
(1)  Certain employees of TCI who became employees of the Company in connection
     with the Distribution had previously been granted options with tandem SARs
     to acquire shares of TCI common stock. The Company assumed the obligation
     for such options on the Distribution Date.

     (d) Compensation of Directors.  Members of the PRIMESTAR Board do not
         --------------------------                                       
receive any compensation for their services as directors.  However, all members
of the PRIMESTAR Board who are not employees of a stockholder of the Company are
reimbursed for expenses incurred to attend any meetings of the PRIMESTAR Board
or any committee thereof.

     During the year ended December 31, 1998, the Company paid Mr. John Goddard,
a director of the Company, $28,000 for consulting services.


                                     III-9
<PAGE>

     In consideration for Mr. Gary Howard's efforts to consummate the
Restructuring, the Company paid Mr. Howard, a director of the Company, a one-
time fee of $937,500.

     (e) Employment Contracts and Termination of Employment and Change of 
         ----------------------------------------------------------------
Control Arrangements
--------------------
 
The Company has entered into an employment agreement with Carl Vogel to serve as
Chairman of the Board and Chief Executive Officer of the Company (the "CEO
Agreement").  The CEO Agreement commenced July 1, 1998 and ends June 30, 2001
unless terminated early in accordance with its provisions. The Company has
agreed to pay Mr. Vogel a base salary of not less than (i) $450,000 per annum
during the period from July 1, 1998 to June 30, 1999, (ii) $475,000 per annum
from July 1, 1999 to June 30, 2000 and (ii) $500,000 per annum from July 1,
2000 to June 30, 2001 (the "CEO Base Salary"). In addition, Mr. Vogel shall be
eligible to receive an annual cash bonus of between 75% and 150% of the CEO Base
Salary based of the performance of the Company and of Mr. Vogel (the "CEO
Bonus"). Payment of the CEO Bonus is at the sole discretion of the Company. The
CEO Agreement also provides for the Company to grant Mr. Vogel options to
purchase 2,000,000 shares of the Company's Class A Common Stock at a purchase
price of $7.69.

The Company and Mr. Vogel each have the right to terminate the CEO Agreement
early upon the happening of certain events.  If the Company terminates the CEO
Agreement without cause or if Mr. Vogel terminates the Agreement for cause, the
Company shall make severance payments to Mr. Vogel ranging from $1,200,000 to
$1,750,000, depending on the circumstances and subject to Mr. Vogel executing a
waiver and release agreement pursuant to which Mr. Vogel would waive any and all
claims against the Company.

In the event that Mr. Vogel becomes disabled during the term of the CEO
Agreement, the Company has agreed to pay Mr. Vogel disability benefits for the
balance of the term of the CEO Agreement and until Mr. Vogel reaches age 65 in
an amount equal to 75% of the Base Salary that would have otherwise been paid
pursuant to the CEO Agreement had the disability not occurred.

The Company has agreed to obtain $1,000,000 of term life insurance payable upon
the death of Mr. Vogel to beneficiaries designated by Mr. Vogel.  The Company's
obligation is contingent upon Mr. Vogel's satisfactory completion of any
applications and other documentation and any physical examination that may be
required and to the availability of such insurance.  The Company is required to
purchase this life insurance for as long as Mr. Vogel remains an employee of the
Company. This insurance is in addition to any group plan generally applicable to
employees of the Company.

In consideration for the compensation set forth in the CEO Agreement, Mr. Vogel
has agreed that during the term of employment and for a period of one year
following the termination of employment, he will not, without the prior written
consent of the Board of Directors of the Company, render services to others in
the business of delivering multi-channel television programming in the United
States by direct broadcast satellite.   Mr. Vogel also agrees that he will not
disclose Company confidential information during the term of employment and
thereafter.

                                    III-10
<PAGE>
 
The Company has entered into an employment agreement with Daniel O'Brien to
serve as President and Chief Operating Officer of the Company (the "COO
Agreement") for the period from April 1, 1998 through December 31, 2000, unless
terminated early in accordance with its provisions. The Company has agreed to
pay Mr. O'Brien a base salary of not less than (i) $350,000 per annum during the
period from April 1, 1998 to June 30, 1998, (ii) $375,000 per annum from July 1,
1998 to June 30, 1999, (iii) $400,000 per annum from July 1, 1999 to June 30,
2000 and (iv) $425,000 per annum form July 1, 2000 to December 31, 2000 (the
"COO Base Salary"). In addition, Mr. O'Brien shall be eligible to receive an
annual cash bonus of between 75% and 150% of the COO Base Salary based of the
performance of the Company and of Mr. O'Brien (the "COO Bonus"). Payment of the
COO Bonus is at the sole discretion of the Company. The COO Agreement also
provides for the Company to grant Mr. O'Brien, effective April 1, 1998, stock
options with tandem stock appreciation rights to purchase 400,000 shares of the
Company's Class A Common Stock at a purchase price of $7.69 per share.

The Company and Mr. O'Brien each have the right to terminate the COO Agreement
early upon the happening of certain events.  If the Company terminates the COO
Agreement without cause or if Mr. O'Brien terminates the Agreement for cause,
the Company shall make severance payments to Mr. O'Brien equal to two times Mr.
O'Brien's then COO Base Salary plus the COO Bonus. In addition, the Company
shall make severance payments equal to the value of certain unvested stock
options granted by Time Warner, Inc., Mr. O'Brien's former employer and current
shareholder of the Company. All such severance payments are subject to execution
by Mr. O'Brien of a waiver and release agreement pursuant to which Mr. O'Brien
would waive any and all claims against the Company.

In the event that Mr. O'Brien becomes disabled during the term of the COO
Agreement, the Company has agreed to pay Mr. O'Brien disability benefits for the
balance of the term of the COO Agreement and until Mr. O'Brien reaches age 65 in
an amount equal to 75% of the COO Base Salary that would have otherwise been
paid pursuant to the COO Agreement had the disability not occurred.

In consideration for the compensation set forth in the CEO Agreement, Mr.
O'Brien has agreed that during the term of employment and for a period of one
year following the termination of employment, he will not, without the prior
written consent of the Board of Directors of the Company, render services to
others in the business of delivering multi-channel television programming in the
United States by direct broadcast satellite.   Mr. O'Brien also agrees that he
will not disclose Company confidential information during the term of employment
and thereafter.

The Company has also entered into an employment agreement with Kenneth Carroll
to serve as Senior Vice President, Finance and Chief Financial Officer for the
Company (the "CFO Agreement").  The CFO Agreement is effective as of April 1,
1998 for a period of three years and provides for an initial base salary of
$247,500 for the period of April 1, 1998 until December 31, 1998 and $264,825
thereafter with increases at the discretion of 

                                    III-11
<PAGE>
 
the Compensation Committee of the Board of Directors. In addition, Mr. Carroll
is eligible for a target cash bonus of 45% of his annual base salary (the
"Senior Vice President Bonus") based on his performance and the performance of
the Company. Payment of the Senior Vice President Bonus is at the sole
discretion of the Company. The CFO Agreement also provides for the Company to
grant Mr. Carroll options to purchase 160,923 shares of the Company's Class A
Common Stock at a purchase price of $7.69 per share.

The Company and Mr. Carroll each have the right to terminate the CFO Agreement
early upon the happening of certain events.  If the Company terminates the CFO
Agreement without cause or if Mr. Carroll terminates the CFO Agreement for good
reason, the Company shall make severance payments over a period of time equal to
the annual base salary in effect at the time of termination multiplied by 2.90,
subject to execution by Mr. Carroll of a waiver and release agreement pursuant
to which Mr. Carroll would waive any and all claims against the Company.

In consideration for the compensation set forth in the CFO Agreement, Mr.
Carroll has agreed that during the term of employment and for a period of one
year following the termination of employment, he will not render services to
others in the business of delivering multi-channel television programming in the
United States by direct broadcast satellite. Mr. Carroll has also agreed that he
will not disclose Company confidential information during the term of employment
and thereafter.

The Company has also entered into an employment agreement with Christopher
Sophinos to serve as Senior Vice President, Sales and Distribution for the
Company (the "Sophinos Agreement").  The Sophinos Agreement is effective as of
April 1, 1998 for a period of three years and provides for an initial base
salary of $235,000 for the period of April 1, 1998 until December 31, 1998 and
$248,000 commencing January 1, 1999 and continuing thereafter with increases at
the discretion of the Compensation Committee.  In addition, Mr. Sophinos is
eligible for the Senior Vice President Bonus based on Mr. Sophinos' performance
and the performance of the Company.  Payment of the Senior Vice President Bonus
is at the sole discretion of the Company.  The Sophinos Agreement also provides
for the Company to grant Mr. Sophinos options to purchase 152,146 shares of the
Company's Class A Common Stock at a purchase price of $7.69 per share.

The Company and Mr. Sophinos each have the right to terminate the Sophinos
Agreement early upon the happening of certain events.  If the Company terminates
the Sophinos Agreement without cause or if Mr. Sophinos terminates the Sophinos
Agreement for good reason, the Company shall make severance payments over time
equal to the annual base salary in effect at the time of termination multiplied
by 2.90, subject to execution by Mr. Sophinos of a waiver and release agreement
pursuant to which Mr. Sophinos waives any and all claims against the Company.

In consideration for the compensation set forth in the Sophinos Agreement, Mr.
Sophinos has agreed that during the term of employment and for a period of one
year following the 

                                    III-12
<PAGE>
 
termination of employment, he will not render services to others in the business
of delivering multi-channel television programming in the United States by
direct broadcast satellite. Mr. Sophinos has also agreed that he will not
disclose Company confidential information during the term of employment and
thereafter.

The Company has entered into a Separation and Release Agreement with Marcus O.
Evans, the Company's General Counsel, effective as of March 5, 1999 (the "GC
Agreement").  The GC Agreement provides for Mr. Evans to receive an initial
severance payment of $207,691 and a subsequent payment of $101,250 on or before
January 30, 2000.  In the event that Mr. Evans is not employed as of March 4,
2000, he will be eligible to receive bi-weekly payments of $8,654 (the "Bi-
weekly Payments") until the first to occur of (i) he becomes employed or (ii) he
has received a total of twenty-six such payments.  If Mr. Evans has not become
employed at any time between March 4, 2000 and March 2, 2001 (the "Second
Year"), the Company has agreed to pay him an additional $101,250 on or before
March 30, 2001 (the "Second Year Bonus").  In the event that Mr. Evans becomes
an independent contractor at any time during the Second Year, the Company will
reduce the Bi-weekly Payments and the Second Year Bonus by the amount of Mr.
Evans' Second Year independent contractor income.

The GC Agreement provides for the acceleration of vesting of all options held by
Mr. Evans to purchase shares of PRIMESTAR, Inc. Class A Common Stock pursuant to
the PIRMESTAR, Inc. 1998 Incentive Plan and the Non-Qualified Stock Option and
Stock Appreciation Rights Agreement between Mr. Evans and the Company.

In exchange for the payments set forth, Mr. Evans has agreed to release the
Company from any and all claims that Mr. Evans may have against the Company.

The Company has separately entered into a Consulting Agreement with Mr. Evans
commencing as of March 6, 1999 pursuant to which Mr. Evans is to provide legal
and regulatory affairs services to the Company in exchange for payments by the
Company of $175 per hour.  The Consulting Agreement terminates no later than
June 1, 1999 unless extended by the mutual consent of the Company and Mr. Evans.

                                    III-13
<PAGE>

     (f) Additional Information with respect to Compensation Committee
         -------------------------------------------------------------
Interlocks and Insider Participation in Compensation Decisions.  The members of
---------------------------------------------------------------                
the Company's compensation committee are Messrs. John F. Connelly and John W.
Goddard, each a director of the Company.  None of the members of the
compensation committee are or were officers of the Company or any of its
subsidiaries.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.
--------  -------------------------------------------------------------- 

     (a) Security Ownership of Certain Beneficial Owners.  The following table
         ------------------------------------------------                     
lists stockholders believed by the Company to be the beneficial owners of more
than five percent of the outstanding Company Common Stock as of December 31,
1998. Voting power in the table is computed with respect to a general election
of directors. So far as is known to the Company, the persons indicated below
have sole voting and investment power with respect to the shares indicated as
believed to be owned by them except as otherwise stated in the notes to the
table.

<TABLE>
<CAPTION>
                                                                 Number of
                                                                   Shares
                 Name and Address                     Title     Beneficially     Percent      Voting
                of Beneficial Owner                  of Class      Owned       of Class (1)  Power (2)
                -------------------                  --------  --------------  ------------  ---------
 
<S>                                                  <C>       <C>             <C>           <C>
TCI Satellite Entertainment, Inc.                    Class A      66,345,565          37.0%      38.0%
 8085 S. Chester Street, Suite 300                   Class B       8,465,324           100%
 Englewood  Colorado                                 Class C              --            --
 
Time Warner Entertainment Company, L.P. ("TWE")(3)   Class A   53,499,980 (3)         29.9%      30.7%
 290 Harbor Drive                                    Class B              --            --
 Stamford, Connecticut                               Class C    6,826,299 (3)         51.2%
 
Comcast Primestar Holdings, Inc.                     Class A      16,919,448           9.5%       9.7%
 1500 Market Street                                  Class B              --            --
 Philadelphia, Pennsylvania                          Class C       2,158,827          16.2%
 
 MediaOne of Delaware, Inc.(4)                       Class A      17,274,638           9.6%       9.9%
 5613 DTC Parkway                                    Class B              --            --
 Suite 700                                           Class C       2,204,147          16.5%
 Englewood, Colorado   
 
Cox Communications, Inc.                             Class A      16,796,125           9.4%       9.6%
 1400 Lake Hearn Drive                               Class B              --            --
 Atlanta, Georgia                                    Class C       2,143,092          16.1%
 
GE Capital Satellites International, Inc.            Class A       8,308,178           4.6%       2.1%
 Four Research Way                                   Class B              --            --
 Princeton, New Jersey                               Class C              --            --
</TABLE>
 
-----------------------------
(1)  Based on 179,143,934 shares of Class A Common Stock, 8,465,324 shares of
     Class B Common Stock and 13,332,365 shares of Class C Common Stock
     outstanding as of December 31, 1998.


                                    III-14
<PAGE>
 
(2)  Based on one vote per share for the shares of Class A Common Stock and ten
     votes per share for the shares of Class B Common Stock and Class C Common
     Stock.

(3)  Includes 823,900 shares of Class A Common Stock and 105,125 shares of Class
     C Common Stock held of record by Paragon Communications, Inc., an affiliate
     of TWE, and 10,587,645 shares of Class A Common Stock and 1,350,925 shares
     of Class C Common Stock held of record by Advance/Newhouse Partnership, for
     which TWE has shared voting power pursuant to a voting agreement with a 
     term of 10 years.

(4)  The shares indicated are owned of record by Continental Satellite Company,
     Inc., etc., each of which is a wholly owned subsidiary of MediaOne of
     Delaware, Inc.

     (b) Security Ownership of Management.  The following table lists the number
         ---------------------------------                                      
of shares of Company Common Stock believed to be owned beneficially by each
director, each of the executive officers named in the above Summary Compensation
Table, and all directors and executive officers as a group as of December 31,
1998, according to data furnished by the persons named. Shares issuable upon
exercise of options and upon vesting of restricted shares are deemed to be
outstanding for the purpose of computing the percentage ownership and overall
voting power of persons believed to beneficially own such securities, but have
not been deemed to be outstanding for the purpose of computing the percentage
ownership or overall voting power of any other person. Voting power in the table
is computed with respect to a general election of directors.  So far as is known
to the Company, the persons indicated below have sole voting and investment
power with respect to the shares indicated as believed to be owned by them.

<TABLE>
<CAPTION>
                                       Number of Shares
                                      Beneficially Owned
                                -------------------------------
                                      Beneficially Owned                     Percent of Class
                                -------------------------------  ----------------------------------------
                                PRIMESTAR  PRIMESTAR  PRIMESTAR   PRIMESTAR     PRIMESTAR     PRIMESTAR     Voting
                                                      ---------                                            ---------
                                 Class A    Class B    Class C    Class A(1)    Class B(1)    Class C(1)   Power(2)
                                ---------  ---------  ---------  ------------  ------------  ------------  ---------
<S>                             <C>        <C>        <C>        <C>           <C>           <C>           <C>
Directors:
John C. Malone                         --         --         --         --            --            --         --
Leo J. Hindery, Jr.                    --         --         --         --            --            --         --
Gary S. Howard                         --         --         --         --            --            --         --
Joseph J. Collins                      --         --         --         --            --            --         --
Dan Cavallo                            --         --         --         --            --            --         --
Robert J. Miron                        --         --         --         --            --            --         --
Miles L. Davenport                     --         --         --         --            --            --         --
Brian L. Roberts                       --         --         --         --            --            --         --
Ajit M. Dalvi                          --         --         --         --            --            --         --
John F. Connelly                       --         --         --         --            --            --         --
John W. Goddard                        --         --         --         --            --            --         --
Executive Officers:
Carl E. Vogel                   2,000,000         --         --        1.1%           --            --          *
Daniel J. O'Brien                 400,000         --         --          *            --            --          *
Christopher Sophinos              152,146         --         --          *            --            --          *
Kenneth G. Carroll                160,923         --         --          *            --            --          *
Marcus O. Evans                   146,294         --         --          *            --            --          *
All such directors and
executive officers as a
group (17 persons)              2,859,363         --         --        1.6%           --            --          *
</TABLE>


----------------------------------------
*  Less than one percent.

(1)  Based on 179,143,934, 8,465,324 and 13,332,365 share of Class A Common
     Stock, Class B Common Stock and Class C Common Stock, respectively,
     outstanding as of December 31, 1998.

(2)  Based on one vote per share for the shares of Class A Common Stock and ten
     votes per share for the shares of Class B Common Stock and Class C Common
     Stock outstanding.


                                    III-15
<PAGE>
 
Item 13.  Certain Relationships and Related Transactions.
--------  ---------------------------------------------- 

     In connection with the Roll-up Plan, the Company entered into the following
related agreements:

     Stockholders Agreement.  Pursuant to the Restructuring Agreement, each of
TWE, Newhouse, Comcast, Cox and MediaOne (collectively, the "Class C
Stockholders"), the Specified Class B Stockholders (as defined below), GE
Americom and PRIMESTAR entered into a Stockholders Agreement (the "Stockholders
Agreement") on the Closing Date, which provides for, among other things, certain
provisions relating to the nomination of directors to the PRIMESTAR Board of
Directors and certain voting agreements, transfer restrictions, conversion
restrictions, rights of first refusal and other rights and obligations of the
Class C Stockholders, the Specified Class B Stockholders and GE Americom in
connection with their respective shares of PRIMESTAR Common Stock.  The term of
the Stockholders Agreement will be ten years.  As used herein, the term
"Specified Class B Stockholders" means (i) prior to the TSAT Merger, TSAT (and
for certain purposes, John C. Malone), and (ii) after the TSAT Merger, John C.
Malone (and, under certain circumstances, certain other holders of Class B
Common Stock).  Although Dr. Malone does not own directly any shares of Class B
Common Stock (all of which are owned by TSAT), he nevertheless executed the
Stockholders Agreement on the Closing Date as a Specified Class B Stockholder
and is entitled to exercise certain rights thereunder, including the rights of
first refusal.

     Registration Rights Agreement.  Pursuant to the Restructuring Agreement, at
the Closing, a registration rights agreement (the "Registration Rights
Agreement") was entered into among PRIMESTAR, TSAT, the Class C Stockholders, GE
Americom and John C. Malone.  The registration Rights Agreement provides that
each of the Class C Stockholders, the Specified Class B Stockholders, GE
Americom, respectively, and their respective affiliates, have certain rights,
under specific circumstances and subject to certain conditions and exceptions,
to require PRIMESTAR to register under the Securities Act all or any portion of
their respective shares of Class A Common Stock and Class B Common Stock.

     Reimbursement Agreements. Prior to entering into the Restructuring
Agreement, affiliates of each of the Partners (or, in the case of TSAT,
affiliates of TCI) other than GE Americom provided letters of credit
(collectively, the "PRIMESTAR Letters of Credit") to secure certain obligations
of the Partnership under (i) the GE-2 Agreement and (ii) the Partnership Credit
Facility. Pursuant to the TSAT Asset Transfer Agreement, PRIMESTAR assumed the
rights and obligations of TSAT under the Indemnification Agreements between TSAT
and the affiliates of TCI that issued PRIMESTAR Letters of Credit, which include
reimbursement obligations in favor of such TCI affiliates with respect to such
PRIMESTAR Letters of Credit on substantially the same terms as the Reimbursement
Agreements. Each of TWE, Comcast, Cox, MediaOne and TCI (or their respective
affiliates) are paid a fee in consideration of their agreement to maintain such
PRIMESTAR Letters of Credit outstanding for a period of time following the
Closing Date. Payments made by PRIMESTAR pursuant to the Reimbursement
Agreements aggregated $10,004,000 during 1998.

     Letter Agreement.  In connection with the execution and delivery of the
Restructuring Agreement by the parties thereto, John C. Malone entered into a
letter of agreement, dated February 6, 1998, for the benefit of such parties
(the "Letter Agreement").  The Letter Agreement provides for, among other
things, the agreement of Dr. Malone to enter into the Stockholders Agreement and
the Registration Rights Agreement at the Closing of the Restructuring
Transaction.

                                    III-16
<PAGE>
 
     TSAT Tempo Agreement.  In connection with the execution and delivery of the
Restructuring Agreement, TSAT and PRIMESTAR entered into the TSAT Tempo
Agreement dated as of February 6, 1998, pursuant to which, among other things,
TSAT granted to PRIMESTAR the exclusive and irrevocable option, exercisable at
any time during the term of the TSAT Tempo Agreement, upon receipt of FCC
approval of the transfer of control of Tempo to PRIMESTAR (including approval of
a transfer in anticipation of a subsequent sale), to purchase from TSAT (at the
Option Holder's election) either (x) all the issued and outstanding shares of
capital stock of Tempo or (y) all the rights, title and interests of TSAT in, to
and under the Tempo Assets (as defined below), in either case for an aggregate
purchase price equal to $2.5 million plus, in the case of an asset purchase, the
assumption by the Option Holder of all obligations and liabilities of Tempo in
respect of the Tempo Assets, other than those incurred in violation of the TSAT
Tempo Agreement.  The Option Holder, in its sole discretion, is entitled to
assign the TSAT Tempo Agreement and PRIMESTAR's rights, interests and
obligations thereunder at any time.  "Tempo Assets" means (i) the FCC Permit,
(ii) the Tempo Satellites, (iii) the Satellite Construction Agreement, and (iv)
all rights, claims and causes of action under the Satellite Construction
Agreement, all insurance claims in respect of the Tempo Satellites, and Tempo's
rights under the Tempo Option Agreement.

     TSAT Stockholders Agreement.  In connection with the execution and delivery
of the Restructuring Agreement, TSAT, John C. Malone and PRIMESTAR entered into
a stockholders agreement dated as of February 6, 1998 (the "TSAT Stockholders
Agreement"), which provides, among other things, that until the termination of
the TSAT Merger Agreement, each TSAT Stockholder (as defined below) will vote or
act by written consent with respect to (or cause to be voted or acted upon by
written consent) all shares of TSAT Common Stock held of record or beneficially
owned by such TSAT Stockholder and all shares of TSAT Common Stock as to which
such TSAT Stockholder has voting control (1) in favor of the TSAT Merger
Agreement and the transactions contemplated thereby and (2) except for the
transactions contemplated by the TSAT Merger Agreement, against any merger
acquisition, consolidation or similar transaction that would adversely affect
the transactions contemplated by the TSAT Merger Agreement, or any amendment of
the TSAT Charter or the TSAT Bylaws, without the prior written consent of
PRIMESTAR.

     In addition, until the termination of the TSAT Merger Agreement, each TSAT
Stockholder has agreed not to convert any of its shares of TSAT Series B Common
Stock into shares of TSAT Series A Common Stock or to transfer any of its shares
of TSAT Common Stock, except to a permitted transferee (as specified in the TSAT
Stockholders Agreement) of such TSAT Stockholder that becomes a party to the
TSAT Stockholders Agreement as a TSAT Stockholder and to the Stockholders
Agreement as a potential Specified Class B Stockholder.  Each TSAT Stockholder
has also agreed, until the earliest to occur of (i) consummation of the TSAT
Merger, (ii) consummation of the transactions contemplated by the TSAT Tempo
Agreement and (iii) termination of the TSAT Tempo Agreement, to vote or act by
written consent with respect to (or cause to be voted or acted upon by written
consent) all shares of TSAT Common Stock held of record or beneficially owned by
such TSAT Stockholder and all shares of TSAT Common Stock as to which such TSAT
Stockholder has voting control, in favor of the TSAT Tempo Agreement and the
transactions contemplated thereby.  "TSAT Stockholder" means (i) Dr. Malone for
so long as he holds of record or beneficially owns or has voting control of any
TSAT Common Stock (or has an affiliate holding TSAT Common Stock pursuant in
specified provisions of the TSAT Stockholders Agreement) and (ii) each permitted
transferee (as specified in the TSAT Stockholders Agreement) that acquires
record or beneficial ownership or voting control of any TSAT Common Stock from a
TSAT Stockholder, as long as such permitted transferee holds of record,
beneficially owns or has voting control of any TSAT Common Stock; provided that
such permitted transferee becomes a party to the TSAT Stockholders Agreement in
accordance therewith.

                                    III-17
<PAGE>
 
     TSAT Transition Services Agreement.  In connection with the Restructuring,
the Company and TSAT entered into a transition services agreement (the "TSAT
Transition Services Agreement").  Pursuant to the TSAT Transition Services
Agreement, the Company is obligated to provide to TSAT certain services for the
administration and operation of TSAT's business and its subsidiaries and
affiliates as a public company.  Such services include (i) tax reporting,
financial reporting, compliance with the requirements of applicable state
corporate laws, the Securities Act, the Exchange Act and other applicable laws,
compliance with NASDAQ/NM filing and other requirements, and similar services
typically performed by the Company's accounting, finance, corporate, legal,
investor relations and tax department personnel, (ii) administration of existing
stock options, restricted stock awards and similar obligations, and (iii) such
other services as TSAT and the Company may from time to time mutually determine
to be necessary or desirable.

     As compensation for services rendered to TSAT pursuant to the TSAT
Transition Service Agreement, TSAT is required to reimburse the Company
quarterly for the actual direct costs and expenses incurred by the Company in
providing such services, provided that the incurrence of such expenses is
consistent with practices generally followed by the Company in managing or
operating its own business and the businesses of its subsidiaries and
affiliates.  The TSAT Transition Services Agreement further provides, however,
that so long as the Company is obligated to reimburse TSAT for expenses pursuant
to the TSAT Merger Agreement, all obligations of TSAT to the Company pursuant to
the TSAT Transition Services Agreement will be offset against, and will for all
purposes be fully and irrevocably satisfied by, the obligations of the Company
to TSAT pursuant to the TSAT Merger Agreement.  The TSAT Merger Agreement
provides that during the term thereof, the Company will reimburse TSAT for all
reasonable costs and expenses (including reasonable legal fees of outside
counsel and reasonable fees to TSAT's independent public accountants) incurred
by TSAT (i) in preparation of tax returns and other reports to governmental
entities, (ii) for payment of required taxes, franchise fees, NASDAQ/NM fees and
similar fees, (iii) in compliance with its reporting obligations under the
Securities Act and the Exchange Act and (iv) to maintain directors' and
officers' insurance on terms reasonably acceptable to the Company.  During 1998,
the net amount of TSAT expenses reimbursed by the Company pursuant to the TSAT
Transition Services Agreement and the TSAT Merger Agreement aggregated $152,000.

     The TSAT Transition Services Agreement continues in effect until the close
of business on December 31, 1999 and will be renewed automatically for
successive one-year periods thereafter, unless earlier terminated by (i) either
party at the end of the initial term or the then current renewal term, as
applicable, on not less than 120 days prior written notice to the other party,
(ii) TSAT upon written notice to the Company following certain changes in
control of the Company, and (iii) either party if the other party is the subject
of certain bankruptcy or insolvency-related events.

     Additional Arrangements with TCI.  John Malone is currently the Chairman of
the Board and a director of TCI and is also the Chairman of the Board and a
director of TSAT and is a director of the Company.  Dr. Malone is also a
principal stockholder of both TCI and TSAT.  The Company is party to a Master
Digital Transmission Agreement (the "NDTC Transmission Agreement") with NDTC, a
subsidiary of TCI.  Pursuant to the NDTC Transmission Agreement, NDTC provides
compression, encryption and uplinking services to the Company, via Ku-band
transmission on domestic satellites designated by the Company, for DTH delivery
of programming signals by the Company as well as certain ancillary services.
NDTC facilitates the connection of satellite authorization facilities operated
by the Company to NDTC's compression encoders and provides advertising,
promotional and/or public service announcement insertion services at additional
rates which are negotiated on an ad hoc basis.  Charges for such services
aggregated $10,659,000 during 1998.


                                    III-18
<PAGE>
 
     TCI also provides the Company with customer support services from TCI's
Boise, Idaho call center.  Management believes that the rates charged by TCI to
the Company approximate fair market rates, as established by agreement between
the Company and TCI.  Amounts charged by TCI to the Company aggregated
$24,938,000 during 1998.

     Additional Arrangements with GE Americom.  The Company is party to the GE-2
Agreement with GE Americom.  Pursuant to the GE-2 Agreement, GE Americom is
obligated to provide the Company with transponder service for the PRIMESTAR(R)
programming service on certain GE Americom communications satellites.

     Since March 1997, the PRIMESTAR(R) service has been transmitted from GE-2.
As originally executed, the GE-2 Agreement had an initial term extending through
February 2003 at an annual rate of $86,340,000, with an option to extend the
term through the  end-of-life of GE-2.  The option to extend has expired without
exercise.  However, the Company remains in discussions with GE Americom
regarding other alternatives for extension of the GE-2 Agreement, and the
Company will continue to assess other medium and/or high power alternatives if
the Hughes Medium Power Transaction is not consummated.

     The Company pays GE Americom (i) fixed minimum monthly service fees per
transponder based on the type of service received (e.g., non-preemptible or
preemptible, non-orbital location protected or orbital location protected) and
(ii) variable monthly fees, based upon the number of subscribers to the
PRIMESTAR(R) programming service up to a maximum of 2 million subscribers.  The
Company is required to pay the fixed transponder fees for all 24 transponders,
whether or not all such transponders are actually used by the Company.  The GE-2
Agreement provides for credits against the transponder fees for any transponders
which fail to meet the performance specifications set for in the GE-2 Agreement.
During the year ended December 31, 1998, the Company paid GE Americom
$64,755,000 pursuant to the GE-2 Agreement.

     Programming Services.  The Company purchases a portion of its programming
services from direct and indirect affiliates of certain of the Restructuring
Parties, including, among others, (i) HBO and Cinemax, which are owned by TWE,
(ii) STARZ!, Encore and DMX, which are owned by subsidiaries of TCI, (iii)
Speedvision and Outdoor Life, which are owned by MediaOne, Comcast and Cox or
their respective affiliates, and (iv) The Golf Channel and E! Entertainment,
which are also owned by Comcast or its affiliates.  The Company believes that
the fees and other terms and conditions of its programming arrangements with
such affiliates are, in the aggregate, comparable to the fees, terms and
conditions on which it could obtain comparable programming (if available) from
third parties.

     In connection with the Distribution, the Company and TCI entered into
various agreements, including the "Reorganization Agreement," the "Transition
Services Agreement," an amendment to TCI's existing "Tax Sharing Agreement," the
"Indemnification Agreements," the "Trade Name and Service Mark Agreement" and
the "Share Purchase Agreement," all of which are described below.

     Reorganization Agreement.    On the Distribution Date, TCI, TCIC and a
number of other TCI subsidiaries, including the Company, entered into the
Reorganization Agreement, which provided for, among other things, the principal
corporate transactions required to effect the Distribution, the conditions
thereto and certain provisions governing the relationship between the Company
and TCI with respect to and resulting from the Distribution.

                                    III-19
<PAGE>
 
     Pursuant to the Reorganization Agreement, TSAT, among other things, granted
an option to TCI to purchase up to 4,765,000 shares of TSAT Series A Common
Stock (as such number may be adjusted to reflect stock dividends, stock splits
and the like), for a purchase price equal to the par value of such shares, as
necessary to satisfy TCI's obligations to deliver shares of TSAT Series A Common
Stock upon conversion of certain convertible securities of TCI as a result of
the Distribution.  During the year ended December 31, 1998, the Company issued
989,000 shares of TSAT Series A Common Stock to TCI for aggregate consideration
of $989,000 under this arrangement.

     TCI Transition Services Agreement.  During the first quarter of 1998 and
pursuant to the TCI Transition Services Agreement, TCI provided to the Company
certain general and administrative services.  In addition, TCI has agreed to
provide the Company with certain most-favored-customer rights to programming
services that TCI may own in the future and access to any volume discounts that
may be available to TCI for purchases of HSDs, satellite receivers and other
equipment.

     As compensation for services rendered to the Company and for the benefits
made available to the Company pursuant to the TCI Transition Services Agreement,
the Company was charged a fee of $1.50 per qualified subscribing household or
other residential or commercial unit (counted as one subscriber regardless of
the number of satellite receivers) per month, up to a maximum of $3 million per
month, and reimbursed TCI for direct, out-of-pocket expenses incurred by TCI to
third parties in providing the services.  During the year ending on December 31,
1998, the Company was charged $3,174,000 pursuant to the TCI Transition Services
Agreement.  Upon consummation of the Restructuring, TSAT and TCI agreed to
terminate the TCI Transition Services Agreement.

     Other Arrangements.  On the Distribution Date, TCI and TSAT entered into
the Share Purchase Agreement, which obligates TCI and TSAT to sell to each other
from time to time, at the then current market price, shares of Series A TCI
Group Common Stock and TSAT Series A Common Stock, respectively, as necessary to
satisfy their respective obligations under Adjusted TCI Options and Add-on TSAT
Options held after the Distribution Date by their respective employees and non-
employee directors.  During the year ended December 31, 1998, the Company issued
no shares of TSAT Series A Common Stock to TCI under this arrangement.

     Certain members of the Company's management and the PRIMESTAR Board have
certain interests in the Roll-up Plan, as described below:

     Directors and Officers of PRIMESTAR.  Certain of the current directors and
officers of TSAT became directors and officers of PRIMESTAR upon consummation of
the Restructuring and will serve as directors and officers of both TSAT and
PRIMESTAR until the TSAT Merger is consummated, at which time they will cease to
be officers and directors of TSAT and will continue as officers and directors of
PRIMESTAR (unless they have been earlier replaced in accordance with the
certificate of incorporation and bylaws of PRIMESTAR).  These include Gary S.
Howard, the Chief Executive Officer and a director of TSAT, who serves as a
director of PRIMESTAR, and John C. Malone, Leo J. Hindery, Jr. and John W.
Goddard, all of whom are directors of TSAT and serve as directors of PRIMESTAR.

                                    III-20
<PAGE>
 
     Treatment of TSAT Options, Stock Appreciation Rights and Restricted Stock
Awards.  As of December 31, 1998, executive officers and directors of TSAT held
options ("TSAT Options") under the TSAT 1996 Plan to purchase an aggregate of
1,580,164 shares of TSAT Series A Common Stock at various exercise prices and
subject to various vesting schedules.  In the case of a tandem option or stock
appreciation right ("TSAT SAR"), the related stock appreciation right or option,
as the case may be, is considered to have been exercised to the extent of the
number of shares of TSAT Common Stock with respect to which such related tandem
option or stock appreciation right is exercised.

     The TSAT Options and TSAT SARs remain outstanding following the
consummation of the Restructuring, as obligations of TSAT, but have been amended
to provide that service as an employee of, or consultant to, PRIMESTAR following
the closing date of the Restructuring is deemed to constitute service as an
employee of, or consultant to, TSAT, for all purposes of such awards and the
TSAT 1996 Plan.

     At the effective time of the TSAT Merger, (x) all TSAT Options outstanding
immediately prior to the effective time of the TSAT Merger, whether vested or
unvested, (y) all obligations of TSAT under the TSAT 1996 Plan and the TSAT DSOP
(collectively, the "TSAT Plans") and (z) the agreements evidencing the grants of
such TSAT Options will be assumed by PRIMESTAR.  Pursuant to the TSAT Merger
Agreement, at the effective time of the TSAT Merger, each TSAT Option
outstanding immediately prior to such effective time will be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such TSAT Option, the same number of shares of PRIMESTAR Class
A Common Stock as the holder of such TSAT Option would have been entitled to
receive pursuant to the TSAT Merger had such holder exercised such TSAT Option
in full immediately prior to the effective time of the TSAT Merger, at a price
per share equal to the exercise price for the shares of Series A Common Stock
otherwise purchasable pursuant to such TSAT Option; provided, however, that in
the case of any option to which Section 421 of the Internal Revenue Code of
1986, as amended (the "Code") applies by reason of its qualification under
either Section 422 or 424 of the Code ("qualified stock options"), the option
price, the number of shares purchasable pursuant to such option and the terms
and conditions of exercise of such option will be determined in order to comply
with Section 424(a) of the Code.  The TSAT Merger Agreement provides that
PRIMESTAR will comply with the terms of the TSAT Plans and ensure, to the extent
required by, and subject to the provisions of, the TSAT Plans, that the TSAT
Options that qualified as qualified stock options prior to the effective time of
the TSAT Merger continue to qualify as qualified stock options after such
effective time. PRIMESTAR will be entitled to make any changes to the TSAT Plans
as will be necessary to give effect to the TSAT Merger.  TSAT SARs issued in
tandem with TSAT Options will be similarly modified.

     On November 10, 1997, the TSAT Board and the Compensation Committee of the
TSAT Board approved modifications to the vesting provisions of all TSAT Options
issued pursuant to the TSAT 1996 Plan and the TSAT DSOP, accelerating the
vesting schedules under such options from five to three years upon consummation
of the Restructuring.  Accordingly, such TSAT Options will vest in three equal
annual installments, commencing February 1998.  TSAT Options granted prior to
the Distribution, which were 40% vested in February 1998, will become two-thirds
vested in February 1999 and fully vested in February 2000.

                                    III-21
<PAGE>
 
     The following table indicates for each person who is an executive officer
or director of PRIMESTAR and who held TSAT Options (including TSAT Options
issued in tandem with TSAT SARs) at December 31, 1998, (a) the number of shares
of TSAT Series A Common Stock subject to such options and/or stock appreciation
rights that were vested at December 31, 1998, (b) the number of shares of TSAT
Series A Common Stock subject to such options and/or stock appreciation rights
that were not vested at such date, and (c) the exercise price per share of TSAT
Series A Common Stock of all such options and/or stock appreciation rights
(whether vested or unvested).  The total number of shares of Class A Common
Stock that would be subject to such options and/or stock appreciation rights
immediately following the effective time of the TSAT Merger assuming that all
such options and/or stock appreciation rights continue to be outstanding
immediately prior to such effective time would be equal to the number of shares
of TSAT Series A Common Stock identified in the table.  The exercise or base
price per share of Class A Common Stock of such options and/or stock
appreciation rights immediately following the effective time of the TSAT Merger
would be equal to the exercise price of the TSAT Options.  The TSAT Options
listed opposite the name of each person in the table below (including TSAT
Options issued in tandem with TSAT SARs) include all TSAT Options and TSAT SARs
granted to such person under incentive plans of TSAT or otherwise.

<TABLE>
<CAPTION>
                                        TSAT              TSAT
                                  Series A Common   Series A Common   Exercise Price
Option and                        Stock Subject to  Stock Subject to     of TSAT
----------                         Vested Options   Unvested Options  Options and/or
SAR Holder                          and/or SARs       and/or SARs          SARs
----------                        ----------------  ----------------  --------------
 
<S>                               <C>               <C>               <C>
Christopher Sophinos                        33,333            66,667  $   8.00
Kenneth G. Carroll                          34,703            67,447  $8.00 - $23.76
John C. Malone                              16,666            33,334  $   8.00
Gary S. Howard                             288,630           405,446  $8.86 - $23.76
John W. Goddard                             16,666            33,334  $   8.00
Leo J. Hindery, Jr.                         16,666            33,334  $   6.50
</TABLE>

      As of December 31, 1998, executive officers and directors of PRIMESTAR
held restricted stock awards ("TSAT Restricted Stock Awards") under the TSAT
1996 Plan representing the right to receive, upon vesting as described below, an
aggregate of 275,000 shares of TSAT Series A Common Stock.  As originally
granted, each TSAT Restricted Stock Award vested 50% on each of January 1, 2001
and January 1, 2002.  On November 10, 1997, the TSAT Board and the Compensation
Committee of the TSAT Board approved modifications to the terms of such awards,
accelerating the vesting provisions to provide for vesting of 50% on each of the
second and third anniversaries of the date of grant.  At the effective time of
the TSAT Merger, pursuant to the TSAT Merger Agreement, (x) all TSAT Restricted
Stock Awards outstanding immediately prior to such effective time, whether
vested or unvested, and the agreements evidencing the grants of such TSAT
Restricted Stock Awards, will be assumed by PRIMESTAR, and (y) each TSAT
Restricted Stock Award will be deemed to constitute a restricted stock award, on
the same terms, with respect to a number of shares of Class A Common Stock equal
to the number of shares of Series A Common Stock previously subject to such TSAT
Restricted Stock Award.

      Indemnification.  The TSAT Merger Agreement provides that all rights to
indemnification for acts or omissions occurring prior to the effective time of
the TSAT Merger existing in favor of the current or former directors or officers
of TSAT and its subsidiaries will survive the consummation of the TSAT Merger
and continue in full force and effect in accordance with their respective terms.

                                    III-22
<PAGE>
 
      Directors' and Officers' Liability Insurance.  The TSAT Merger Agreement
provides that, for a period of not less than three years from the effective time
of the TSAT Merger, directors' and officers' liability insurance will be
maintained by PRIMESTAR covering current TSAT directors and officers on terms
and conditions no less advantageous than TSAT's existing insurance, to the
extent such coverage can be maintained or procured by the payment of an annual
premium not exceeding one and one-half times the current annual premium paid by
TSAT for its existing coverage.

                                    III-23
<PAGE>
 
                                    PART IV


Item 14.    Exhibits, Financial Statements and Financial Statement Schedules
--------    ----------------------------------------------------------------
            and Reports on Form 8-K
            -----------------------

(a)  (1)    Financial Statements
            --------------------

<TABLE>
<CAPTION>
Included in Part II of this Report:                                                  Page No.
                                                                                  ---------------
        <S>                                                                           <C>
 
        Independent Auditors' Report                                                  II-16
 
        Consolidated Balance Sheets,
          December 31, 1998 and 1997                                                  II-17
         
        Consolidated Statements of Operations,
          Years ended December 31, 1998, 1997 and 1996                                II-19
         
        Consolidated Statements of Equity (Deficit),
          Years ended December 31, 1998, 1997 and 1996                                II-20
 
        Consolidated Statements of Cash Flows,
          Years ended December 31, 1998, 1997 and 1996                                II-21
 
        Notes to Consolidated Financial Statements,
          December 31, 1998, 1997 and 1996                                            II-22

</TABLE>


(a)  (2)    Financial Statement Schedules
            -----------------------------

<TABLE> 
<CAPTION> 

Included in Part IV of this Report:
     <S>                                                                              <C>
     (i) Financial Statement Schedules required to be filed:

         Schedule II - Valuation and Qualifying Accounts,                             IV-6
            Years ended December 31, 1998, 1997 and 1996.
</TABLE> 

                                     IV-1
<PAGE>
 
(a)  (3)  Exhibits
          --------

The following exhibits are filed herewith or are incorporated by reference
herein (according to the number assigned to them in Item 601 of Regulation S-K)
as noted:

2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
<TABLE>
<C>              <S>
            2.1  Reorganization Agreement dated as of December 4, 1996, among Tele-Communications,
                 Inc. ("TCI"), TCI Communications, Inc. ("TCIC"), Tempo Enterprises, Inc., TCI Digital
                 Satellite Entertainment, Inc., TCI K-1, Inc. ("TCI K-1"), United Artists K-1
                 Investments, Inc. ("UA K-1"), TCI SE Partner 1, Inc. ("TCISE 1"), TCI SE Partner 2,
                 Inc. ("TCISE 2") and TCI Satellite Entertainment, Inc. ("TSAT"). (c)

            2.2  Merger and Contribution Agreement dated as of February 6, 1998, among PRIMESTAR, Inc.
                 (the "Company"), TSAT, Time Warner Entertainment Company L. P. ("TWE"),
                 Advance/Newhouse Partnership ("Newhouse"), Comcast Corporation ("Comcast"), Cox
                 Communications, Inc. ("Cox"), MediaOne of Delaware, Inc. ("MediaOne") and GE American
                 Communications, Inc. ("GE Americom"). (b)

            2.3  Asset Transfer Agreement dated as of February 6, 1998, between the Company and TSAT.
                 (b)

            2.4  Agreement and Plan of Merger dated as of February 6, 1998, between the Company and
                 TSAT. (b)

            2.5  Guarantee Agreement dated as of February 6, 1998, by US WEST Media Group, Inc. ("US
                 West"), in favor of each of the Company, TSAT, TWE, Newhouse, Comcast, Cox and GE
                 Americom. (b)

            2.6  Letter Agreement dated as of February 6, 1998, between John C. Malone and the
                 Company, TSAT, TWE, Newhouse, Comcast, Cox , MediaOne and GE Americom, for the
                 benefit of the Company, TSAT, TWE, Newhouse, Comcast, Cox, MediaOne and GE Americom.
                 (b)

            2.7  Form of Stockholders Agreement among he Company, TSAT, TWE, Newhouse, Comcast, Cox,
                 MediaOne, Continental Satellite company, Inc./, Continental Satellite Company of
                 Chicago, Inc., Continental Satellite Company of Minnesota, Inc., Continental
                 Satellite company of New England, Inc., Continental Satellite Company of Michigan,
                 Inc., Continental Satellite Company of Ohio, Inc., Continental Satellite Company of
                 Virginia, Inc., MediaOne Satellite II, Inc., GE Americom and John C. Malone. (b)

            2.8  Form of Registration Rights Agreement among the Company, TSAT, TWE, Newhouse,
                 Comcast, Cox, MediaOne, Continental Satellite Company, Inc., Continental Satellite
                 Company of Chicago, Inc., Continental Satellite Company of Minnesota, Inc.,
                 Continental Satellite Company of New England, Inc., Continental Satellite Company of
                 Michigan, Inc., Continental Satellite Company of Ohio, Inc., Continental Satellite
                 Company of Virginia, Inc., MediaOne Satellite II, Inc., GE Americom and John C.
                 Malone. (b)

</TABLE> 
                                     IV-2
<PAGE>
 
<TABLE>
<CAPTION> 

2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession (continued):
<C>              <S>
            2.9  Stockholders Agreement dated as of February 6, 1998, among the Company, TSAT and John
                 C. Malone. (b)

           2.10  TSAT Tempo Agreement dated as of February 6, 1998, between the Company and TSAT. (b)

<CAPTION> 


3 - Articles of Incorporation and Bylaws:
<C>              <S>
            3.1  Amended and Restated Certificate of Incorporation of the Company. (b)

            3.2  Amended and Restated Bylaws of the Company. (b)

<CAPTION> 
4 - Instruments Defining the Rights of Security Holders:

<C>              <S>
            4.1  Specimen certificate representing shares of Class A Common Stock of the Company. (b)

            4.2  Specimen certificate representing shares of Class B Common Stock of the Company. (b)

            4.3  Indenture dated as of February 20, 1997 between TSAT and Bank of New York, as
                 Trustee, with respect to $200 million principal amount of 10-7/8% Senior Subordinated
                 Notes due 2007.(d)

            4.4  Indenture dated as of February 20, 1997 between TSAT and Bank of New York, as
                 Trustee, with respect to $275 million principal amount of 12-1/4% Senior Subordinated
                 Discount Notes due 2007.(d)

            4.5  Registration Rights Agreement - Senior Subordinated Notes, dated as of February 20,
                 1997, among TSAT and Donaldson, Lufkin and Jenrette Securities Corporation; Merrill
                 Lynch, Pierce, Fenner and Smith Incorporated; NationsBanc Capital Markets, Inc.; and
                 Scotia Capital Markets (USA) Inc. (d)

            4.6  Registration Rights Agreement - Senior Subordinated Discount Notes, dated as of
                 February 20, 1997, among TSAT and Donaldson, Lufkin and Jenrette Securities
                 Corporation; Merrill Lynch, Pierce, Fenner and Smith Incorporated; NationsBanc
                 Capital Markets, Inc.; and Scotia Capital Markets (USA) Inc. (d)

<CAPTION> 

10 - Material Contracts
<C>              <S>
           10.1  Indemnification Agreement dated as of December 4, 1996, by and between the Company
                 and TCI UA 1, Inc. (d)

           10.2  First Amendment to Indemnification Agreement dated as of December 31, 1997 between
                 the Company and TCI UA I, Inc. (c)

</TABLE> 

                                     IV-3
<PAGE>
 
<TABLE> 
<CAPTION> 

10 - Material Contracts (continued):
<C>              <S>   
           10.3  Indemnification Agreement dated as of December 4, 1996, by and between the Company
                 and TCIC. (d)

           10.4  First Amendment to Indemnification Agreement dated as of December 31, 1997 between
                 the Company and TCI Communications, Inc. (c)

           10.5  Option Agreement dated February 8, 1990, between Tempo and K Prime Partners, L.P. (e)

           10.6  Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR Partners, L.P.
                 relating to FSS. (e)

           10.7  Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR Partners, L.P.
                 relating to BSS. (e)

           10.8  Amended and Restated Reimbursement Agreement dated March 1, 1995, between TCI UA 1,
                 Inc., Chemical Bank and The Toronto Dominion Bank. (e)

           10.9  Senior Subordinated Credit Agreement, dated as of April 1, 1998 among PRIMESTAR,
                 Inc., as Borrower, the Guarantors party hereto, the Lenders party hereto, Merrill
                 Lynch & Co., as Arranger and Syndication Agent, Morgan Stanley Senior Funding, Inc.,
                 as Administrative Agent, and Donaldson, Lufkin & Jenerette Securities Corporation, as
                 Documentation Agent. (a)

          10.10  Credit Agreement, dated as of March 9, 1994, among PRIMESTAR Partners, L.P., the
                 Lenders party hereto, The Bank of New York, Chemical Bank and Citibank, N.A. as
                 Managing Agents, The Bank of New York, as Documentation Agent and Chemical Bank, as
                 Administrative Agent, as amended by Amendment No. 1 dated November 21, 1994, as
                 amended by Amendment No. 2 dated February 27, 1997, as amended by Amendment No. 3
                 dated June 2, 1997, as amended by Amendment No. 4 dated December 19, 1997 and as
                 amended by Amendment No. 5 dated September 29, 1998. (a)

          10.11  U.S. $700,000,000 Credit Agreement, dated as of March 31, 1998 among PRIMESTAR, Inc.,
                 as Borrower, The Bank of Nova Scotia, as Administrative Agent, Nationsbank of Texas,
                 N.A., as Syndication Agent, Credit Lyonnais New York Branch, as Documentation Agent,
                 Various Financial Institutions, as Lenders and The Bank of Nova Scotia, Credit
                 Lyonnais New York Branch and Nationsbank of Texas, N.A., as Arranging Agents. (a)

          10.12  Share Purchase Agreement dated as of December 4, 1996, between TCI and the Company.
                 (d)

          10.13  Option Agreement dated as of December 4, 1996, between TCI and the Company.(d)


</TABLE> 

                                     IV-4
<PAGE>
 
<TABLE> 
<CAPTION> 
 
10 - Material Contracts (continued):
<C>              <S>   
                 Indemnification Agreement dated as of June 11, 1997 among News Corp., the Company,
          10.14  the Partnership, Time Warner, Comcast, Cox, MediaOne, Newhouse, and GE Americom. (b)
 

          10.15  Asset Purchase Agreement among the Company, PRIMESTAR Partners, L.P., PRIMESTAR MDU,
                 Inc., the Stockholders of PRIMESTAR, Inc. listed herein and Hughes Electronics
                 Corporation, dated as of January 22, 1999. (f)

          10.16  Asset Purchase Agreement by and among Hughes Electronics Corporation, the Company,
                 PRIMESTAR Partners L.P., Tempo Satellite, Inc. and the Stockholders of PRIMESTAR
                 listed herein, dated as of January 22, 1999. (f)

             21  Subsidiaries of the Registrant.(a)

             27  Financial Data Schedule.(a)

</TABLE>



-------------------------------

  (a)     Filed herewith.

  (b)     Incorporated by reference to the Company's Registration Statement on
          Form S-4 filed with the SEC on February 9, 1998 (Registration No. 333-
          45835).

  (c)     Incorporated by reference to TSAT's Annual Report on Form 10-K for the
          year ended December 31, 1997 (Commission File No. 0-21317).

  (d)     Incorporated by reference to TSAT's Annual Report on Form 10-K for the
          year ended December 31, 1996 (Commission File No. 0-21317).

  (e)     Incorporated by reference to TSAT's Registration Statement on Form 10
          filed with the Securities and Exchange Commission ("SEC") on November
          15, 1996 (Registration No. 0-21317).

  (f)     Incorporated by reference to the Company's Current Report on Form 8-K,
          dated February 1, 1999.

(b)  Reports on Form 8-K filed during the quarter ended December 31, 1998:

     None.

                                     IV-5
<PAGE>
 
                                                                     Schedule II
                                                                     -----------


                                PRIMESTAR, INC.

                       Valuation and Qualifying Accounts

                  Years ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                                           Additions         Deductions
                                                        ---------------  ------------------
                                         Balance at       Charged to         Write-offs         Balance
                                          beginning         profit             net of           at end
Description                                of year         and loss          recoveries         of year
-----------                            ---------------  ---------------  ------------------  -------------
                                                              amounts in thousands
<S>                                    <C>              <C>              <C>                 <C>
Year ended
   December 31, 1998:
      Allowance for doubtful
         receivables - trade                    $5,307           43,460            (41,325)          7,442
                                       ===============  ===============  =================   =============
 
Year ended
   December 31, 1997:
      Allowance for doubtful
         receivables - trade                    $4,666           18,339            (17,698)          5,307
                                       ===============  ===============  =================   =============
 
Year ended
   December 31, 1996:
      Allowance for doubtful
         receivables - trade                    $4,819           19,235            (19,388)          4,666
                                       ===============  ===============  =================   =============
</TABLE>

                                     IV-6
<PAGE>
 
                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                              PRIMESTAR, INC.



                              By:    /s/  Carl E. Vogel
                                  -------------------------------
                                  Name:   Carl E. Vogel
                                  Title:  Chief Executive Officer

Dated April 15, 1999



     Pursuant to the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the date indicated:

<TABLE>
<CAPTION>
                 Signature                                 Title                          Date
                 ---------                                 -----                          ----           
<S>                                       <C>                                      <C>
 
        /s/ Carl E. Vogel                                                              April 15, 1999
    ------------------------------------
            Carl E. Vogel                      Chief Executive Officer                           
                                            
 
 
        /s/ John C. Malone                                                             April 15, 1999
    ------------------------------------
            John C. Malone                        Director
 
 

        /s/ Leo J. Hindery, Jr.                                                        April 15, 1999
    ------------------------------------
            Leo J. Hindery, Jr.                   Director
 

        /s/ Garry S. Howard                                                            April 15, 1999
    ------------------------------------
            Garry S. Howard                       Director
 
 
        /s/ Joseph J. Collins                                                          April 15, 1999
    ------------------------------------
            Joseph J. Collins                     Director
 
 
 
        /s/ Daniel P. Cavallo                                                          April 15, 1999
    ------------------------------------
            Daniel P. Cavallo                     Director
 
 
 
        /s/ Robert J. Miron                                                            April 15, 1999
    ------------------------------------
            Robert J. Miron                       Director
 
 
 
        /s/ Miles L. Davenport                                                         April 15, 1999
    ------------------------------------
            Miles L. Davenport                    Director
 

</TABLE> 
 
                                     IV-7
<PAGE>
 
<TABLE> 
<CAPTION> 
 
                 Signature                                 Title                          Date
                 ---------                                 -----                          ----           
<S>                                       <C>                                      <C> 
 
        /s/ Brian L. Roberts                                                           April 15, 1999
    ------------------------------------
            Joseph J. Collins                     Director
 


        /s/ Ajit M. Dalvi                                                              April 15, 1999
    ------------------------------------
            Ajit M. Dalvi                         Director
 
 
 
        /s/ John F. Connelly                                                           April 15, 1999
    ------------------------------------
            John F. Connelly                      Director
 
 
 
        /s/ John W. Goddard                                                            April 15, 1999
    ------------------------------------
            John W. Goddard                       Director
 
 
 
        /s/ Daniel J. O'Brien                                                          April 15, 1999
    ------------------------------------
            Daniel J. O'Brien                     President and
                                             Chief Operating Officer
 
 
        /s/ Kenneth G. Carroll                                                         April 15, 1999
    ------------------------------------
            Kenneth G. Carroll              Senior Vice President and
                                             Chief Financial Officer
                                          (Principal Financial Officer)
 
        /s/ Scott D. Macdonald                                                         April 15, 1999
    ------------------------------------
            Scott D. Macdonald             Vice President and Controller
                                          (Principal Accounting Officer)
</TABLE>

                                     IV-8
<PAGE>
 
                                 Exhibit Index
                                 -------------

The following exhibits are filed herewith or are incorporated by reference
herein (according to the number assigned to them in Item 601 of Regulation S-K)
as noted:

2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
<TABLE>
<C>              <S>
            2.1  Reorganization Agreement dated as of December 4, 1996, among Tele-Communications,
                 Inc. ("TCI"), TCI Communications, Inc. ("TCIC"), Tempo Enterprises, Inc., TCI Digital
                 Satellite Entertainment, Inc., TCI K-1, Inc. ("TCI K-1"), United Artists K-1
                 Investments, Inc. ("UA K-1"), TCI SE Partner 1, Inc. ("TCISE 1"), TCI SE Partner 2,
                 Inc. ("TCISE 2") and TCI Satellite Entertainment, Inc. ("TSAT"). (c)

            2.2  Merger and Contribution Agreement dated as of February 6, 1998, among PRIMESTAR, Inc.
                 (the "Company"), TSAT, Time Warner Entertainment Company L. P. ("TWE"),
                 Advance/Newhouse Partnership ("Newhouse"), Comcast Corporation ("Comcast"), Cox
                 Communications, Inc. ("Cox"), MediaOne of Delaware, Inc. ("MediaOne") and GE American
                 Communications, Inc. ("GE Americom"). (b)

            2.3  Asset Transfer Agreement dated as of February 6, 1998, between the Company and TSAT.
                 (b)

            2.4  Agreement and Plan of Merger dated as of February 6, 1998, between the Company and
                 TSAT. (b)

            2.5  Guarantee Agreement dated as of February 6, 1998, by US WEST Media Group, Inc. ("US
                 West"), in favor of each of the Company, TSAT, TWE, Newhouse, Comcast, Cox and GE
                 Americom. (b)

            2.6  Letter Agreement dated as of February 6, 1998, between John C. Malone and the
                 Company, TSAT, TWE, Newhouse, Comcast, Cox , MediaOne and GE Americom, for the
                 benefit of the Company, TSAT, TWE, Newhouse, Comcast, Cox, MediaOne and GE Americom.
                 (b)

            2.7  Form of Stockholders Agreement among he Company, TSAT, TWE, Newhouse, Comcast, Cox,
                 MediaOne, Continental Satellite company, Inc./, Continental Satellite Company of
                 Chicago, Inc., Continental Satellite Company of Minnesota, Inc., Continental
                 Satellite company of New England, Inc., Continental Satellite Company of Michigan,
                 Inc., Continental Satellite Company of Ohio, Inc., Continental Satellite Company of
                 Virginia, Inc., MediaOne Satellite II, Inc., GE Americom and John C. Malone. (b)

            2.8  Form of Registration Rights Agreement among the Company, TSAT, TWE, Newhouse,
                 Comcast, Cox, MediaOne, Continental Satellite Company, Inc., Continental Satellite
                 Company of Chicago, Inc., Continental Satellite Company of Minnesota, Inc.,
                 Continental Satellite Company of New England, Inc., Continental Satellite Company of
                 Michigan, Inc., Continental Satellite Company of Ohio, Inc., Continental Satellite
                 Company of Virginia, Inc., MediaOne Satellite II, Inc., GE Americom and John C.
                 Malone. (b)

</TABLE> 
<PAGE>
 
2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
    (continued):
<TABLE> 
<C>              <S> 
            2.9  Stockholders Agreement dated as of February 6, 1998, among the Company, TSAT and John
                 C. Malone. (b)

           2.10  TSAT Tempo Agreement dated as of February 6, 1998, between the Company and TSAT. (b)

<CAPTION> 

3 - Articles of Incorporation and Bylaws:
<C>              <S>
            3.1  Amended and Restated Certificate of Incorporation of the Company. (b)

            3.2  Amended and Restated Bylaws of the Company. (b)

<CAPTION> 

4 - Instruments Defining the Rights of Security Holders:
<C>              <S>
            4.1  Specimen certificate representing shares of Class A Common Stock of the Company. (b)

            4.2  Specimen certificate representing shares of Class B Common Stock of the Company. (b)

            4.3  Indenture dated as of February 20, 1997 between TSAT and Bank of New York, as
                 Trustee, with respect to $200 million principal amount of 10-7/8% Senior Subordinated
                 Notes due 2007.(d)

            4.4  Indenture dated as of February 20, 1997 between TSAT and Bank of New York, as
                 Trustee, with respect to $275 million principal amount of 12-1/4% Senior Subordinated
                 Discount Notes due 2007.(d)

            4.5  Registration Rights Agreement - Senior Subordinated Notes, dated as of February 20,
                 1997, among TSAT and Donaldson, Lufkin and Jenrette Securities Corporation; Merrill
                 Lynch, Pierce, Fenner and Smith Incorporated; NationsBanc Capital Markets, Inc.; and
                 Scotia Capital Markets (USA) Inc. (d)

            4.6  Registration Rights Agreement - Senior Subordinated Discount Notes, dated as of
                 February 20, 1997, among TSAT and Donaldson, Lufkin and Jenrette Securities
                 Corporation; Merrill Lynch, Pierce, Fenner and Smith Incorporated; NationsBanc
                 Capital Markets, Inc.; and Scotia Capital Markets (USA) Inc. (d)

<CAPTION> 

10 - Material Contracts
<C>              <S>
           10.1  Indemnification Agreement dated as of December 4, 1996, by and between the Company
                 and TCI UA 1, Inc. (d)

           10.2  First Amendment to Indemnification Agreement dated as of December 31, 1997 between
                 the Company and TCI UA I, Inc. (c)

</TABLE> 
<PAGE>
 
10 - Material Contracts (continued):
<TABLE> 
<C>              <S>  
           10.3  Indemnification Agreement dated as of December 4, 1996, by and between the Company
                 and TCIC. (d)

           10.4  First Amendment to Indemnification Agreement dated as of December 31, 1997 between
                 the Company and TCI Communications, Inc. (c)

           10.5  Option Agreement dated February 8, 1990, between Tempo and K Prime Partners, L.P. (e)

           10.6  Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR Partners, L.P.
                 relating to FSS. (e)

           10.7  Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR Partners, L.P.
                 relating to BSS. (e)

           10.8  Amended and Restated Reimbursement Agreement dated March 1, 1995, between TCI UA 1,
                 Inc., Chemical Bank and The Toronto Dominion Bank. (e)

           10.9  Senior Subordinated Credit Agreement, dated as of April 1, 1998 among PRIMESTAR,
                 Inc., as Borrower, the Guarantors party hereto, the Lenders party hereto, Merrill
                 Lynch & Co., as Arranger and Syndication Agent, Morgan Stanley Senior Funding, Inc.,
                 as Administrative Agent, and Donaldson, Lufkin & Jenerette Securities Corporation, as
                 Documentation Agent. (a)

          10.10  Credit Agreement, dated as of March 9, 1994, among PRIMESTAR Partners, L.P., the
                 Lenders party hereto, The Bank of New York, Chemical Bank and Citibank, N.A. as
                 Managing Agents, The Bank of New York, as Documentation Agent and Chemical Bank, as
                 Administrative Agent, as amended by Amendment No. 1 dated November 21, 1994, as
                 amended by Amendment No. 2 dated February 27, 1997, as amended by Amendment No. 3
                 dated June 2, 1997, as amended by Amendment No. 4 dated December 19, 1997 and as
                 amended by Amendment No. 5 dated September 29, 1998. (a)

          10.11  U.S. $700,000,000 Credit Agreement, dated as of March 31, 1998 among PRIMESTAR, Inc.,
                 as Borrower, The Bank of Nova Scotia, as Administrative Agent, Nationsbank of Texas,
                 N.A., as Syndication Agent, Credit Lyonnais New York Branch, as Documentation Agent,
                 Various Financial Institutions, as Lenders and The Bank of Nova Scotia, Credit
                 Lyonnais New York Branch and Nationsbank of Texas, N.A., as Arranging Agents. (a)

          10.12  Share Purchase Agreement dated as of December 4, 1996, between TCI and the Company.
                 (d)

          10.13  Option Agreement dated as of December 4, 1996, between TCI and the Company.(d)

</TABLE> 
<PAGE>
 
10 - Material Contracts (continued):
<TABLE>
<C>              <S>
          10.14  Indemnification Agreement dated as of June 11, 1997 among News Corp., the Company,
                 the Partnership, Time Warner, Comcast, Cox, MediaOne, Newhouse, and GE Americom. (b)

          10.15  Asset Purchase Agreement among the Company, PRIMESTAR Partners, L.P., PRIMESTAR MDU,
                 Inc., the Stockholders of PRIMESTAR, Inc. listed herein and Hughes Electronics
                 Corporation, dated as of January 22, 1999. (f)

          10.16  Asset Purchase Agreement by and among Hughes Electronics Corporation, the Company,
                 PRIMESTAR Partners L.P., Tempo Satellite, Inc. and the Stockholders of PRIMESTAR
                 listed herein, dated as of January 22, 1999. (f)

             21  Subsidiaries of the Registrant.(a)

             27  Financial Data Schedule.(a)

</TABLE>

----------------------

  (a)     Filed herewith.

  (b)     Incorporated by reference to the Company's Registration Statement on
          Form S-4 filed with the SEC on February 9, 1998 (Registration No. 333-
          45835).

  (c)     Incorporated by reference to TSAT's Annual Report on Form 10-K for the
          year ended December 31, 1997 (Commission File No. 0-21317).

  (d)     Incorporated by reference to TSAT's Annual Report on Form 10-K for the
          year ended December 31, 1996 (Commission File No. 0-21317).

  (e)     Incorporated by reference to TSAT's Registration Statement on Form 10
          filed with the Securities and Exchange Commission ("SEC") on November
          15, 1996 (Registration No. 0-21317).

  (f)     Incorporated by reference to the Company's Current Report on Form 8-K,
          dated February 1, 1999.